Property and Casualty Reinsurance Issues from a Midwestern Buyer’s Perspective

1. Property and Casualty Reinsurance Issues from a Midwestern Buyer’s Perspective February 9, 2004 Marty Orth, ACAS, MAAA Farm Bureau Financial Services Farm Bureau Mutual Insurance Company Vice President Research and Development

2. Speech Style • There are many issues • Who can predict the next major issue? • Therefore, this is an interactive speech • Your participation appreciated

3. Let’s take a sampling • What is your Reinsurance Knowledge? • Never Involved…know very little • Work with infrequently • Part of current responsibilities • Primary responsibility

4. Participation and Discussion • What do you think the reinsurance issues are in 2004? • What do you think the long-term reinsurance issues will be over the next 10 years?

5. LESSON 1: Reinsurance Purposes • Limit liability of specific risks • Stabilize loss experience • Protect against catastrophes • Increase capacity • Other • Entry into a new line • Cut off exposure on an existing line • Gain reinsurer’s expertise

6. LESSON 2: Reinsurance Does NOT • Change the inherent nature of the risk • Make a bad risk insurable • Make an exposure more predictable or desirable • Alter the total risk exposure

7. Types of Reinsurance General Types • Facultative • Treaty • Financial Also • Proportional or Pro rata • Excess reinsurance or non-proportional

8. Reinsurance Examples • FAC • Excess • Property Per Risk • Excess Per Occurrence • Property Catastrophe • Aggregate Excess of Loss • Funded Programs • LPT

9. Property Facultative Obligatory Reinsurance Treaty (FOT) Characteristics Capacity to write larger risks Stability by limiting exposure on an individual risk Degree of catastrophe protection from major loss on an individual risk Vehicle to protect other reinsurance results Limits ceding company’s exposure on risks not normally written by the company

10. Excess of Loss

11. Combination Per Risk Excess and Surplus Treaty $40,000,000 Third Surplus Share Layer $30,000,000 $10,000,000 Second Surplus Share Layer $7,500,000 $ 2,500,000 First Surplus Share Layer $2,000,000 $ 500,000 Per Risk Excess $400,000 xs $100,000 $ 100,000 Retention

12. Property Surplus Share Example Reinsurer Insurance Company

13. Risk Size = $1,000,000 Retention = $200,000 Company retains 20% Surplus Share ProgramExample

14. Fundamentals of Reinsurance • WWW.REINSURANCE.ORG

15. Overview • Current Market Overview • Reinsurance Issues • Midwestern Buyer’s View

16. 2001 Combined Ratios Source: Reinsurance Association of America – Reinsurance Underwriting Report

17. 2002 Combined Ratios Source: Reinsurance Association of America – Reinsurance Underwriting Report

18. 2003 9-Month Combined Ratios Source: Reinsurance Association of America – Reinsurance Underwriting Report

19. Historical Combined Ratios Source: Reinsurance Association of America – Reinsurance Underwriting Report

20. RAA Industry Results – U.S. Reinsurers Source: Reinsurance Association of America – Reinsurance Underwriting Report

21. Reinsurance Bits and Pieces • Reinsurance outlook • Reserve Charge Example YIELD

22. Reinsurance Outlook • Continuous reserve development? • Financial Rating Issues Capitalization • Is Bermuda overcapitalized? • Will there be additional capital entering? • Continued reinsurer exits and consolidations?

