Lloyd’s Market Briefing

1. Lloyd’s Market Briefing March 2004

2. Disclaimer The information contained in this presentation is being provided on a confidential basis and should not be made available to the general public, the media or any third party without the express prior written consent of Lloyd’s. This information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The content of this presentation does not represent a prospectus or invitation in connection with any solicitation of capital. Nor does it constitute an offer to sell securities or insurance, a solicitation or an offer to buy securities or insurance, or a distribution of securities in the United States or to a U.S. person, or in any other jurisdiction where it is contrary to local law. Such persons should inform themselves about and observe any applicable legal requirement. It is the responsibility of any person publishing or communicating the contents of this document or communication, or any part thereof, to ensure compliance with all applicable legal and regulatory requirements. Lloyd’s has provided the material contained in this presentation for general information purposes only. Lloyd’s accepts no responsibility and shall not be liable for any loss which may arise from reliance upon the information provided. This presentation includes forward-looking statements. These statements reflect Lloyd's current expectations and projections about future events and financial performance, both with respect to Lloyd's in particular and the insurance, reinsurance and financial and services sectors in general. All forward-looking statements address matters that involve risks, uncertainties and assumptions. Based on a number of factors, actual results could vary materially from those anticipated by the forward-looking statements. These factors include, but are not limited to, the following: (a) rates and terms and conditions of policies may vary from those anticipated; (b) actual claims paid and the timing of such payments may vary from estimated claims and estimated timing of payments, taking into account the preliminary nature of such estimates; (c) claims and loss activity may be greater or more severe than anticipated, including as a result of natural or man-made catastrophic events; (d) competition on the basis of pricing, capacity, coverage terms or other factors may be greater than anticipated, or Lloyd's products could become uncompetitive in light of changes in market conditions; (e) reinsurance placed with third parties may not be fully recoverable, or may not be paid on a timely basis, or such reinsurance from creditworthy reinsurers may not be available or may not be available on commercially attractive terms; (f) developments in the financial and capital markets may adversely affect investments of capital and premiums, or the availability of equity capital or debt; (g) changes in legal, regulatory, tax or accounting environments in relevant countries may adversely affect (i) Lloyd's ability to offer its products or attract capital, (ii) claims experience, (iii) financial return, or (iv) competitiveness; (h) mergers, consolidations, divestitures and other transactions by third parties could adversely affect Lloyd's, including but not limited to changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;] or (i) economic contraction or other changes in general economic conditions could adversely affect (i) the market for insurance generally or for certain products offered by Lloyd's, or (ii) other factors relevant to Lloyd's performance. The foregoing list of factors is not comprehensive, and should be read in conjunction with other cautionary statements that are included herein or elsewhere. Lloyd's undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

3. Agenda • Market profile in 2004 • Financial results • Building capital strength • Lloyd’s market ratings • Franchise performance & risk management • Appendix - Equitas

5. Market profile in 2004

6. F R A N C H I S O R 165Lloyd’s Brokers CLIENTS MEMBERS FRANCHISEES 45 Managing Agents 66 Syndicates $26.78bn Capacity AM Best: A- S&P: A Reinsureds 53 Corporate Groups Commercial 2,048 Individuals (Unlimited Liability Members) 4Members’ Agents Service Companies 637Conversions Personal BUSINESS FLOW CAPITAL PROVISION Market profile in 2004 The Lloyd’s market in 2004 Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003

7. Market profile in 2004 Structure of a Lloyd’s business Management Managing Agent Underwriting Syndicate Names Corporate Member 2 Corporate Member 1 Capital Provision

8. $bn 30 26.78 25.8 25 21.8 20.2 19.5 20 Capacity Other insurance industry 14% 18.2 18.5 18.1 18.2 17.9 17.7 15% US insurance industry 15.9 11% Bermudian insurance industry 15 42% UK listed and other corporate Names conversion capital 6% 10 Names (unlimited) 12% 5 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Market profile in 2004 Profile of capacity provision: 1993-2004 Based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003 Source: Lloyd’s, N.B. capacity figures shown at beginning of each year

9. $bn 30 26.78 26.60 25 2004 Other corporate capital 5% 20 UK non-listed 7% UK listed 30% Capacity 15 Trade investors 40% 6% Conversion capital Names (unlimited) 12% 10 5 0 2003 2004 Market profile in 2004 Profile of capacity remains largely unchanged Mid year pre-emption (Year End) (Jan 2004) Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003

