CAN/WILL THE “HARDENING” P&C MARKET CONTINUE ABSENT …€¦ · PC Ind. Less BRK & AIG Wal-Mart PC Ind. Less BRK, AIG & Brokers Microsoft General Electric Google Chevron Corp

CAN/WILL THE “HARDENING” P&C MARKET CONTINUE ABSENT A CAPITAL EVENT?

IMPLICATIONS FOR (RE)INSURANCE INTERMEDIARIES

12th Annual TMPAA Summit Meeting

Vincent J. Dowling, Jr.

1

AFFILIATIONS WITH MAJOR INSURANCE INDUSTRY PLAYERS

Private Equity

Research & Capital Markets

M&A Advisory

2

Why Nobody Cares About P/C (Re)Insurance…But Should

What Is A Reasonable Return In The Current Environment

How We Think About The Property/Casualty Business

Reinsurance Pricing Pressures Drive Channel Conflict

Where Are We In The Underwriting Cycle?

Can The Industry Earn An “Adequate” Return Without A Decline In Surplus?

Q&A

AGENDA

3

WHY NOBODY CARES ABOUT P/C (RE)INSURANCE… BUT SHOULD

4

U.S. & BERMUDA P&C UNDERWRITER MARKET CAP “ONLY” $248 BB

$60

$160

$260

$360

$460

$560

$660

$760

$860

1997 1999 2001 2003 2005 2007 2009 2011

Composite Property/Casualty Industry Market Cap ($,B)

Total Market Cap. ($557) Less BRK/a ($341) Less BRK/a & AIG ($298) Less BRK/A, AIG & Brokers ($248)

AIG Market Cap Peaked In Late 2000 = Represented ~45% Entire P/C Industry Market Cap

Peak Market Cap Of $755B In

May 2007

AIG

Berkshire

5

$571 $557

$417$341

$298$253 $248 $235 $224 $222 $218 $217 $216 $197

Apple P/C Industry ExxonMobil P/C Ind. LessBRK

PC Ind. LessBRK & AIG

Wal-Mart PC Ind. LessBRK, AIG &

Brokers

Microsoft GeneralElectric

Google ChevronCorp.

IBM BerkshireHathaway

AT&T

TOP 10 LARGEST U.S. COMPANIES BY MARKET CAP VS. P/C INDUSTRY

P/C Insurance Is Roughly The Same Size Of…

LACK OF INTEREST = SIZE ALLOWS INVESTORS TO “AVOID”

$248$216

$180 $158$110 $100

PC Ind. LessBRK, AIG &

Brokers

BerkshireHathaway

Wells Fargo JP Morgan Citi Group Bank ofAmerica

P/C (RE)INSURANCE COMPOSITE & TOP 5 LARGEST U.S. LISTED FINANCIALS BY MARKET CAP

6

CUMULATIVE TOTAL VALUE CREATION (TBV/SH + DIVS) SINCE 2006 15

1%15

0%14

6%14

4%13

8%12

6%11

4%11

3%10

8%10

5%10

4%10

4%10

3%99

%95

%95

%88

%87

%87

%86

%83

%80

%80

%65

%62

%58

%57

%50

%49

%48

%47

%36

%35

%34

%31

%31

%27

%4%

-6%

-12%

-16%

-100%-80%-60%-40%-20%

0%20%40%60%80%

100%120%140%160%

Fairfa

xAl

lied W

orld

Arch

Cap

ital

HCC

Lanc

ashir

eAm

erica

n Fin'

lAc

e Ltd.

Rena

issan

ce R

eTr

avele

rsEn

dura

nce

Partn

er R

eCh

ubb

Aspe

nAX

IS C

apita

lW

.R. B

erkle

yPl

atinu

m U/

W RLI

Navig

ators

Montp

elier

Re

Infini

ty P&

CTo

wer G

roup

Ever

est R

eSa

fety

Alleg

hany

Prog

ress

iveHa

nove

rAr

go G

roup

Whit

e Mou

ntains

Marke

lAl

terra

Mercu

ry Ge

nera

lSe

aBrig

htCN

A Fin

'lAl

lstate

Baldw

in &

Lyon

sOn

eBea

con

Selec

tive

Cinc

innati

Fin'

lHa

rtfor

d Fin'

lGl

obal

Indem

nity

XL G

roup

Source: Company Reports

CUMULATIVE TVC & STOCK PRICE SINCE YEAR-END 2006(YE:06 - Q3:12E)Cumulative TVC (TBV/Sh + Dividends) Cumulative % Chg in Stock Price

48% Cumulative Growth = 7% CAGR

92% Cum. = 12% CAGR

123% Cum.= 15% CAGR

7

CUMULATIVE TOTAL VALUE CREATION (TBV/SH + DIVS) SINCE 2006

Valuation Decline 18%

6%

33%

46%53%

68%

-1%

-25%-21%

-13%-9%

-2%

-35%

-15%

5%

25%

45%

65%

Y2007 Y2008 Y2009 Y2010 Y2011 Q3-12ESource: Company Reports, D&P Analysis

CUMULATIVE GROWTH IN TVC & STOCK PRICE SINCE YEAR-END 2006(41 D&P Composite Companies Ex. BRK & AIG)

Cumulative Growth in TVC (Tang. BV/sh + Dividends)Cumulative Growth in Stock Price

Valuation Decline

8

70%

95%

120%

145%

170%

195%

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

D&P P/C (RE)INSURANCE COMPOSITE PRICE TO STATED BOOK VALUEEx. AIG and Berkshire Hathaway (Includes Bermuda)

HurricaneAndrew

Northridge EQ

Cheating phase "bubble"

WTCRates "roll"

Internet "Bubble" Peak

Rates Begin To Rise

Current = 100%

Katrina

Subprime/Credit hits

Commercial lines pure rate increases peak near 50%

5 Years Ago136%

10 Years Ago132%

15 Years Ago174%

20 Years Ago159%

Source: Bloomberg

100% 100%

25 Years Ago123%

YE'11 = 91%

VALUATIONS REMAIN NEAR HISTORIC LOWS

?

25 Years of Declining Peak Valuations

9

WHAT IS A REASONABLE RETURN IN THE CURRENT ENVIRONMENT?

