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The U.S. Reinsurance Under 40’s Group

Bermuda Tour Report

May 27th

to May 30th

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Table of Contents

Overview 3

Schedule 4

Guy Carpenter 5

AXIS 7

Partner Re 9

Renaissance Re 11

Allied World 13

XL 15

Endurance 17

Marshall Diel & Myers 19

Watford Re 21

Hiscox 22

Catlin 24

Bermuda Monetary Authority 26

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Overview:

The purpose of US Reinsurers Under 40’s tours is for participants to expand their (re)insurance

knowledge by learning from the experts in a key global market. This year’s tour provided a great

opportunity to learn about the (re)insurance marketplace in Bermuda, and allowed participants to grow

their network in ways they would not normally be exposed to. The tour was an opportunity for all the

participants to growing relationships with other tour participants as well as to meet numerous industry

professionals throughout the time spent on the island. The tour consisted of a wide variety of

presentations from Bermuda insurers, reinsurers, brokers, regulators, and law firms. Each presentation

had a different topic and presenters were predominantly senior and executive level company

representatives. With their wealth of knowledge and industry experience, there was a lot to gain from

hearing them speak. The following pages are a summary of the presentations throughout the tour.

Participants:

Name Company Role Title

Anna Rumbaugh, CPCU, ARe Munich Re Underwriter Underwriter - Ocean Marine

Blake Berman, ACAS Guy Carpenter Actuary AVP - GC Analytics

Chris Craveiro

Brit Global Specialty

USA Underwriter VP & Underwriter

Dom Yarnell, FCAS Aspen Insurance Actuary VP & Pricing Actuary

Edward Boyanoski, CPCU, ARe Munich Re Underwriter Underwriter - Property

Grant Donkervoet XL Actuary Pricing Actuary

Marlin Ramlal, CPCU, ARe Axis Re Underwriter Senior Underwriter - Multiline

Philipp Their Munich Re Underwriter Underwriter - Property

Robert DiUbaldo, Esq Edwards Wildman Attorney Partner

Sean Ramlal, ACAS Allied World Re Actuary AVP & Pricing Actuary

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Itinerary:

26-May 27-May 28-May 29-May 30-May

Monday Tuesday Wednesday Thursday Friday

8:00 AM 8-

9:30 Rendezvous

& Breakfast at

Hamilton

Princess

8:30 AM

9:00 AM 9-10:30 Allied

World - Tracey

Gibbons

9:30 AM 9:30-11 Catlin

- Jon Sutcliffe 10:00 AM

10-11:30 Guy

Carpenter - Tony

Fox, Chris Dart

10:30 AM

10:30-12

Bermuda Monetary

Authority

11:00 AM

11:30 AM 11:30-1:30 XL

Professional

Liability - Matt

Irvine

11:30-

1:30 Watford

Re, John

Rathgeber

12:00 PM 11:45-1:30 AXIS -

Peter Kiernan 12:30 PM

1:00 PM

1:30 PM 1:45-3 Partner

Re Property Cat,

Greg Haft

1:30-5 CABER Boat

cruise (for

actuaries,) -

Albuoy's Point

2:00 PM 2-

3:30 Endurance

Professional

Lines - Forbes

Geekie

2:30 PM

2:30-4 Hiscox,

Nick Pascall 3:00 PM

3:30 PM 3:30-5 Ren Re

Property Cat -

Justin O'Keefe

4:00 PM 4-6 Marshall

Diel & Myers,

Reinsurance

Arbitration -

Katie Tornari

4:30 PM

5:00 PM

5-8 Ren Re

Cruise on Bravo

Zulu

5-8 Happy

Hour with

Validus Re,

Royal Yacht

Club

5:30 PM

Arrival,

Rendezvous

Dinner at the

Hamilton

Princess

6:00 PM 6:15-8 Happy

Hour w/

Bermuda Re

Under 40

Group -

Candace Roach

6:30 PM

7:00 PM

7:30 PM

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5/27/14

Guy Carpenter: Tony Fox, CEO – Bermuda, Chris Dart, SVP.

Presentation Topic: Bermuda Market Insights – A Broker’s Perspective

Tony and Chris are two of thirteen employees in the GC Bermuda office. They have two main

responsibilities: produce/place US and international retro, and assist with the placement of US and

International Property Cat Treaties with Bermuda markets. Most of the retro business is on a quota

share basis, while the property cat coverage is predominantly excess of loss. Tony and Chris’ P&L is tied

in with the US broking operations. There is one Facultative broker in the Bermuda office, with the rest of

the colleagues focusing predominantly on treaty.

We learned that the Bermuda work permit/visas for expats expires within 3-5 years and needs to be

renewed. Upon expiration, the job must be posted and available to Bermudian workforce. The

population in Bermuda is about 62,000, of which 3,000 are employed by the insurance industry. There

are 29 traditional reinsurers on the island. Bermuda’s economy is based on its two largest economic

sectors, insurance and tourism. The majority of expats are from the US, Canada, and the UK.

