1. 1 CANADIAN INSTITUTE OF ACTUARIES ANNUAL MEETING St. John’s, June 28-29, 2005 Gordon Crutcher – Sutton Reinsurance

2. 2 P & C REINSURANCE 2004 REVIEW – PREVIEW 2004 REVIEW – PREVIEW OF 2005 & BEYOND OF 2005 & BEYOND CURRENT DIRECTIONS OF OF

3. 3 EXECUTIVE SUMMARY THE CURRENT REINSURANCE MARKET

4. 4 CURRENT REINSURANCE MARKET 2004 was a profitable year for most reinsurers, despite an unprecedented frequency of natural disasters. Underwriting profits were earned in 2003 and 2004. Continuing good results are expected for 2005.

5. 5 CURRENT REINSURANCE MARKET Balance sheets have been strengthened again. Treaties generally adequately priced. Capacity is adequate for most lines.

6. 6 CURRENT REINSURANCE MARKET Market has definitely started to soften (as it has for insurance). Investment gains are rising (although still 20% below peak in 1998). Not the bull market of the ’90’s but a global economic recovery appears underway.

7. 7 CURRENT REINSURANCE MARKET However, a falling combined ratio can be a reinsurer’s worst enemy.... Times are good.... Losses are down.... If we soften prices, we gain more market share. Right? Source: BestWeek – January 24, 2005

8. 8 SURPRISES AHEAD ?

9. 9 JUST STARTING THE RIDE DOWN?

10. 10 HOW SERIOUS ARE REINSURERS ABOUT MAINTAINING PRICING DISCIPLINE IN 2005?

11. 11 THIS SERIOUS?

12. 12 INTERESTING OBSERVATION “The underwriting cycle is back with a vengeance and will have no mercy this time around. Pricing, reserving and underwriting blunders will prove far more lethal, far more quickly in today's lethargic investment environment, especially if potential investors flee following the recent spate of insurance industry scandals.” Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist, Insurance Information Institute (www.iii.org)

13. 13 ANOTHER INTERESTING OBSERVATION P/C Insurance Will Always Be An Impossible Business: “Impossible to use past information to determine prices today for a product sold tomorrow for claims that may arise in the distant future AND expect to be right.” Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist, Insurance Information Institute (www.iii.org)

14. 14 2004 – A BRIEF REVIEW  Once again, it was an “interesting time” for insurers, reinsurers and brokers.  Challenges came from: - Nature- Economy - Public- Regulators - Ourselves

15. 15 REINSURERS’ COMBINED RATIOS Canadian Reinsurers  2000:113%  2001:119%  2002:110%  2003: 96%  2004: 92% U.S. Reinsurers  2000:114%  2001:143%  2002:121%  2003:101%  2004 105%

16. 16 COMBINED LOSS & EXPENSE RATIOS OF CANADIAN REINSURERS Source: Annual Statistical Issues of Canadian Underwriter Magazine

17. 17 NET PREMIUMS WRITTEN BY CANADIAN REINSURERS Source: Annual Statistical Issues of Canadian Underwriter Magazine

18. 18 TOTAL CANADIAN REINSURANCE ASSUMED Source: Canadian Insurance 2005 Statistical Issue

19. 19 LESS BUSINESS FOR REINSURERS TO WRITE Reinsurance “pie” continues to shrink in Canada. Insurer retentions continuing to increase. One major insurer significantly increased its retention for 2004. Another has done so for 2005.

20. 20 LESS BUSINESS FOR REINSURERS TO WRITE Insurance Company mergers and acquisitions are not good news for reinsurers. Allianz Canada no longer buys an independent treaty program. Supply of reinsurance has increased but demand is flat – or declining.