10

1. Sustainable Combined Ratio: Ultimate Loss Ratio & Exp. Ratio

2. Duration of Loss & LAE Reserves = “Tail” (How Long You Keep $)

3. New Money Rate - Investment Return

4. Premium: Surplus (> Leverage, > Return if CR < 100%)

5. Tax Rate (Taxes Matter = Bermuda, Ireland, Switzerland, etc.)

SIMPLE ECONOMICS OF THE (RE)INSURANCE BUSINESS

Five Simple Variables = Accident Year ROE

11

6.8% 7.5

% 7.9%

7.9%

8.2%

8.2%

7.7%

7.2%

7.4%

7.4%

7.2%

7.0%

6.4%

5.8%

5.7%

5.8%

5.6%

5.7%

5.1%

4.9%

5.1%

4.8%

4.9%

4.4%

4.1% 4.6

%

4.5%

4.4%

4.2%

4.0%

3.7%

3.8%

3.4%

3.2%

3.1%

11.4%

13.9%

13.0%

11.1% 12

.5%

10.6%

7.7% 8.4

% 8.9%

8.5%

8.6%

7.9%

7.0%

5.9% 7.1

%

6.6%

6.4%

6.4%

5.3%

5.7%

6.0%

5.0%

4.6%

4.0%

4.3%

4.3% 4.8

%

4.6%

3.7%

3.3%

3.2%

2.8%

1.9%

0%

2%

4%

6%

8%

10%

12%

14%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

'12 Y

TD20

13E

2014

E

Source: A.M. Best Aggregates & Averages, Federal Reserve, D&P Analysis

AVG. P/T NII YIELD VS. 10 YEAR TREASURY YIELDAvg. P/t Yield 10 Yr Treasury Yield

LOW INTEREST RATES & LOWER LEVERAGE DRIVES DOWN ROE

Source: A.M. Best Aggregates & Averages; D&P Analysis, D&P Estimates

UPDATE

333%

337%

340%

332% 340%

324% 331%

318%

315%

289%

274%

248%

239%

239% 249% 27

0% 291%

273%

270%

267%

252%

249% 26

2%

245%

232% 239%

243%

247% 253%

0%50%100%150%200%250%300%350%400%

$0$200,000$400,000$600,000$800,000

$1,000,000$1,200,000$1,400,000$1,600,000

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E20

13E

2014

E

Invested Assets to Surplus

Invested Assets ($, MM) IA/Surplus (%)

12

SINCE 2004 U.S. STATUTORY SURPLUS UP 35% WHILE PREMIUMS FLAT

$271 $288 $290

$276 $262 $263

$313

$354

$384

$442

$475

$430

$475 $491

$479

$280 $284 $290 $304

$330

$380

$418 $438

$438 $453

$452

$444

$426 $430 $447

$200

$250

$300

$350

$400

$450

$500

$550

$600

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Historical P&C Industry Statutory Surplus And Net Premiums Written ($, B) Stat Surplus Ex. NICO

NICO Surplus

Burlington Northern

Net Written Premium

13

2012

Assumptions (1) Duration: 1.8 years (2) Expense Ratio: 28% (3) Surplus p/t Yield = 250bps Over New Money

ECONOMICS OF 12% ACCIDENT YEAR ROE OVER PAST 25 YEARS

1985

SOLVE FOR COMBINED RATIO TO EARN 12% A/T ROENew Money p/t Yield

P:S 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%70% 80.7% 81.9% 83.2% 84.4% 85.7% 86.9% 89.5% 92.2% 94.9% 97.6% 100.5%80% 83.4% 84.5% 85.7% 86.8% 88.0% 89.2% 91.6% 94.1% 96.7% 99.3% 101.9%90% 85.5% 86.5% 87.6% 88.7% 89.9% 91.0% 93.3% 95.7% 98.1% 100.5% 103.0%

100% 87.1% 88.1% 89.2% 90.3% 91.3% 92.4% 94.6% 96.9% 99.2% 101.6% 104.0%110% 88.5% 89.5% 90.5% 91.5% 92.5% 93.6% 95.7% 97.9% 100.1% 102.4% 104.7%120% 89.6% 90.6% 91.5% 92.5% 93.6% 94.6% 96.6% 98.7% 100.9% 103.1% 105.3%130% 90.5% 91.5% 92.4% 93.4% 94.4% 95.4% 97.4% 99.5% 101.5% 103.7% 105.8%140% 91.3% 92.3% 93.2% 94.2% 95.1% 96.1% 98.1% 100.1% 102.1% 104.2% 106.3%150% 92.1% 93.0% 93.9% 94.8% 95.8% 96.7% 98.6% 100.6% 102.6% 104.6% 106.7%160% 92.7% 93.6% 94.5% 95.4% 96.3% 97.2% 99.1% 101.0% 103.0% 105.0% 107.0%170% 93.2% 94.1% 95.0% 95.9% 96.8% 97.7% 99.6% 101.5% 103.4% 105.3% 107.3%180% 93.7% 94.6% 95.5% 96.3% 97.2% 98.1% 100.0% 101.8% 103.7% 105.6% 107.6%190% 94.1% 95.0% 95.9% 96.7% 97.6% 98.5% 100.3% 102.1% 104.0% 105.9% 107.8%200% 94.5% 95.4% 96.2% 97.1% 98.0% 98.8% 100.6% 102.4% 104.3% 106.1% 108.0%

2001

9% A/T ROE TODAY = 90-94%

14

75%

80%

85%

90%

95%

100%

105%

110%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%

Com

bine

d Ra

tio

New Money P/tax Yields on Underwriting

C. RATIO NEEDED TO ACHIEVE DIFFERENT A-TAX ROEs

Source: A.M. Best A&A, D&P Analysis

TODAY'S NEW MONEY YIELDS

25 YEARS OF LOWER LEVERAGE & LOWER INTEREST RATES

15

25 YEARS OF LOWER LEVERAGE & LOWER INTEREST RATES

1.5%

3.0%

4.5%

6.0%

80%

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

AY

Com

bine

d R

atio

Accident Year Duration

C. RATIO NEEDED FOR A 12% A/T ROE AT VARIOUS NEW MONEY RATES C

MP

Wor

kers

Com

p

Oth

er/P

rodu

ct L

iabi

lity

XS W

orke

rs C

omp

Source: D&P Analysis

16

DIFFERENT RETURN HURDLES OVER TIME

9.8%

8.9%

8.9%

75%80%85%90%95%100%105%110%115%120%125%

75%80%85%90%95%

100%105%110%115%120%125%

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E20

13E

COMBINED RATIO NEEDED FOR ADEQUATE RETURN VS. HISTORICAL ULTIMATE AYAccident Year Return on Surplus Basis (Excluding National Indemnity)

CR Needed for 12% (5 Year Treasury < 5%) CR Needed for 15% ROE CR Needed For 5yr Trs +700bps

12% ROE

15% ROE

10yr Trs +700bps

ROE

Single Digit ROEs?

12% ROE ERA15% ROE ERA

17

9.8%

8.9%

8.9%

75%80%85%90%95%100%105%110%115%120%125%

75%80%85%90%95%

100%105%110%115%120%125%

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E20

13E

COMBINED RATIO NEEDED FOR ADEQUATE RETURN VS. HISTORICAL ULTIMATE AYAccident Year Return on Surplus Basis (Excluding National Indemnity)

CR Needed for 12% (5 Year Treasury < 5%) Estimated Ultimate AY CRCR Needed for 15% ROE CR Needed For 5yr Trs +700bps

EstimatedUltimate AY CR

12% ROE

15% ROE

10yr Trs +700bps

ROE

Single Digit ROEs?

