1. Rating Methodology Update & Implications for Mutual Insurers Mid-Atlantic Mutual Advantage Convention Hot Springs, Virginia 8 August 2016 Stefan Holzberger Chief Rating Officer

2. Mid-Atlantic Mutual Advantage Convention Disclaimer 2 © AM Best Company (AMB) and/or its licensors and affiliates. All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT AMB’s PRIOR WRITTEN CONSENT. All information contained herein is obtained by AMB from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall AMB have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of AMB or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if AMB is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. Credit ratings do not address any other risk, including but not limited to, liquidity risk, market value risk or price volatility of rated securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY AMB IN ANY FORM OR MANNER WHATSOEVER. Each credit rating or other opinion must be weighed solely as one factor in any investment or purchasing decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security or other financial obligation and of each issuer and guarantor of, and each provider of credit support for, each security or other financial obligation that it may consider purchasing, holding or selling.

3. Rating Methodology 2017 3  Impetus for Change  Timeline  Building Block Approach & New BCAR  Rating Implications for Mutual Insurers Mid-Atlantic Mutual Advantage Convention

4. Impetus for Change 4  Transparency & consistency  A rapidly evolving industry  A move towards best practices  A way to integrate new tools o Application of BCAR Mid-Atlantic Mutual Advantage Convention

5. Timeline 5 Mid-Atlantic Mutual Advantage Convention Draft BCRM & PC BCAR criteria is released for comment Comment Period will include public updates as specific issues raised Comment Period will be extended to coincide with release of all BCAR models Comment Period Ends Comments Incorporated as Necessary into BCRM and all BCAR criteria BCRM and BCAR criteria is published and becomes effective 03/10/16 Remainder of 2016 YE 2016 2017

6. Updated BCRM 6 The BCRM is being updated but the fundamental rating drivers will remain the same  Balance sheet strength  Operating performance  Business profile  Enterprise risk management Mid-Atlantic Mutual Advantage Convention

7. Balance Sheet Strength Operating Performance Business Profile Country Risk Enterprise Risk Management Current Rating Process BCAR Cash Flow Asset Quality Asset Liquidity Financial Lev/Flex Actuarial Reports ALM QAR STAT/GAAP Statements Company Forecasts MD&A Lines of Business Management Team Geographic Spread Growth Risk Impact Worksheet Event RiskReins Program Benchmarking ICM SRQ Loss Reserve Model / LRD Lift/Drag from Affiliates Risk Appetite, Tolerance, etc. Distribution Channel(s) Rating 7 AMB Projections Mid-Atlantic Mutual Advantage Convention

8. Building Block Approach Mid-Atlantic Mutual Advantage Convention 8

9. Balance Sheet Strength Mid-Atlantic Mutual Advantage Convention 9 Balance sheet strength is broken down into several parts  Rating unit balance sheet strength assessment o BCAR o Other qualitative and quantitative factors  Holding company impact assessment  Country risk impact

10. Stochastic Based BCAR Best’s Capital Adequacy Ratio (BCAR) is a comprehensive quantitative tool that evaluates many of the risks to the balance sheet simultaneously and generates an overall estimate of the required level of capital to support those risks and compares it with available capital.  BCAR is an important tool in the assessment of balance sheet strength o Not the sole determinant of balance sheet strength o Not the sole determinant of the rating 10 Mid-Atlantic Mutual Advantage Convention

11. BCAR Summary of Changes  Do not intend to change underlying view of the risks  Do not intend to change the main risk categories of the models Goals are to: o Generate risk factors using stochastic simulations from probability curves & ESG o Incorporate company specific detailed data from SRQ & statutory financial statements 11 Mid-Atlantic Mutual Advantage Convention

12. New Metric – VaR (Value at Risk) Summary of Changes VaR 99.0 VaR 99.5 12 VaR does not tell us about what’s in the tail so we need to look at more than one VaR Mid-Atlantic Mutual Advantage Convention

13. Example of Impact to Score APHS (ex Potential Cat Losses) = $150M Potential Cat Losses = $30M NRC (ex Potential Cat Losses) = $80M BCAR = (150 – 30 ) / 80 = 120/80 = 150.0 Current BCAR Calculation (Ratio to NRC) Available Capital (ex Potential Cat Losses) = $150M Potential cat Losses = $30M NRC (ex Potential Cat Losses) = $80M NRC (incl. Potential Cat Losses) = $110M BCAR = (150 – 110 ) / 150 = 40/150 = 26.7 Planned BCAR Calculation (Ratio to Available Capital) 13 Mid-Atlantic Mutual Advantage Convention

14. Display of BCAR Scores 14 Mid-Atlantic Mutual Advantage Convention BCAR

15. BCAR Impact on Balance Sheet Mid-Atlantic Mutual Advantage Convention 15  Scores at confidence levels provide differentiation in initial assessment categories (prior to quality of capital/holding company adjustment)