21. 21 CEDED REINSURANCE PREMIUMS AS % OF TOTAL INS. PREMIUMS 24%30%31%30% 27% Source: OSFI @ Q4 each year

22. 22 RELATIVE IMPORTANCE OF REINSURANCE TO CANADIAN INSURERS Ratios of “Reinsurance Ceded” to “Net Premiums Written” Wawanesa Mutual Insurance: 2% Dominion of Canada General: 3% Co-operators General 6% Aviva Insurance Co. of Canada: 18% ING Insurance Co. of Canada: 23% Economical Mutual 26% Zurich Insurance Company: 33% R & SA Insurance Co. of Canada: 37% Commonwealth Insurance Company: 65% Source: http://www.osfi-bsif.gc.ca/ Data as of Q4 2004http://www.osfi-bsif.gc.ca/

23. 23 REINSURANCE CEDED TO PREMIUMS WRITTEN Source: OSFI @ Q4 2004

24. 24 IT’S GETTING LONELY OUT THERE! Fewer licensed reinsurers Now only 19 active markets in Canada Used to be 41 in 1991

25. 25 ACTIVE FEDERALLY – LICENCED INDEPENDENT REINSURERS 1. Aspen Re 2. AXA Re 3. CCR 4. Endurance Re 5. Everest Re 6. Folksamerica 7. GE/ERC 8. General Re 9. Hannover Re 10. Lloyd’s 11. Mapfre Re 12. Munich Re 13. Odyssey Re 14. Partner Re 15. SCOR Re 16. Swiss Re 17. Toa Re 18. Transatlantic Re 19. XL Re NEW IN 2004: - Endurance Re - Mapfre Re LOST IN 2004: - Converium Re

26. 26 CANADIAN CATASTROPHES July 2, 3, 7, 11: Rain, hail and flooding in Edmonton: ($170 million) July 2, 3, 7, 11: Rain, hail and flooding in Edmonton: ($170 million) July 15 - 20: Rainstorms and flooding in Peterborough: ($90 million) July 15 - 20: Rainstorms and flooding in Peterborough: ($90 million) September 8: Rainstorm and flooding in Kingston/Ottawa & Niagara: September 8: Rainstorm and flooding in Kingston/Ottawa & Niagara: ($60 million) Wildfires in B.C.: ($50 million) Wildfires in B.C.: ($50 million)

27. 27 CATS ELSEWHERE WERE THE PROBLEM INSURED LOSSES HIT NEW RECORD LEVELS IN 2004! $42 billion! 300 Cats $18.5 billion in 2003. $37 billion in 2001. (Remember September 11?)

28. 28 WORLD – WIDE CAT LOSSES IN 2004 4 hurricanes in Florida within 6 weeks. (>$22 billion total loss) (Hurricane Andrew was $20.3 B in 1992) 10 typhoons in Japan (>$6 billion) Asian earthquake & tsunami (>$5 billion and >295,000 deaths)

29. 29 EXCEPTIONAL CAT LOSSES IN 2004 The exceptional world-wide Catastrophe loss experience in 2004 no doubt dampened increasing competitive pressures on rates.

30. 30 DECEMBER 26 TH - What A Disastrous Date! In 2004: Asian earthquake & tsunami: >295,000 killed In 2003: Earthquake in Iran: >41,000 killed In 1999: Winter storm Lothar in Europe: $6.5 billion

31. 31 CAT LOSS TREND IS STEADILY RISING Source: Swiss Re Sigma

32. 32 CAT LOSS TREND IS DISTURBING

33. 33 INSURED LOSSES BY CATEGORY IN 2004

34. 34 CAT EXPOSURE IN NORTH AMERICA IS ENORMOUS (Originals of this map can be ordered from Risk Management Solutions)

35. 35 ANOTHER CATASTROPHE? Elliot Spitzer Permanent significant impact on market practices, broker revenues and disclosure.

36. 36 SPITZER... To say nothing what he has done to Marsh McLennan’s share price !

37. 37 SPITZER’S IMPACT ON REINSURANCE Modest impact generally on reinsurance industry. Could see changes in broker structure and distribution. Finite reinsurance under intense scrutiny – but it’s a very small line in Canada.

38. 38 CANADIAN REINSURANCE MARKET – 2005 RENEWALS Reinsurance renewal pricing for Jan 1, 2005 in Canada was firmer and less competitive than originally expected.

39. 39 CANADIAN REINSURANCE MARKET – 2005 RENEWALS Pricing continues to be based on modeling results → less volatility. Final underwriting decision on many treaties made in London, Europe, Bermuda, or the U.S. No significant changes in treaty terms and conditions.