12% ROE ERA15% ROE ERA

DIFFERENT RETURN HURDLES OVER TIME

18

GOV’TS “DESTROYED INSURANCE INDUSTRY VALUE” TO SAVE BANKS

“The central bankers and policy makers did their best to save the banking

system and we are the collateral victims of the bail out of the banking

system… The ultra low rates policy led by central banks has had an

impact on all the yields for all investments. In order to save the banks,

they destroyed part of the value of the insurance industry... It’s well

known that when the policymakers have a choice between saving a bank or

an insurance company, they will always choose a bank.”

- SCOR Chairman & CEO Denis Kessler

September 2012

19

HOW WE THINK ABOUT THE PROPERTY/CASUALTY BUSINESS

20

6 KEY INVESTMENT THEMES FOR THE P/C SECTOR

1. Over The Long Term The Only Measure Of Financial Success For Owners Of A Property/Casualty (Re)Insurer Is Growth In Tangible Book Value (Equity) Per Share. Share Price Tracks Book Value Over Time. Volatility Matters.

21

“SUCCESS” IN (RE)INSURANCE = COMPOUNDING BOOK VALUE PER SHARE

• Long-term stock price tracks growth in Book Value per share.

• We think about companies in 3 categories:

• WIN

• PLACE

• Just “SHOWing Up”

• (Re)Insurance is all about the magic of compound returns

• Compounding book value at 12% per year = “double” every 6 years

Win Place Show

Length of Time 15% 12% 7% 5-Years 2.0 1.8 1.4

10-Years 4.0 3.1 2.0

15-Years 8.1 5.5 2.8

20-Years 16.4 9.6 3.9

25-Years 32.9 17.0 5.4

22

OVER THE LONG TERM STOCK PRICE PERFORMANCE TRACKS CLOSELY WITH GROWTH IN BV/SH

FFH

PGR

MKLPRA

MCY

WRB

RLI

WTM

CB

CINFSIGI

BWINB

NAVG

XL

R² = 0.73

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

5.0% 10.0% 15.0% 20.0%TO

TAL

RETU

RN C

AGR

TOTAL VALUE CREATION CAGR

20 YEAR VALUE CREATION CAGR VS. TOTAL STOCK RETURN CAGR

(6M:92 - 6M:12)

Source: Company Reports; D&P Analysis

FFHMKL

PGR

MCY

WTM

WRB

RLI

CB

CINF

BWINB

SIGINAVG

R² = 0.86

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

5.0% 10.0% 15.0% 20.0%

TOTA

L RE

TURN

CAG

R

TOTAL VALUE CREATION CAGR

25 YEAR VALUE CREATION CAGR VS. TOTAL STOCK RETURN CAGR

(6M:87 - 6M:12)


25 & 20 Year Total Value Creation Vs. Total Stock Return

23

QUALITY U/WERS ARE GROWTH COS IN TERMS OF BV/SH GROWTH

19% 17% 16% 14% 13% 13% 12% 11% 11% 9% 9% 8% 11% 10% 8%

14%

17% 15%

12%12% 12% 13%

11%10% 9%

7%6%

8%

10%9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Fairfa

x

Marke

l

Prog

ress

ive

Mercu

ry

Whit

e Mou

ntains

W.R

. Ber

kley

RLI C

orp

Chub

b

Cinc

innati

Fina

ncial

Baldw

in &

Lyon

s

Selec

tive

Navig

ators

Zenit

h

Safec

o

Ohio

Casu

alty

25 YEAR TANGIBLE BV/SH + DIVIDENDS (Q2:87 - Q2:12) vs. TOTAL STOCK RETURN (6/30/87 - CURRENT) - CAGR

TBV CAGR Total Stock Return (Price + Dividends)

Source: Company Reports, D&P Analysis

Last Update PriorTo Being Acquired

24

ONLY MEASURE OF MANAGEMENT SUCCESS = GROWTH IN TANGIBLE BOOK VALUE/SHARE OVER TIME

1. Underwriting = #1 Driving Force & Price of Entry To “Win”

5 Levers Available to Management to Build Tangible Book Value/share:

25

Generated Surplus Growth Quintiles By Underwriting Contribution Quintiles (2002-2011) (% of Surplus Growth Quintile in Each Underwriting Quintile)

Generated Surplus Growth Quintile

Top Quintile

Second Quintile

Third Quintile

Fourth Quintile

Bottom Quintile

Top Quintile 61% 29% 10% 0% 0%

Second Quintile 15% 35% 35% 6% 8%

Third Quintile 3% 23% 29% 29% 16%

Fourth Quintile 6% 5% 18% 48% 23%

Bottom Quintile 15% 8% 8% 16% 53%

Total 100% 100% 100% 100% 100%

UNDERWRITING = DRIVER OF PERFORMANCE: 2002 - 2011

Source: Dowling & Partners Analysis of 310 Groups/Companies (Ex. Mtg & Fnc’l Guaranty)

Und

erw

ritin

g

Con

trib

utio

n Q

uint

ile

26



2. Investment of “Float” = Loss Reserves/Unearned Premium


27




3. Investment of “Capital/Surplus”


28





4. Capital Management

Capital Structure = Appropriate Use of Non-Equity Capital

Sale/Repurchase of Common Shares @ Opportune Times

Dividend Policy


29





4. Capital Management

Capital Structure = Appropriate Use of Non-Equity Capital

Sale/Repurchase of Common Shares @ Opportune Times

Dividend Policy

5. Location of Domicile


30

6 KEY INVESTMENT THEMES FOR THE P/C SECTOR 1. Over The Long Term The Only Measure Of Financial Success For Owners Of

A Property/Casualty (Re)Insurer Is Growth In Tangible Book Value (Equity) Per Share. Share Price Tracks Book Value Over Time. Volatility Matters.

2. Underwriters' Reported Financial Statements Are Always Wrong. Reported Results, With The Income Statement Driving The Balance Sheet, Are Either Too High Or Too Low (Intentionally Or Not) = But Are Always Inaccurate

31

6 KEY INVESTMENT THEMES FOR THE P/C SECTOR 1. Over The Long Term The Only Measure Of Financial Success For Owners Of A

Property/Casualty (Re)Insurer Is Growth In Tangible Book Value (Equity) Per Share. Share Price Tracks Book Value Over Time. Volatility Matters.


