Seminar on ReinsuranceSeminar on Reinsurance

Stefan HolzbergerStefan HolzbergerManaging Sr. Financial AnalystManaging Sr. Financial Analyst

A. M. Best CompanyA. M. Best CompanyJune 2, 2003June 2, 2003

22

Objective of Best’s RatingObjective of Best’s Rating

Financial Strength RatingFinancial Strength Rating Opinion as to (Re)insurer’s Ability to Meet Opinion as to (Re)insurer’s Ability to Meet

Obligations to Cedants / PolicyholdersObligations to Cedants / Policyholders

Debt RatingDebt Rating Opinion as to (Re)insurer’s Ability to Service Opinion as to (Re)insurer’s Ability to Service

Debt and Meet Obligations to Security Debt and Meet Obligations to Security HoldersHolders

33

Counterparty Rating Counterparty Rating ApproachApproach

Counterparty Rating

Financial Strength of Insurance Operations

Debt Ratings

Financial StrengthRatings

Holding Company

Non-InsuranceBusinesses

44

Financial Strength RatingFinancial Strength RatingKey ComponentsKey Components

Balance Sheet Strength

Operating Performance

BusinessProfile

Best’s Rating

55

Best’s Rating EvaluationBest’s Rating EvaluationBalance Sheet StrengthBalance Sheet Strength

Capitalization / LeverageCapitalization / Leverage

Capital Structure / Holding CompanyCapital Structure / Holding Company

Quality / Soundness of ReinsuranceQuality / Soundness of Reinsurance

Adequacy of Loss ReservesAdequacy of Loss Reserves

Quality / Diversification of AssetsQuality / Diversification of Assets

LiquidityLiquidity

66

Best Rating EvaluationBest Rating EvaluationOperating PerformanceOperating Performance

ProfitabilityProfitability

Revenue CompositionRevenue Composition

Management Experience & StrategyManagement Experience & Strategy Ability to Meet PlanAbility to Meet Plan

SustainabilitySustainability

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Rating Evaluation Rating Evaluation Business ProfileBusiness Profile

Market RiskMarket Risk

Competitive Market PositionCompetitive Market Position

Spread of RiskSpread of Risk ProductProduct GeographicGeographic

Event RiskEvent Risk

Regulatory RiskRegulatory Risk

Sustainable Competitive AdvantageSustainable Competitive Advantage

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Why Business Profile and Why Business Profile and Operating Performance?Operating Performance?

Leading Indicators of the Future Balance Sheet

Finan

cial

Str

ength

Strong Business Profile and Operating Performance

Weak Business Profile and Operating Performance

Last Balance

Sheet

Today Time

99

Rating ConsiderationsRating Considerations

SecureA++ B+

VulnerableB D

Balance SheetStrength

OperatingPerformance

BusinessProfile

Outstanding

Very Stable/Strong

Strong /Sustainable AdvantagesWell-Diversified

Weak

Volatile/Poor

Questionable ViabilityCompetitive Disadvantages

Concentrated Risk

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Best’s Rating PerspectiveBest’s Rating Perspective

Capital Strength is KeyCapital Strength is Key

Sustainable, Stable Operating ProfitabilitySustainable, Stable Operating Profitability

Diversified / Strong Profile = StabilityDiversified / Strong Profile = Stability

Reinsurance TrendsReinsurance Trends

The Bad NewsThe Bad News

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Reinsurance Rating TrendsReinsurance Rating Trends

Downgrades Outpace UpgradesDowngrades Outpace Upgrades

Superior Rated Companies DeclineSuperior Rated Companies Decline

Negative Rating Outlooks on the RiseNegative Rating Outlooks on the Rise

Ratings Move to Vulnerable CategoryRatings Move to Vulnerable Category

European Reinsurers Leave U.S. Market European Reinsurers Leave U.S. Market

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High Profile Rating ChangesHigh Profile Rating Changes

FromFrom ToTo

American ReAmerican Re A++A++ A+A+

Employers’ ReEmployers’ Re A++A++ A+A+

St Paul Re (now Platinum) St Paul Re (now Platinum) A+A+ AA

AXA Corp. Solutions Re (US)AXA Corp. Solutions Re (US) A+A+ BB

SCOR (US)SCOR (US) A+A+ A-A-

Gerling Re (US)Gerling Re (US) A-A- B-B-

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Effects of Hard Market Effects of Hard Market Tempered in 2002 Tempered in 2002

