1. Seminar on Reinsurance June 2, 2003 Michael Kerner Ceded Reinsurance - Analyzing Reinsurer’s Financial Security

2. Credit Quality - Current Events Security Review Process Other Issues - Terrorism

3. Why Is Security Important? Primary Company Capitalization Under Pressure Capital is Expensive - Providers Demanding High ROEs Opportunities driving Capital Demand Increase in Reinsurance Recoverables

4. Why Is Security Important? Ability To Pay Willingness to Pay Focus on Contracts Increase in Disputes

5. Why Is Security Important? Large Number of Rating Downgrades – 70% of World’s Reinsurance PremiumSuffered Downgrade in Past Year Large Amount of Premium on Negative Outlook Buffet Comments V.J. Dowling Newsletter

6. Global Premium/Rating Shift % Premium Rating 2001 Current Difference Aaa/AAA61.9%11.9%-50.1% Aa/AA28.3%68.8%40.5% A9.8%14.1%4.3% Below A0.0%5.2%5.2% Total100.0%100.0%0.0% Negative Outlook69.3% Source: Morgan Stanley

7. Reinsurers’ Balance Sheets Stressed Published Results are Generally Poor (through 12/02). Where has all the Ceded Gone? – Reserve Strengthenings – Insolvencies and Stressed Primaries “We simply think it unlikely that U.S. reinsurer’s $6 billion + adverse reserve development in calendar year 2002 fully captures these adverse underlying claim trends” -- Morgan Stanley

8. Not all Reinsurers Will Survive Balance Sheet Repair Efforts will be Hindered New Capacity Market Showing Signs of Flattening Ample Capacity Available at the Right Price

9. Source: Guy Carpenter

10. Availability - New Capital Post 9/11 (as of May 21, 2002) $ Billions Capital Raised: – 2001$20.5 – 2002$4.1 Total$24.6 Bermuda Start-ups:$8.5 Source: Guy Carpenter

11. Security Process

12. Security Review Process Group Level Activity Multidisciplined Team –Finance –Risk Management –Ceded Reinsurance Exception Process

13. Focal Points of Security Review Analysts Ratings –A.M. Best –Standard & Poor’s –Moody’s –Other Strengths –Independent Evaluation –In Depth Knowledge of Company –Relatively Consistent Weakenesses –Not All Companies Have Ratings –The Shifting “Bar”

14. Focal Points of Security Review Detailed Proprietary Financial Analysis Strengths –Consistent Evaluation –Process Promotes an In Depth Analysis of the Reinsurer –Customizable Based on Our View of the World Weakenesses –Resource Intensive –Generally doesn’t benefit from Non-Public Information

15. Focal Points of Security Review Other Items –Size –Experience & Longevity of Organization –Experience & Longevity of Management and Underwriting Team –Organizational Structure –Current Relationship

16. Security Review - Other Considerations New Capital Vs. Old Capital – The devil you know vs. the devil you don’t Short-Tailed Vs. Long-Tailed Collateralization –Partial or Full Line Size Limitations

17. Terrorism

18. U.S. Terror Bill Retention Quota Share Terror Definition –Foreign Vs. Domestic –Fire Policy Issue

19. Outline of Legislation Key Features – Run by Department of Treasury – Act is Triggered when Secretary of Treasury, Secretary of State and Attorney General Certify an Event as an Act of Terrorism – Covers Acts of International Terrorism Only – Act terminates 12/31/2005 – Also covers Acts of War but only for Workers Compensation – Losses must exceed $5MM for Act to be triggered – Only Acts of Foreign Terrorism (eg. Excl. Oklahoma Federal Building)

20. Outline of Legislation Structure of Act – All Commercial Insurers must participate and must offer Terrorism Coverage during first 2 years of program – Insurer Deductibles are a Percentage of Direct Premiums from Previous Calendar Year –1% in Transition Period –7% in Year One (2003) –10% in Year Two (2004) –15% in Year Three (2005 – Above Insurer Deductible, Federal Government Share is 90% and Insurers’ Share is 10% – Losses Capped at $100 Billion

21. Terror Risk: Modeling 1.First Wave - Risk Analysis 2.Second Wave - Accumulation Controls 3.Third Wave - Probabilistic Models - Hazard Module - Vulnerability Module - Exposure Module

22. Terrorism - Market Reaction Inconsistent Stand Alone Covers Available, but Expensive Some Coverage Available in LOB Placements Certified Vs. Non-Certified NCB

23. QUESTIONS ?