3. Rating Agencies = Have Been The De-facto Regulators = Flexing Muscles Again Outside The U.S. With Higher Capital Requirements & Increased Oversight

32

Primary CompaniesAA+ AA AA- A+ A A-

Chubb Corp Zurich American Financial Chartis Argo GroupHCC Holdings ACE Arch Capital Allied World CNA Financial

Travelers Group AXIS Capital Catlin Hanover GroupFireman's Fund Cincinnati Fnc'l Liberty Mutual

Lloyd's Endurance OneBeaconNationwide Hartford

Old Republic HiscoxQBE Group NavigatorsRLI Corp. Selective

W.R. Berkley XL Group

S&P FINANCIAL STRENGTH RATINGS TABLE

RATING AGENCIES = THE DEFACTO REGULATORS

Positive OutlookNegative OutlookStable OutlookWatch Negative

Primary CompaniesA++Chubb ACE RLI Corp Allied World Endurance Markel

Arch Capital Travelers American Finc'l Fireman's Fund NavigatorsCincinnati Financial W.R. Berkley Argo Group Hanover OneBeacon

HCC Holdings Zurich AXIS Capital Hartford Old RepublicNationwide Catlin Hiscox QBE Insurance

Chartis Liberty Mutual SelectiveCNA Financial Lloyd's XL Group

A.M. BEST FINANCIAL STRENGTH RATINGS TABLE

A+ A

33





4. “He Who Controls The Customer Wins” = Intermediaries Capture Outsized Returns Relative To Underwriters On An Absolute & Risk Adjusted Basis.

34

“HE WHO CONTROLS THE CUSTOMER WINS”

0.0x 1.0x 2.0x 3.0x 4.0x

Marsh & McLennan

Aon

AJ Gallagher

Willis Group

Brown & Brown

2011 2012E

ENTERPRISE VALUE TO 2011A & 2012E REVENUE

20%

20%

21%

23%

33%

20%

20%

21%

21%

30%

0% 10% 20% 30% 40%

Marsh &McLennan

Aon

Willis Group

AJ Gallagher

Brown &Brown

2012E BROKER ADJUSTED MARGINSWith and Without Contingent Commissions

AON, MMC, WSH on operating basis, AJG & BRO on EBITDA(C) basis

35

RISE OF LARGE GLOBAL INTERMEDIARIES CHANGES BUSINESS

Only 6 Remain: Marsh McLennan

Aon Willis

Arthur J. Gallagher Gras Savoye

Jardine

Independent

Independent

Relative 1989 1989* Top 20Rank Broker ($, B) Mkt. Sh.

1 Marsh McLennan $2.5 27%2 Alexander & Alexander $1.2 14%3 Sedgwick Group $1.0 12%4 Johnson & Higgins $0.8 9%5 Corroon & Black $0.5 5%6 Willis Faber $0.5 5%7 Frank B. Hall $0.4 4%8 Rollins Burdick Hunter $0.3 4%9 Minet $0.3 3%10 Jardine Insurance Brokers $0.2 3%

TOP 10 $7.7 86%

11 C.E. Heath $0.2 2%12 Arthur J. Gallagher $0.2 2%13 Bain Clarkson PLC $0.2 2%14 Hogg Group PLC $0.2 2%15 Faugere & Jutheau $0.1 1%16 Jauch & Hubener $0.1 1%17 Hudig-Langeveldt Group $0.1 1%18 Gras Savoye SA $0.1 1%19 Sodarcan $0.1 1%20 Hilb, Rogal & Hamilton $0.1 1%

TOP 20 $9.0 100%Source: A.M. Best Review; *Brokerage Revenue

36

RISE OF LARGE GLOBAL INTERMEDIARIES CHANGES BUSINESS Relative

2011 2011* Top 20Rank Broker Ownership ($, B) Mkt. Sh.

1 Marsh & McLennan Public $11.5 30%2 Aon Corp. Public $11.3 29%3 Willis Group Ltd. Public $3.4 9%4 A.J. Gallagher Public $2.1 5%5 Wells Fargo Bank / Public $2.0 5%6 Jardine Lloyd Thompson Public $1.3 3%7 BB&T Bank / Public $1.2 3%8 Brown & Brown Public $1.0 3%9 Lockton Private $0.9 2%

10 Hub Int'l Private Equity $0.9 2%TOP 10 $35.6 91%

11 USI Holdings Private Equity $0.7 2%12 Insphere Ins. Solutions Private Equity $0.7 2%13 AmWins Group Private Equity $0.5 1%14 Alliant Insurance Services Private Equity $0.5 1%15 Cooper Gay Swett & Crawford Private Equity $0.3 1%16 The Leavitt Group Private $0.2 0%17 Confie Seguros Private Equity $0.2 0%18 AssuredPartners Inc. Private Equity $0.2 0%19 Frank Crystal & Co, Inc. Private $0.1 0%20 Hays Group Inc. Private $0.1 0%

Top 20 $39.0 100%Source: A.M. Best, Business Insurance, D&P Analysis; P&C Predominating*Total Revenue for all except: AssuredPartners, Frank Crystal and Hays Group = Brokerage Revenue

37

RISE OF LARGE GLOBAL INTERMEDIARIES CHANGES BUSINESS

Relative Relative 1989 1989* Top 20 2011 2011* Top 20Rank Broker ($, B) Mkt. Sh. Rank Broker Ownership ($, B) Mkt. Sh.

1 Marsh McLennan $2.5 27% 1 Marsh & McLennan Public $11.5 30%2 Alexander & Alexander $1.2 14% 2 Aon Corp. Public $11.3 29%3 Sedgwick Group $1.0 12% 3 Willis Group Ltd. Public $3.4 9%4 Johnson & Higgins $0.8 9% 4 A.J. Gallagher Public $2.1 5%5 Corroon & Black $0.5 5% 5 Wells Fargo Bank / Public $2.0 5%6 Willis Faber $0.5 5% 6 Jardine Lloyd Thompson Public $1.3 3%7 Frank B. Hall $0.4 4% 7 BB&T Bank / Public $1.2 3%8 Rollins Burdick Hunter $0.3 4% 8 Brown & Brown Public $1.0 3%9 Minet $0.3 3% 9 Lockton Private $0.9 2%10 Jardine Insurance Brokers $0.2 3% 10 Hub Int'l Private Equity $0.9 2%

TOP 10 $7.7 86% TOP 10 $35.6 91%

11 C.E. Heath $0.2 2% 11 USI Holdings Private Equity $0.7 2%12 Arthur J. Gallagher $0.2 2% 12 Insphere Ins. Solutions Private Equity $0.7 2%13 Bain Clarkson PLC $0.2 2% 13 AmWins Group Private Equity $0.5 1%14 Hogg Group PLC $0.2 2% 14 Alliant Insurance Services Private Equity $0.5 1%15 Faugere & Jutheau $0.1 1% 15 Cooper Gay Swett & Crawford Private Equity $0.3 1%16 Jauch & Hubener $0.1 1% 16 The Leavitt Group Private $0.2 0%17 Hudig-Langeveldt Group $0.1 1% 17 Confie Seguros Private Equity $0.2 0%18 Gras Savoye SA $0.1 1% 18 AssuredPartners Inc. Private Equity $0.2 0%19 Sodarcan $0.1 1% 19 Frank Crystal & Co, Inc. Private $0.1 0%20 Hilb, Rogal & Hamilton $0.1 1% 20 Hays Group Inc. Private $0.1 0%