Bermuda tax advantages make it a great country to do business in. There is no income tax or corporate

tax. With 53% of global Cat placement done in the Bermuda reinsurance market, the island is the

biggest cat market in the world. It makes more sense to write short tail business in Bermuda as it tends

to be profitable and thus can be impacted by greater taxes. Since long tail business may not be as

profitable, it makes more sense to write it in countries where they can serve as an offset to positive

income. With the increased cost of housing and schooling, many back office jobs are being moved off

the island. Tony sees a lot of modeling functions being shifted to Hyderabad and Dublin.

Tony gave an in-depth overview of third party capital. For insurers with personal and commercial books,

the main benefit of third party capital is that it provides another source of reinsurance protection. This

provides cedents with more negotiating leverage and pricing power. Cat bonds are securities which

provide reinsurance protection in case of a catastrophic event. They are structured to offer issuers the

benefit of fully-collateralized reinsurance. The most common trigger types for cat bonds are: indemnity,

industry, or parametric index and modeled loss.

Guy Carpenter has a specialty team for ILWs. These transactions are usually performed after the

renewal or placement of reinsurance program. An ILW is a type of reinsurance contract where the

payout is triggered when a catastrophic event causes losses to the entire insurance industry in excess of

the trigger amount. The industry insurance losses are calculated and reported by a third party index

provider such as Property Claims Services (PCS) in the US and PERILS outside the United States.

Currently, there is $30T of pension fund money looking for a place to invest. About, $900M of that

money is expected to be directed into the reinsurance sector. Pension money is considered very sticky;

managers tend not to pull in and out of investments like a hedge fund typically does. They are not

looking for very high returns and prefer low risk and stability.

The best method for non-traditional business remains the traditional markets. Relationships, claims

handling, market know-how, management of the entire process, and consistency of wording is the key

attributes the traditional reinsurance market offers. What makes non-traditional markets cost less for

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buyers is: no rating agencies, few employees, less modeling costs, no infrastructure, brings no insight –

only capacity, no reserving – all collateralized.

In terms of industry pressures… there has been no loss activity to drive rates, there is too much supply,

companies are holding more net, and there is increased competition from nontraditional markets. A

California earthquake may be one of the events that can cause markets to harden. In addition to the

devastation it would cause both physically and to company balance sheets, Tony thinks many players

will be caught off guard by the tail of quake losses. As an example, he thinks claims from the New

Zealand earthquake will be adjusted for the next 15 years.

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5/27/14

AXIS Re: Peter Kiernan, President & CUO

Presentation Topic: Bermuda as an Industry Leader

Over the years, Bermuda has evolved as a (re)insurance leader, providing an array of coverage across all

types of insurable risks. Peter shared with us several facts (sourced from ABIR) of the Bermuda market.

Early evolution of the (Re)Insurance Market in Bermuda:

• During the 1940’s – Initial Domicile of American Insurance Group (AIG), chosen by C.V. Starr

• During the 1960’s – Captive insurance companies started forming. By the 1980’s, Bermuda was

the captive domicile of choice

• During the 1980’s – ACE and XL were established in Bermuda. These insurers were established

in order to address the US commercial liability crisis

• During 1992 – 8 companies formed following Hurricane Andrew to address void in the prop cat

reinsurance sector ($14B of capital raised)

• During 2001 – 7 companies formed following 9/11 focusing on a broad mix of business with

focus on property cat and specialty insurance ($15B of capital raised)

• During 2005 – 11 new companies formed following KRW ($32B of total capital raised)

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• Development of reinsurance and reinsurance-like options since 2005:

o Parallel Companies-DaVinci Re provides property catastrophe reinsurance

o Sidecars - The earliest sidecars were created in Bermuda in the 1990s. This included Top

Layer Re and OpCat, both of which placed capacity under the control of Renaissance Re on

the part of other re/insurers (Overseas Partners, State Farm).

o Re-Domestication - Companies have re-domesticated from Bermuda to other countries, i.e.

Allied World, Amlin moved from Bermuda to Switzerland and ACE re-domesticated to

Zurich.

o Collateralized Reinsurance Companies/Catastrophe Bonds

o Alternative / Third Party Capital- Amlin (Leadenhall), Montpelier Re (Blue Water), SCOR

(Atropos) and Validus (AlphaCat)

Bermuda Market Overview (Association of Bermuda Insurers and Reinsurers):

• Currently, there are 21 Bermuda domiciled insurers and reinsurers

• Member company wrote $66.4 billion in global gross written premium (CY 2012)

• Aggregate global capital is over $95 billion (CY 2012)

• Employs nearly 61,200 people worldwide, including US, Bermuda, Bermuda and others

Bermuda-based (re)insurers and the US:

• Paid nearly 30% of the insured losses from 2005 Hurricanes Katrina, Rita and Wilma

• Paid $22 billion to rebuild the US Gulf and Florida coasts from the horrific hurricanes seasons

of 2004 and 2005

• Provide more than 60% of the hurricane reinsurance in Florida and Texas.

• Provide up to one third of US crop reinsurance in key states

• Support 25% of the US medical liability insurance and reinsurance market

• Contributed $35 Billion between 2001-2012 to U.S. catastrophe losses

Bermuda-based (re)insurers:

• Write 20% of the broker-placed European property catastrophe reinsurance

• Provide 26% of the capacity for Lloyds of London

• Write 14% of aggregate global reinsurance premium

• Include 15 of the top 40 reinsurers in the world

• Supply 40% of the US and EU broker-placed property catastrophe reinsurance market

Bermuda (re)insurers recent covered events:

• 50% of the reported losses for the 2012 Costa Concordia cruise liner sinking

• 16% of the reported liabilities for United States’ 2012 Hurricane Sandy

• 29% of the reported liabilities for the international reinsured share of the 2011 Japanese

earthquake.

