Managing the Underwriting Cycle with Reference to the Energy Market

Market Dynamics

Cycle Management Strategies

•RoE•Cost of Capital / Excess Capital•Consolidation acquisition•Share repurchase•Dividend strategy•Reserve releases•Combined ratios•Diversification•Value

Global Economy

•GDP Growth•Recession•Developing markets•Sovereign debt•Interest rates•Inflation•Global economies – emergence of new powers such as China, India & Brazil•Eurozone

Regulation

•Solvency II•China, India & Brazil not open markets to trade in•RMS v11•Capital models•Recent Californian workers reform package

State of the Market

•Pricing•Coverage•Reserves•Capital Markets•Supply•Demand•Risk•Talent•Softening

Old

•WTC•Hurricane Andrew•Asbestos•Hurricanes Katrina, Rita & Wilma

Recent

•Japan•Chile•New Zealand•Australia•USA hail / tornados•Macondo•Thailand•Oil sands•Maersk

Catastrophe Losses

1983 Hurricane Alicia and Cat 24 1987 ROE’s were in the region of 17.3%* Significant losses from LMX in the late 1980’s caused huge

claims “the spiral” Significant losses include:

Piper Alpha Exxon Valdez Hurricane Hugo Liability claims on an occurrence form in the back

years still deteriorate Culminated in 1992 with Hurricane Andrew The market turned on a global basis

1983 - 1992

Global Cycle Management

*Source: Insurance Information Institute

Benign loss period in the early 1990’s Renewal & restoration at Lloyd’s Introduction of corporate capital Global stock market boom / rising interest rates Introduction of Australian low level reinsurance capacity,

e.g. New Cap Re, REAC, G.I.O., Rhine Re, etc. All started to drive down underwriting discipline culminating

in marginal rating going into 2001, which saw significant losses from Petrobras (platform sinking), Sri Lanka (airport attack) & World Trade Center

The market turned on a global basis

1992 - 2001

Global Cycle Management

From a global hardening at the end of 2001 rates drop off again until Hurricanes Katrina, Rita and Wilma in 2005

At this point note that even with losses of this magnitude ($100.7bn) this is the first non-global hardening of the market

Territories such as Asia continue to reduce in pricing Singapore market size by written premium:

2001: $9bn 2006: $10bn

2002 - 2005

Global Cycle Management

Global rates have been reducing since 2006 with the occasional blip Hurricane Ike in 2008 Global financial crisis in 2008

Withdrawal of circa $80bn of capital in the first half of 2009 is re-injected in July 2009

Ascot’s rate renewal index for 2009: 1 January – 30 June: +9.0% 1 July – 31 December: 0.0%

2011 had $110bn of claims – with the amount of excess capital only territories with specific losses are hardening, e.g. Japan, New Zealand and Thailand

Earnings event not a capital event Singapore market size in 2011 was $16bn Will we ever again see a global hardening from a single event?

2005 - Present

Global Cycle Management

Source: Aon Benfield

US P&C Total Capital & Surplus

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Capital & Surplus USD billions

300 299 360 404 432 500 528 462 522 566 563 574

ABA of 31 companies for first half of 2012: $480bn An increase of $25bn from end of 2011

Access to capital Florida March / April 2012: initial estimates were $2bn of

reinsurance capital would be required; this was filled within 6 weeks by various sidecars, cat bonds, etc.

Capital models encourage markets to stay within certain classes with poor combined ratios because they offer diversification credit enabling them to write more catastrophe business

*Source: Aon Benfield

Lloyd’s

WTC Attacks: 26.9%

Hurricanes Katrina, Rita,

Wilma: 30.8%

NZ, Japan EQ, Thai

Floods: 25.5%

Ove

rall co

mb

ine

d ra

tio

Major losses can have a severe impact in a soft market

*Courtesy of Lloyd’s, from the 2012 May Market Presentation. Source: Lloyd's Annual Reports. Lloyd’s started to collect prior years’ result movements in 2002, the figures prior to 2002 are Lloyd’s estimates based on prior years’ claims movements.