TOP 20 $9.0 100% Top 20 $39.0 100%Source: A.M. Best Review; *Brokerage Revenue Source: A.M. Best, Business Insurance, D&P Analysis; P&C Predominating

*Total Revenue for all except: AssuredPartners, Frank Crystal and Hays Group = Brokerage Revenue

Independent

Independent

38

M&A REBOUNDS OFF RECESSION (2009) LOWS … WITH RISING PRICES

M&A has returned at higher prices given low interest rates and improved pricing

5.5 x

5.3 x

6.8 x

5.6 x

5.6 x 6.2

x

8.0 x

6.5 x

7.8 x

7.1 x

7.7 x

6.9 x

7.4 x

7.3 x

6.7 x 8.7

x 10.5

x

0.0 x

2.5 x

5.0 x

7.5 x

10.0 x

12.5 x

15.0 x

17.5 x

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

YTD

(Re)insurance Broker Industry Transaction Multiples - EBITDA

1.3 x

1.4 x

1.6 x

1.4 x 1.4

x 1.7 x

2.0 x

1.9 x

2.2 x

1.8 x

2.0 x

2.1 x

2.5 x

2.2 x

1.9 x

2.8 x

2.8 x

0.0 x

2.0 x

4.0 x

6.0 x

8.0 x

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

YTD

(Re)insurance Broker Industry Transaction Multiples - Revenue

81 85 81 50 52 75 49

101 57 7039 53

5943

88

5175

3259

71

21

103

7680

50

8283

0

50

100

150

200

250

300

350

400

2006 2007 2008 2009 2010 2011 2012

Q4 Q3 Q2 Q1

Announced Transactions By Quarter

*Data through 8/15/12

Source: Dowling Hales Proprietary Database

39

ORGANIC GROWTH REBOUNDS, BUT STILL INCONSISTENT

Public Brokers’ Organic Growth Turned Positive In H2:10, Led By The “Big 3” Global Brokers = International Diversification And Initiatives To “Enhance Yield.”

Momentum Shifting To The U.S. Middle Market With Economy Stable And Rates Increasingly “+” (Compares To Europe/UK Headwinds & Slower Rate Movement On The International Front).

0.0% 1.0

%

-0.9%

1.0%

2.8% 4.5

%

1.3%

2.9%

1.4%

0.4% 0.8%

0.9%

0.5% 2.0

%

0.0%

-0.3%

-2.6% -1.

1% -1.2%

0.2% 1.2

%

3.2%

3.2%

2.4% 2.7%

2.2%

4.4%

4.3%

2007

2008

2009

2010

2011

2012

E

Q1:07

Q2:07

Q3:07

Q4:07

Q1:08

Q2:08

Q3:08

Q4:08

Q1:09

Q2:09

Q3:09

Q4:09

Q1:10

Q2:10

Q3:10

Q4:10

Q1:11

Q2:11

Q3:11

Q4:11

Q1:12

Q2:12

(Re)Insurance Brokerage Composite Organic Growth


40

MARGIN EXPANSION = A FUNCTION OF ORGANIC GROWTH

16.5% 18.3%

21.0% 21.4% 21.0% 23.4% 23.4%

1.5%

2007 2008 2009 2010 2011 H1:12 H1:12 PF

Brokerage Adjusted EBITDA Margin

Source: Company Reports; *Margin assuming 4% yield on cash/investments

Impact of low interest rates costs ~1.5pts*

With “Expense Levers” Pulled (During 2008/2009) Margin Expansion Largely Subject To (Organic) Revenue Growth.

Low Interest Rates have far less impact than on underwriters

41

(RE)INSURANCE INTERMEDIARY BUSINESS REMAINS A GREAT BUSINESS

Not Capital Intensive

Stable Cash-Flow Business

Relationships & People Are Critical

Rating Agencies Not A Factor

Economies of Scale Matter

Constant Consolidation & Regeneration of New Firms

“He Who Controls The Customer Wins”

42

MGA Business: Small But Rapidly Growing As A % Of Commercial Lines

42

Source: D&P Analysis, Statutory Filings, A.M. Best Aggregates & Averages *Statutory Filings = Based on Statutory Disclosures Of Top Commercial Lines Writers

COMMERCIAL LINES DIRECT PREMIUMS WRITTEN ($, BILLIONS)

MGA / PROGRAM BUSINESS SNAPSHOT*

Other Cml Lines

$146.996%

MGA Business*

$6.54%

1999Other Cml

Lines$228.892%

MGA Business*

$20.08%

2011

43 43

MARKEL AS A CASE STUDY = CONTINUES TO BUILD ITS PROGRAM BUSINESS

Announces 3rd “MGA” Acquisition In The Last Year = Buying The Premium Source

$137 $163 $236 $271 $294 $319 $340 $347 $355

$302 $375

$572

$700

$965

$1,075

$0

$200

$400

$600

$800

$1,000

$1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

MARKEL SPECIALTY ADMITTED SEGMENT GROSS PREMIUMS

Source: Company Reports, D&P Estimates

Specialty Admitted (Historical)

FirstComp (Closed Oct. 2011)

THOMCO (Closed Jan. 2012)

Essentia/Hagerty (Announced Oct. 2012)

44





4. “He Who Controls The Customer Wins” = Intermediaries Capture Outsized Returns Relative To Underwriters On An Absolute & Risk Adjusted Basis

5. “Bermuda Was a Better Mousetrap” And Underwriters Operating From The U.S., Paying Full U.S. Taxes, Are At A Distinct Competitive Disadvantage

45

BERMUDA WAS DOMICILE OF CHOICE FOR OVER LAST 25 YEARS XL

Pa

rtne

rRe

Axis

Harbor Point

ACE

Mid

-Oce

an

Allied World

Lancashire

IPC

Re

Montpelier

Validus Re G

lob.

Cap

Endurance

Ariel Re La

Salle

Platinum

Flagstone

Tem

pest

Aspen

Ren

Re

Arch C

entr

e C

at

DaV

inci

$611

$2,892

$8,660

$5,015

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000

'85-'86

1993

2001

2005

STARTUP CAPITAL BY "WAVE" = POST EVENT(S)

$,M

Class of:

$,M

46

Public (Re)Insurance Stocks Selling Below Book

Class of 2005 Did Not “Work” For P/E Investors

Rating Agency Capital Model Changes Dampen Returns

Acceptance of Other Risk Transfer Mechanisms

Cat Bonds – No Longer “An Eloquent Solution In Search of Demand”

Sidecars

Fully Collateralized Reinsurers

Exception: Tax Driven “Hedge Fund” Strategies

THERE WILL NOT BE A BERMUDA CLASS OF 201X POST EVENT

47

6 KEY INVESTMENT THEMES FOR THE P/C SECTOR 1. Over The Long Term The Only Measure Of Financial Success For Owners Of A

Property/Casualty (Re)Insurer Is Growth In Tangible Book Value (Equity) Per Share. Share Price Tracks Book Value Over Time. Volatility Matters.



