Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright (c) 2006 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. Reinsurance Overview Damien Magarelli Director CAS May 8, 2007

2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Agenda  Reinsurance Ratings & Outlook  Insurance Major Rating Factors  Reinsurance Focus  Catastrophe Issues & Criteria  Florida’s legislative changes

3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Rating Distribution: Global Reinsurance Lines

4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Global Reinsurance Outlook Stable As of 11/13 of each year; 54 interactive ratings.

5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Global Reinsurance Outlook Positive Factors influencing Reinsurance Outlook: Very strong earnings generation in 2006, expectation of good earnings in The pricing peak was in 2005 and 2006 for many accounts and product lines (terms and conditions are deteriorating). Increased focus on risk management and profitability. Negative Factors influencing Reinsurance Outlook: High earnings and balance sheet volatility Commoditized market/low differentiation Potential increase in frequency of large catastrophe events

6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.  Industry Risk  Potential threat of new entrants, Substitute products or services, Regulatory risk  Competitive Position  Competitive advantage: distribution channel, underwriting, pricing power, scale, diversification (sector and/or line of business).  Management and Corporate Strategy  Enterprise Risk Management (ERM)  Risk controls, optimization of earnings and capital  Operating Performance  Capitalization/Reinsurance  Investments and Liquidity  Financial Flexibility/Reinsurance Insurance Major Rating Factors

7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.  Reinsurance Risk is incorporated into ratings and major rating factors, with varying degrees of importance depending on each company’s risk profile.  Company utilizing significant reinsurance protections – may be the overwhelming ratings factor.  Company with excess capital and minimal use of reinsurance, may be less important.  Reinsurance Risk is incorporated in ratings on a quantitative basis (capitalization) and on a qualitative basis as well.  Reinsurance Risk is incorporated as part of our ERM evaluation. Reinsurance – Importance to Ratings

8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Quantitative Basis  Capital Model:  Reinsurance recoverables are charged based on credit risk and amount of recoverable (historical loss).  The catastrophe exposure charge (1/250 net aggregate property PML) is applied on a net basis – so, reinsurance is applied and reduces this PML capital charge.  Side-cars, catastrophe bonds and other forms of reinsurance may receive credit in the capital model based on a transaction level review in each case. Reinsurance – Importance to Ratings

9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Qualitative Basis  Could a company adjust its level of reinsurance utilization, would this impact competitive position or not? (line size, capacity offered)  The selection of a retention involves a compromise between stability and cost.  A relatively low retention provides earnings stability but is expensive. (specifically, post-event cost may be too expensive)  Due to reinsurance, does the insurance company insure large single risks (or a large number of smaller risks) in excess of what capital base can safely support?  Is reinsurance purchased to protect against frequency or severity, or both? (mitigate volatility, generate steady earnings).  Ability to access reinsurance? (financial flexibility) Reinsurance – Importance to Ratings

10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Qualitative Basis  Why is reinsurance utilized? (reduce capital charges including catastrophe charges).  How is reinsurance purchased? (committee approach, purchased by segment or at a corporate level)  Does company monitor reinsurance quality? (low or non-rated companies)  Does company monitor concentrations? (Florida, FHCF)  Does company utilize reinsurance to manage pricing cycles? Optimize earnings? (ERM)  What is the process to monitor reinsurance quality? (ERM)  What is the process to update reinsurance program as conditions change? (ERM) Reinsurance Risk

11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Catastrophe - Year 2004 & 2005 in Review  Year 2004  Southeast hurricanes: The four hurricanes in the Southeast US during Q caused more than $23 billion in insured damage.  The last time 4 hurricanes hit one state (Texas) was  Japan: The 10 typhoons in Japan caused more than $6 billion in damages during the third and fourth quarters in  10 typhoons in Japan in 2004, previous maximum was 6, and the average from was 2.6 per year.  Year 2005  In 2005, insurers worldwide measured property losses (includes business interruption) of $83 billion, in 2004 this figure measured $48 billion.  Hurricane Katrina alone measured property losses of $45 billion.  Year 2005 measured 27 named storms, previous record was 21 in  Number of hurricanes in 2005 was 15, previous record was 12 in  Year 2005 was also the highest number of category 5 hurricanes – at three.