• 37% of the reported liabilities for Europe’s 2010 Windstorm Xynthia

• 38% of the reported liabilities for Chile’s 2010 earthquake

• 51% of the reported liabilities for New Zealand’s 2010 earthquake

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5/27/2014

Partner Re: Greg Haft, FCAS, CCRA – Head of Catastrophe.

Presentation Topic: Historical Catastrophes and the Partner Research App

Greg Haft is the Head of Catastrophe for Partner Re responsible for Bermuda, US, Canada, and retro

business. Greg is new to the Partner Re team and his past experience includes time spent at Chubb,

Chubb Re, and Harbor Point (�Max Re� Alterra�Markel). While Greg has actuarial credentials, he

functions in an underwriting capacity.

He described Partner’s Bermuda location as mostly cat underwriters and back office support. Partner is

currently a small player in the alternative capital space with the intent to build history rather than be a

competitive player. This is because many funds require a company to have a 5 year history before

engaging in business transactions. The plan is to be able to be a formidable competitor in this market in

the future, if they choose to.

The majority of Greg’s presentation was to showcase the Partner Research App for the Apple iPad. The

app is free and provides an illustrative display of the path, extent, and intensity of 1100+ windstorms

since the year 1900. The app gives a great visualization of wind fields and gives the user a sense of the

severity as it compares to other storms throughout history. Storms can be found by name, location,

year, etc. The app is not a model, as it does not accept a risk profile or generate PMLs, but it did win the

Business Insurance Innovation Award in 2014, and is available for free, (currently for iPad only).

Greg also discussed Partner’s approach to cat modeling and software used. He noted that buyers are

becoming more sophisticated in purchasing cat coverage and understand the differences between cat

bonds and the traditional markets. The more sophisticated buyers find great value in reinstatements,

issues of collectability, and look for second event covers as some storms occur in clusters.

In addition the walking us through the app and his professional background, Greg made some points

about the industry in general:

• Hurricane experience is difficult to use directly for pricing and capital modeling purposes, as the

portfolio of risks has adjusted significantly since the 2004-2005 hurricanes.

• Interestingly, some clients are concerned about falling reinsurance rates, as the primary market

has the tendency to follow the reinsurance market.

• Firms providing alternative capital, like Nephila, do a great job, but they fail to differentiate

between clients. At Partner Re, instead of focusing on writing in superior areas, they look for

superior clients.

New entrants into the catastrophe market may stick around long enough that the industry may have to

get used to the idea of lower returns

Greg wrapped up his presentation with a few comments on actuaries in underwriting roles. His view is

that actuaries that can understand the business and management side of the industry and can perform

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well in social settings are a tremendous yet underleveraged asset to a company. He continued by

providing examples on how an actuarial background is useful to property underwriting.

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5/27/2014

Renaissance Re: Justin O’Keefe, Chief Underwriting Officer – Property. Keith McCue, VP - Underwriting.

Presentation Topic: Ren Re’s Place in the Bermuda Market

RenaissanceRe is part of the class of ’93 that sprung up as result of hurricane Andrew, which hit the

industry for $15.5B in losses. They are mostly a property/cat reinsurer with about $4.2B of market cap.

In their 21 years of business, Ren Re has paid close to $8.3B in claims. They have a few offices around

the world including Bermuda, which serves as their headquarters, Connecticut, which writes specialty,

and Dublin, which handles much of their back office tasks.

They chose Bermuda as their home for a variety of reasons including the tax benefits, the regulatory

environment, the market place, the location, and the infrastructure. Additionally, many captives had

already set up operations in Bermuda which meant a lot of the back office roles such as accounting, IT,

etc. were already on the island.

While Ren Re has been around for over 20 years, they have less than 300 employees world-wide. Their

focus is capital efficiency and part of the luxuries of being small is a highly collaborative environment

with a lot of communication and consistency.

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They focus on property, but they’ve always written specialty (casualty) lines as well, and have engaged

in several joint ventures, including:

• Top Layer Re (1999) – Enjoys high-rated capital and can write hundreds of millions in limits.

• DaVinci Re (2001) – Writes property cat and other low-frequency, high-severity reinsurance

lines.

• Starbound (2006) – Fully collateralized sidecar (Fun fact: The name, “Starbound,” was the result

of an error in the registration process. The company was supposed to be named, “Starboard,”

the nautical term for the right side of a ship.)

Alternative capital was a popular topic of conversation for most of the companies we visited, and RenRe

was no exception. Nephila (also a regular topic of conversation), a company that seems to be on the

vanguard of this alternative capital trend, was described with praise at RenRe: “If they were a public

company, I would buy them.” But they were quick to assert that third-party capitalization cannot replace

underwriting, which may explain why of the $315B of 2013 cat business, $265B is traditional

reinsurance. Right now, Nephila is still small when compared with traditional reinsurers, but its rapid

growth is a trend that merits watching over the coming years.