23. XL Capital Ltd – 2004 Example • January 13 • XL Capital Ltd Completes Previously Announced Claims Audit Review and Year End Reserve Review • Expects fourth quarter charge of $647 million after taxes • Majority due to adverse development in Company’s North American reinsurance operations for casualty business written during 1997-2001 underwriting years • Company to raise at least $750 million of new capital

24. XL Capital Ltd – 2004 Example • January 14 • A.M. Best • Downgraded all debt ratings of XL Capital Ltd. (Cayman Islands) • Placed ratings of A+ (superior) under review with negative outlook for XL Capital Group (Hamilton, Bermuda) and its affiliated companies • S&P • Cuts XL Capital Rating to AA- vs. AA

25. XL Capital Ltd – 2004 Example • January 22 • XL Capital Ltd Announces Retirement Of Insurance Operations Chief Executive

26. XL Capital Ltd – 2004 Example • January 22 • XL Capital Ltd Announces Management Changes Within Its Global Reinsurance Operations

27. Special Termination Language • Special Termination Language or Downgrading Clauses • Don’t Rely on it • Do the Due Diligence • Reinsurers beginning to resist • Could allow run on the bank due to return premiums

28. Legacy Issues • Mold • Construction Defects • Asbestos • Environmental • 9/11 • Professional Liability/ Med Mal • Others???

29. New / Evolving Issues • Terrorism • Mad Cow • GMO’s • Obesity • SARS? • Soft Market? • Others?

30. Terrorism Risk Insurance Act (TRIA) Update • A.M. Best SRQ • What are your potential targets? • TRIA Flow Chart • Update

31. A. M. Best SRQ • VI. Terrorism Section • 41. Terrorism Exposure Management • 42. Largest Single Insurance “At Risk” • 43. Largest Single Insured TIV • 44. Zonal Aggregate Exposure

32. TRIA Update • AIR landmark database includes over 300,000 Potential Targets

33. Terrorism Risk Insurance Act of 2002Coverage Flowchart LOSS OCCURS Covered by Policy Not Covered by Policy Deny Claim Is it a Certified Act? No Yes Does underlying policy have a Terrorism Exclusion? Pay & Submit to Treasury No Yes Pay loss – Collect against the Terrorists Deny Claim Terrorism Risk Insurance Act of 2002 sunsets on December 31, 2005. The Act only applies to Commercial insurance which includes Farmowners. Department of Treasury is sole authority on terrorism act “certification”.

34. TRIA Update • Treasury survey • How is the industry handling • Will the industry have enough capacity to handle itself? • Will TRIA be allowed to sunset?

36. Mad Cow • What is a Mad Cow • Bovine Spongiform Encephalopathy • What does this have to do with reinsurance?

37. Mad Cow • USDA’s Risk Management Agency (RMA) • Offers Livestock Risk Protection • Market-based price protection policy • Mad Cow Disease found in Washington State • Results • Sold more policies on that day as compared to life-to-date of program

38. GMO’s • What are they? • Genetically Modified Organisms • Issues • Potential Liability? • Cross pollination • Loss of market value • Health • Other • Reinsurance Issues?

39. Hard Market • Is the Primary market softening • What are the Reinsurance Issues • Best Rating Issues

40. So what’s a company to do?

41. Midwestern Issues and View • Regional isolation • Cat Placement • Models • Data Issues • Pricing • Future Events / Issues

42. FBM

43. Regional Isolation • It’s what you don’t see • Earthquake • Coastal • Midwestern Issues • It’s all about the CAT

44. Midwestern Cat Definition • Event occurs over a 72 hour period: Wind/hail etc

45. Cat Model Issues • Models • AIR: straight wind/tornado/hail • RMS: no straight wind • EQE: no tornado/hail • Data Issues • Where is the property located • County, zip, policy • Other Issues

46. Use of Reinsurance Brokers • Pros • Expertise and service • Modeling and pricing • An intermediary • Cons • Access to directs

47. Cat Placement • Number one questions asked • Deductibles • Number two questions asked • TIV

48. Open Discussion • What are the reinsurance issues to watch out for in 2004 and beyond?

49. Summary • Understand your exposures • Do your homework • Look for long-term relationships • Seek advice of experts if needed • Contract attorneys • Reinsurers • Brokers • Monitor Results…Monitor Results…

50. Contact Information • Marty Orth morth@fbfs.com (515) 226-6295