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May 2013

Global Reinsurance trends R eflections Of A Reinsurer. May 2013. Insurance and Reinsurance Operations Investment Management Non-insurance Businesses. Premiums Written $ 5.0 billion Investments 19.2 billion Total Assets 23.2 billion

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May 2013

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  1. Global Reinsurance trends Reflections Of A Reinsurer May 2013

  2. Insurance and Reinsurance Operations Investment Management Non-insurance Businesses

  3. Premiums Written $ 5.0 billion • Investments 19.2 billion • Total Assets 23.2 billion • Stockholders’ Equity 6.7 billion

  4. Alleghany’s (Re)Insurance Operations Premiums Written $ 3.5 billion Stockholders’ Equity 4.4 billion Premiums Written $ 1.3 billion Stockholders’ Equity 1.6 billion Premiums Written $ 175 million Stockholders’ Equity 300 million Premiums Written $ 40 million Stockholders’ Equity 100 million

  5. Overview of TransRe Premiums by Region Premiums by Line Asia Pacific Europe Specialty Professional Liability North America Latin America Casualty Property $14.4 billion of investments $4.4 billion of capital Over 600 employees 24 offices in 19 countries 2012 Net Written Premium

  6. Role of Reinsurance Share Of Premiums Share Of Recent Losses $ billions Reinsurance $150 billion $37.5 billion 40% $13.0 billion $10.0 billion $8.3 billion $5.0 billion 73% 60% 95% 44% 40% 2011 Japan EQ 2011 NZ EQ 2011 Thailand Floods 2010 Chile EQ 2011 Australia Floods Global P&C Insurance Premiums $2.0 trillion Sources: A M Best, Insurance Insider

  7. Global Trends Three Topics Low Investment Yields Capital Markets & Alternative Reinsurance Future Growth Opportunities

  8. Low Investment Yields

  9. Ten-Year Sovereign Yields 1988 to 2013 % 2013 Source: Bloomberg

  10. Range of Ten-Year Sovereign Yields 2003 to 2013 UK USA Germany % Japan Switzerland Source: Bloomberg

  11. Economics of Insurance Underwriting must deliver If yield is down And leverage is down To maintain returns Underwriting Results Investment Yield Leverage Total Return + = *

  12. Combined Ratio to Earn 12% ROE Sources: Dowling & Partners, Bloomberg, Goldman Sachs

  13. Required Combined Ratio Improvement To Offset 1% Decline in Yield 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% Source: A M Best

  14. Implications Underwriting is more important than ever Investment income cannot cover underwriting losses Large underwriting losses could be lethal

  15. Capital Markets & Alternative Reinsurance

  16. Alternative Reinsurance Background • Investorsprovide reinsurance directly to insurers • Investment vehicles: • Catastrophe bonds • Collateralized reinsurance • Industry loss warranties (ILWs) • Sidecars • Investor motivations: • Returns not correlated with traditional investments • Attractive expected returns over time relative to bonds • Unbundles reinsurance risk from other corporate risks

  17. Alternative Reinsurance Key Developments • 1973 An inquiry into the feasibility of a reinsurance futures market • (Goshay & Sandor) • 1990 Chicago Board of Trade announces plan to trade insurance futures • 1992 Following hurricane Andrew, CBOT begins trading catastrophe futures and options • 1997USAA places first large-scale catastrophe bond, Residential Re • 1998First dedicated catastrophe bond fund formed • 2005First publicly disclosed total loss to a cat bond, Kamp Re • 2013 $45 billion of investments outstanding

  18. Growth of Alternative Reinsurance Billions Outstanding $ Supply Driven Demand Driven Sources: Aon Benfield, Guy Carpenter

  19. Alternative Reinsurance Comparison with Prior Capital Waves $ 45.0 billion $ billion Collateralized Reinsurance ILWs Sidecars / Retrocessions Cat Bonds $8.7 billion $2.9 billion $600 million Ace XL Center Cat Global Capital IPC Re LaSalle Re Mid-Ocean Partner Re RenRe Tempest Allied World Arch Aspen Axis DaVinci Endurance Montpelier Platinum Ariel Flagstone Harbor Point Lancashire Validus Source: Goldman Sachs, Guy Carpenter

  20. Global Property Cat Market Current Market Shares $ 313 billion of Limits Purchased $ 45 billion Cat Bonds $16 billion Collateralized Reinsurance $15 billion Sidecars / Retrocessions $8 billion ILWs $6 billion Traditional Reinsurance $268 billion Sources: Guy Carpenter

  21. A Sense of Scale Capital Markets vs. Reinsurance Global Pension Funds Assets Under Management $30 Trillion Global Cat Limits of $313 billion Alternative Reinsurance of $45 billion Sources: AON Benfield, Guy Carpenter

  22. Alternative Reinsurance remains Untested What happens when…. Interest rates increase? One or more large losses happen? Models are not correct? Significant claims disputes occur? Funds are escrowed for potential claims?

  23. Possible Implications Lower returns on ‘peak zone’ cat risk Dampens post-event pricing spikes Expands into other lines and territories Increases amount of limits purchased Reinsurers develop asset management capabilities May be catalyst for reinsurance M&A Sources: AON Benfield

  24. A Note Of Caution (Or Two) Many investors buy (risky) securities … because they “need income” and cannot get along with the meager return offered by top-grade issues. Experience clearly shows that it is unwise to buy a bond or a preferred which lacks adequate safety merely because the yield is attractive. … It is bad business to accept an acknowledged possibility of a loss of principal in exchange for a mere 1 or 2% of additional yearly income. If you are willing to assume some risk you should be certain that you can realize a really substantial gain in principal value if things go well. Benjamin Graham The Intelligent Investor (1949) • Chasing yield is crazy. You know, just because you'd like to earn eight percent or you'd like to earn ten percent or you'd like to earn six percent, the world isn't going to adapt to that.  You have to think about what is the most intelligent thing to do and if that produces five percent or six percent, that's the best you're going to do.  But to get enticed into some investment that is riskier [or] that you don't understand because somebody promises you a higher yield, … it just doesn't make any sense at all. • Warren Buffett • CNBC, May 13, 2013

  25. Future Growth Opportunities

  26. Future Growth Opportunities Economic Growth Emerging Risks ‘Public’ Risks

  27. Growth in P&C Premiums 2002 to 2012 217% 110% % Developed Markets Growth Markets Source: Guy Carpenter

  28. Global Catastrophe Losses Economic vs. Insured $380 billion $ billions 72% $200 billion $170 billion Economic Loss $150 billion 59% Uninsured Loss 78% 75% $50 billion 56% Insured Loss Source: Munich Re Nat Cat Service in constant $ (unadjusted for inflation)

  29. Private Solutions for ‘Public’ Risks

  30. Closing Thought

  31. Benefits of Traditional Reinsurance Long-term commitment to the business Understands insurance business and risks Expertise and services Ease of doing business Proven track record

  32. Benefits of Traditional Reinsurance TransRe Latin America Specialty Casualty Surety Property 20 Years of Service 60 employees 4 offices in 4 countries

  33. Global Reinsurance trends Reflections Of A Reinsurer May 2013

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