Ascot account

Rate Rises

Global Cycle Management

2006 2011

Overall Syndicate +17.1% +2.1%

P/C Insurance Industry Combined Ratios 2001 - 2011

Global Cycle

As recently as 2001 insurers paid out

nearly $1.16 for every $1 in earned premiums

Heavy use of reinsurance lowered net

losses

Best combined ratio since 1949 (87.6)

Relatively low Cat losses,

reserve releases

Cyclical deterioration

Relatively low Cat losses,

reserve releases

Average Cat

losses, more

reserve releases

Higher Cat losses, shrinking reserve releases, toll of

soft market

*Source: Insurance Information Institute (from A.M. Best, ISO). *Excludes Mortgage & Financial Guaranty insurers 2008 – 2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=106.4

107.5

100.1

98.4

100.8

92.6

95.7

101.0

99.3

100.8

108.2

115.8

*2009 – 2011 Back year reserve releases stripped out very poor pure accident years

Combined RatiosA 100 Combined Ratio isn’t what it once was: Investment impact on ROE’s

*Source: Insurance Information Institute (from A.M. Best and ISO data). *2008 – 2011 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%

Combined ratios must be lower in today’s depressed investment environment to generate risk appropriate ROE’s

Global Cycle Summary

Back year reserve redundancy estimated at $11.7bn 2011 release estimated at $12.5bn 2010 release estimated at $12bn

Interest rates (or lack thereof) Claims inflation Senior management and shareholders more aware of poor return on

capital by underwriting class

What will cause the market to turn?

The points above combined with External factors such as the Eurozone and low GDP growth in

developed countries A $50bn - $75bn event (Fitch: $50bn - $60bn event) in a country

with high pure insurance premium

Green Shoots of Opportunity

Source: Aon Benfield

Rationale

Ascot Cycle Management

Not all doom and gloom: for example Bermuda market stats after Q2 estimate 11.5% ROC

Aon Benfield Aggregate (ABA) group combined ratio is 90.1% for the first half of 2012

Cycle management critical over the next 2-3 years given market conditions and each company’s cycle management will be driven by its corporate objectives

Ascot Ascot was incorporated in 2001 Offices in London, Houston, Chicago, Hartford & Singapore 2012 GWP $1,075,000,000 137 staff worldwide Aim over 5 years is a 15% return on capital Over the 10 year cycle Ascot has achieved in the region of 29% return on capital In our opinion the biggest single contributor towards the underwriting cycle is the

supply of capacity against the demand for capacity

Source: Aon Benfield

Tools

Ascot Cycle Management

Fixed expenses linked to GWP per employee and by underwriting unit KPI’s that are linked to the return on capital and attritional loss ratios

rather than retention rate and GWP Technical premium for each risk written, benchmarked vs. exit price

and the cost of capital for each specific risk written Pure premium per territory – Chile, New Zealand, Thailand

Even if market increases by 50% is it enough against the aggregate deployed; one of the vagaries of capital models

Rate renewal terms New business benchmarked vs. current portfolio All of these require significant investment in Management Information

(MI) and quality reporting and give Ascot the ability to flex up and down in classes and sub-classes as the market dictates

Ascot Cycle Management

Aggregate systems that mitigate reliance on models and control tail risk Collegiate underwriting teams – allowing deployment of aggregate

to the class with the best return on capital (GOM wind one of largest clash scenarios)

Strong Risk Committee to review external risk factors, e.g. the global economy, recession (including moral risk), downgrading of corporate bonds, etc.

