1. Strategic Planning for Captive Growth A Capital Modelling Perspective

2. Strategic Planning for Captive Growth Speakers: William Montanez, Director, Risk Management, Ace Hardware Jeff Doffing, Director & Actuary, Aon Risk Consulting Jim McNichols, Risk Modeling Actuary, Aon Risk Consulting Moderator: Robert Paton, Executive VP, Aon Captive Managers

3. Strategic Planning for Captive Growth Ace Hardware Corporation (Ace) –Founded in Chicago (1924) by local hardware store owners to leverage group purchasing power –Current Corporate Headquarters in Oak Brook, Illinois Established Ace Insurance Agency in 1981 Formed Bermuda based captive in 1996 –Largest retailer-owned hardware cooperative in the industry –Each store is independently owned by local entrepreneurs –4,400 Retailer owned & operated stores worldwide –4,100 US based locations

4. Strategic Planning for Captive Growth Captive Background for New Age Insurance, Ltd (“NAIL”) –Formed by Ace Hardware in 1996 as a Class 3 (re)insurer with $1 million of capital and several strategic objectives: Achieve long term insurance cost savings Stabilize insurance expenses for corporate and retail Minimize administrative and operating costs Attain efficient funding levels for retained risk Enhance coverage options for retail operations Increase retail risk program market penetration

5. Strategic Planning for Captive Growth Captive (NAIL) Profile and Performance –Underwrites WC/GL/Auto/Property exposures (related risk & 3 rd party) at varying retentions averaging $500,000/occ. 2009 Gross/Net Written Premium = $12.5 MM/10.5 MM 2000-2009 Average Loss & ALAE ratio = 70% 2000-2009 Average Expense ratio = 15% 2009 Year End Loss & ALAE Reserves = $21.0 MM 2009 Year End Capital & Surplus = $24 MM

6. Basic Financial Diagnostics

10. Capital Requirements - Regulatory Bermuda Statutory Capital / Surplus Requirements –Requisite statutory capital and surplus must exceed the greater of A or B or C A) Class 3 Minimum => $1,000,000 B) Premium Level Test (20% / 5:1) => $2,000,000 C) Loss Reserve Level Test (15% / 6.7:1) => $3,000,000 NAIL Statutory capital & surplus @12/31/2009 = $24,000,000 Bermuda Regulatory Excess Statutory Surplus = $21,000,000

11. Capital Requirements - Regulatory Premium to Surplus Ratio The ratio of net written premiums to total capital and surplus has decreased from 2005 to 2009. Bermuda allows up to a 5:1 ratio. A 2:1 ratio is considered conservative. This measure indicates that NAIL has significant underwriting capacity available. At a 2:1 ratio, NAIL could write an additional $37.1mm of premium.

12. Capital Requirements - Regulatory Reserves to Surplus Ratio The ratio of loss & ALAE reserves to total capital and surplus has continued to decrease. This measures the degree to which surplus would be impaired if loss & ALAE reserves are undervalued due to inflation or other factors. A typical range is 2:1 to 4:1, so NAIL is now significantly below that range.

13. Historical Underwriting Variability

14. Historical Loss Reserve Variability

15. Historical Asset (Bonds & Equities) Variability

16. Capital Requirements – Liquidation Scenario

17. Capital Requirements Financial Statement Statutory Surplus = $24,000,000 Bermuda Regulatory Excess Statutory Surplus = $21,000,000 Liquidation Scenario Excess Surplus = $12,300,000

18. Capital Requirements – Risk Based Economic Capital/Dynamic Risk Capital/Solvency II Capital –All these terms denote risk based capital approaches which are designed to better capture the inherent effects from more extreme / Black Swan events. Recent examples would include: Mortgage CDO induced banking credit crisis New Zealand earthquake Australian & Mississippi floods Japan earthquake/tsunami/nuclear fallout Commodities market price bubble Alabama & Missouri tornados

19. Capital Requirements – Risk Based Economic Capital Modeling –Requires dynamic risk modeling techniques to analyze all of the key risk exposures, namely; Underwriting risk ( i.e., in-force premium risk) Reserve variability ( i.e., prior years reserve changes) Interest rate (primarily within the investment portfolio) Credit risk (corporate bonds & reinsurance recoverable) Equity investment volatility (including F/X risks)

20. Capital Requirements – Risk Based Economic Capital Modeling Perspective –1 year forward time horizon –1:200 stress level events Underwriting Risk (Example) Frequency Severity Aggregate claims distribution Stochastic (i.e., Monte Carlo) simulated outcomes Stress level thresholds (e.g., Black Swans) Economic capital contribution

21. Underwriting Risk – Example (Corp WC-Only) Stochastic Simulation (aka Monte Carlo)

22. Underwriting Risk – Example (Corp WC-Only) Monte CarloDirectNet Mean3,246,900 2,997,000 5.0% 1,087,400 1,083,600 15.0% 1,579,700 1,539,700 25.0% 1,977,300 1,910,400 35.0% 2,348,000 2,234,400 45.0% 2,724,200 2,550,200 55.0% 3,130,200 2,916,600 65.0% 3,576,500 3,294,400 75.0% 4,099,400 3,767,600 85.0% 4,938,000 4,444,200 95.0% 6,597,700 5,947,300 98.0% 7,849,600 6,935,200 99.0% 9,154,800 7,973,800 99.5% 9,750,400 8,800,000

