#IASACFO

1. #IASACFO

2. Market Watch: What’s on the Horizon Steve Korducki President, BMS Re US Julie Serakos Executive Vice President, BMS Re US

3. Agenda • 2017 Cats: Macro Effect on the Reinsurance Market • Convergence of Traditional Reinsurance and Capital Markets • Captives – the Basics

4. Market Watch 2017 Cats: Macro effect on the reinsurance market

5. 2017 Cats: Macro Effect on the Reinsurance Market • 2017: $140+ Billion Loss Year • Impact on Stock Price, Ratings and Access to Capital • Market Reaction – Capacity & Price

6. 2017: $140+ Billion Loss Year Worldwide • For the first time since 2011, the insurance industry has suffered over $100B in insured losses worldwide • Insured losses exceeded the industry’s 10-year annual average of $58B Sources: PCS/MunichRe/SwissRe/Artemis

7. The Major Hurricane Drought is Over • Longest drought in 114 years on record - 4,323 days • 27 major hurricanes occurred in the Atlantic Ocean basin between Wilma (2005) and Harvey (2017), which ended the record drought • The odds of this occurring are 1:2300, according to Phil Klotzbach at CSU • Many records were broken

8. Wildfire Events • 2017 will be the largest wildfire loss year ever recorded • Over $11B in insured losses occurring in the U.S. alone • Previous largest loss year of 1991, which, in today’s dollars, would be an insured loss of $3.4B • Additional $0.5B in loss from mudslides occurred in 2018

9. Severe Storm Events • Insured losses from thunderstorms were driven by large hail events impacting urban areas • The only tornado that caused substantial damage in an urban area was the East New Orleans event on Feb 7th, which generated less than $85M in loss Events *Insured Loss *Insured losses have not been adjusted Source: PCS

10. Cat Model Performance • Cat model vendors were challenged to project losses • Modeled estimates remain higher than current PCS loss projection of $57B for HIM • The industry relies on modeled estimates for impact on reinsurance, cat bonds, ILW’s, investments, stock prices “Modeling firms are producing actually less good data than they used to” – Hudson Structured Capital Management

11. Macro Effect on the Reinsurance Market Post 2017 • 2017: $100+ Billion Loss Year • Impact on Stock Price, Ratings and Access to Capital • Market Reaction – Capacity & Price

12. Impact on Stock Prices • (Re)Insurance stocks took a beating in the days leading up to Irma’s landfall • But the P&C market rebounded ending the year +11.3% • Lead by London markets +32% • Despite the overall drop by Bermuda companies -8.6%

13. Impact on Ratings • To date, no ratings downgrades have occurred due to HIM • Demotech’s review of the Florida/Coastal carrier market affirms all company ratings • Placed more importance on claims handling procedures • Sited concerns about diminishing premium rates due to competition and development of claim costs with expectation of re-opened claims/AOB • New NAIC RBC requirements placed more focus on surplus needs

14. Impact on Capital/ILS • 13 Cat Bonds were in play at time of Irma • Irma Live-Cat trades had industry triggers ranging $40B - $80B • Market was fearful of “trapped capital” • Small-medium ILS players owned by a larger company were able to raise capital through its parent • Collateralized capital secured LOC’s at renewal • But capital was actually running towards the market • Short term potential for modestly better risk spreads at renewal • Longer term potential to partner with (Re)Insurance capital and add to AUM Nearly $4B of new (disclosed) capital was raised Q4 2017

15. Macro Effect on the Reinsurance Market Post 2017 • 2017: $100+ Billion Loss Year • Impact on Stock Price, Ratings and Access to Capital • Market Reaction – Capacity & Price

16. Market Reaction – Capacity & Price • Reinsurers were posturing for high rates at renewal “Price rises in loss affected areas could be as much as 40-50%” – Hannover Re CEO, October 2017 • Reality: there was more capacity for 1/1/18 renewals than at 2017 • Rates were up a modest 5%, with loss-free contracts renewing flat • Company differentiation was key for renewals: data, claims handling procedures and management • Retro was up 10% to 20% • Forced some retro ILW covers to be replaced by UNL retro for better terms

17. National Flood Insurance Program • Reinsurers doubled-down on NFIP reinsurance program despite $9.5B loss from HIM • 2017 was the first year NFIP purchased reinsurance • Took a full limits loss in Harvey: $1.024B with 25 markets • 2018 it increased its reinsurance purchase: $1.46B with 28 markets; expects to purchase Cat Bond this summer • Asked for $16B in debt forgiveness from Congress • NFIP reform is being debated in congress • Renewed through 7/31/18 • Key item: Allow banks to accept private market flood coverage

18. Summary of Impacts & Outlook • The industry is in one of its best positions to pay claims • Record high surplus of $734B for the 2017 hurricane season • 2012 (Sandy) - $600B; 2005 (Katrina) - $400B • Individual company losses were bearable, albeit severe, due to global spread of risk throughout worldwide markets • Industry losses are an earnings volatility story, not capital impairment • Personal Auto and BI are the biggest unexpected losses • HIM stressed insurance operations due to claims management and impacted loss adjustment expense (20%+ in FL) • Opportunity for Insurtech: drones, satellite imagery, gig-adjusters • Hasn’t been a PR issue with the potential for coverage disputes • Flood, CA mudslides, FL AOB • Additional capital has been added to the market - $4B+ in 2018 • Midyear renewals have been orderly, a few early placements • Low early severe storm activity - jury is out on hurricane season