4. “He Who Controls The Customer Wins” = Intermediaries Capture Outsized Returns Relative To Underwriters On An Absolute & Risk Adjusted Basis.

5. “Bermuda Was a Better Mousetrap” And Underwriters Operating From The U.S., Paying Full U.S. Taxes, Are At A Distinct Competitive Disadvantage.

6. In The Aggregate (Re)insurance Has Been/Is/And For The Invest-able Future Will Be A Lousy Business (Fails To Earn Its Cost Of Capital Over Time).

48

97.7% 98

.2% 98.6% 99

.1%10

2.0%

103.2

%10

2.6%

99.0%

100.2

% 101.5

%10

2.5%

100.1

%96

.4%96

.2%99

.2%10

5.4% 10

7.9%

102.4

%97

.2% 97.5%

100.6

% 103.1

%10

6.0%

109.6

% 112.0

%11

7.8%

116.2

%10

8.0%

104.6

%10

5.4%

109.2

%10

9.5%

108.9

%11

5.8%

108.2

%10

9.2%

107.2

%10

6.6%

101.3

%10

5.4% 10

7.5% 10

9.6%

115.3

%10

7.3%

99.9%

98.5%

100.8

%92

.6%95

.5%10

5.1%

101.1

%10

2.2%

108.2

%10

5.6%

105.4

%10

5.2%

90%

95%

100%

105%

110%

115%

120%

125%

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E20

13E

2014

E

U.S. P&C Industry Reported Combined Ratio (Calendar Year)

COMBINED RATIOS RISING AGAIN. 2012 RESULTS ARE “BAKED IN”

Best in 50 Years

4th Best

4pts from Financial/ Mortgage Guaranty

2003-2007 Great Results

1979 – 2003 = 25 YEARS Average Combined Ratio = 108.3%

Source: A.M. Best Aggregates & Averages, D&P Estimates

Sarbanes- Oxley ERA

49

1985 – 2010: 25 YEARS WITH ONLY 7 YEARS OF 10%+ ROE -1

%

11%

12%

12%

7% 7% 7%

0%

7% 5% 8% 8% 11%

6% 4% 3%

-4%

3% 8% 9% 10%

14%

10%

3% 7% 6% 3%

90%

100%

110%

120%

130% -4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1985

19

86

1987

19

88

1989

19

90

1991

19

92

1993

19

94

1995

19

96

1997

19

98

1999

20

00

2001

20

02

2003

20

04

2005

20

06

2007

20

08

2009

20

10

2011

P/C INDUSTRY RETURN ON SURPLUS AND STAT COMBINED RATIO Operating Return on Surplus Stat. Combined Ratio

50

PROPERTY/CASUALTY INSURANCE ROEs VS. FORTUNE 500

* Excludes Mortgage & Financial Guarantee in 2008 - 2012. Source: Insurance Information Institute

P/C ROEs Are Lower And More Volatile

51

8.3%

8.8%

12.2%

15.0%

17.1%

23.1%

InvestmentCompanies

P&C*

Life & Health*

Bank

Broker/Dealer

AssetManager

Pre Financial Crisis1996-2007 Avg. Trailing ROE

% By Industry

Source: SNL Financial; * Statutory Filings

UNDERWRITING IS/WAS/WILL BE A LOW RETURN BUSINESS

After Subsequent

Losses, Non-P/C Returns Were All

Overstated

3.6%

4.6%

5.9%

8.1%

9.4%

10.0%

InvestmentCompanies

Bank

P&C*

Asset Manager

Broker/Dealer

Life & Health*

Post Financial Crisis2009-2011 Avg. Trailing ROE

% By Industry

Source: SNL Financial; * Statutory Filings

52

2%

5%

7%

10%

15%

FifthQuintile

FourthQuintile

ThirdQuintile

SecondQuintile

TopPerforming

Quintile

2001-2011 Average Return On Statutory Surplus

(Top 250 U.S. (Re)Insurance Groups)

15%

12%

10%

7%

3%

TopPerforming

Quintile

SecondQuintile

ThirdQuintile

FourthQuintile

FifthQuintile

2001-2011 Avg. Operating ROEGAAP Equity

(D&P (Re)Insurance Composite of 30*)

RELATIVE RETURNS IMPROVE IN “NEW WORLD” & “SPREAD” IS WIDE

Our Job

* Underwriters under coverage with applicable history Source: D&P Analysis, Company Reports Source: SNL Financial

53

WHY P/C IS DIFFERENT & WELL POSITIONED RELATIVE TO OTHER FINANCIALS

Less Invested Asset Leverage

P&C Companies Usually Take Risk On Liability Side, Not Asset Side

Largest Liability (Loss Reserves) Have No Covenants = No “Run On The Bank”

“Matching” Of Assets To Liabilities = Ability To Hold To Maturity

Economic “Distress” Less A Negative On Operating Results

Business Model Not Required to Change Post 2008-2009

Last Man Standing In Time of Financial Distress

RELATIVE RETURNS OF P/C UNDERWRITERS WILL IMPROVE GOING FORWARD

54

REINSURANCE PRICING PRESSURES DRIVE CHANNEL CONFLICT

55

REINSURANCE PRICING PRESSURES

Excess Capital (Industry Wide)

56

(RE)INSURANCE CAPITAL UP DESPITE 2011 CAT LOSSES

Reinsured Loss From 2011 Cat Events = ~$45B*

$411

$342

$402

$470$455

$480

$200

$250

$300

$350

$400

$450

$500

2007 2008 2009 2010 2011 Q2:12

Reinsurer Capital ($, Billions)

Source: Aon Benfield

Source: Guy Carpenter

57

POST 2011 … NO REINSURERS RAISE CAPITAL/GO OUT OF BUSINESS

USE CHART WE ALREADY HAVE BERMUDIAN/REINSURER - KRW LOSSES

Katrina/Rita/Wilma Losses as % of Q2 Sh. Equity. Total A/T Net Impact = ~$12BB.

