State of the Reinsurance Market

1. Midwest Actuarial Forum March 22, 2005 State of the Reinsurance Market Bill Godfrey

2. Reinsurance Market Review • Security Assessment • Renewals in 2005

3. A.M. Best Rating Distribution Source: A.M. Best

4. S&P Rating Migrations Among theTop 150 Reinsurers* Source: Standard & Poor’s

5. S&P Outlook on Reinsurance Sector • September 13, 2004 – Revised outlook to stable from negative • Expect downgrades AND upgrades will be limited • Potential for more reporting of prior-year reserve development continues to weigh on ratings of older reinsurers • Concern over Asbestos reserving remains – Reinsurers not recognizing what primary insurers are • Negative on Rating related triggers • Diminishing Parental Support • Outlook for 2004 and 2005 Strong Profitability

6. Rating Changes Since September 11, 2001 for Top Ten Reinsurers • U – indicates under review • NR3 - indicates rating procedure inapplicable

7. Combined RatioU.S. P & C vs. Reinsurance Industry

8. Global Insured Catastrophe Losses

9. Reserve Strengthening: 5 Selected Groups Source: U.S. SEC Filings

10. Reinsurance Industry Reserve Additions The impact of U.S. casualty reinsurance business from 1997-2001 2003 Examples include: Additional Development 2003 Combined Ratio Employers Reinsurance Corp $ 355 million 105.1% American Re-Insurance Co $ 546 million 108.4% General Reinsurance Corp $ 402 million 103.6% Swiss Re America $ 903 million 138.5% Transatlantic Re $ 298 million 96.4% XL Reinsurance America Inc $ 289 million 151.3% $2,793 million Source: U.S. Statutory Filings

11. Reinsurance Industry Reserve Additions The impact of U.S. casualty reinsurance business from 1997-2001 • 2004 First 9-months updates: Additional Development Combined Ratio • American Re-Insurance Co $ 201 million 114.3% • Employers Reinsurance Corp $ 473 million 116.2% • General Reinsurance Corp $ 474 million 112.6% • Swiss Re America $ 134 million 108.0% • Transatlantic Re $ 157 million 102.0% • XL Reinsurance America Inc $ 50 million 94.4% $1,489 million Despite these actions, have reinsurers fully accounted for reserve additions taken by primary companies during the last 30 months? Source: U.S. Statutory Filings

12. S&P Global Reinsurance Industry Combined Ratio Versus Return on Revenue

13. US Reinsurance CompositeReturn on Equity (Surplus)

14. U.S. Reinsurance CompositeRBC Composite Weighted Average

15. U.S. Reinsurance RBCComposite Companies - 2003

16. US Reinsurance Recoverables from Unaffiliated Reinsurers • Reinsurance Recoverables on: • 2003 2002 • Paid Losses $17,931 M $16,833 M • Unpaid Losses 79,945 M 77,490 M • IBNR Losses 79,090 M 78,146 M • Sub-total 176,966 M 172,469 M • Funds Withheld -20,706 M -18,920 M • Total Recoverable $156,260 M $153,549 M Source: A.M. Best

17. 2003 US Reinsurance Recoverables • Reinsurance Recoverables $156 B • Admitted Assets $1,174 B • Reins. Recov. / Adm. Assets 13% • Industry Surplus $354 B • Reins. Recov. / Surplus 44% Source: A.M. Best

18. U.S. Reinsurance Recoverables Dependence of U.S. Insurers on Reinsurance (recoverables as percentage of surplus) Source: Standard & Poor’s

19. An Unprecedented Convergence • Adverse loss development in commercial lines for the last 10 accident years • Adverse loss development for asbestos and pollution • Increased severity and frequency in short tail lines • September 11, 2001 - correlated losses from one event • Increase in reinsurance recoverables • Reserve gap (primary & reinsurers) • Low interest rates and lack of investment income • Drop in asset values due to equity market volatility • Regulatory and rating agency scrutiny following a climate of corporate scandals • Prolonged soft market in insurance and reinsurance A perfect storm?