Discussing the value of risk selection and analysis, Ren Re licenses software from about 15 different

modeling companies including RMS, AIR, EQECAT, OASIS, and PERIL to name a few. They employ a team

of 25 PhD’s to study the models and use what they feel are the best parts as well as add things they

think are missing (such as social inflation). They encourage their employees to seek designations

outside of their scope or core responsibility. Their philosophy is that everyone should know everyone

else’s roles… underwriters should know the capital markets and capital market employees should know

underwriting. Ren Re also stressed the importance of networking and not burning bridges.

Further points of interest in the session included:

• Being in Bermuda offers RenRe a distinct tax advantage, but the Federal Excise tax, (1% on

reinsurance premiums, 4% on direct premiums) works to the advantage of companies that write

volatile lines of business, like property cat.

• The nature of the insurance business is inherently unusual: There aren’t many industries in

which you can sell a product one year, and expect to sell that same product to the same

customer the following year.

• The popularity of alternative capital in the property cat market has resulted in underwriters

becoming savvier in investment theory.

• Regulations combined with market forces can have unforeseen results: Although relatively few

homes in California have earthquake coverage, a change in regulation could force homeowners

there to buy EQ coverage, which might make CA EQ the new peak peril, possibly causing an

increase in CA EQ rates and a decline in Florida hurricane reinsurance rates.

After the presentation, they gave us a copy of “Catastrophe Reinsurance and Risk Capital in the Wake of

the Credit Crisis” by Christopher Culp and Kevin O’Donnell. They then took the group out on Bravo Zulu

(Ren Re’s yacht) for cocktails, networking, and a tour of Bermuda from the water.

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5/28/2014

Allied World: Tracey Gibbons, SVP - Specialty Reinsurance.

Presentation Topic: Bermuda Specialty/WC Cat

The types of business considered by Tracey and her team consists of Personal Accident and Life

Catastrophe, US WC Catastrophe, Contingency, Pandemic XOL, Death ILWs, Political Risk and Trade

Credit, Canadian Casualty – Excess and Umbrella XOL, Property Terror, Kidnap and Ransom, Product

Recall/ Crisis Management, and Environmental. This presentation offered a look at the Bermuda market

from a casualty perspective, whereas, the majority of our meetings had a property focus.

The book of business can be summarized through the following common themes:

• High attaching cat business written to high return periods.

• Pro rata business is typically high margin but volatile – this is the opposite of the majority of the

pro rata business written by AWRe in other parts of the company.

• AW is the lead on the majority of the insureds in the book.

• Highly diversified in terms of geography and exposure.

Tracey discussed various clauses found in a typical treaty for her book including hours clauses, radius

clauses, and sanctions clauses.

She spoke at length on terrorism and NBCR. The biggest vulnerabilities being copy cats (Boston attacks),

managing aggregates across countries, and how contagion is a concern as it isn’t generally considered in

modeling software. This launched a discussion into modeling Terrorism exposures. Tools used include

RMS, IHS Foresight, JLT Towers Re, as well as studies by academia.

When asked about some of things in the “Other” category of business that keep her up at night, she

spoke about infectious disease and pandemic specific business. She gave vivid examples of how large

claims can or have been generated due to disease/fear, such as trip cancellation policies being triggered

when the Toronto airport shut down for SARS. She also discussed the example of the utilization of

medical facilities for a pandemic and the risk of infection to hospital workers. One of her fears is Middle

East Respiratory Syndrome and her expectation that we are overdue for an event as history indicates a

major pandemic hits approximately every 30 years. However, major changes in medical research have

changed the playing field in our advantage, perhaps lengthening the time between pandemics.

When asked about “Black Swans”, she spoke briefly of Solar Flares. A topic that raised the interest of

the group as most of us had not considered them in the context of reinsurance coverage.

She concluded her presentation with a conversation on the competitive landscape and pressures from

excess capacity and lack of discipline. Her biggest concerns are those typical of a soft market –

including the easing of terms and conditions and lack of clarity in contracts. For excess casualty, she’s

found that while there is some interest from alternative markets to play in the space, most of the

attention has been on the property side. She spoke of what separates the traditional markets from the

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alternative markets… mainly the importance of long standing relationships and claims expertise. If a

coverage issues arises that has a “gray area” – reinsurers would consider historic partnerships while

alternative markets may not.

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5/28/2014

XL: Matthew Irvine, CUO – Professional Liability. Patrick Tannock, Managing Director – XL Leadership

Council. Noel Pearman, VP – Professional Lines

Presentation Topic: The Bermuda Market and Professional Liability

The presentation from XL was split into two parts. Patrick spoke about the Bermuda Market and Noel

spoke about Professional Liability.

Patrick jumped around many topics concerning the Bermuda market but it flowed very smoothly.

He first spoke of the value proposition that Bermuda offers. Bermuda attracts capital with little friction,

this is the key for companies to start businesses on the island. The island is quick and nimble in

response to changes. This allows the speed of innovation to keep pace with the increases in complexity

causing the entire competitive landscape globally to be impacted.

