Reinsurance Marketplace

1. Reinsurance Marketplace Stephan L. Christiansen Conning Research & Consulting

2. The Dinosaur’s Dilemma Enduring a changing environment. Food sources decreasing. Competition for food increasing. Need for food increasing as dinos get bigger. So keep that thought!

3. The Reinsurance Environment:Setting the Stage Market Size and Trends Performance Characteristics Some Emerging Opportunities

4. The U.S. Direct (Primary) Market ($ bns)Premiums vs. Cessions, Surplus vs. Recoverables From 2001 to 2005, direct premiums have grown 34% to $485 billion, while cessions other than to non-US affiliates have stayed about even at about $61 billion. Reinsurance recoverables have grown slightly, but have stayed at about 50% of surplus. Source: A. M. Best, Conning Property-Casualty Forecast & Analysis By Line of Insurance

5. The U.S. Reinsurer UniverseProfessional Reinsurer Aggregate From the standpoint of U.S. reinsurers, net premium volume has declined, business is becoming more concentrated, and returns have been volatile. Total premium of U.S. reinsurers is $26 billion. Source: Company Statutory Statements and Conning analysis

6. Global Reinsurance Market$140 Billion USD Globally, ceded reinsurance is about a $140 billion market (excluding life re). North America represents about $58 billion. Source: Swiss Re Economic Research & Consulting

7. ROE: Public Reinsurers vs. Other Financial Services Aggregating reinsurer shares from the public market, in 2006, ROEs compared favorably with other financial services, including brokers and money center banks. Source: Cap IQ via Yahoo Finance April 2007

8. Conclusions • 2006 was a good year for reinsurers • But the sector faces considerable volatility and low market growth • ROE at peak results in 2006 was only about equal to other financial services firms

9. The Reinsurer’s Dilemma Significant Evolutionary Forces Some are Challenges Some are Emerging Opportunities Enduring a changing environment. Revenue sources decreasing. Competition for revenue increasing. Need for revenue increasing. As reinsurers get bigger.

10. Feast and Famine: Market Cycles • Environmental Factors: Losses • Competitive Factors— - Too much supply leads to price wars - New entrants - New competition from outside • Shrinking Demand Loss Volatility is a major factor in reinsurance volatility– losses are predominantly excess-attaching and asymmetric to inflation or other forces.

11. The Dinosaur’s Dilemma Catastrophes and other unexpected events can change everything !

12. Loss Volatility – Catastrophes:Natural, Manmade, Terrorism, Pandemics, Nanotechnology The events of 2004 and particularly 2005 have literally changed the scale of expected catastrophe losses. Reinsurance costs have increased by several hundred percent in some exposed areas. Primary pricing has not kept pace, leading to constraints on capacity. KRW Florida Andrew WTC Northridge Source: Property Claims Service

13. Long-Tailed Loss Volatility Volatility of Losses and Loss Development Initial & Latest Estimated Accident-Year & Calendar-Year Loss Ratios, Total All Lines, Professional Reinsurer Aggregate Impact of casualty losses and loss development is another major factor in producing volatility of results. Source: Conning Property-Casualty Loss Reserve Analysis by Line of Insurance

14. Feast and Famine: Market Cycles • Environmental Factors:Losses • Competitive Factors— - Too much supply leads to price wars - New entrants - New competition from outside • Shrinking Demand Competition is a major factor in reinsurance volatility— Both from existing players seeking growth, from new entrants, and from outside the reinsurance industry entirely.

15. The Dinosaur’s Dilemma While the changing environment may be challenge enough, new competitors are entering and challenging traditional dominance.

16. Capital Buildup Outpaces Market GrowthU.S. Professional Reinsurer Aggregate(excluding Berkshire Hathaway) Competition starts inside the sector. Competition spurred by excess capital buildup. Even with volatility and low returns, capital is building up faster than premium. Source: Conning Property-Casualty Forecast & Analysis by Line of Insurance

17. Pricing Volatility vs. PrimaryU.S. Non-Proportional Reinsurance Premium volatility is a sign of changing prices and changing demand. Source: Company Statutory Statements and Conning analysis

18. Re-emergence of the Winner’s Curse? Other things being equal, a softer market, with more competition for a risk, increases the probability that the “winner” will underprice the business. Bias increases as the number of bidders increases. Bias increases as the variance of bids increases—greatest for riskier lines and higher layers. Source: Auction Theory and Risk Load, Chris Svendsgaard, Swiss Reinsurance Co.

