Bermuda Quarterly 9M 2008 Bittersweet December 2008

Transcription

1 Bermuda Quarterly 9M 2008 Bittersweet December 2008

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3 Aon Benfield 1 December 2008 Bermuda Quarterly 9M 2008 Bittersweet Angela Coad T:+44 (0) F:+44 (0) angela.coad@aonbenfield.com Jonathan Eggins T:+44 (0) F:+44 (0) jonathan.eggins@aonbenfield.com T:+44 (0) F:+44 (0) aonbenfieldresearch@aonbenfield.com Benfield Group Limited trading as Aon Benfield Benfield Group Limited is a wholly owned subsidiary of Aon Corporation Benfield Group Limited (for itself and on behalf of each company within its group of companies) (Trading as Aon Benfield) Aon Benfield reserves all rights to the content of this document. This document is provided exclusively for the use of the directors and employees of the organisation to which it was originally delivered. Copies may be made by that organisation for its own internal purposes, but no part of this document may be made available to any third party without both (i) Aon Benfield s prior written consent and (ii) that third party having first signed a recipient of report letter in a form acceptable to Aon Benfield. Aon Benfield will accept no liability to any third party to whom this document is disclosed whether in compliance with the preceding sentence or otherwise. This document does not constitute any form of legal, accounting, taxation regulatory or actuarial advice. Without prejudice to the generality of the preceding sentence this document does not constitute an opinion of reserving levels or accounting treatment. The recipient acknowledges that in preparing this document Aon Benfield may have based analysis on data provided by the recipient and/or from third party sources. This data may have been subjected to mathematical and/or empirical analysis and modelling. Aon Benfield has not verified, and accepts no responsibility for, the accuracy or completeness of any such data. In addition, the recipient acknowledges that any form of mathematical and/or empirical analysis and modelling (including that used in the preparation of this document) may produce results which differ from actual events or losses. Where this document includes a recommendation or an assessment of risk, the recipient acknowledges that such recommendation or assessment of risk is an expression of Aon Benfield s opinion only and not a statement of fact. Any decision to rely upon any such recommendation or assessment will be solely at the risk of the recipient, for which Aon Benfield accepts no liability, and the recipient acknowledges that this document does not replace the need for the recipient to make its own assessment. Aon Benfield will not be liable, in any event, for any special, indirect or consequential loss or damage of any kind (including, but not limited to, loss of profit and business interruption) arising from any use of the information contained in this document. Benfield Limited is authorised and regulated by the Financial Services Authority under the reference number

4 CONTENTS Chapter page Bittersweet 3 Premium income 4 Premiums and pricing 4 Market outlook 6 Earnings 7 Above average 7 Underwriting expenses 8 Investment return and net income 11 Balance Sheet 13 Asset mix 13 Capital 15 Financial strength ratings 17

5 Bermuda Quarterly 9M 2008 Bittersweet PAGE 3 Bittersweet Acquisition in the mix Gross written premiums for the group edged upwards to USD51bn (+2%) but this masked a wide range in performance. Once again it was acquisitions that flattered a number of the positive results. Falling prices and weaker terms and conditions created by increased competition reduced the appetite for business and premium income for the majority of companies declined. Catastrophe costs The 1H 2008 featured a number of expensive industrial losses and the third quarter included hurricanes Gustav and Ike. Combined estimates for the two are pencilled in the USD20 25bn range and it looks as though the Bermudian group will share some USD3bn of this, representing approximately 9 percentage points (p.p.) of the combined ratio. 100% mark The aggregate combined ratio increased from 86.0% to 95.7%. Prior year reserve releases continued on an upward trend and accounted for 7.9p.p. (5.0p.p) of this result. Despite an active loss quarter only three companies breached the 100% mark. Net worth Shareholders funds for the selected group fell 10% to USD66bn, as catastrophe costs, investment losses and an appreciation of the US dollar all took their toll. Net income remained in positive territory but unrealised gains reported in other comprehensive income, dividends and share buybacks more than offset. Companies are now adopting a more cautious strategy regarding the latter and a number have announced suspension of buyback programmes. Nil desperandum The events of the third quarter and those of the fourth quarter so far have tested the resilience of the selected group of Bermudian companies. Hurricane Ike looks to be among the top five most costly insured events and the dislocation in the investment market has seen no equal. While the group has emerged from the third quarter relatively unscathed, confidence in the capital markets has continued to deteriorate. Pricing rather than return of capital has become the most powerful tool in insurers armoury and the belief that the soft market has ended is now widely held.