While the talent pool is on the island already (through accounting and consulting firms), Patrick feels

that many companies are doing more with less. Back office functions are being moved out of Bermuda

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and new companies are setting up operations with only front office roles on the island such as

underwriters, brokers, and actuaries.

Patrick switched gears to discuss the four necessary components for a hard market:

1. A period of sustained loss.

2. Contraction of reinsurance capacity.

3. Increase in solvency/surplus requirements.

4. Discipline exhibited by insurance executives.

While he feels that all these requirements were met in 2011 due to world catastrophes, the market did

not respond as expected.

Similar to comments mentioned during the Partner Re discussion, Patrick talked about actuaries in non-

traditional roles. He described social skills as being critical and felt that companies that can nurture

these soft skills and combine it with technical acumen are the companies that would be the most

successful. He spoke of Goldman Sach’s and Citibank’s view that alternative capital will be a major

market disruptor and countered that by talking about the importance of business relationships and the

differentiation offered through services and analytics provided by reinsurers.

His final comments were a challenge to the group to constantly update our skill sets, make a lifelong

commitment to embrace change, and to never stop learning. He stressed the importance of cross

discipline knowledge.

Noel talked about Professional Lines. The XL professional book is split at about 30/50/20% for

D&O/E&O/EPL.

In his presentation, he spoke about the Betty Dukes decision which reduced EPL severity by limiting the

designation of class action status for large multi-geographical lawsuits (ex. Women employees being

treated unfairly at Walmart).

He then briefly gave an overview of what Wage and Hour claims are. The most common type is for

underpayment, which can be caused by donning & doffing, pay practices, misclassification of employees

(hourly vs salary), pay for overtime/off the clock work, and missed meals/breaks. He gave various

examples of cases - including tip pooling at Starbucks where salaried managers took a portion of the tips

given to hourly workers and some of the larger lawsuits such as those against Novartis and American

Commercial Security.

Noel later discussed Cyber Liability. One of the biggest challenges of technology companies is leveraging

the tools that technology provides while managing the nefarious risks that accompany them. The value

proposition for customers purchasing coverage in Bermuda is that Bermuda carriers would typically

cover fines/penalties associated with a loss while US insurers typically would not. He then spoke about

dependent business interruption involving vendors that are attacked by a cyber-breach. This can lead to

a loss to a company that uses that vendor, even if the breach does not directly impact that companies

own servers.

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5/28/2014

Endurance: Forbes Geekie, SVP – Professional Lines.

Presentation Topic: Endurance Professional Lines and the Bermuda Market

Forbes Geekie is an SVP & Professional Lines Practice Leader at Endurance. He started his career at

Chubb in London working on their FI business. Before moving to Bermuda in 2006, he had a career at

Lloyds and spent some time on the broker side.

Forbes began his presentation with a brief overview of important events in the history of the Bermuda

reinsurance and insurance industry.

There are 3 main markets for Professional Lines: Bermuda, London, and NY. Every large bank in the

world buys insurance in Bermuda. 12 markets in Bermuda write Professional Lines. Each market must

have at least $25M in capacity in order to play in the professional lines space. There are currently about

12 markets with $25M of capacity writing PL business in Bermuda. Clients don’t like each market to

have more than $50M on any placement. The average line offered by Endurance is $17M. All Endurance

offices share in the aggregate company limit (75M) which is monitored through a central clearance

process. Most of Endurance’s Bermuda business comes from the big brokers such as Marsh and Aon

versus NY or London which have better 2nd tier distribution channels.

Most large financial institutions purchase their insurance from the Bermuda insurers. This allows the

FI’s to take advantage of a competitive market place to get the best coverage at competitive prices. The

last hard market for Professional lines was 2008-2009 in the FI sector. Since then, the market has seen

steady erosion in rates across all classes i.e. commercial, lawyers, directors & officers, medical, etc.

There is huge capacity and tons of competition. Berkshire was noted as a large problem in the

competitive arena. Also adding to the competition is a new professional lines team at Endurance in the

US, who want to triple their book of business. The US team will target regional growth by having people

across the US in Atlanta, the West coast, and Chicago. Forbes Geekie said he would be happy with 5-

10% growth in his Bermuda Professional Lines portfolio over the next 3 years, since Bermuda is a mature

market. While there is frustration with the lack of new business, Forbes continues to see approximately

82% of his clients face to face and retains approximately 90% of his clients. The Bermuda market has a

flatter structure, more underwriter consistency, and more face to face contact.

Another contributing factor to the soft market is that reinsurance rates have decreased dramatically.

Reinsurers need to be more disciplined. In order to affect change, there would need to be a

catastrophic event of unprecedented magnitude or a significant amount of mergers and acquisitions to

reduce the capacity/players. The strain on income puts strain on expenses. If you can’t make more

income, you have to cut expenses. The market has seen companies creating other entities to battle the

high expense environment i.e. AWAC with Pine River and Arch with Watford Re. These entities can

match the lower return casualty lines against more aggressive investment portfolios. Others have been

targeting mergers and acquisitions. John Charman of Endurance has large growth aspirations, which he

would like to accomplish through M&A. His most recent targeting of Aspen has been in the news quite a

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bit. Forbes explained that Endurance is about a $2.5B company and Aspen is also about a $2.5B

company. In order to be a large competitor or player in the market, a company needs to be about a $5B

company. The combination of Endurance and Aspen would reach that $5B target, which would take

much longer if that growth was done organically. There are also certain synergies between the two

companies: Endurance has a fledgling London operation, while Aspen’s is developed. Aspen provides

international opportunities. Aspen is a small presence in Bermuda, while Endurance is larger. In the

time since our visit Endurance’s acquisition bid for Aspen has been terminated.