10. Major trade investors continue to support the Lloyd’s market 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 $m 2003 2004 Market profile in 2004 Capacity provided by owned corporate members (No 1 Stamp) Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003

11. 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2003 2004 Market profile in 2004 Lloyd’s listed companies successfully grow their businesses $m Capacity provided by owned corporate members (No 1 Stamp) Source: Lloyd’s, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003

12. 7% 8% Geographical source Property Casualty 36% 9% Marine Direct 48% Aviation 52% Reinsurance Motor 11% Energy 29% 3% 5% 8% North America UK 12% 45% Europe Asia Pacific Latin America Africa/Middle East 27% Market profile in 2004 Business mix: 2004 year of account Class of business Source: Lloyd’s, Syndicate business plans

13. Financial results

14. Financial results 2002 results summary • $1,493m annually accounted profit • Combined ratio of 98.6% • Balance sheet resources +85% • Central Assets +55% (Central Fund +70%) • WTC estimates remain stable: • $8.7bn gross and $3.3bn net • 89% of reinsurance asset ‘A-’ or above • US funding requirements met in full Source: Lloyd’s, based on exchange rates of £1: US$1.79 as at 31 December 2003

15. 0 10 20 30 40 50 60 70 80 90 100 110 120 130 % 98.6% Lloyd's 121.3% US reinsurers* 107.2% US P/C** European 105.1% reinsurers*** Financial results Lloyd’s vs industry 2002 combined ratios * Source: Reinsurance Association of America 2002 Figures ** Source: Insurance Information Institute 2002 Figures *** Source: Credit Suisse First Boston 2002 Figures

16. Financial results Performance of the Lloyd’s listed companies*(combined ratio – 6 months interims 2003) * as at 30 June 2003 Source: 6 month interim results by companies

17. Financial results …standing favourable comparison with rest of industry Combined ratio – H1 2003 Source: Lloyd’s analysis of 6 month interim results announced by companies * Source: Credit Suisse First Boston 2003 Figures ** Source: Reinsurance Association of America 2003 Figures *** Source: Insurance Information Institute 2003 Figures

18. % 140 120 100 80 60 % growth 40 20 0 -20 -40 -60 XL AIG AXA ZFS ACE Allianz Chubb St Paul Swiss Re Munich Re Lloyd's listed Berkshire Hathaway Financial results Market capitalisation: Lloyd’s vs peers Market capitalisation (10/09/01 vs 19/02/04) Source: Reuters, as at 19 February 2004

19. Building capital strength

20. Building capital strength Net resources vs peers 2002 net resources* Lloyd’s net resources $15.7bn at H1 2003 Update * as at 31 December 2002 / net resources = total assets – total liabilities Source: Lloyd’s analysis, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003

21. Building capital strength Net resources vs peers 2002 net resources % growth (YoY) Lloyd’s net resources grew 115% as at H1 2003 since 12/31/01 Update Source: Lloyd’s analysis

22. Building capital strength Growth in key components of chain of security End 2002 (% change from 2001) Corporate Members Individual Members Premiums Trust Funds (PTFs) Premium Trust Funds (PTFs) $30,749m (+28%) Funds at Lloyd’s (set by RBC) (FAL) Funds at Lloyd’s (set by RBC) (FAL) $16,053m (+16%) Other Personal Wealth (OPW) $503m (-14%) Central Fund Other central assets Central Fund + Other central assets $853m $155m $1,008m (+55%) Key: Several assets Mutual assets Source: Lloyd’s, based on exchange rates of £1: US$1.79 as at 31 December 2003

23. Building capital strength Lloyd’s risk based capital (RBC) model • The Lloyd’s RBC model was introduced in 1995 for Corporate Members • The model is used to calculate the capital (Funds at Lloyd’s / FAL) required to underwrite a planned book of business, expressed as a percentage of authorised premium • Lloyd’s applies a minimum requirement after the RBC calculation of 40% • The underlying concept of the model is to equalise the potential risk to the Central Fund irrespective of the portfolio underwritten

24. loss loss Central Fund Central Fund RBC + premium RBC + premium MOTOR CAT X/L time time Building capital strength Risk based capital concept

25. Building capital strength Risk based capital: summary • Security • Promote efficient distribution of capital in relation to risk • Aim to minimise loss to Central Fund for given level of market capital • Consistent with optimising policyholder security • Note that capital distribution optimal for risk, not profit • Competitiveness • Ensure policyholders not disadvantaged by paying extra premiums to service unnecessary levels of capital • Reduce possibility of each member being required to mutualise the losses of others • Best practice • To ensure Lloyd’s capital-setting process is in line with industry “best practice” in regulating capital to risk • Equity between members • To support the equitable allocation of capital between capital providers