6 Bermuda Quarterly 9M 2008 Bittersweet PAGE 4 Premium income Gross premium written for the BBQ group ticked up 2% to USD51bn in 9M 2008 despite 11 of the 18 companies posting a reduction. The range was wide, as shown in Table 1, extending from -15% to +47% with Ace, the market leader, reporting a 10% increase. A deceleration in the rate of decline in pricing has been experienced in The events of the third quarter and continued dislocation in capital markets have led market participants to predict a change in pricing direction for Table 1 9M 2008 GPW Company announcements USD mn 9M M M 2008 Change 2008/07 ACE 13,391 13,596 14,922 10% XL Capital 7,786 7,438 6,939-7% Axis Capital 5,790 6,034 5,727-5% PartnerRe 3,004 3,087 3,276 6% White Mountains 3,400 3,285 3,237-1% Arch Capital 3,409 3,312 2,844-14% Everest Re 3,014 3,027 2,782-8% Endurance Specialty 1,499 1,503 2,011 34% RenaissanceRe 1,749 1,687 1,574-7% Aspen Insurance 1,659 1,514 1,566 3% Validus ,171 47% Allied World 1,379 1,245 1,135-9% Max Capital % Platinum % Flagstone Re % Montpelier Re % Lancashire Holdings % IPC Holdings % Total 50,015 50,176 50,995 2% Premiums and pricing Both Endurance Specialty and Validus reported strong increases in premium income reflecting the contributions of acquired companies Armtech and Talbot respectively. At Endurance a 22% contraction of the reinsurance book was offset by a 134% increase in the insurance segment. This growth was spurred by the addition of USD660mn agriculture premium from Armtech; premium in this sector totalled more than USD1.2bn and now represents 63% of premium revenue, as opposed to 35% in Validus completed the acquisition of Talbot in the second quarter of 2007 and this is reflected in the 2007 comparative. The USD557mn of gross premium written from Talbot in 2008 was offset by a slight reduction in the Validus Re segment. At Ace, the increase in top line revenue is attributable to the consolidation of Combined Insurance (completed April 2008), where the addition of life premiums pushed life revenue up from USD283mn to USD913mn in Organic growth, featured at Max Capital, was attributable to

7 Bermuda Quarterly 9M 2008 Bittersweet PAGE 5 expansion in agriculture reinsurance and US specialty business. Premiums in agriculture, which increased from USD1mn to USD80mn, reflected both attractive opportunities and strong agriculture market conditions. These may not recur. Flagstone Re was another company reporting organic top line growth in both its P&C and specialty reinsurance segments. Property and Catastrophe reinsurance premiums advanced by 20% from USD353mn to USD426mn and the specialty business segment grew 119% to USD118mn (2007: USD55mn). Flagstone indicated that these advancements were due to the addition of new clients, increased business through participation in new programmes and increasing lines from existing clients. Arch Capital and Lancashire reported the largest falls in revenue relative to the prior year period of 14% and 15% respectively. Lancashire attributed the decline to lower premium rates and a corresponding greater proportion of submissions being declined. A decision to reduce offshore energy exposure impacted the energy account where premiums fell 32%. A 26% contraction of the reinsurance book at Arch was attributable to casualty and only partially offset by a 14% increase in property business. Lancashire s comments regarding the declines in GPW were echoed by a number of others. In addition to lower premium rates some also reported inadequate terms and conditions as a result of increased competition. Chart 1 shows the distribution of GPW by the Bermudian group in Market shares were largely unchanged, ACE further strengthened its position as the market leader, increasing its market share by 2%. Chart 1 Distribution of GPW 9M 2008 GPW USD51bn ACE 29% XL Capital 14% Axis Capital 11% PartnerRe 6% White M ountains 6% Arch Capital 6% Everest Re 5% Endurance Specialty 4% RenaissanceRe 3% Aspen Insurance 3% Validus 2% Allied World 2% Max Capital 2% Platinum 2% Flagstone Re 1% M ontpelier Re 1% Lancashire Holdings 1% IPC Holdings 1%

