Reinsurance Capital: Predictions for the Near Term

1. Strictly private & confidential Reinsurance Capital: Predictions for the Near Term Brian Moon Director Deutsche Bank Securities Inc. June 7, 2004

2. “IMPORTANT: This presentation has been prepared by members of our investment banking department. Statements and opinions regarding the company's investment case, positioning and valuation are not, and should not be construed as, an indication that Deutsche Bank will provide favorable research coverage of the Company or publish research containing any particular rating or price target for the Company's common stock. This presentation speaks only as of the date it is given, and the views expressed are subject to change based upon a number of factors, including market conditions and the Company's business and prospects.”

3. X X X X X X X X X X X X X X X X X X X X X X X X Significant number of M&A deals in the “softer” part of the last cycle Question: Will we see significant M&A activity in Bermuda soon? Paragon catastrophe price index 2.5 2.0 ? 1.5 1.0 0.5 0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

4. There are a number of potential catalysts that suggest that the answer is “yes” • Maturing P&C pricing cycle and lower growth and returns • Maturing growth of start-ups • Future inability to reach ROE and growth expectations of the market • Private equity investors “want out” • Potential strategic imperatives • penetrate top reinsurer/ insurer ranks • diversify further into primary or other businesses (e.g., ACE and XL model) • geographic diversification/extension to include U.S., Bermuda, London, continental Europe, Asia and Latin America • diversify distribution to include both direct and broker (directs expand broker channel in U.S. and Bermuda) M&A?

5. But, hopefully, we learned that buying other people’s problems can be expensive… Acquiring other people’s problems persisted through the soft part of the cycle • M&A actually added fuel to the soft cycle as investors demanded to see growth from the high-premium acquisitions • This growth came at exactly the wrong time! • Solutions: i) Reserve guarantee or risk sharing structures ii) Renewal rights transactions iii) Acquire shorter tail businesses

6. …and insurance M&A in the news today indicates very little interest “No bubble boys here: P&C execs eschew M&A” “…this time, with a greater deal of unanimity and in more resounding tones, [insurance] industry leaders spoke out against that other great vestige of the late-90s P&C industry: mergers and acquisitions.” – SNL Insurance daily, 5/3/04 “ACE, XL Capital looking to internal growth rather than deals” “XL does not want to deploy any capital for a major acquisition. …[an XL executive’s] comments echoed those of ACE. ACE also plans to stay away from acquisitions [according to a company executive]...” – SNL Insurance Weekly P&C Edition, 12/8/03

7. Accounting issues lead to ROE dilution Illustrative acquisition and ROE dilution Only weaker franchises have lower ROEs (1) Pro forma calculations assume no change to seller’s earnings from synergies or purchase accounting adjustments

8. …and difficult EPS accretion Illustrative acquisition and EPS accretion/ (dilution) Without improvement of earnings, it is difficult to argue the merits of the transaction

9. All you are left with is an increase in book value per share, offsetting ROE dilution Value map: P/B vs. ROE regression

10. Recent transactions highlight these issues

11. Evolving M&A environment • “Bigger is better” • Growth in market share imperative • Fear of being acquired/ taken over • Pooling accounting • Europe, ACE and XL as buyers Paragon catastrophe price index 2.5 X X X X X X X X X X 2.0 X X X X X X X X X X X X X X 1.5 Rapid consolidation slowed through the late 90’s 1.0 0.5 0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

12. Evolving M&A environment(continued) • “Bigger is better” – rating agency driven • Rate adequacy vs. market share goals • Risk of being acquired/ taken over non-existent • Few buyers • No pooling accounting • Amortization of reserve discount – purchase accounting issue • Nimble is better Paragon catastrophe price index 2.5 X X X X X X X X X X 2.0 X X X X X X X X X X X X X X 1.5 New cycle; same mistakes? 1.0 • Excess capital used to acquire at a premium and buy the reserve mistakes of others • Companies chase growth and market share driving a steep downturn 0.5 0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

13. Evolving M&A environment(continued) Current M&A strategies: primarily “don’t” Potential M&A strategies • Recruit underwriting teams • Renewal rights transfers (e.g., Hart Re, CNA re, LaSalle Re) • Merger of equals • Bolt-on whole company acquisitions with limited to no reserve risk • Transforming/diversifying acquisitions (e.g., ACE/CIGNA) Issues with traditional M&A • Management distraction • Difficulty integrating business (i.e., systems, culture, retention of key employees, etc.) • Negative revenue synergies • Lack of significant cost savings • Target reserve adequacy • ROE dilution from goodwill (premium to book paid) • Accounting changes – dilution from amortization of loss reserve discount • Limited track records of successful M&A execution