26. Building capital strength Realistic disaster scenarios • Realistic disaster scenarios (RDS) deployed since 1995 to manage catastrophe exposure at a syndicate and market level • Generic scenarios include: • USA Windstorm ($50bn/Florida-Gulf of Mexico) • Aviation collision (two aircraft over major US city/$3bn liability plus hull & products) • Specific event-based scenarios with theoretical return periods include: • Florida Windstorm / Los Angeles Quake ($60bn/1-in-250-year return period) • Japanese Earthquake ($19bn/Zone 5 epicentre of magnitude MMI IX plus adjacent zones) • Further enhancements underway: • Introduction of terrorism RDS for 2003 • Inputs to capital allocation model (risk based capital) • Franchise guidelines Source: Lloyd’s

28. Market ratings

29. Lloyd’s market ratings Lloyd’s market ratings • Lloyd’s is interactively assessed by the leading two insurance rating agencies: • Lloyd’s is rated as a market: • All Lloyd’s policies are ultimately backed by the common security of the Central Fund • The Lloyd’s market ratings apply to all business underwritten by all 66 syndicates AM Best A- ‘Excellent’ Affirmed 17/07/03 Stable outlook Standard & Poor’s A ‘Strong’ Affirmed 12/02/03 Source: AM Best, Standard & Poor’s

30. Berkshire Hathaway Gerling Global Re Employers Re Hannover Re Converium Munich Re XL Capital Swiss Re Lloyd's Allianz SCOR 0 1 2 3 S&P notches downgraded 4 5 6 7 8 Unchanged since Sept 2001 Downgraded since June 02 Rating withdrawn since June 02 Lloyd’s market ratings Shift in S&P ratings of the world's largest reinsurers since September 11th Source: Standard & Poor’s

31. Lloyd’s market ratings Future rating prospects • Franchise Performance team takes a more active role in managing performance at Lloyd’s, particularly into next down cycle • Continued strong support from capital providers • Substantially improved operating performance from 2002 • Continuation of ‘hard market’ conditions through 2003-2004 • Maintenance of strong niche business position in global insurance and reinsurance • Reduction in exposure to reinsurance receivables, with overall credit quality of asset maintained • No material deterioration in Equitas solvency • Resolution of the Central Fund insurance dispute, with no material impact on Central Fund Source: Lloyd’s

32. Lloyd’s market ratings Syndicate-level measurements • The rating agencies apply a range of rankings and measures at a syndicate-level, none of which are endorsed by Lloyd’s • In general, Lloyd’s is not supportive of rating individual syndicates: • Security/solvency is at a member not syndicate level • All members are capitalised by Lloyd’s Risk Based Capital model - independently verified as one of the most technically sophisticated models in the industry • All policies underwritten by all syndicates are backed by the Lloyd’s Chain of Security which is partially mutualised by the Central Fund • Lloyd’s believes that brokers remain best placed to assess client needs based on a wide range of factors placing confidence in the strength of the common security underpinning all Lloyd’s policies on which the Market ratings are predicated

34. Franchise performance & risk management

35. Franchise performance & risk management Lloyd’s change programme Lloyd’s change programme Drivers of change initiative Unacceptably poor performance between 1997 and n 2001 New corporate governance structure to promote n Huge disp arity between the best performing and more commercial, coordinated approach n worst performing businesses (syndicates) Focus on franchise performance/risk management n Business p rocess i mprovement s seek to address n inefficient and costly practices Need to provide a competitive trading platform n Premium levies for Central Fund eliminated for 2004 n Franchise performance controls and RBC model aim tominimise ‘costs of mutuality’ in medium/long term n Transition to full annual accounting from 1 January 2005 n Complex financial reporting and accounting , lack of n Commitment from HM Treasury to change tax n transparency ; antiquated concept of unlimited treatment to allow unlimited liability members to liability convert Target market rating initiative to determine target n IFS ratings and foc us on requirements to achieve Increased policyholder / cedant concern with n them financial security Source: Lloyd’s

36. Franchise performance & risk management Lloyd’s Franchise • A new franchise structure with the “centre” taking a more active commercial role • The Corporation of Lloyd’s has become the “franchisor”, the managing agencies, “the franchisees” • A new underwriting byelaw sets out the relationship between “franchisor” and franchisees” including a syndicate business planning process and franchise guidelines • The challenge is now to balance greater scrutiny whilst maintaining the opportunistic and entrepreneurial culture • The ultimate sanction is to remove a franchisee from the franchise Source: Lloyd’s