8 Bermuda Quarterly 9M 2008 Bittersweet PAGE 6 Market outlook The combination of higher underwriting losses and distress in the financial markets has shifted the outlook on pricing. The previously downbeat forecast on pricing, voiced just 60 days ago has been, in the most part, revised with a prediction of price increases. This was summed up by Evan Greenberg, Chairman of ACE, In sum, the end of the soft market in insurance has arrived. 1 The financial distress experienced by AIG, one of the largest capacity providers in the primary market was, in the view of John Charman, CEO and President, Axis Capital, the haystack, not the straw that broke our industry camel s back. 2 In the fallout from the situation, Endurance has experienced both brokers and clients alike taking a much more conservative approach to assigning large lines to individual insurers. Lead positions are being changed, which is allowing the market to re-underwrite and re-price business. A flight to quality has been noted with clients willing to accept flat to upward pricing trends on placements with companies that are not surrounded by financial uncertainty. ACE, the largest insurer in the Bermudian group, has reported increased submissions as business is shifting from weaker competitors. Submission activity from late September, early October was up over 31% over the prior year, with submissions for large accounts up 80%. Such increases in demand are being met with the ACE mandate of flat pricing and no reductions and this could be a strong indicator of a hardening of the insurance market. The drought in the capital markets and increasing expense is a concern. Reinsurance could be the answer for some and this is placing upward pressure on pricing as reinsurers in turn reassess their risks. Such price rises seem likely to prompt price increases in the insurance sector. Some companies were more guarded in their optimism than others. Christopher O Kane, CEO of Aspen, was of the opinion that it was possible for the first time since the initial call as a public company in February 2004, to be hopeful about a general upturn in market fortunes. Nevertheless he declared, To be hopeful is not the same as to be completely persuaded that a general market correction has arrived. 3 Michael Price, President and CUO of Platinum, declared that this was not a situation, unlike 2005, when there was instantaneous recognition that rates must go up. Events of 2008 would still prompt the realisation over time that pricing would need to change. Although the majority of the companies are of the opinion that there will be an upturn in the market, many were reluctant to comment on the extent to which prices would increase. Jim Bryce, CEO and President of IPC expected to see double digit rate increases at renewals, the degree of which will vary on supply. 1 ACE, Conference call, 29 October Axis Capital, Conference call, 28 October Aspen, Conference call, 30 October 2008

9 Bermuda Quarterly 9M 2008 Bittersweet PAGE 7 Earnings Losses from hurricanes Gustav and Ike more than offset the favourable impact from prior year reserve releases and the combined ratio for the selected group of companies increased by 9.7p.p. to 95.7%. All but three companies still reported a combined ratio below 100% for the nine month period. A number of companies now effectively recognise all realised and unrealised gains through the income statement and this exacerbated the downward trend in reported net income. Above average ISO Property Claims Services (PCS) reported that US P&C insurers losses are expected to total USD11.5bn resulting from a total of 11 catastrophes in 22 states in 3Q Chart 2 shows this period to be the fourth largest insured property loss in a third quarter since The frequency is also of note as the 9M 2008 exceeds previous periods and reflects the trend in 2008 for a high number of events coupled with significant insured losses. 4 Chart 2 Nine month US catastrophe losses ISI PCS USD bn 30 6 Events '08 Av Insured loss USDbn (LH scale) Number of events (RH scale) 0 Hurricanes Gustav and Ike were the most costly events of the quarter and estimates for Ike have been on an upward trend. Gustav caused significant damage in Haiti, the Dominican Republic, Jamaica, the Cayman Islands and Cuba as a Category 3 storm. It weakened to a Category 2 by the 4 ISO property Claim Services, press release, 27 October ISO PCS defines a catastrophe as an event that causes USD25mn or more in insured property losses and affects a significant number of policyholders and insurers. PCS estimates represent anticipated insured loss on a US industrywide basis from catastrophes, reflecting the total insurance payment for personal and commercial property lines covering fixed property, personal property, vehicles, boats, related property items, business interruption and additional living expenses. Estimates exclude loss adjustment expenses.