40. 40 INSURERS’ CONCERNS WHEN BUYING REINSURANCE 1. Price 2. Terms and conditions 3. Security

41. 41 INSURERS’ CONCERNS Insurers no longer consider relationships an important factor when buying reinsurance. It’s price, terms and conditions. Followed by reinsurer security.

42. 42 CANADIAN REINSURANCE MARKET – 2005 RENEWALS Canadian Cat rates decreased slightly (10% - 15%). As did Property “Per Risk” covers. Little change in proportional commissions. Casualty rates generally held firm, except for lower layers where rates increased.

43. 43 AVERAGE TREATY RATE CHANGES IN CANADA Source: Swiss Re Canada Est. for 2005

44. 44 AUTO IS NOT A POPULAR LINE WITH REINSURERS

45. 45 REINSURERS CONTINUE TO SEE LARGE AUTO CLAIMS

46. 46 CANADIAN REINSURANCE MARKET – 2005 RENEWALS While public is not reporting small collision & comprehensive losses to private insurers (frequency is down) – “fear induced frequency suppression” – reinsurers are seeing higher severity for A.B. & liability losses.

47. 47 CANADIAN REINSURANCE MARKET – 2005 RENEWALS HIGHER SEVERITY e.g. Laura Browne claim (1997) $13 million settlement in 2004. Passenger in a leased car. $3 M from State Farm; $10 M from AIG. Vicarious liability involved.

48. 48 CHARACTERISTICS OF TODAY’S INSURERS They are retaining a lot more risk. Common to see $2 to $10 million retentions. They don’t buy as much reinsurance. Sophisticated analytical tools help to increase insurers’ comfort level in retaining higher levels of risk.

49. 49 CHARACTERISTICS OF TODAY’S INSURERS They are very price conscious. The security rating of their reinsurers is important - but the predominant issue is price!

50. 50 CHARACTERISTICS OF TODAY’S REINSURERS Also retaining more risk. Getting larger. Top 10 markets write 80% of business. Retro market capacity is still limited and expensive. Disciplined underwriting (so far). Focused on bottom-line results.

51. 51 CHARACTERISTICS OF TODAY’S REINSURERS Require considerably more underwriting information. Pricing is directly tied to risk modeling. Little room for rate negotiation.

52. 52 WHAT DOES 2005 HOLD? The biggest risk is the most predictable: - the cyclical nature of the market! Periods of strong profitability have historically been followed by cyclical downswings in pricing. Continuing aggressive weather patterns: - frequency and severity of Cats.

53. 53 WHAT DOES 2005 HOLD? Profitability should continue but rate of growth in profits will be lower. Premium growth is faltering. Real premium growth in 2005 will be near zero. Source: Best Week of June 20, 2005

54. 54 WHAT DOES 2005 HOLD? Big changes are happening in global reinsurance industry, most coming from Europe. Fundamental shifts (or updates) in strategy. EC allowing European reinsurers more business mobility with less expense and better use of capital. Source: Best Week of June 20, 2005

55. 55 WHAT DOES 2005 HOLD? Business mix changing. Reinsurers seeking more life business to offset impact of the P&C cycle. Focus on emerging markets in Asia and Pacific Region. Some major reinsurers retreating from U.S. market for better prospects in Europe. Source: Best Week of June 20, 2005

56. 56 WHAT DOES 2005 HOLD? Additional adjustments for reserve deficiencies. Likely other mergers or withdrawals. Subtle shifts in strategy expected. Volatile investment environment. Another major terrorism loss?

57. 57 TERRORISM Authorities in the U.S. have envisaged a scenario, (involving conventional explosives), where a terrorism loss could exceed $25 billion. A loss on this scale would severely test the market’s ability to respond.

58. 58 TERRORISM Uncertain if the world’s largest reinsurance program – TRIA – will be extended beyond Dec. 31, 2005. Without TRIA, market capacity for U.S. terrorism reinsurance likely only about $750 million.

59. 59

60. 60 If you would like to receive a copy of this presentation by e-mail, please request one from Gordon Crutcher at: gcrutcher@SuttonReinsurance.com