14. Private equity is patient, not “hot” “Class of ’93” equity investors waited at least six years to completely exit Paragon catastrophe price index 2.5 Warburg Pincus got out in Q1’00 Almost 7 years RenRe 2.0 More than 7 years LaSalle Re Sold to Trenwick in an all-stock deal in 9/00, creating liquidity for private equity to exit in the open market 1.5 More than 6 years MidOcean Sold to Exel in an all-stock deal in 8/98, creating liquidity for private equity to exit in the open market 1.0 0.5 0.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Conclusion: Recent IPOs and secondaries provide liquidity in the post-9/11 start-ups but only smaller investors have been able to exit a majority of their position (e.g., Lightyear and Vestar)

15. …and if M&A is questionable as a capital management tool today, what else can we do? Increasing dividend yields Share repurchase programs and large repurchases

16. But there are problems with capital management Question: Can I get it back when the cycle turns? • Rating agencies view as a fixed charge • Limited flexibility: “terrible” things will happen if you cut your dividend • post 9/11 no company cut its dividend to fund growth; why not? • cutting dividends due to small/ medium sized cat losses hurting earnings and cash flow would be difficult for your stock • Special dividends are not fully valued and non-recurring • Rising interest rates and subsequently higher required yields to be attractive to investors Dividends • Limited shares to repurchase in the open market • Negotiating directly with private equity at a discount to market to repurchase shares will be limited by current valuations • In periods of high multiples, difficult to justify Share repurchases

17. Yes, you can, and quickly

18. 2.5 2.0 PRE Zurich RNR PTP RE CHR ACGL Mid Ocean MXRE MRH ACE IPCR ENH 1.5 AXS AHL XL 1.0 0.5 0.0 2/21/01 1/1/03 1/1/90 11/10/91 9/18/93 7/28/95 6/6/97 4/15/99 Number of public reinsurers has increased once again Paragon catastrophe price index X X X X X X X X X X IPO phase X X X Consolidation phase X X X X X X X X X X X Late 1990’s post-consolidation phase Now ACE XL Partner Re Berkshire Hathaway Transatlantic Holdings Trenwick RenaissanceRe IPC Holdings PXRE PMA Everest Re Berkshire Hathaway ACE Ltd XL Capital Ltd Everest Re Group AXIS Capital Transatlantic Holdings PMA RenaissanceRe PartnerRe Montpelier Re Endurance Specialty Converium AG IPC Holdings Aspen Ins Holding Arch Capital Odyssey Re Platinum Underwriters Max Re Capital PXRE Total number of public companies: 11 Total number of public companies: 19

19. So, where does that leave us today? • Turning cycle • New accounting challenges to M&A at a premium • ACE, XL and Europe potentially not acquisitive • Historical issues with returning capital (i.e., can I get it back when I need it?) • More efficient capital markets • Rate adequacy and returns over market share understood by investors • More public companies providing information about rate adequacy Same mistakes?

20. Potential future scenarios I. Same mistakes • Excess capital funds M&A deals at a premium and buying the mistakes by others • Companies chasing growth and market share driving a steep downturn II. Bifurcation of the market between large diversified and nimble/ “professional” reinsurers • MOEs among Bermuda post 9/11s to gain size, scale and geographic and business diversification • Excess cash used to acquire insurance properties/ markets in the U.S. and Europe • If valuations of post-9/11s drop enough and existing large diversifieds maintain valuations, then they may acquire post-9/11s in a financially attractive deal under current accounting and market constraints • Active capital management to return capital to shareholders during downturns and raise capital/ cut dividends when market turns again (“believe you can get it back”) • Avoid severe price competition without returning capital, still resulting in a decline in ROEs Large diversified strategies Nimble/ prof. reinsurer strategies

21. Bio Brian Moon is a Director in the Financial Institutions Group at Deutsche Bank. He joined the group in September 2003 from Morgan Stanley. Mr. Moon has executed a broad range of advisory and capital raising assignments for Bermuda-based reinsurers, as well as property-casualty and life insurance and reinsurance companies and asset management companies globally. A few noteworthy assignments include Montpelier Re and AXIS IPOs and secondary offerings; People’s Insurance Company of China’s IPO; Partner Re strategic work and PEPS offering; and numerous reinsurance sellside transactions, including Allstate Re, Constitution Re, Axa Re, and CNA Re. Prior to rejoining Morgan Stanley as an associate, Mr. Moon spent two years as the director of finance reporting to the Chief Financial Officer of Constitution Reinsurance and several months at EXOR America (parent company of Constitution) where he assisted in the execution of the sale of Constitution. Mr. Moon has a B.A. with honors from University of California, Berkeley.