10 Bermuda Quarterly 9M 2008 Bittersweet PAGE 8 time it hit the Louisiana coast on 1 September but damage is still estimated by the modelling agencies at around USD5bn. 5 Hurricane Ike followed in quick succession and on 5 September was rated a Category 4 hurricane. As with Gustav, Ike weakened and made landfall in Texas as a Category 2 hurricane. Initial industry estimates are believed to be significantly understated because Ike s large wind field and the storm's high integrated kinetic energy (IKE), combined with wind damage through the Ohio Valley, were not fully contemplated. RMS revised its estimate for US onshore and offshore losses to USD13bn - USD21bn on 24 October. Chart 3 shows the average of top end estimates for AIR, EQECAT and RMS. Hurricane Ike looks likely to rank third in terms of most costly hurricane events behind Hurricane Andrew and Hurricane Katrina. Chart 3 Hurricane Ike vs. most costly insured losses Swiss Re sigma 1/2008 Modelling agencies Hurricane Hugo Typhoon Mirelle/No 19 Hurricane Charley Hurricane Rita Hurricane Wilma Hurricane Ivan Hurricane Ike Northridge Earthquake Terror Attack on WTC Hurricane Andrew Hurricane Katrina USDbn Underwriting expenses Table 2 shows the selected Bermudian Group ranked by 9M 2008 combined ratio. The weighted average shows almost a 10p.p. deterioration from 86.0% to 95.7% as catastrophe costs more than offset favourable movements in prior year reserves. Perhaps surprisingly as a property catastrophe specialist, IPC Holdings not only had the lowest ratio but also showed the greatest improvement in combined ratio, as the loss ratio for the 9 month period fell from to 33.8% losses included USD35mn from Kyrill and USD50.7mn and USD50.5mn from the Australian and UK floods respectively. This compared with losses of USD106mn for Ike and USD3.7mn for Gustav reported in the 9M 2008 comparative. Prior year reserve release also played a part, with a favourable 6.7p.p. impact in 2007 increasing to 16.9% in A favourable movement in prior year reserves was also the key driver for Allied World which showed a 5.9% improvement. This included a positive 25.5p.p. (10.0p.p.) favourable move in prior year reserves. This more than offset the USD71.6mn cost of hurricanes Gustav and Ike. 5 Mid point average

11 Bermuda Quarterly 9M 2008 Bittersweet PAGE 9 Table 2 9M 2008 combined ratios Combined ratio 9M 2007 Combined ratio 9M 2008 Loss ratio 9M 2008 Combined ratio p.p. change 9M 2008 IPC Holdings 73.4% 50.1% 33.8% -23.2% Allied World 87.1% 81.2% 59.0% -5.9% Max Capital 101.4% 89.1% 66.6% -12.3% Platinum 83.0% 90.1% 62.4% 7.1% ACE 86.0% 90.3% 61.4% 4.3% PartnerRe 80.9% 91.4% 61.4% 10.6% RenaissanceRe 63.0% 92.0% 68.7% 29.0% Validus 61.4% 93.1% 61.7% 31.7% Arch Capital 85.3% 94.1% 63.2% 8.8% Flagstone Re 75.9% 94.9% 63.5% 19.0% Aspen Insurance 84.1% 96.5% 66.1% 12.4% Endurance Specialty 81.6% 96.7% 68.2% 15.1% Axis Capital 76.7% 97.1% 70.9% 20.4% XL Capital 87.2% 97.7% 68.7% 10.5% Everest Re 86.0% 99.6% 70.5% 13.5% Montpelier Re 64.4% 100.4% 66.5% 36.0% Lancashire Holdings 49.2% 101.9% 77.2% 52.7% White Mountains 102.8% 110.2% 70.7% 7.4% Weighted average 86.0% 95.7% 65.4% 9.7% It was less surprising to see property catastrophe specialists, Renaissance Re and Montpelier Re among the list of biggest increases in combined ratio. Lancashire Holdings claimed top slot on this score and in so doing moved from the third lowest combined ratio at the half year stage to the second highest at the nine month stage. Hurricane Ike was principally to blame with losses from Ike and Gustav together (Gustav immaterial) reported at USD150mn representing 32.2% of 9M 2008 net earned premiums. Despite the events of the third quarter only three companies reported combined ratios above 100%. This contrasted with only one featuring above at the 1H 2008 stage. Hurricane Katrina was more than three times as costly as Hurricane Ike and so the fact that only Arch and Ace of the selected group reported a combined ratio below 100% at the 9M 2005 was perhaps to be expected. The range was 98.9% to 257.7%. Chart 4 shows the impact of prior year reserve movements on the combined ratio of the selected group. The negative values reflect a favourable movement and consequent reduction in combined ratio. The weighted average positive impact of 7.9p.p. reflects a 3p.p. enhancement on the comparative period.