16. Additional Balance Sheet Factors 16 The BCRM is being updated but the fundamental rating drivers will remain the same  Quality & appropriateness of reinsurance programs  Quality and diversification of assets  Financial & operational leverage  Liquidity  Quality of capital  Economic capital Mid-Atlantic Mutual Advantage Convention

17. Holding Company Impact 17 The BCRM is being updated but the fundamental rating drivers will remain the same  Financial leverage  Interest coverage  Financial flexibility & liquidity  Intangible assets  Non-rated affiliates Mid-Atlantic Mutual Advantage Convention

18. Balance Sheet Strength Mid-Atlantic Mutual Advantage Convention 18

19. The Baseline Assessment Mid-Atlantic Mutual Advantage Convention 19

20. Balance Sheet Only Goes So Far Mid-Atlantic Mutual Advantage Convention 20

21. Operating Performance 21 The BCRM is being updated but the fundamental rating drivers will remain the same  Underwriting performance  Investment performance  Total earnings & returns  Prospective financial forecasts Mid-Atlantic Mutual Advantage Convention

22. Baseline Adjusted for Performance Mid-Atlantic Mutual Advantage Convention 22  Depending on a company’s operating performance, the baseline can be adjusted up or down o Using appropriate benchmark o Looking at level, trend and volatility

23. Business Profile Mid-Atlantic Mutual Advantage Convention 23 Sub-AssessmentPositiveNeutralNegative Product/Geographic Concentration Significant diversification of product line /geographies Moderate diversification of product lines / geographies Insufficient diversification of product lines / geographies Market Position Increase profitable market share at a sustainable rate Sustain profitable market share Unable to sustain profitable market share Pricing Sophistication & Data Quality Provides Competitive Advantage No Competitive Advantage/Disadv. Lack of sophistication creates disadvantage Product RiskLow Risk OfferingsAverage Risk OfferingsHigh Risk Offerings Degree of CompetitionLow CompetitionAverage CompetitionHigh Competition Management Quality Consistently achieves forecasts & targets Occasionally falls short of forecasts & targets Provides unreliable forecasts & targets Regulatory, Event & Market Risks Very Low or Significantly Reduced Moderate and Stable Very High or Significantly Increased Distribution Channels Created a significant competitive advantage thru distribution channels Has not created a significant competitive advantage thru distribution channels Faces a significant competitive disadvantage with regards to distribution The BCRM is being updated but the fundamental rating drivers will remain the same

24. Baseline Adjusted for Profile Mid-Atlantic Mutual Advantage Convention 24  Sub-assessments are qualitatively combined by analyst into a single business profile assessment

25. ERM 25 The BCRM is being updated but the fundamental rating drivers will remain the same  Major Categories of Risk Assessment are not changing o Credit, Market, Underwriting, Operational, Strategic o Reinsurance, Legislative, Reserving, Management  Primary Tool that Analysts use in ERM assessment process is not changing o Risk Impact Worksheet Mid-Atlantic Mutual Advantage Convention

26. Baseline Adjusted for ERM Mid-Atlantic Mutual Advantage Convention 26  Depending on a company’s ERM, the baseline can be adjusted up or down

27. Comprehensive Adjustment Mid-Atlantic Mutual Advantage Convention 27  Evaluation of key rating factors includes parameters which place limits on any one factor  Recognizes a truly uncommon strength/weakness that is not captured through the rating process

28. Application of Lift or Drag Mid-Atlantic Mutual Advantage Convention 28  Non-lead rating units may be eligible for partial rating enhancement based on benefits it receives from being affiliated with the lead rating unit.

29. The Building Block Approach Mid-Atlantic Mutual Advantage Convention 29 Rating recommendation of “a”

30. Rating Implications 30  BCRM is NOT a means to change ratings although some ratings may change  Analyst will communicate any potential rating issues as they become apparent during comment period o Companies should feel free to discuss changes with their analyst  Ratings affected will be placed under review at end of comment period o Need to be resolved within 6 months Mid-Atlantic Mutual Advantage Convention

31. Rating Implications for Mutuals 31  Mutual structure and ratings o In many respects, no difference in analysis o Access to capital is limited (financial flexibility) o Ability to look longer term o Conflict between policyholder and stockholder does not exist o Can hold excess capital with less stakeholder pressure o Greater customer loyalty  BCAR & tail risk for mutuals o In most respects, no difference in analysis o Exposure to extreme events a rating factor for all o How much tail protection does a rating imply? o For Nat Cat, PML is only one view of risk exposure Deterministic view, TVaR, Characteristic Event Mid-Atlantic Mutual Advantage Convention

32. .Thank You 32 Mid-Atlantic Mutual Advantage Convention