79%61%

39%20% 26% 20% 29% 21% 14% 15% 16% 9% 14% 9% 7% 7% 6%

9%

10%

4%5%

4%

18%

5%

6%

14% 6% 12%

106%

77%

49%37% 36% 36% 33% 29% 24% 23% 23%

17% 17% 15% 12% 11% 10%7%

0%

20%

40%

60%

80%

100%

PXRe

Montp

elier

IPCR

e

RenR

e

Endu

rance

Plati

num

Aspe

n

Axis

Evere

st Re

Partn

erRe

XL C

apita

l

Odys

sey

Allie

d Worl

d

Max R

e

Arch

Tran

satla

ntic

ACE

Katrina Rita Wilma

34%

23%

19%

19%

15%

12%

13%

13%

15%

10%

10%

8% 7% 9% 8% 8% 7% 6% 5% 4% 2%

40%

26%

23%

23%

18%

17%

17%

17%

16%

13%

13%

13%

13%

11%

10%

10%

9% 9% 6% 5% 3%

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%

Flag

stone

Plat

inum

U/W

Partn

er R

e

Mon

tpeli

er R

e

AXIS

Cap

ital

Valid

us

Endu

ranc

e

Aspe

n

RenR

e

Ever

est R

e

Tran

satla

ntic

Odys

seyR

e

Lanc

ashir

e

Argo

Gro

up

Arch

Cap

ital

Allie

d W

orld

Alte

rra

Fairf

ax

XL G

roup

Whit

e M

tns

ACE

Ltd.

A/T

Loss

es as

% o

f 201

0 S/E

BERMUDA/REINSURANCE - 2011 CATASTROPHE LOSSES2011 RDE Q4 Losses as % of 2010 S/E 9M Losses as % of 2010 S/E

Source: Company Reports, D&P Analysis* Excluding 2011 RDE: MRH (22%), PRE (23%), VR (15%), RE (13%)

2011 INTERNATIONAL CAT LOSSES REVEAL “DEWORSIFIERS”

"It's only when the tide goes out that you learn who's been swimming naked.” [Warren Buffett]

3.0%4.5%

6.4%9.0%9.2%9.5%9.6%

11.4%12.7%12.9%13.5%

16.3%16.6%16.7%17.0%18.0%

22.8%23.4%

25.8%39.9%

ACE Ltd.White Mtns

XL GroupAlterraFairfax

Allied WorldArch CapitalArgo GroupLancashire

TransatlanticEverest Re

RenReAspen

EnduranceValidus

AXIS CapitalMontpelier Re

Partner RePlatinum U/W

Flagstone

2011 Catastrophe Losses as % of Beginning S/E


59



Increased Retention By Clients

60


Excess Capital (Industry


Ajit Jain = The “Cycle” Killer?

61

AJIT JAIN = THE “CYCLE” KILLER? NICO AS % OF P/C SURPLUS

Source: A.M. Best Aggregates & Averages, SNL Financial

$271 $288 $290

$276 $262 $263

$313

$354

$384

$442 $475 $430

$475

$491 $479

12%

14% 13% 13%

9%

10%

12% 12% 12%

12% 12% 11%

12%

16% 17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

$200

$250

$300

$350

$400

$450

$500

$550

$600

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Historical P&C Industry Statutory Surplus And Net Premiums Written ($, B)

Stat Surplus Ex. NICO NICO Surplus Burlington Northern NICO as % of PC Surplus

62

BURLINGTON NORTHERN = SECOND LARGEST GLOBAL REINSURER

Source: A.M. Best, Statutory Filings

$34.7

$95.1

$31.3 $30.2 $28.2

$7.3 $6.5 $6.1 $6.0 $5.7 $4.1 $0

$10 $20 $30 $40 $50 $60 $70 $80 $90

$100

NIC

O

Sw

iss

Re

Mun

ich

Re

Lloy

d’s

Han

nove

r Re

Par

tner

Re

Eve

rest

Re

CR

C C

orp

SC

OR

S.E

.

Tran

satla

ntic

Top Global Reinsurance Groups (P/C Gross Premiums >$3B)

Ranked By Total Shareholders' Funds ($,B)

Burlington Northern

63

AJIT JAIN = THE CYCLE KILLER?

64




Ajit Jain = The “Cycle” Killer?

“Tipping Point” For Alternative Sources Of Capital

65

ALTERNATIVE CAPACITY BECOMING A BIGGER PLAYER IN THE MARKET

$5 $7 $7 $8 $9

$12 $13

$16 $33

$43

$0

$10

$20

$30

$40

$50

2012* 2015E

NON-TRADITIONAL P/CAT LIMITS BY TYPECat Bond Collateralized Re Retro ILW

Source: Guy Carpenter; *As Of 4/1

• A major reinsurance broker predicts alternative capacity will ultimately comprise 20-30% of total reinsurance spend.

• Currently non-traditional capacity is estimated to provide ~13% of total worldwide cat limits.

66

Willis Re Chairman Peter Hearn – 7/1/12 “… It is clear that the damping impact on rates due to the influx of new capital is frustrating for existing reinsurers who are battling concerns over falling investment income and dwindling reserve releases.”

Validus Re CEO Ed Noonan – 7/27/12 “There are places where third party capital or institutional money has a disproportional impact and right now we would point to Florida…”

RenaissanceRe CEO Neill Currie – 8/1/12 “We had anticipated additional firming at June 1 renewals, but as it turned out, pricing was relatively flat. We believe this was due primarily to new supply entering the market...”

“The ‘Tipping Point’ For The P/Cat Market May Have Been Reached at 6/1.”

66

[IBNR Weekly 6/14/12]

67

REINSURANCE GOES MAINSTREAM = CAT GAINS INSTITUTIONAL ACCEPTANCE

Source: Towers Watson Global Pension Assets Study 2012

Non-U.S.$11.442%

Defined Benefit

$6.925%

Defined Contribution

$9.233%

U.S.$16.158%

PENSION FUND ASSETS$27.5 trillion

PENSION FUND ASSETS RELATIVE TO GLOBAL PROPERTY CAT LIMITS

Global P/Cat Limits

($240B)

U.S. Defined Benefit Pension

Assets (~$7 Trillion)

2% Allocation to “Reinsurance”

($140B)

Traditional Reinsurance

Market?

69

Direct Global Equity£4,95923%

Private Equity£1,193

5%

Credit£5,69826%

Property£8054%

Hedge Funds£5883%

Reinsurance£3952%

Infrastructure£2001% ILS & liability

hedging£6,03227%

Cash & Liquid Assets£2,059

9%

RBS Group Pension Fund Distribution of Assets as of 3/31/12

RBS GROUP PENSION FUND ALLOCATES 1.8% TO NEW ASSET CLASS: “REINSURANCE”

“The new strategic benchmark is being phased in through 2011 and 2012. So far the Fund has reduced its equity exposure by £2 billion to reduce investment risk and introduced two new asset classes – reinsurance and infrastructure.”

Note: £395M = $640M, or ~ the entire size of Flagstone @ take out.

