COOKSON WALKER CONSULTING P&C CRYSTAL BALL 2008

1. DIRECTIONS IN REINSURANCE COOKSON WALKER CONSULTING P&C CRYSTAL BALL 2008 Gordon Crutcher Aon Re Canada January 25, 2008

2. CURRENT DIRECTIONS OF P & C REINSURANCE 2007 REVIEW - 2008 PREVIEW GORDON CRUTCHER, Aon Re Canada 2

3. THE REINSURANCE MARKET IS GLOBAL 3

4. REINSURANCE MARKET • The reinsurance market is complex and inter-related. • One reinsurer can rarely respond to all of a client’s needs.

5. REINSURANCE MARKET • Insurers usually prefer to have several reinsurers on their treaties. • Better security; more flexibility.

6. REINSURANCE MARKET In compiling its 2007 edition of Global Reinsurance Highlights, Standard & Poor’s Ratings Services collected data on approximately 250 reinsurance organizations from over 50 countries.(Life + P&C)

7. REINSURANCE MARKET Estimated Global Reinsurance: • Shareholders’ Funds: $483 billion • Net Reinsurance Premiums Written: $168 billion S&P: Global Reinsurance Highlights, Sept. 2007 (P&C + Life)

8. REINSURANCE MARKET Estimated Market Share of the top five World-Wide Reinsurance Groups: 47% (up from 40% in 2005) (Munich Re, Swiss Re, Lloyd’s, Hannover Re, & Berkshire Hathaway Re) S&P: Global Reinsurance Highlights, Sept. 2007 (P&C + Life)

9. REINSURANCE MARKET Estimated Global Reinsurance Capacity: $2 billion any one program 9

10. REINSURANCE MARKET • Reinsurers usually want to spread their risks geographically, and by class of business – seeking a diverse portfolio of risks. • Diversification helps make underwriting results more predictable, less volatile – and more profitable.

11. REINSURANCE MARKET • Canada does NOT have a single independent domestic reinsurance company. • All independent reinsurers operating here are foreign-owned. 11

12. COMPARISON OF GROSS CEDED REINSURANCE PREMIUMS Canada

13. COMPARISON OF CEDED REINSURANCE PREMIUMS • Information source for Gross Reinsurance Premiums ceded by Region: International Association of Insurance Supervisors – “Global Reinsurance Market Report 2007” Published December 12, 2007

14. Thus eventselsewherein the worldcan impactCanadian reinsurance rates and conditions – as well as the security ratings of reinsurers doing business in Canada. 14

15. THE CHANGING FACE OF REINSURANCE • With the retro market in decline, there has been an amazing increase in the securitization of risks during last few years. • Capital Market instruments include: - Catastrophe Bonds; - Catastrophe Loans; - Sidecars; - Industry Loss Warranties; - Insurance Linked Securities.

16. THE CHANGING FACE OF REINSURANCE • These types of solutions now account for 30% – 40% of the retro market; • And between 5% – 10% of the reinsurance market. According to Goldman Sachs’ Financing Group

17. THE CHANGING FACE OF REINSURANCE “It’s evident that the steady convergence of the capital markets with the insurance sector is irreversible.” Source: Jardine Lloyd Thompson – When two worlds converge . . .; May 2007

18. THE CHANGING FACE OF REINSURANCE “The landmark issuance by State Farm of a $1.2 billion multi peril catastrophe bond, the largest ever issuance of its type, is an example of what we believe is an emerging trend.” Standard & Poor’s: Global Reinsurance Highlights, September 2007

19. REINSURANCE MARKET Remember this slide? Estimated Global Reinsurance Capacity: $2 billion any one program

20. S&P’s outlook for the GLOBAL reinsurance sector remains stable. However, 2008 could be a watershed for the reinsurance industry. Standard & Poor’s: Global Reinsurance Highlights, September 2007 20

21. REINSURERS’ COMBINED RATIOS • Canadian Reinsurers - as per MSA Research • 2003: 95% • 2004: 93% • 2005: 105% • 2006: 87% • 2007 (@ Q3): 86% • U.S. Reinsurers – as per R.A.A. • 2003: 101% • 2004: 106% • 2005: 129% • 2006: 95% • 2007 (@ Q3) 94%

22. COMBINED LOSS & EXPENSE RATIOS OF CANADIAN REINSURERS Source: Annual Statistical Issues of Canadian Underwriter Magazine and MSA Research for Q3 2007

23. Reinsurers Combined Ratio Comparison Sources: RRA and RRC and various publications, 23

24. TOTAL REINSURANCE CEDED(Domestic & Foreign Companies) Source: OSFI Financial Data

25. TOTAL REINSURANCE WRITTEN(By Canadian Licensed Reinsurers) Source: MSA Research

26. LESS BUSINESS AVAILABLE FOR REINSURERS • Insurer retentions continue to increase. • Significant decline in use of Proportional reinsurance. • Mergers and acquisitions of insurers. • The reinsurance “pie” in Canada is definitely shrinking.

27. LESS BUSINESS AVAILABLE FOR REINSURERS • Insurance company mergers and acquisitions are NOT good news for reinsurers. • e.g. neither Allianz Canada, nor Citadel Canada, nor CNS buys an independent treaty program any more. • SUPPLY of reinsurance has increased but the DEMAND has been declining.