12 Bermuda Quarterly 9M 2008 Bittersweet PAGE 10 Chart 4 Percentage point impact of adverse (favourable) movement in prior year reserves Flagstone Re White Mountains Everest Re Lancashire Holdings Validus PartnerRe ACE XL Capital Aspen Insurance Endurance Specialty Arch Capital Platinum RenaissanceRe Axis Capital IPC Holdings Montpelier Re Max Capital Allied World -30% -25% -20% -15% -10% -5% 0% 5% 9M M M 2008 prior year reserve release as % net earned premium Chart 5 shows the reported losses from hurricanes Ike and Gustav. Disclosure of losses in 10Q statements and press releases does vary but where possible the reported net impact is shown in this report. These losses totalled just over USD3bn for the group and represented some 9% of net earned premium income for the 9M The impact of these losses on 30 June 2008 SHF is shown in Chart 6 on a company basis. The weighted average for the group was 4.3% of aggregate SHF as at 30 June Chart 5 Hurricanes Gustav and Ike losses USDmn Max Capital Allied World IPC Holdings White Mountains Flagstone Re Platinum Montpelier Re Arch Capital Endurance Specialty Lancashire Holdings Aspen Insurance Validus Holdings PartnerRe Everest Re XL Capital RenaissanceRe ACE Axis Capital USDmn loss

13 Bermuda Quarterly 9M 2008 Bittersweet PAGE 11 Chart 6 Hurricanes Gustav & Ike losses as % 30 June 2008 SHF ACE White Mountains XL Capital Allied World Max Capital Arch Capital Everest Re IPC Holdings PartnerRe Aspen Insurance Endurance Specialty Platinum RenaissanceRe Axis Capital Flagstone Re Montpelier Re Validus Holdings Lancashire Holdings 2% 2% 3% 3% 3% 3% 4% 5% 5% 5% 6% 6% 7% 7% 8% 8% 9% 11% 0% 2% 4% 6% 8% 10% 12% 14% Gustav and Ike USDmn loss as % 30 June 2008 SHF Investment return and net income Investment return for the selected group is shown in Table 3. Realised and unrealised investment gains and losses are recognised under US GAAP. Exactly where they appear depends on whether companies have elected to adopt FAS 159. Those companies accounting under FAS 159 will show realised and unrealised gains in the income statement. Those that have not made this election continue to report asset value movements below the line in other comprehensive income. The variation in reporting distorts inter company comparison. Moreover different election dates add further complexity. For example, the mark to market pricing impact (prompted by the dramatic credit spread rises and drop in equity prices) was clear to see at ACE as investment return was USD862mn lower in 9M Chart 7 shows the aggregate impact of these investment losses. Chart 7 Net income split Net income USDbn M M 2008 Underwriting result Net investment income Investment gains and losses Other income Net income 0.7