12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Meteorological changes  Climate change:  The 1990s were the warmest decade globally since records began, with the four warmest years all occurring since Climate change could increase frequency and severity of extreme weather events.  Atlantic Multi-decadal Oscillation (AMO): describes how sea surface temperatures oscillate between warm and cold periods. Warm Sea Surface Temperatures are strongly correlated to high tropical cyclone activity.  Bermuda High: An area of high pressure that forms over the Atlantic Ocean during the summer.  Depending on its location this in part determines the number of hurricanes that make landfall in the US or remain over the Atlantic Ocean.

13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Socio-economic factors  The severity of property catastrophe risks is increasing with population growth in coastal areas, inflation, and higher building values.  From 1980 to 2003 the coastal population in the US grew by 33 million, and is projected to increase by a further 12 million by  At the same time, household sizes are decreasing.  Result: The number of properties at risk to extreme weather is increasing.  In the U.S., more than 50% of the U.S. population now lives within 50 miles of a coastline.  Florida specifically has experienced a 70% increase in the number of state residents from 1980 to  During the period from residential exposure in Florida increased over 90%.  Hurricane Andrew: If Hurricane Andrew had hit Florida in 2002 rather than 1992, the losses would have been double due to increased coastal development and rising asset values.

14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Property Catastrophe Criteria Conclusion  It is very likely that insured losses due to hurricanes will increase over the next years due to meteorological and socio-economic changes.  This higher risk will be imbedded in ratings.  Result: Where a modeling agency provides more than one view of expected loss on a portfolio of catastrophe risk, Standard & Poor's will use the most conservative view.  Currently, that equates to selecting the shorter term view of expected loss, but it is reasonable to assume in periods of benign activity the most conservative view would be obtained by using the longer term perspective.

15. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Property Catastrophe Criteria/Capital Charge  Tax adjusted Net aggregate 1/250-year property Probable Maximum Loss (PML) with two premium offsets.  (New) The catastrophe capital charge will now be Tax Adjusted (US = 35%).  First premium offset, the catastrophe related premium embedded in the property book will be removed from the premium risk charge to avoid double count of required capital.  Second premium offset, the net aggregate 1/250-year PML will be reduced by 70% of the associated catastrophe Net Written Premium.  For both Insurers and Reinsurers – this premium offset reflects the view that premiums could be collected early in the year that would reduce a prospective PML loss later in the same year.  The capital charge is applied on all property (personal & commercial) exposures on a global basis. The total portfolio PMLs are expected to be calculated for all perils (wind, earthquake, tornado/hail and flood (non-US)), and zones combined.  Therefore, diversification by peril and location is applied.

16. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Legislative Changes in Florida  In January 2007, the State of Florida (Florida) passed an insurance and reinsurance reform bill that will significantly impact insurance and reinsurance pricing, the capacity the insurance industry offers, and the competitive position of many companies from  The reform bill has the objective of lowering insurance premiums in Florida, and is expected to reduce property insurance rates by an average of 22%.  Property reinsurance rates are also expected to decrease substantially to a level below what private reinsurers would have charged for catastrophe reinsurance.  The reform bill will be made effective through Florida’s two state sponsored entities: Citizens Property Insurance Company (Citizens), and the Florida Hurricane Catastrophe Fund (FHCF).

17. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Legislative Changes in Florida Modeling & Pricing  The pricing structure expected in Florida does not apply the near-term catalog of events and does not include assumptions for demand surge and storm surge.  Standard & Poor’s applies the near-term catalog of events as part of its insurance and reinsurance catastrophe criteria and capital charges, consistent with its criteria for ratings on sidecars and catastrophe bonds.  If a company does not apply these assumptions, Standard & Poor’s will adjust the data and PMLs accordingly, and increasing PMLs above 40% would be expected.  Standard & Poor’s also expects that assumptions for demand surge and storm surge will be incorporated within PML figures, in some cases increasing PMLs greater than 30% is expected.

18. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Legislative Changes in Florida Conclusion  The insurance industry’s ability to price for catastrophe risk has been significantly reduced.  The lack of pricing power could lead to inadequate prices, substantially reduced earnings and increased competition in other geographic locations outside Florida and lines of businesses outside property, as capital flows to these other locals.  The likelihood exists for earnings and ratings to slowly deteriorate or simply be limited at their 2006 level. Potential rating upgrades, especially for property focused companies, has also declined substantially.  Prospective rate increases are not expected to be substantial, and the lack of significant rate increases post-event may limit the flow of new capital (including sidecars and catastrophe bonds), into the insurance industry, and so the financial flexibility of many companies has weakened.

Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright (c) 2006 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. Reinsurance Overview Damien Magarelli Director CAS May 8, 2007