28. IMPACT OF BILL C-37 ON CANADIAN REINSURERS? • Bill C-37 will amend Part XIII of the Insurance Companies Act, (ICA). • Becomes effective January 1 2009. • Among other provisions, could eliminate need for a foreign reinsurer to maintain a Canadian branch.

29. IMPACT OF BILL C-37 ON CANADIAN REINSURERS? • “Will this eventually result in an exodus of foreign reinsurers from Canadian soil?” • Read the article by J. Brian Reeve, Partner, Cassels Brock & Blackwell LLP in the November 2007 issue of Canadian Underwriter.

30. CEDED REINSURANCE PREMIUMS AS % OF TOTAL INS. PREMIUMS Billions $ 27% 30% 31% 30% 24% 24% 26% 26% Source: OSFI @ Q4 each year – but Q3 for 2007

31. RELATIVE EMPLOYMENT OF REINSURANCE BY CANADIAN INSURERS Ratios of “Reinsurance Ceded” to “Direct Premiums Written” • State Farm Auto: 0% • Allstate Insurance Co. of Canada: 0% • Wawanesa Mutual Insurance: 2% • Dominion of Canada General: 4% • Chubb Insurance Co. of Canada: 14% • Aviva Insurance Co. of Canada: 17% • Economical Mutual Insurance: 26% • Royal & SunAlliance Canada: 28% • ING Insurance Co. of Canada: 40% • Commonwealth Insurance Company: 76% Source: OSFI Data as of Q4 2006

32. REINSURANCE CEDED TO PREMIUMS WRITTEN Source: OSFI @ Q4 2006

33. CAUTION • Reinsurance premiums can be ceded: - to EXTERNAL reinsurers, - or INTERNALLY for “group” protections.

34. IT’S GETTING LONELY OUT THERE! • Fewer licensed reinsurers. • Only 19 active, independent markets left in Canada. • Used to be 41 in 1991. 34

35. ACTIVE FEDERALLY – LICENCED INDEPENDENT REINSURERS • Ace • Aspen Re • Berkley • CCR • Everest Re • Folksamerica • General Re • Hannover Re • Lloyd’s • Mapfre Re • Munich Re • Odyssey Re • Paris Re • Partner Re • SCOR Re • Swiss Re • Toa Re • Transatlantic Re • XL Re • NEW IN 2007: • None LOST IN 2007: - None Note: The FMRP is not an independent reinsurer.

36. REVIEW OF 2007 “The absence of large catastrophe losses wasa key factor in the softening of reinsurance markets.” Guy Carpenter: Global Reinsurance Review – January 2008 36 36

37. 37

38. GLOBAL CAT LOSS TREND BEEN STEADILY RISING

39. GLOBAL CAT LOSSES • Natural and man-made catastrophes produced insured losses of some US $25 billion in 2007. • In comparison, such insured cat losses in 2005 exceeded US $112 billion. (4.5 times higher!) Source: Swiss Re Sigma 39

40. U.S. Insured Catastrophe Losses* $ Billions $100 Billion CAT year is coming soon 2006 & 2007 were a welcome respite. 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Through 9/30/07. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Source: Property Claims Service/ISO; Insurance Information Institute 40

41. CAT EXPOSURE IN NORTH AMERICA IS ABSOLUTELY ENORMOUS (Originals of this map can be ordered from Risk Management Solutions)

42. WHAT WILL IT TAKE TO TURN THE MARKET? 42

43. WHAT WILL IT TAKE TO TURN THE MARKET? • Probably a ceded loss of US $15 to $25 billion is required to change the direction of the market. Aon Re Canada – Reinsurance Market Conditions – January 2008 43

44. WHAT WILL HAPPEN IN 2008? • Predicted to be an active hurricane season. • Unlikely to have a benign hurricane season two years in a row. • And an earthquake can happen at any time.

45. CANADIAN CAT LOSSES IN 2007

46. REVIEW OF 2007 CANADIAN CAT LOSSES • “The West had too much weather.” - Severe summer weather warnings; - Tornados; - Intense rainfalls; - Wind storms; - Hail storms; - Crop losses. INSURED LOSSES OVER $200 MILLION

47. REVIEW OF 2007 CANADIAN CAT LOSSES • Elie, Manitoba – June 22, 2007 - Canada’s first documented F5 intensity tornado with winds above 420 km/h. - An F5 is the highest rating on the internationally recognized Fujita tornado damage scale.

48. REVIEW OF 2007 CANADIAN CAT LOSSES • A number of significant flood events in B.C., last spring. The worst flooding ever in the Prairies. • Up to 50 cm of snow in Vancouver Island in December. • Extreme heat and humidity in Alberta, Saskatchewan and Manitoba in July. (The 2nd hottest July on record in Calgary.)

49. REVIEW OF 2007 CANADIAN CAT LOSSES August 9th – Dauphin, Manitoba. A spectacular hail storm triggered some 13,000 claims for MPI. Estimated loss of $53 million. One of the single largest catastrophic events in MPI’s history. 49

50. REVIEW OF 2007 CANADIAN CAT LOSSES • Reinsurers will bear only a small proportion of the 2007 Canadian Cat losses. • Most of these losses will be absorbed instead by insurers. • The insurers’ share of the losses typically fall within their Cat deductibles.