37. Franchise performance & risk management Franchise implementationKey milestones to date • Key franchise performance and risk management initiatives implemented • New syndicate business planning regime – structured commercial approach • Franchise guidelines - control / manage underwriting exposures • Syndicate risk assessment - provides focus for central risk management effort • Performance benchmarking – identify under performance at the earliest opportunity • Key strategic initiatives well advanced • New underwriting byelaw to provide a clear and transparent relationship between the Franchisor and Franchisees • Comprehensive review of Lloyd’s capital structure commenced • Benchmark profitability measures being established by line of business • On target to achieve conversion to annual accounting 1/1/2005 through changes in EU legislation Source: Lloyd’s

38. Franchise performance & risk management Franchise performance: primary areas of focus • Quarterly internal review of agents by Franchisor executive • Efforts concentrated on agents with underwriting and capital issues • RDS process reviewed for 2003 and 2004 • Review of pre-emption application process • Review of new syndicates seeking admission to the market • QQS policy reviewed Source: Lloyd’s

39. Franchise performance & risk management Qualifying quota shares (QQS) • Maximum level of QQS set at 10% for 2004 • QQS to be used where exceptional underwriting prospects exist – not to maximise capacity • No longer to be on all business written by the syndicate • Terms should reflect underlying profitability of the business • Applications require specific approval of FPD – an approved business plan stipulating intent to use QQS does not constitute approval of the QQS Source: Lloyd’s

40. Franchise performance & risk management Business planning process • All syndicates are required to submit business plans for the following year in September / October • All business plans reviewed in depth • Strategic plan • Forecast financial performance • Lines of business • Outwards reinsurance • Catastrophe exposure • Franchise guidelines • Close oversight of underwriting – but careful not to stifle opportunistic/entrepreneurial culture Source: Lloyd’s

41. Franchise performance & risk management Franchise guidelines • Gross underwriting profit on each line of business • Catastrophe exposure management using risk management modelling, minimum return periods and maximum gross and net exposures to a single RDS event (gross 75%, net 20% of syndicate capacity) • Approved reinsurer selection process • Maximum gross line size - 10% of capacity • Minimum reinsurance retention - 10% of gross line • Restrictions on multi-year contracts Source: Lloyd’s

42. Actual syndicate development Future year “expectation” 120% 120% 100% 100% 50% confidence interval 50% 80% 80% confidence Bottom quartile Bottom quartile interval Syndicate form 2 data 60% Loss ratio 60% Loss ratio Market median 40% 40% Market Top quartile Top quartile median 20% 20% 0% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 1 2 3 4 5 6 7 8 9 10 11 12 13 Quarter (13 = ultimate) Actual syndicate development Quarter (13 = ultimate) 350% 300% 50% confidence 250% interval 200% Syndicate Loss ratio form 2 data 150% Bottom quartile 100% Market median Top quartile 50% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 Quarter (13 = ultimate) Franchise performance & risk management Performance benchmarking Source: Lloyd’s

44. Appendix - Equitas

45. Appendix Equitas • Established as a company independent of Lloyd’s in 1996 • Formed as part of Lloyd’s R&R to reinsure the liabilities of Lloyd’s syndicates’ 1992 and prior years of account (excl. life syndicates) • Ahead in the reserving cycle: • Ground-up actuarial reviews conducted mid 90s; further augmented over last 3 years • Gross undiscounted asbestos reserves increased $5.7bn during 2000 - 2001. $716m discounted increase for 2003 • Equitas reserves consistent with Schedule F analyses • Survival ratio of 24.6 years1 1 Equitas survival ratio 2003 excludes buyouts and commutations; US Industry survival ratio 2003: Equitas sample incl. buyouts and commutations, if any Source: Equitas, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003

46. % $m 30 12 1,400 1,215 10.3% 24.6 1,200 25 10 1,053 8.7% 1,000 931 20 8 800 Years 5.6% 15 6 600 11 10 4 400 2 5 200 0 0 0 Startup 2002 2003 Startup 2002 2003 US Industry Equitas Gross Appendix Equitas Accumulated Surplus Solvency Margin Survival Ratio Solvency margin = (accumulated surplus) / (net claims o/s) Equitas survival ratio excludes commutations; US Industry: AM Best report Oct. 2002 2001, 2002: Year end data Start up: September 1996 Source: Equitas, based on an exchange rate of £1 sterling: $1.79, as at 31 December 2003

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