A Reinsurance Perspective. Ty Birkett Willis Re Australia

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2 A Reinsurance Perspective Ty Birkett Willis Re Australia

3 Interesting Times. The U.S. Federal Government has pledged more money to bail out the financial services industry than it spent on: the Louisiana Purchase the New Deal the Marshall Plan the Race to the Moon the Savings and Loan Crisis Operation Iraqi Freedom and NASA s lifetime budget Other Governments including China are also making unprecedented efforts to stimulate their economies Source: Slide from someone s presentation and I have not done the Maths!

4 Depends on Your Perspective

5 Technical Considerations Today Demand for Reinsurance Supply of Reinsurance Near Future Implications for Insurers

6 Technical Considerations Covered today in detail BUT FOR REINSURANCE. Longer claims tail than direct business More uncertainty around pricing Leveraged impact of large claims Lag nature of proportional business Larger exposure to systemic risks

7 Demand Demand Curve Reinsurance Cost Reinsurance Capacity

8 Demand Demand for Capital or Need for Preservation Asset-side Impairment - Equity and fixed interest Increased volatility Reduced risk appetite Increased regulatory scrutiny Potential increase losses

9 Demand Sources of Capital EQUITY TOUGH TO SOURCE DEBT EPENSIVE REINSURANCE RELATIVELY CHEAP EASY TO SECURE BUT VOLATILE

10 Sydney Storm (1/91) Sydney Hail (2/92) Canberra Bushfire (1/03) Cyclone Larry (3/06) Sydney Hail (12/07) Mackay Storms (2/08) Hunter Region Storms (6/07) Brisbane Storms (11/08) Victoria Bushfires (2/09) Sydney Hail (4/99) Newcastle EQ (12/89) Demand - non-gfc Impacts Australian Market Catastrophe Losses ( present) > $300m (2007 Values) $5,000 m $4,500 m $4,000 m $3,500 m $3,000 m $2,500 m $2,000 m $1,500 m $1,000 m $500 m East Coast Storms (2/90) Sydney Hail (3/90) $0 m

11 Supply Supply Curve Reinsurance Cost Reinsurance Capacity

12 Supply Demand for Capital or Need for Preservation Asset-side Impairment - Equity and fixed interest Increased volatility Reduced risk appetite Increased regulatory scrutiny Potential increase losses SAME ISSUES FOR REINSURERS!

13 Supply - Quality AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Below M unich Re Swiss Re General Re ERC Chubb Allianz Hannover Re L Re PartnerRe AA Re Transatlantic Re SCOR Gerling Global Re Everest Re W.R. Berkley Lloyd's of London Converium (Swtz) Axis Re Odyssey Re CNA Paris Re Endurance M ontpelier ACE Tempest IPC Trenwick Renaissance Re PRE Re Black lines denote movement between 9/11 and Sept 03 Standard & Poor Ratings

14 Supply - Quality AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Below M unich Re Swiss Re General Re ERC Chubb Allianz Hannover Re L Re PartnerRe AA Re Transatlantic Re SCOR Gerling Global Re Everest Re W.R. Berkley Lloyd's of London Converium (Swtz) Axis Re Odyssey Re CNA Paris Re Endurance M ontpelier ACE Tempest IPC Trenwick Renaissance Re PRE Re Black lines denote movement between 9/11 and Sept 03 Red lines denote movement between Sept 03 and Aug 05 Standard & Poor Ratings

15 Supply - Quality AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- Below M unich Re Swiss Re General Re ERC Chubb Allianz Hannover Re L Re PartnerRe AA Re Transatlantic Re SCOR Gerling Global Re Everest Re W.R. Berkley Lloyd's of London Converium (Swtz) Axis Re Odyssey Re CNA Paris Re Endurance M ontpelier ACE Tempest IPC Trenwick Renaissance Re PRE Re Black lines denote movement between 9/11 and Sept 03 Red lines denote movement between Sept 03 and Aug 05 Green lines denote movement post-katrina to March 09 Standard & Poor Ratings

16 USD 'bn Proceeds Interest (LIBOR) Unused collateral paid back at Maturity Reduction in Alternate Sources Supply Value of Catastrophe Bond Capacity LIBOR 14 Collateral Trust Total Return Swap Swap Counterparty 12 Investment Income Premium Funds from sale of notes Sponsor (usually the insured) Cover SPV Balance on Maturity LIBOR + Premium Investors Issued Outstanding Role of Investment Banking Withdrawal of Hedge Fund capacity Capital Reload occurred in mid-90s, 2001 and /09?

17 1996 American Re (USA) 1997 Reale Riassicurazioni S.p.A 1999 New Re (Swiss) 2000 CNA Life Re (USA) 2007 MSP Underwriting Ltd (UK) 2007 Bell & Clements (USA) 2008 Sterling Life Insurance (USA) 2008 Midland Company (USA) 2009 Hartford Steam Boiler (USA) 1996 M & G Re (UK) 1997 Union Re (Swiss) Unione Italiana (Italy) Underwriters Re (USA) 201 Bavarian Re (Germany) GE Insurance Solutions (USA) Barclays Life (UK) Supply Munich Re Group (Germany) Swiss Re Group (Switzerland) Nordisk Re (Norway) 1995 Frankona Re (Germany) 1995 Aachen Re (Germany) 1996 First & Excess Re (USA) 1998 Eagle Star Re (UK) 1998 Kemper Re (Belgium) Employers Re Group (member of GE Cap) GECapital (USA) GE Insurance Solutions (USA)

18 Supply 2000 Partner Re Life (USA) 2001 SOREMA (France) 2006 Revios (Germany) 2007 Converium (Swiss) 1997 SAFR (France) 1998 Winterthur Re (Swiss) 1998 Mid Ocean Re (Bermuda) 1999 NAC Re (UK) 2000 CGNU (US Surety Only) 2003 Le Mans Re (France) SCOR Group (France) Partner Re Group (Bermuda) L Group (Bermuda) 1996 Tempest Re (Bermuda) 1998 CAT Re (Bermuda) 1998 Cat Limited (Bermuda) 1998 Cigna (USA) 1999 Capital Re Corp. (USA) Combined Insurance 2008 Company of America (USA) Ace Group (Bermuda)

19 Source: Swiss Re Sigma 2/09 most costly insurance losses Supply - non-gfc

20 BUT some positive signs: Supply Improved results underwriting and investment Less required by some e.g. Florida and Texas schemes Signs of new capital Insurance Linked Securities regaining some momentum General reduction in EQ models Non-peak versus Peak (US EQ+ WS, Jpn EQ, Eur WS)

21 Supply and Demand Demand Curve Supply Curve Reinsurance Cost Reinsurance Capacity

22 Where to From Here? Market Hardening - GFC - Other factors - Territory specific Market cycle impacted by regular one off events - LM, WTC, KRW, GFC, etc. etc. Flow of future capital key traditional, alternative, self-generated Reinsurance remains a resilient form of capital

23 Issues for Insurers Capacity for Australia and NZ remains strong BUT Need clear understanding of purpose of reinsurance: - Capital, earnings, compliance, etc. - Recent years: retain more manage volatility capital source Locked in well price capacity where possible Ensure large loss potential feeds through into pricing - all losses not just RI costs Will remain a key risk / capital management tool