19. New Forms of Companies Forming, with Higher Risk/Return Characteristics Pesky new entrants are changing the competitive landscape. New companies and new forms of capital are emerging based on changing opportunities and access to capital. Hedge Funds have become a new and potentially formidable entrant. Source: PartnerRe

20. Regulation and Taxation Growth of Bermuda—Bermuda’s Market Share of Net Reinsurance Premiums Written Bermuda is thriving in part as a more flexible location for innovation and capital efficiency. Developing characteristics of an insurance cluster. Source: Guy Carpenter and Swiss Re Economic Research & Consulting

21. Market Capitalization (USD) > 15bn 5 – 15bn < 5bn Average net claimin % of shareholders'equity = 49% USD m 5 000 75% 151% 4 000 60% 3 000 45% Swiss Re* 2 000 30% 1 000 15% 0 0% Net claims estimate (before tax) as at Oct 2006 Net claims in % of shareholders' equity Size and Diversification in Managing Large Losses – Natural Catastrophes Katrina, Rita and Wilma (KRW) Impact of catastrophes as percentage of equity was very different on larger reinsurers compared to smaller specialty reinsurers, but many of the latter raised additional capital– as much a $25 billion— this time. Source: Company data, Analyst Reports* Swiss Re claims estimate net of equalisation reserve release

22. Emerging Catastrophe Bond Market Short- and Long-Term Risk and Capital SupportNon-life ILS Bonds ($ in millions) Catastrophe bonds and capital market solutions are getting increased attention and building, but still a small part of the market. Source: Swiss Re Economic Research & Consulting

23. Feast and Famine: Market Cycles • Environmental Factors:Losses • Competitive Factors— - Too much supply leads to price wars - New entrants - New competition from outside • Shrinking Demand Lower Demand As primary companies retain more risk, and as risk flees from the insurance market altogether…

24. The Dinosaur’s Dilemma Increasing competition for a decreasing food supply.

25. Property-Casualty ForecastAggregated U.S. IndustryBuilt up from 16 Underlying Segments At the primary insurer level, our forecast shows continued strong performance on a combined ratio basis, with ROEs tailing off in 2006-2008 based on growth in capital and rising combined ratios. Source: Conning Property-Casualty Forecast & Analysis By Line of Insurance

26. Property-Casualty Capital Leverage Premiums and Loss Reserves to Surplus In the primary market, capital is building up. Ratios of net premiums and loss reserves to surplus are declining as surplus increases. Surplus is strong, not necessarily excessive, but accumulating faster than exposures and claims can drive premium. Source: Conning Property-Casualty Forecast & Analysis By Line of Insurance

27. Traditional Insurance Traditional Insurers’ Market Share (%) Loss prevention, risk analysis, claim service, capitalmanagement Claims service, loss prevention, fronting, captivemanagement High Frequency Low Severity Moderate Frequency Moderate Severity Low Frequency High Severity Where We Go from Here From a recent study on alternative markets, Increasingly, insurers and reinsurers will occupy the middle-of-the road position between high-frequency/low-severity events that are most economically handled by self-insured retentions, and low-frequency/high-severity events that will be addressed by capital markets or government solutions. Loss Spectrum

28. Some Emerging Opportunities • Short- and long-term risk segmentation • Convergence of economic and regulatory theories of capital and risk • Changing capital markets to support different needs • Emerging importance of services to cope with change • Mathematical Risk vs Behavioral Risk Increasingly, reinsurers will analyze and segment risk-taking based on the nature and capital intensity of the risk, with an eye to both regulatory and economic capital implications. Some risk can be more economically passed on to the capital markets.

29. Convergence of Regulatory Risk Capital A wide variance in capital definitions from different sources are ultimately converging under a basis of principles of reserving, risk analysis, and capital definitions. Economic/ Internal View Rating agencies Solvency II (EU) U.S. Solvency IFRS Note: Illustrative only; the lines are not representative of any specific case.

30. Emerging Value-Added Services • Risk and asset models, predictive models • Sarbanes-Oxley and Solvency II support • Underwriting and claims mitigation services Reinsurers will compete on services that can improve the profitability of their clients, not just on capital and risk transfer solutions. Risk Transfer Financing Expertise Know-how Transfer Diversification, Nat cat cover Risk & product expertise Pricing, claims management Capital strength Source: Swiss Re Economic Research & Consulting

31. The Dinosaur’s Dilemma-- Adapt New tools and new strategies for survival

32. The Dinosaur’s Dilemma-- Evolve Thank you ! Questions?

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