19. Market Watch Convergence of Traditional Reinsurance and capital markets

20. Reinsurance Market Capital Convergence of Capital and Risk Markets • Traditional reinsurers (direct and broker markets) $527 billion • Alternative reinsurance instruments (ILS) $85 billion

21. Alternative Reinsurance Capital Increasing part of market- 4% of reinsurance capital in 2006- 14% of reinsurance capital today- Could double in size by 2020 Collateralized Re growing- Comparable to traditional - Easier placement- Most price efficient- Smaller deal size than cat bonds Investors- 50% from pension / sovereign funds- 30% from hedge / specialty PE funds- Balance from banks and (re)insurers Growth in 2017- Traditional market grew 2%- Alternative market grew 9%- ILS grew 25%

22. Factors Driving the Growth • Enhancements in the level and quality of data • Lower cost of capital for uncorrelated risk (price competition) • Diversification of reinsurer claims-paying capacity by insurers • Investor diversification of property cat geographic exposure • Addition of perils beyond property cat • Rating agency metrics and NAIC risk based capital changes increase reinsurance demand and favor collateralization • Collateralized markets efficiently bundling multiple coverages

23. Alternative Market MechanismsCollateralized Versus Traditional Reinsurance Traditional Reinsurance Collateralized Reinsurance Generally unrated reinsurer Assets in dedicated trust fund back the promise to pay Transactional, though buyers can develop market reputations No post event reinstatement, use it you lose it No term or condition amendments are generally possible mid term May contain collateral release and commutation requirements • Generally “A” or better ratings • Billion $$ balance sheets that back the promise to pay • May benefit from long term relationship between parties • May offer reinstatement of coverage post event • Potential to try to amend contract terms and conditions mid term • Potential obligation of reinsurer continues indefinitely

24. Some ILS Issuers / Sponsors

25. ILS Diversify Beyond Property Catastrophe • Essent Guaranty / Arch - excess of loss for mortgage portfolios • Aetna - excess of loss for medical benefit loss ratio • AXA Global Life - excess mortality above expected for Japan, France and the US • California State Fund - workers compensation claims resulting from a California earthquake • World Bank - pandemic risk funded through the Pandemic Emergency Financing Facility • Swiss Re and Scor Global Life - extreme mortality

26. Accessing the Marketplace Evolving Model vs. Traditional Placement Model Traditional Reinsurers Traditional Broker Placement Process Special Purpose Reinsurer Large Dedicated Collateralized Markets Broker Dealer (FINRA Regulated) Investors / Collateralized Markets May access untapped competitively priced collateralized capacity

27. Scenarios for Third Party Capital • Peaks at current level (10% to 15% of market) • Disruption continues resulting in growth to 25% to 35% of market • Dislocation as alternative capacity grows to represent more than 35% of the market First quarter of 2018 saw $3.1B of new ILS issued

28. Market Watch Captives – the basics

29. Introduction to Captives What is a Captive?“A captive is a special purpose insurance company established to finance risks emanating from its parent company, group or groups” Captives Can Add Value • Part of a long term risk management strategy • Reduces exposure to market pricing trends • Manages retained loss or expense volatility in rated entities • Validation for primary rates

30. Some Facts About Captives Captive Domiciles • Bermuda (885) • Cayman Islands (780) • Vermont (581) • BVI / Barbados (510) • Delaware (333) • Hawaii (194) • South Carolina (158)

31. Some Benefits of Captives • Can minimize ultimate dollars out the door for risk leading to improved cash flow and investment earnings • Stabilizes results of rated entities over time through the use of off statutory balance sheet financing of volatility • Can favorably impact BCAR and RBC results without external transactions • Enhances leverage over traditional reinsurance market • Increases flexibility in reinsurance program design • Allows participation in profits • Might allow development of increased product offerings • Tax deferral or savings potential

32. Considerations and Disadvantages • Financial strength of parent organization and its ability and desire to retain increased underwriting risk is top consideration • Captives are insurers and subject to regulation in their domicile • Captive as a reinsurer is subject to Credit for Reinsurance provisions of state laws • The ability and desire of the parent organization(s) to commit the amount of capital necessary to support the captive • Management time commitment, infrastructure needs and administrative expenses • Tax laws for premiums ceded to off shore subsidiaries • GAAP consolidation

33. Insurer Specific Captive Applications • Reduce event or aggregate retention to smooth volatility, manage capital requirements and address rating agency concerns • Build capacity over time to potentially fund higher retentions or take co participations in higher margin layers • Strengthen negotiating position in harder reinsurance markets • Manage volatility of self funded employee benefits • Low cost surplus relief and risk based capital benefits • Allow distribution network or preferred insureds to share in results of the business

34. Aggregation of Retention Losses • Manage volatility associated with net accumulations- Weather- Medical utilization- Mortality experience- Collision frequency- Workers’ comp

35. Captive Formation – Getting Started • Define objectives (risk management, risk financing, providing reinsurance coverage, etc.) in synch with a long term risk management strategy • Understand regulatory and rating agency implications • Quantify funding requirements and identify source of funding • Team building – internal and external- Internal “owner”- Regulatory counsel - External resources (actuarial, reinsurance, etc.)- Captive manager • Domiciled company versus protected cell decision

36. QuestionsMarket Watch: What’s on the Horizon Steve Korducki President, BMS Re US Stephen.Korducki@bmsgroup.com Julie Serakos Executive Vice President, BMS Re US Julie.Serakos@bmsgroup.com