Forbes walked us through how the financial crisis led to a hard market in Q4 of 2008 through 2009.

Since, rates have eroded due to no large catalyst on the claims side and capacity increasing from a larger

appetite for PL from established companies.

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5/28/2014

Marshall, Diel, & Myers: Mark Diel, Director. Katie Tornari, Director.

Presentation Topic: Catastrophe Excess of Loss Reinsurance and ILWs, Reinsurance Claim Disputes

Marshall Diel & Myers (“MDM”) is a Bermuda law firm that handles a wide array of matters, including

litigation and arbitration for insurers, reinsurers, other entities involved in the insurance/reinsurance

and financial services space.

Ms. Tornari began the presentation by discussing a hypothetical large loss arising under a catastrophe

excess of loss reinsurance agreement (the “Treaty”). The subject claims involved damages caused in the

US/Caribbean by a hurricane that occurred in September 2012, as well as damages caused a few months

later in other countries by a Tsunami-generated seaquake in the Indian Ocean. The Treaty covered

losses occurring during this period that were caused by “natural perils”, including hurricanes, seaquakes

and tsunamis. The $25 million limit of liability applied on an “each and every loss occurrence” basis,

which was defined as “all individual losses arising out of and directly occasioned by one catastrophe.”

Further, the Treaty was governed by Bermuda law, with all disputes thereunder to be resolved by

arbitration pursuant to the Bermuda International Conciliation and Arbitration Act of 1993.

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The Group discussed whether the subject claims constituted a single occurrence under the operative

Treaty wording, given that such claims involved damages arising from different natural perils that

occurred several months apart and in varied locations. Moreover, the Group analyzed the interplay

between the location of the various damages and the Express Warranty provision, which provided as

follows:

EXPRESS WARRANTIES … 2. Reinsurers hereon shall only pay in the event of

there being an estimated original insured physical damage market loss within

the territory covered herein, equal to or greater than USD 15,000,000,000 in

respect of the United States of America (50 States including District of

Columbia), USD7,000,000,000 in respect of Japan USD 5,000,000,000 in respect

of Europe or USD2,500,000,000 in respect of all other territories …

Last, we examined how the subject loss would be calculated under the facts of the hypothetical and

operative language in the Treaty, which stated:

In establishing the total amount of the original insured market loss, Reinsurers

hereon shall accept the figure shown in “PCS” for all USA losses and “SIGMA” for

all non USA losses. Final evaluation of the loss shall be the figure published in

the relevant publication . . . In the event that either “PCS” and/or “SIGMA” are

discontinued or they materially change their methodology in any way, or they

become unsuitable for the purpose intended, or that they fail to report an

estimate of insured loss for any reason, an alternative source will be used

subject to the agreement of Leading Underwriter and Reinsured.

The Group spent the latter half of the presentation discussing the arbitration process generally,

and the differences between the US, UK and Bermuda systems. Among other things, we

discussed the arbitrator(s) authority, decision-making process, neutrality, the role of party-

appointed arbiters, the use of expert witnesses, the potential effect of arbitral awards, the

ability to challenge such awards, and the circumstances in which a party may be entitled to

recover its attorneys’ fees, costs and expenses. We also discussed the differences between

arbitration, mediation and litigation from a procedural, substantive and costs perspective, and

the advantages to each. Further, we exchanged several “war stories” (non-confidential ones, of

course) concerning prior disputes in which several of us were involved. In short, the MD&M

presentation was well received by all, and provided a unique perspective to the majority of the

Tour attendees, who had no knowledge of and experience with the role of arbitration/dispute

resolution in the (re)insurance industry.

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5/29/2014

Watford Re: John Rathgeber, CEO

Presentation Topic: The founding of Watford Re

The Bermuda market tour group had the great pleasure of meeting the CEO of Watford Re, John

Rathgeber. Watford Re is an emerging reinsurance market with a nontraditional business model. John

was very gracious in providing insight into the inner working of the company and the benefits of

Watford Re’s lean infrastructure, strategic partnership with Arch, and advantageous investment

strategy.

The origin of Watford Re was a concept pursued by Arch and other investors to found a carrier that

utilized an investment strategy in 100% non-investment grade corporate credit. This investment strategy

could deliver a better return than the traditional (re)insurance investments of bonds and equities in the

low interest rate environment allowing for more competitive pricing while generating a higher return on

capital.

Watford Re is an independent Class 4 BDA-domiciled company, with approval from the BMA, in close

alignment with Arch, which put up over $100m of initial capital at its founding. Business written ranges

from short to long tail, but the primary class is liability reinsurance. Arch underwrites casualty

reinsurance business that may benefit from Watford’s efficient capital structure and utilize their A- rated

paper by pricing using Watford Re’s separate underwriting model. Arch quota-shares 15% of every

policy that Watford Re writes. In return for allowing Watford to utilize its underwriting infrastructure

and serve as its sole distribution channel, Arch is paid a fee from Watford and can receive a profit

commission.

