Standley H. Hoch, FSA

Chief Operating Officer and

Chief Financial Officer

CIGNA Reinsurance

May 7-8, 2007

Run-off Considerations

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Overview

• Runoff Market

• Runoff Management

• Evaluating the Book of Business

• Risk Management

• Exit Strategies

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Overview

• Runoff Market

• Runoff Management

• Evaluating the Book of Business

• Risk Management

• Exit Strategies

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Runoff Market

• UK Life Assurance Cos in Runoff: 53 Companies with £136 billion of Liabilities

• UK Non-Life Cos in Runoff: £26 billion of Liabilities (excluding Lloyds)

• Continental Non-Life Cos in Runoff: €75 + billion of Liabilities

• Membership in AIRROC (US runoff org.): 53

companies

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Exit decisions may be driven by many different reasons

• Adverse loss experience

• Difficult pricing environment

• Increased regulatory requirements

• Changes in strategy or focus

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Management may perceive a sale of the business to be the best strategy:

• Frees up capital

• Avoids distraction

• Positive impact on share price

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But the sale of a discontinued business or product line may be difficult or quite costly

• Opportunity for profitable new business may be limited

• Customer base and infrastructure of minimal value

• Loss exposures difficult to quantify

• Regulatory issues or adverse publicity

• Buyers of distressed assets may demand a significant premium to reserves

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Overview• Runoff Market• Runoff Management• Evaluating the Book of Business• Risk Management• Exit Strategies

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Companies often decide to establish dedicated runoff administration

• May require specialized product/market knowledge and skills

• Different approach to external relationships than an active business

• Improve transparency and alignment around strategy

• Employee incentives can be tailored to the requirements of a runoff business

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Skills to Retain for Runoff Management

• Claims management and Audit

• Accounting, Financial reporting and Contract administration

• Reinsurance administration

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Skills to Strengthen for Runoff Management

• Program management

• Actuarial forecasting

• Reinsurance collections

• Dispute resolution

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Attracting and Retaining Employees for a Dedicated Runoff Management Unit

• Retention incentives tied to specific skills and product knowledge

• Some functions may be shared with other active businesses

• Some functions may be outsourced or supplemented with external resources

• Hiring from outside the business unit will bring a fresh perspective and help avoid conflicts of

interest

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Turn-key alternatives are available

• How much of the existing structure can be redeployed?

• How confident are you in your assessment of the liabilities?

• Importance/availability of risk transfer alternatives?

• Organizational capabilities/experience in managing

outsourced arrangements

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Overview

• Runoff Market

• Runoff Management

• Evaluating the Book of Business

• Risk Management

• Exit Strategies

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Access to records can be a significant issue for companies transitioning to runoff

• Claim and contract info should be fairly well organized and accessible

• What about email records? Underwriting files?• Do you have contracts written and/or administered

by MGUs? Are they still in business? Are they still talking to you?

• Who administers your reinsurance program?• What is their commitment going forward?• What is the quality, timeliness and level of detail of

the information being reported to you by ceding companies?

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Resources, models, methodologies and assumptions• Who’s the expert in evaluating your block of

business? • What do you need to know about the exposures

and how will you measure them (premiums, reported claims)?

• What information is available “in-house”? What do you need to seek elsewhere?

• Will you use expert information? Industry data? Broader economic models?

• How will you segment your book for experience analysis?

• How much individual contract information will you use (deductibles, limits, sunsets, commutation clauses, etc.)

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Planning for the future

• How frequently should you refresh the analysis?• What can you do to improve the data,

methodologies and overall analysis the next time around?

• How will you incorporate new/updated information into the analysis in the meantime?

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Overview

• Runoff Market

• Runoff Management

• Evaluating the Book of Business

• Risk Management

• Exit Strategies

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We’ve already talked about three important risk management initiatives

• Securing and enhancing program/contract documentation

• Ensuring access to the right people/resources/skills

• Developing a solid evaluation of claim and contract exposures

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Other areas to consider

• Strengthening regular claims review/adjudication/administration

• Enhancing audit scope/frequency/resources

• Dedicating additional resources to reinsurance collections

• Purchasing additional reinsurance for open exposures

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Ways to leverage risk management effectiveness

• Improving the effectiveness of ceding company/TPA claims management procedures

• Improving communications with ceding companies, TPAs, reinsurers and other business partners

• Using reserving/exposure studies to identify and prioritize segments of the portfolio with greatest potential for volatility

• Taking advantage of the “domino effect”

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Overview

• Runoff Market

• Runoff Management

• Evaluating the Book of Business

• Risk Management

• Exit Strategies

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Readiness to exit

• Improved controls on claim administration and reinsurance collections

• Enhanced contract documentation and the quality and timeliness of financial data

• Comprehensive assessment of exposures and liabilities

• Addressed significant areas of uncertainty in the portfolio

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Wholesale strategies• Portfolio transfer by sale or reinsurance• Solvent Scheme of Arrangement (UK)

• Insolvency and Liquidation

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Considerations in pursuing wholesale strategies

• Length and credibility of loss history

• Impact on existing reinsurances

• Potential for cost reduction/redeployment of capital

• Buyer’s risk tolerance and capacity to absorb future adverse development

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Retail strategies• Claim commutations• Structured settlements• Contractual clauses

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Considerations in pursuing retail strategies

• Development methods may be difficult to apply due to limited history

• Assess open claims exposure and adequacy of case reserves

• Determine timing of expected cash flows

• Apply discounts for interest and mortality

• Evaluate exposure to new/reopened claims

• Consider contractual sunset and commutation clauses

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Windows of Opportunity may be important in executing a retail approach

• Addressing counterparty credit issues

• Resolving disputes

• Seeking administrative cost savings

• Simplifying complex arrangements

• Securing net settlements