23. Underwriting Risk – Example (Corp WC-Only) Net 99.5 th Percentile Losses 8,800,000 Expected Earned Premium (3,500,000) Required Risk Capital 5,300,000

24. Capital Requirements – Risk Based Economic Capital Modeling Results (U/W Risk variable only) –Stochastic Simulation of each LOB variable at 1:200 stress Work Comp - Corp $ 5.3 MM Work Comp - Retail 2.1 MM Gen Liab. - Corp & Retail 1.6 MM Auto Liab. - Corp & Retail 1.0 MM Auto PD - Corp & Retail 0.5 MM Retail Property 2.0 MM Sum $12.5 MM Required Economic Capital => $ 8.5 MM* * does not equal the sum of the parts due to portfolio effects

25. Capital Requirements – Risk Based Economic Capital Modeling Results (All 5 key risk variables) –Stochastic Simulation at 1:200 stress, 1 yr time horizon Underwriting Risk $ 8.5 MM Reserve Variability 2.0 MM Interest Rate 3.5 MM Credit Risk 0.5 MM Equity Volatility 2.5 MM Sum $17.0 MM Required Economic Capital => $14.0 MM* * does not equal the sum of the parts due to portfolio effects

26. Capital Requirements Financial Statement Statutory Surplus = $24,000,000 Bermuda Regulatory Excess Statutory Surplus = $21,000,000 Liquidation Scenario Excess Surplus = $12,300,000 Risk Modeling Based Excess Surplus = $10,000,000

27. Capital Requirements – Rating Agency A.M. Best – Best Capital Adequacy Ratio (BCAR) Capital Adequacy Ratio Estimation B1Fixed Income Securities 600,000 B2Equity Securities1,500,000 B3Interest Rate 250,000 B4Credit 200,000 B5 Loss & LAE Reserves5,000,000 B6Net Premiums Written3,000,000 B7 Business Risk - Unadjusted Required Capital (Sum B1=>B7)10,550,000 Covariance Adjustment (i.e., Portfolio Effect) (4,150,000) Net Required Capital (“NRC”) 6,400,000 Reported Surplus14,000,000 Loss Reserve Equity 2,000,000 Adjusted P/H Surplus (“APHS”) 16,000,000 Capital Adequacy Ratio [APHS/NRC] = 2.50

28. Capital Requirements – Rating Agency A.M. Best – Best Capital Adequacy Ratio (BCAR) Capital Adequacy Scale (2009) RATINGMINIMUM SCOREMEDIAN SCORE A++1.752.65 A+1.602.60 A1.452.50 A-1.302.25 B++1.152.00 B+1.001.70

29. XS Capital Employment Options Risk capital DRM analyses demonstrated that NAIL is carrying approximately $10 million in “excess” Capital/Surplus ACE/NAIL are considering three strategic growth options 1.Providing additional property coverage to the 350 retailers located in coastal properties. 2.Increasing third party participation from all retailers by lowering BOP rates 10%. 3.Writing Umbrella Excess Coverage for retailers.

30. XS Capital Employment Options 1.Providing additional property coverage to the 350 retailers located in coastal properties Incremental Increase in Earned Premium = $3.5 MM Expected Loss & ALAE = $1.4MM Expected Underwriting Gain/(Loss) = $2.1 MM (i.e., Expected U/W Loss Ratio = 40%) 1:200 Adverse Cat Loss & ALAE Projection = $13.5 MM DRM estimated Capital Charge* = $10.0 MM * On a stand alone basis – before any reduction from portfolio effect

31. XS Capital Employment Options 2.Increasing third party participation by all retailers by lowering BOP rates by 10% Incremental Increase in Earned Premium = $2.5 MM Expected Loss & ALAE = $2.0 MM Expected Underwriting Gain/(Loss) = $0.5 MM (i.e., Expected U/W Loss Ratio = 80%) 1:200 Adverse Loss & ALAE Projection = $4.5 MM DRM estimated Capital Charge* = $2.0 MM * On a stand alone basis – before any reduction from portfolio effect

32. XS Capital Employment Options 3. Writing Umbrella Excess Coverage for retailers Incremental Increase in Earned Premium = $1.0 MM Expected Loss & ALAE = $0.1 MM Expected Underwriting Gain/(Loss) = $0.9 MM (i.e., Expected Loss Ratio = 10%) 1:200 Adverse Cat Loss Projection = $8.0 MM DRM estimated Capital Charge* = $7.0 MM * On a stand alone basis – before any reduction from portfolio effect

33. XS Capital Employment: $10mm available Capital Retailer Growth Option Premium Growth Estimate Expected U/W Gain Relative Capital Charge Business Considerations Underwrite Coastal Coverage $3.5 mm$2.1mm$10.0mm Represents 9% of total stores Reduce political distractions Improve cross selling opps. 10% BOP Rate Decrease $2.5mm$0.5mm$2.0mm Service more Ace retailers Provides more pricing flexibility Minimal capital usage allows for additional captive expansion Underwrite Umbrella Coverage $1.0mm$0.9mm$7.0mm Reduce subsidy of 3rd parties Customize coverage Overall program pricing flexibility