70

32%

P/CAT PRICE SPIKES MITIGATED. PRICING ON SECULAR DECLINE

Source: Guy Carpenter; 2013 = D&P Estimate

26%

86%

65%

-16% -11% -12%

-20% -15% -12%

1%

28% 24%

5%

-9% -8%

32%

-6% -10%

8%

-6% -8%

10%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

50

100

150

200

250

300

350

400

450

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Guy Carpenter World Property Cat Reinsurance Rate on Line Index* * 1990 = 100

? Post KRW

Post 2011 Cat Losses

10%

71

WHERE ARE WE IN THE UNDERWRITING CYCLE?

72

CYCLE MANAGEMENT = WELL INTO THE “CHEATING PHASE”

Phases of P/C Cycle Reported results are always wrong Reported results are a lagging indicator of true profitability 2 main drivers • Initial AY Loss ratio “pick” • Prior period reserve adjustments Reported results (Calendar Year) worse than underlying results (Accident Year) = Restoration Phase Reported results (Calendar Year) better than underlying results (Accident Year) = Cheating Phase

73

($6)($0)

$12 $19

$24

$11 $2

($15)

($26) ($23) ($23)($17)

($13) ($11)($7)

-$30-$20-$10

$0$10$20$30

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E

Source: A.M. Best Aggregates & Averages; D&P Analysis

Cumulative Accident Year Development Difference Between Initial and Estimated Ultimate Incurred Loss ($,BB)

Ultimate Development Remaining

Actual Development To Date

($3) ($6) ($9) ($5) ($0)

$11 $22

$14 $10 $7 ($6) ($9)

($13) ($14)($10) ($12)

-$20

-$10

$0

$10

$20

$30

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011A 2012E 2013E 2014ESource: A.M. Best Aggregates & Averages; D&P Estimates

Prior Period Reserve DevelopmentBy Calendar Year ($,B)

AY – How initial is setup vs. what we ultimately think

REPORTED RESULTS ARE ALWAYS WRONG.

-$23B

~$64B

-$64B

74

$3

($6)

($21)($24) ($24)

$0

$20

$29

$36 $31

$16

$9

($0)($3) ($3)

($15)

-$30

-$20

-$10

$0

$10

$20

$30

$40

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011A 2012E 2013E 2014E

Implicit Strengthening/(Weakening) of Overall Industry Balance Sheet By Calendar Year Impact in $, B: Estimated Ultimate Redundancy/Shortfall Created by Accident Year +Prior Year Reserve Development

Total Weakening (1997-2000)

= $75B

Total Strengthening (2001-2008) = $145B

Weakening


"Soft" "Soft""Hard"

THE “CYCLE” = INCOME STATEMENT LAGS Declining Conservatism In Initial Loss Ratio Picks Combined With Reserve Releases = Cheating Phase

75

10% 12

% 13% 14% 15

%15

%14

%19

%24

%24

%23

%20

%16

%12

%10

%8% 7%

4%2%

0%-1

%-1

%-2

% -1%

0%-1

%-1

%-1

%-2

%-3

%-4

%-5

%-5

%-6

% -4% -3%

1% 2% 3% 2% 1% 0%-1

%-1

%0%

2%4%

6%8% 9% 8%

13% 17% 19% 23% 30

% 34%

36% 46

%61

% 67%

67% 76

%87

%87

%84

% 90% 10

0%94

%88

% 90% 98

%92

%84

% 88% 98

%90

%82

% 86% 94

%84

%75

%77

% 84%

73%

68% 72% 86

%77

%73

% 75% 88

%77

%71

% 73% 88

%80

%78

% 84%

103%

97%

92%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Q1:00

Q2:00

Q3:00

Q4:00

Q1:01

Q2:01

Q3:01

Q4:01

Q1:02

Q2:02

Q3:02

Q4:02

Q1:03

Q2:03

Q3:03

Q4:03

Q1:04

Q2:04

Q3:04

Q4:04

Q1:05

Q2:05

Q3:05

Q4:05

Q1:06

Q2:06

Q3:06

Q4:06

Q1:07

Q2:07

Q3:07

Q4:07

Q1:08

Q2:08

Q3:08

Q4:08

Q1:09

Q2:09

Q3:09

Q4:09

Q1:10

Q2:10

Q3:10

Q4:10

Q1:11

Q2:11

Q3:11

Q4:11

Q1:12

Q2:12

Q3:12

Rate Change (Left Axis) Cumulative Rate Change (Right Axis)

CHUBB STANDARD MARKET COMMERCIAL LINES INCREASES

U.S. COMMERCIAL LINES PRICING NOW BACK TO 2004 LEVELS Doubled in 2 years

Flat for 7

Year-Over-Year % ChangeCOMMERCIAL LINES RATE CHANGES BY SURVEY

-20%

-10%

0%

10%

20%

30%

40%

Q4:99

Q1:00

Q2:00

Q3:00

Q4:00

Q1:01

Q2:01

Q3:01

Q4:01

Q1:02

Q2:02

Q3:02

Q4:02

Q1:03

Q2:03

Q3:03

Q4:03

Q1:04

Q2:04

Q3:04

Q4:04

Q1:05

Q2:05

Q3:05

Q4:05

Q1:06

Q2:06

Q3:06

Q4:06

Q1:07

Q2:07

Q3:07

Q4:07

Q1:08

Q2:08

Q3:08

Q4:08

CIAB AdvisenMarketScout* CLIPS

Source: Advisen, CIAB, MarketScout, Towers Watson

-10%-8%-6%-4%-2%0%2%4%6%8%

Q1:09

Q2:09

Q3:09

Q4:09

Q1:10

Q2:10

Q3:10

Q4:10

Q1:11

Q2:11

Q3:11

Q4:11

Q1:12

Q2:12

Q3:12

* Reported monthly. Monthy average used

76 76

CAN THE INDUSTRY EARN AN “ADEQUATE” RETURN

WITHOUT A DECLINE IN SURPLUS?

77

-30%

-20%

-10%

0%

10%

20%

30%

-30%

-20%

-10%

0%

10%

20%

30%

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

E20

13E

2014

E

P/C Industry P/T Net Return On Surplus Vs. YOY Chg. In SurplusReturn on Surplus (Left Axis) Change In Surplus (Right Axis)


Hoped For Turn

Driven By Investments

St. PaulLiberty Mutual Sell Common

Stocks @ Bottom

No "Turn" Without A Decline In Surplus

CAN THERE BE A MAJOR MARKET TURN WITHOUT A DECLINE IN SURPLUS?

77

?

78

Price Increases vs. Loss Costs

Investment Returns

Reserve Adjustments

VARIABLES FOR 2013 - 2014

79

Q&A

Documents

CAN/WILL THE “HARDENING” P&C MARKET CONTINUE ABSENT …€¦ · PC Ind. Less BRK & AIG Wal-Mart PC Ind. Less BRK, AIG & Brokers Microsoft General Electric Google Chevron Corp