Significant Reserve ShortfallsSignificant Reserve Shortfalls

Underlying Loss Cost TrendsUnderlying Loss Cost Trends

Underpricing More Severe Than AnticipatedUnderpricing More Severe Than Anticipated

Underestimated WTC LossesUnderestimated WTC Losses

Asbestos Losses Asbestos Losses

Credit Losses Credit Losses

1515

TerrorismTerrorismPrimary Companies Mandated to Offer Primary Companies Mandated to Offer Terrorism CoverTerrorism CoverTRIA (US Terrorism Risk Insurance Act)TRIA (US Terrorism Risk Insurance Act) Excludes Reinsurers from Mandatory CoverageExcludes Reinsurers from Mandatory Coverage

Clash Potential Remains a ConcernClash Potential Remains a ConcernReinsurers Offer CoverReinsurers Offer Cover Cost is ProhibitiveCost is Prohibitive In an Event – Will Rates be High Enough?In an Event – Will Rates be High Enough?

Reinsurance TrendsReinsurance Trends

The Good NewsThe Good News

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Reinsurance Financial TrendsReinsurance Financial Trends

Composite of US Based Reinsurers

2001 2002 2003PChange in NPW (%)Change in Surplus (%)

3.4(19.9)

17.8 5.2

22.010.9

Combined Ratio 142.4 117.5 109.2Change in Net Inv. Income (%)Investment Yield

(2.3)4.1

0.1 4.0

2.23.8

After-tax Return on Surplus (%)NPW/PHS (Reported)

(7.2) 0.5

(4.2) 0.6

3.2 0.6

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Reshaping the MarketReshaping the Market

Continued Rate Increases For Second Continued Rate Increases For Second Consecutive Year Consecutive Year

Tighter Terms & ConditionsTighter Terms & Conditions

Limited Capacity for Certain RisksLimited Capacity for Certain Risks

Shift from Customer Focus to U/W FocusShift from Customer Focus to U/W Focus

Flight to QualityFlight to Quality

Withdrawal of CapacityWithdrawal of Capacity

Entry of New CapitalEntry of New Capital

1919

New Capital – BermudaNew Capital – Bermuda

CompanyCompany SponsorSponsor

Initial Initial CapitalCapitalRaisedRaised

Axis Specialty LimtedAxis Specialty Limted Marsh & McLennanMarsh & McLennan $1.7 billion$1.7 billion

Allied World AssuranceAllied World Assurance AIG/Chubb/Goldman SachsAIG/Chubb/Goldman Sachs $1.5 billion$1.5 billion

Endurance Specialty Endurance Specialty AONAON $1.2 billion$1.2 billion

Montpelier ReMontpelier Re White Mtns./Beinfield GreigWhite Mtns./Beinfield Greig $1.1 million$1.1 million

Arch Reinsurance Ltd.Arch Reinsurance Ltd. Arch Capital/Warburg/HellmanArch Capital/Warburg/Hellman $1.0 billion$1.0 billion

Platinum U/W Holdings LtdPlatinum U/W Holdings Ltd St. Paul Spin OffSt. Paul Spin Off $1.0 billion$1.0 billion

Olympus Reinsurance LtdOlympus Reinsurance Ltd White MountainsWhite Mountains $500 million$500 million

Expectations & Rating OutlookExpectations & Rating Outlookfor thefor the

Reinsurance SectorReinsurance Sector

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Future ExpectationsFuture ExpectationsInvestor Expectations Remain HighInvestor Expectations Remain High So Far Have Been UnrewardedSo Far Have Been Unrewarded

Earnings Must Come From UnderwritingEarnings Must Come From Underwriting

Adherence to Operating FundamentalsAdherence to Operating Fundamentals

Pricing Models Reestablished Pricing Models Reestablished

Rates Continue to Rise Although SlowerRates Continue to Rise Although Slower

Program Structures AmendedProgram Structures Amended

Focus on Capital / Risk ManagementFocus on Capital / Risk Management

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Reinsurance Rating OutlookReinsurance Rating Outlook

Leaders Maintain Superior Financial StrengthLeaders Maintain Superior Financial Strength

Additional Reserve StrengtheningAdditional Reserve Strengthening

Weaker Players Continue to be ChallengedWeaker Players Continue to be Challenged

Favorable Market Sustained for Near-TermFavorable Market Sustained for Near-Term In Most Lines of BusinessIn Most Lines of Business

Thank You.Thank You.