In order to be a viable carrier in the Bermuda marketplace, Watford Re needed to secure at least and A-

rating from AM Best. This was a very thorough process of educating the rating agency to the details and

benefits of the capital model. In fact, AM Best shared with John that this was their largest team ever

placed on a start-up insurer. The effort proved successful, and Watford is rated A- by AM Best.

John described this model’s benefits succinctly: Arch was turning down profitable business simply

because of Arch’s high cost of capital. By utilizing an alternative business model; underwriters have a

more competitive option with slightly lower rated paper and do not have to pass on good business.

John is optimistic that with sustained long-term positive performance Watford Re is well positioned for a

potential IPO in the next 2-4 years.

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5/29/14

Hiscox: David Roache – Vice President, Underwriting at Hiscox Re; Sharmini Samuels – Assistant VP,

Casualty at Hiscox

Presentation Topic: Property Reinsurance and Casualty/Specialty Insurance at Hiscox

Property Reinsurance:

David Roache has been with Hiscox Re for 5 years. Hiscox is the oldest continually running

Lloyd’s Syndicate, which was founded in 1901, and headquartered in Bermuda. Hiscox Re consists of

Syndicates 33 and 626, as well as Hiscox Bermuda. The combined entity was formed January 1, 2014 in

response to changing market conditions. Hiscox Re needed to be able to provide larger line size, better

service, a consistent message, and to reduce duplication of work. Combined the company has $200M in

line capacity. Approximately 28% of Hiscox’s gross written premium is from Reinsurance, which

amounted to approximately $840M in 2013. Types of reinsurance written are per risk treaties, Property

CAT, and Marine. Marine is written by Guy Ellis out of London, who has a $20M line capacity. Rates

overall at January 1, 2013 were flat due to the combination of decreases in other lines and increases in

Property CAT due to Sandy. At 6/1/13 and 7/1/13, Hiscox observed 7% decreases in rates. For 2014,

Hiscox predicted another 15-20% drop due to increased competition from insurance linked securities.

To overcome the challenges of the competitive market, David walked us through examples of

specific challenges and tips on how to address those challenges. He suggested traditional reinsurers

think about renewal structures approximately 10 months prior to inception so they can offer new

structures or alternatives, such as top and drop layers, option covers, 2nd and 3rd event covers, etc.

- Softening in the market has included the expansion of contract terms, Increased Hours

Clause, Reinstatements calculated Pro Rata to Time, Adding terror back in to the cover,

Multiyear contracts, etc.

- Tips: Make sure you price for all perils not just the modeled perils. For non-modeled perils,

look at different return periods to develop a starting point loss cost. For modeled perils,

blend RMS/AIR and add loads or discount based on your analysis of the risk.

Casualty Insurance:

Sharmini Samuels recently joined the Hiscox team in Bermuda in November 2013. Her and her

colleague Nick Pascall ran portfolios previously at Catlin Re and then at American Safety Re, which was

bought by Fairfax and sold to Catalina for run-off. Because the previous books they worked on were put

into runoff, Hiscox has a good opportunity to pick up much of the business previously underwritten by

Nick and Sharmini. Target casualty classes include Medical Malpractice, professional lines, D&O, general

liability, Excess and Umbrella, commercial auto liability, and a limited appetite for workers

compensation. Target clients include specialty carriers, risk retention groups, captives, mutual insurance

companies, regional carriers, nationwide carriers for specific programs, and Lloyd’s Syndicates. Target

structures include per risk as opposed to per event, working layers as opposed to excess layers.

Approximately 72% of the book is XOL and 28% is proportional business. Hiscox casualty typically attach

within the first $1M of cover. The maximum line size per program is $5M, the average line size is

$500,000, and the average premium is $200,000. Hiscox casualty receives business from brokers in the

US (49%), London (28%), and Bermuda (23%), mainly Willis, Aon, Guy Carpenter, etc. Main casualty

renewals are 1/1 and 7/1. Fifty percent of the book is MedMal (Healthcare), with a positive record for

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the last 10 years. The clients may not be purchasing the same layers as in the past, but they tend to

retain a portion for themselves, which is preferred as the client has more “skin in the game”.

While Hiscox has seen their healthcare business have strong performance in recent years, there

are still challenges in the marketplace. The pressure, however, is on signings rather than on pricing.

There is new capacity entering the space, and cedants themselves are retaining more, leaving less for

the market. Main competitors of Hiscox’s casualty business are Catlin, Amlin, Montpelier Re, Ren Re,

and Tokio Millennium (new entrant). However, because Bermuda is a subscription market, many of

these competitors can be seen as partners.

The MedMal book is made up of mostly physicians; however, with the healthcare reform, many

physicians are being consolidated into the Hospital’s insurance program, which moves even more

business from the MedMal/Healthcare sector and into the HPL business. Electronic medical records

open companies up to cyber risk, which could creep into the MedMal cover. There is growth in the Allied

Healthcare World, which includes coverage for Registered Nurses, Nurse Practitioners, and Physicians

Assistants, who are all seeing more patients in cases which the Dr. perceives as less severe. This could

potentially cause more claims. In order to combat some of these issues that come along with a changing

marketplace, Hiscox is attempting cross-selling with the Property department where possible.