Lloyd’s Lloyd’s Franchise Board Subscription market

Tools

Track record of strong underwriting performance

Lloyd’s Combined Ratio

93

102

95

101

91

107 108 107

101

105

60

80

100

120

Lloyd's US P/C Industry (i) US Reinsurers (ii) European(Re)Insurers (iii)

Bermudian(Re)Insurers (iii)

2007 2008 2009 2010 2011

*Courtesy of Lloyd’s, from the 2012 May Market Presentation. Sources i) Insurance Information Institute (estimate-2011), ii) Reinsurance Association of America, iii) Company data (8 European companies: 17 Bermudian companies).

Combined Ratio Versus Peers

E&P Property – Market UpdateGeneral Energy Losses 1990 – 2011 Excess of $5mn

0.0

5.0

10.0

15.0

20.0

25.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.0

5.0

10.0

15.0

20.0

25.0

Losses excess US$5m Estimated Worldwide Premium (US$)

4 Profitable Years out of 21 …….. “bad risk or over-capacity”

*Source: Aon Benfield

2000 – 2012 (ex GoM windstorm)

Upstream Insurer Capacities

0

1,000

2,000

3,000

4,000

5,000

6,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Operating

Construction

Estimated “realistic” market capacities

2012 upstream capacity highest since records began

*Source: Willis

2012 upstream capacity is the highest since records began For quality business at realistic prices the market can provide program

limits of $4bn for operating risks $3.6bn for offshore construction

Post Hurricane Ike Energy risk losses2010 accident year to current

Year Loss Insured Loss Estimate

2010 Deepwater Horizon U$560m

2010 Macondo Well US$1.0bn to US$3.0bn

2010 Oil Pipeline leak into Michigan River (Liability) US$500m

2010 Aban Pearl US$235m

2010 California gas pipeline explosion US$1.0bn

2011 Canadian Oil Sands US$740m

2011 Maersk floating production, storage and offloading unit (FPSO) US$960m

2011 Jupiter I US$230m

2011 Chevron Brazil oil spill Unknown

2011 Petrojarl FPSO US$300m

2011 Kolskaya jack-up US$125m

2011 KS Endeavour jack up US$235m

2012 Elgin North Sea Platform Unknown

*Source: Aon Benfield

(ex Gulf of Mexico windstorm)

Year on Year Trend - 2002

90%

Spread ROL 15.00%Equiv ROL increase 230%

10%8%

xs 2.5% of NML

Energy Upstream GoM Wind

Reinsurance Product

First loss attachment point

Available reinsurance capacity for

Attach % of NML

Limit % of NML

Energy Upstream

GoM Wind

Metrics Max Line Increase

50%

Income

Prior Year Loss Impact

WTC

SummarySignificant price increase

Core program metrics unchanged

Diminishing appetite for low level cover

*Source: Aon Benfield

(ex Gulf of Mexico windstorm)

Year on Year Trend - 2006

90%

Spread ROL 22.50%Equiv ROL increase Flat

10%10%

Second loss below 10%

Energy Upstream

Limit % of NML

Attach % of NML

First loss attachment point

Reinsurance capacity for

Reinsurance ProductGoM Wind

Reinsurance Product

80%

Spread ROL 30.00%Equiv ROL increase Flat

20%

GoM Wind

Limit % of RDS

Attach % of RDS

*Source: Aon Benfield Alternative RI “Cat in a Box”

Ascot Upstream Reinsurance 2002 vs 2006

Global Cycle Management

Max Line Retention(s) in USD Percentage Spend

2002 $40,000,000A.O. Platform

$5,000,000(One combined retention)

29.85%

2006 $60,000,000A.O. Platform

GOM Wind Lloyd’s RDS

$5,000,000$15,000,000 (GOM Wind)

39.18%

(ex Gulf of Mexico windstorm)

Year on Year Trend - 2012

87.50%

Spread ROL 27.50%Equiv ROL increased by 10%

12.50%

Energy Upstream

Limit % of NML

Attach % of NML

Limit % of RDS

Attach % of RDS

*Source: Aon Benfield

Reinsurance Product GoM Wind Reinsurance Product