20. Reasons to be optimistic... • In the end, the insurance and reinsurance mechanism has effectively done what it is supposed to do • The industry has absorbed the losses from • WTC / 9-11 • asbestos • pollution • and many other systemic threatening situations • Corrective measures are in place • An increased focus on underwriting disciplines • Adequate pricing • New risk management techniques

21. New Capital2001 - 2003 Start-Ups

22. Reinsurer Standard & Poor's AM Best & Co. Allied World Assurance NR A+ Arch Re NR A- Aspen Re A A AXIS A A Catlin Insurance Co. NR A DaVinci Re A A Endurance A- A Montpelier Re A- A Olympus Re NR A- Platinum Underwriters NR A Agencies issue ratings to start up companies Start Up Credit Ratings

23. Exited 2001 - 2004

24. Major Reinsurance Centers:Financial State in 2004 • Bermuda • Profitable • Hurricanes impact reduced by FHCF • Exposed to new Florida “take-outs” • US • Profitable • UK • Profitable • Lloyd’s reducing capacity in 2005

25. Reinsurance Market Review • Security Assessment • Renewals in 2005

26. 2005 Renewals • Property • Casualty

27. U.S. – Cat Property Rate On Line Index* * 1989=100. Index constructed by Guy Carpenter & Company, Inc.

28. Insured Losses from 2004 Hurricanes$ billions US data for Charley, Frances, Ivan and Jeanne from PCS. Other figures from model estimates.

29. Price Nationals pricing about flat. Average ROL down marginally for about 3% for regionals Florida exposure a concern (developing issue) Market most competitive at upper layers Retentions and limits stable Horizontal exposures a concern (active 2004 hurricane and typhoon seasons) Pricing high Terms and Conditions Some extension from 72 hours to 96 hours Terrorism - following TRIA. Personal lines get full cover Commercial lines get cover for “domestic” terror. Brushfire defined by location, not ignition source Capacity Generally available. Decrease in oversubscriptions from 2004 U.S. Property Catastrophe 2005 Renewals

30. U.S. Property Renewals, 2005 (Excluding Catastrophe) • US Property: • Per risk • Pricing flat or down • SPI growth implies significant drop in contract rates • Reinsurers concerned over softness in primary property market • Margins in pro rata renewing at expiring • Florida exposure a concern. Aggregate caps imposed. • Capacity adequate

31. 2005 U.S. Casualty Renewals • Workers Compensation • Medical Malpractice • Directors & Officers • Errors & Omissions • Employment Practices • Umbrella and Excess

32. 2005 U.S. Casualty Renewals Workers Comp • Primary pricing strong • Abundant capacity in catastrophe layers • Market improved , but still firm for single claimant exposures • Terror issue: • In-depth evaluation of exposure • Non-certified free (ex NBC) • Security concerns

33. 2005 U.S. Casualty RenewalsMedical Malpractice • Primary market recovering, but 20 states in crisis • Pricing main issue, not capacity (new Bermuda capacity) • Reinsurance rate stable (unless unfavorable loss history) • Problem areas: • Start-ups • Pro rata medical professional liability • Tort terrors • Cook County IL, South Florida

34. 2005 U.S. Casualty Renewals Directors & Officers • Imbalance between soft primary market and firm reinsurance market • Rates declining on primary business • Reinsurance firm because: • Exits from the line, notably Converium • Security issue reduces potential reinsurance panel • Heightened concerns on Financial Institutions • Rising settlement values • Ceding commissions under fire as underlying premium viewed as inadequate • Return of loss ratio caps and loss corridors

35. 2005 U.S. Casualty Renewals Errors & Omissions • Primary market expected to soften in 2005 • A diverse line, with varying market conditions • At January 1, 2005, ceding commissions and terms dependent on type of business, loss experience and portfolio size • Difficult lines include: • Large Accountants • Large Lawyers • Project Architects & Engineers • Large Technology E&O • Start-ups pushed to Quota Share

36. 2005 U.S. Casualty Renewals Employment Practices • Mild softening of of the primary market in 2004 and continuing into 2005 • Reinsurance renewals tend to be at expiring • Increasing concerns by reinsurers on third party EPLI claims

37. 2005 U.S. Casualty RenewalsUmbrella and Excess • Primary market • Flat to single digit increases in rates in early 2004 • Single digit decreases to flat later in 2004 • Some classes saw 10-15% decreases • Decreases in single digit range anticipated in 2005 • Reinsurance market • Reinsurers do not view original rates as redundant • Reinsure pricing also reflecting fear of inadequacy, and possible recurrence of poor 1997-2001 years • Quota share: • Increased pressure for ceding commissions on a cost plus basis. • Pressure to minimize override in ceding commission • Pressure from reinsurers for mold, asbestos, silica, tobacco and terror exclusions

38. Summary • Finances of reinsurers improved • New non-legacy capital expanding in capacity and scope • Moderate softening at reinsurance renewals in January, 2005 • TRIA and market security over-riding concerns

39. Midwest Actuarial Forum March 22, 2005 State of the Reinsurance Market Bill Godfrey