CASUALTY ACTUARIAL SOCIETY

2004 Annual Meeting Montreal, Canada November 16, 2004

Security and the Reinsurer

Security and the Reinsurer

Presentation Format
I. II. III. IV. Introduction Brief Presentation Panelist Q/A Audience Q/A

Reinsurance Recoverable as a Percent of Surplus

Source: Standard & Poors/Fitch

Secured vs. Unsecured Reinsurance Recoverables

In Billions $

% of Surplus

Secured

Secured

Unsecured

Unsecured

Source: Standard & Poors

Provision For Uncollectible Reinsurance

Source: Fitch Ratings

Reinsurer Profitability Has Been Poor

Source: Standard & Poors

Source: Standard & Poors

Where Has All the Ceded Gone?

Direct Insurer Reserve Increases (examples, asbestos alone)
Ace Ltd. $2.2 billion (4Q 02 - gross of reinsurance) Travelers Insurance Co. $2.7 billion (4Q 02 - net of reinsurance Hartford Financial Services Group Inc. $3.9 billion (1Q 03 - gross of reinsurance) CNA Financial Corp. $642 million (1Q 03 - net of reinsurance) Chubb Corp. $250 million (4Q 03 - net of reinsurance)
Source: Standard & Poors

Historical Aggregate Recoverable Gap

Source: Conning & Co.

Global Premium/Rating Shift

Source: Morgan Stanley

Source: Standard & Poors/AON

Rating Trends: North America Reinsurance

Source: Standard & Poors

US Reinsurers in 1993
American Re Axa Reins Co Cologne Reins Co of Amer Folksamerica Group Scor U.S. Group Employers Re CIGNA Reins Chartwell Reins Co Gerling Global Reins Transatlantic/ Putnam Signet Star Reins Co Winterthur Reins Co Prudential Re Zurich Reins Centre Chatham Rein Corp PMA Reins Co. Tig Reins Co Constitution Reins General Re Group

Frankoana Reins Co

Sorema NA Reins Co NAC Reins Corp

Toa RE America

Skandia America Reins

Source: Standard & Poors

US Reinsurers Today
American Re Axa Reins Co Employers Re General Re Group

Folksamerica Group

Scor U.S. Group

Transatlantic/ Putnam

Signet Star Reins Co/Berkley Ins Co

Tig Reins Co

NAC Reins Corp

Prudential Re/ Everest Re Source: Standard & Poors

Exit - Stage Right

Notable Reinsurer that ceased underwriting over the last several years Gerling-Konzern Globale Rckversicherungs-AG (GKG)
Trenwick America Reinsurance Corp Scandinavian Reinsurance Co. Ltd.; Commercial Risk Reinsurance Co. Ltd. and Commercial Risk ReInsurance Co. AXA Corporate Solutions Reinsurance Co. and AXA Corporate Solutions Life Reinsurance Co. PMA Capital Insurance Co. CNA Re

Source: Standard & Poors

Exit - Stage Left

Notable Spin-Offs/Renewal Rights Sales Zurich Re/Converium St. Paul Re/Platinum Hart Re/Endurance

Still on Stage
Notable Recent Downgrades Scor Converium

New Capital Post 9/11 (as of May 21, 2002)

$ Billions Capital Raised: 2001 2002 Total Bermuda Start-ups: $20.5 $4.1 $24.6 $8.5

Source: Guy Carpenter

Not All Reinsurers Will Survive

Balance Sheet Repair Efforts will be Hindered New Capacity Market Showing Signs of Turning Ample Capacity Available at the Right Price

Conclusion
Reinsurance Recoverables make up a significant portion of policyholder surplus Cedants and Rating Agencies are concerned with the financial strength of reinsurers The game has changed and the pace of change has increased.

Security and the Reinsurer

2004 CAS Annual Meeting Montreal, Canada November 16, 2004

Panelist Questions

Security and The Reinsurer

Is the focus on reinsurers security a new phenomenon or is it an old issue? What is your perspective on the history of reinsurers security?

Security and The Reinsurer

How should reinsurance buyers evaluate reinsurers security? What things should they look at and what methods should they employ?

Security and The Reinsurer

How should buyers differentiate between reinsurers with different credit quality? What are common existing practices and what are some ideas for the future?

Security and The Reinsurer

How has the insurer/reinsurer relationship changed over the last decade? What has led to the change? How has this impacted reinsurer security?

Security and The Reinsurer

In the last decade there have been many innovations in the ways to manage run-off insurer and reinsurer businesses. How have these innovations impacted the security of reinsurance recoverables?

Security and The Reinsurer

What tools do cedants use to mitigate their risk to reinsurance unrecoverable? Are there differences between the US and the Rest of the World in this regard?

Security and The Reinsurer

Do so-called ratings triggers in reinsurance contracts help mitigate credit risk or do they exacerbate the credit exposure?

Security and The Reinsurer

In recent discussions on managing the cycle, the concept of capital management has been raised as a tool to help reduce the amplitude of the cycle. In fact, several reinsurers have recently initiated share buy backs and increased dividends as a way to return capital to shareholders as they perceive opportunities to deploy that capital to be more limited. Do such capital management strategies help or hurt the security of the reinsurance recoverables?

Security and The Reinsurer

What is the current quality of reinsurance recoverables in general? Is it getting better or worse in 2004?

Security and The Reinsurer

What methods should cedants use to establish a provision for reinsurance unrecoverable? Is there a consistent approach used or are there big differences from company to company?

Security and The Reinsurer

What methods should cedants use to build the cost of uncollectible reinsurance into their rates? Are these methods accepted by regulators in the rate filing process?