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5/29/14

Catlin: Graham Pewter – Hub CEO; Chase Toogood – Senior Underwriter (Reinsurance) ; Tom Sperryn-

Jones - Senior Property Treaty Underwriter; Hinal Patel – Chief Actuary; Matthew Gorrell – Senior

Underwriter

Presentation Topic: Bermuda Market & Catlin

Catlin is the 3rd/4th largest Bermuda domiciled insurer, with $5.5B in GWP for 2014. Catlin has 6

underwriting hubs: London (reflects 12 – 13% of the overall business only), US, Europe, Bermuda, Asia-

Pacific (with Australia), and Canada. Catlin is incorporated in Bermuda, and its shares are traded on the

London Stock Exchange. Catlin maintains underwriter profitability benchmarks and is a significant

purchaser of outwards reinsurance. Catlin writes 36 classes of business, more insurance than

reinsurance, and more short-tail business than long-tail. All hubs can offer Lloyd’s and/or Non-Lloyd’s

paper. 90% of Bermuda business is Property / Casualty Treaty business.

Both Bermuda and London are wholesale markets in which Catlin is an established leading market.

Growth markets are Latin America, China, and India. Catlin had significant growth post 9/11 in 2002-

2003 when private equity was used to set up business in Bermuda. Catlin then acquired Wellington in

2006, post Katrina, Rita and Wilma.

Catlin focuses on underwriting profit (based on underwriting discipline) and values its core principles

- Transparency, open communication internally and externally

- Accountability, “Underwriter should think and act like an owner of the company”

- Teamwork, bonus payments only if entire group made profits

- Integrity, stand up to Catlin standards

- Dignity

The Catlin group is one profit center with a strong “Group first” mentality which emphasizes benefit in

diversification. Catlin has worked on many projects to diversify their product offerings.

- Catlinseaviewsurvey.com : a joint effort with Google and University of Queensland.

Teaches that the Health of the reef is important for food sources and income and

makes users aware of coastal erosion as well as other issues.

- Catlin Global Reef Record : another project which is great for the environment as

well as for Catlin’s marketing efforts.

- These projects are mainly for gathering information and to take social responsibility

Catlin’s approach on Alternative Capital

- Uncorrelated investment

- Attractive current yield developments

- Attractive long term performance due to reduced cycle volatilities (Nephilia, 17

years of profit)

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Catlin discussed 8 Secular Disruptive Themes by Goldman Sachs called “Creative Destruction” from

2013. Topics included points such as:

- Alternative Capacity

Increasing capital markets capacity is affecting the property CAT world because

alternative capital seeks uncorrelated investments (zero-beta), an attractive current

yield, and attractive long-term performance. $310B Global Property CAT provided

of which 16% is in non-traditional markets.

- Non-traditional markets must fully collateralize. Therefore, the issue is which

reinsurers and insurers must allocate capital and whose capital is most expensive. In

peak zones, reinsurers and insurers struggle to compete with capital markets

because of the cost to put that capital aside.

- We want reduced volatility and increased return

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5/30/2014

Bermuda Monetary Authority: Andy Gibbs, Director

Presentation Topic: Role and History of the BMA

The Bermuda Monetary Authority (“BMA”) is the regulatory body that has oversight of the insurance

industry in Bermuda. The BMA was created in 1969 as a separate independent body from the

government. Their mission statement reads:

“To protect and enhance Bermuda’s reputation and its position as a leading international financial center, utilizing

a team of highly skilled professionals acting in the public interest to promote financial stability, safeguard our

currency and provide effective supervision and regulation.”

Based on the amount of reinsurers that are domiciled or have operations in Bermuda, the quality of the

BMA regulation has definitely instilled confidence to the international community. As with any

regulatory system, finding the proper level of oversight can attract or deter foreign companies from

investing in that country. Similarly, the oversight is just as important to the policyholders looking to get

coverage from companies with appropriate capitalization and risk management. The BMA’s reputation

has given Bermuda an advantage relative to its Caribbean counterparts based in part on its regulatory

consistency and quality.

Given the small size of Bermuda, the domestic market is not a primary focus of the BMA. The BMA has

an external focus primary to protect its reputation in the international community. One advantage that

Bermuda offers over many larger service oriented economies is the predictability and stability of

legislation. Where it has become burdensome to navigate in the U.S. and Europe for example, it has

remained simple and transparent to understand the laws impacting one’s business model. Bermuda

also offers a unique advantage of having such a specialized economy focused on insurance.

Consequently, the issues affecting insurance and reinsurance get a very high priority. This allows for

faster time to market for new insurance products to better meet the ever changing client demands. This

culture of innovation is evident in new types of companies that quickly emerge such as sidecars and

SPIs.

The BMA knows the value proposition Bermuda offers, but more so, they understand their role and how

they fit into the international scheme of the insurance market places. A country will not be able to

attract or retain business if they have isolationist legislation and regulations. This is more important

than ever in today’s interconnected economy and the BMA makes it a priority to provide a regulatory

environment that facilitates a global marketplace.

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