14 Bermuda Quarterly 9M 2008 Bittersweet PAGE 12 Table 3 9M 2008 investment return USD mn Inv. income 9M 2007 Gains / Losses 9M 2007 Inv. return 9M 2007 Inv. income 9M 2008 Gains / Losses 9M 2008 Inv. return 9M 2008 ACE 1, ,419 1, Arch Capital Aspen Insurance Allied World Axis Capital Endurance Specialty Everest Re Flagstone Re IPC Holdings Lancashire Holdings Max Capital Montpelier Re PartnerRe Platinum RenaissanceRe Validus White Mountains XL Capital 1, ,556 1, Total 6, ,061 6,020-4,290 1,729 Table 4 Net income Company announcements USD mn 9M M M 2008 % Change 2008/07 ACE 1,640 2,006 1,177-41% Arch Capital % Axis Capital % Allied World % Platinum % Endurance Specialty % Aspen Insurance % RenaissanceRe % IPC Holdings % Lancashire Holdings % Validus % Everest Re % PartnerRe % Max Capital % Montpelier Re % Flagstone Re % White Mountains % XL Capital 1,281 1,156-1, % Total 8,216 9, %

15 Bermuda Quarterly 9M 2008 Bittersweet PAGE 13 Balance Sheet Balance sheets tend to have been conservatively invested but net assets have not been immune from impairment charges and falling mark to market values through widening spreads. Hurricanes Gustav and Ike and investment losses flowing through the income statement reduced the net income contribution but it was still in positive territory. Capital raising at XL provided the bulk of the group s additional capital but a further USD6bn of investment losses plus USD4bn of dividends and share buybacks more than offset increases. Asset mix Total balance sheet footings have fallen 1% to USD227bn in the 9M 2008 period and included a 5% fall in invested assets for the selected group of companies. The split of these invested assets is shown in Chart 8 with fixed income securities forming the majority. Chart 8 Total invested assets Total Invested Assets 30 September 2008 USD182.3bn 5% 4% 15% Fixed Interest investments Cash and cash equivalents Other investments Equity investments 76% The individual company exposure to equities (including hedge fund assets) is shown in Chart 9. Six of the group have no investments in this asset class. The S&P 500 Index fell by 19% in the first 9 months of 2008 and has since fallen a further 26% November 2008

16 Bermuda Quarterly 9M 2008 Bittersweet PAGE 14 Chart 9 Equities as % 30 September 2008 SHF Validus RenaissanceRe Aspen Platinum Allied World Max Capital Endurance Specialty Axis Capital XL Capital Lancashire Holdings Flagstone Re ACE Arch Capital Montpelier Re Everest Re IPC Holdings PartnerRe White Mountains 0% 5% 10% 15% 20% 25% 30% 35% 40% Equities as % 30 September 2008 SHF Table 5 shows the asset split as shown for the aggregate selected group in Chart 7 and Table 6 provides a more detailed analysis of the fixed income component on a company by company split. Table 5 Investment split as % 30 September 2008 SHF As % 30 September 2008 SHF Fixed income (FI) Equities Cash Other Total Inv. USDmn XL Capital 306% 5% 65% 57% 37,516 Max Capital 268% 0% 51% 77% 5,042 Arch Capital 240% 11% 7% 60% 11,195 ACE 235% 8% 3% 46% 44,789 Allied World 239% 0% 33% 17% 6,563 PartnerRe 239% 21% 17% 9% 11,690 White Mountains 152% 34% 5% 89% 11,389 Everest Re 218% 18% 4% 40% 14,120 Endurance Specialty 192% 2% 23% 28% 5,556 Platinum 201% 0% 34% 7% 4,290 Aspen 167% 0% 28% 28% 5,892 Axis Capital 184% 3% 31% 31% 11,441 RenaissanceRe 120% 0% 14% 82% 6,566 Validus 135% 0% 17% 26% 3,430 Flagstone Re 64% 7% 59% 42% 1,871 Lancashire Holdings 113% 6% 49% 1% 1,962 Montpelier Re 108% 18% 25% 15% 2,337 IPC Holdings 96% 20% 11% 1% 2,340

17 Bermuda Quarterly 9M 2008 Bittersweet PAGE 15 The period was marked by failing financials and widening spreads. Some companies also looked to de-risk their balance sheets with the consequent acceptance of lower investment yield. Many companies gave detailed information on the ratings of investments within the various asset classes where investors have been concerned and also provided further sub segments such as financial corporate bonds. Table 6 Investment split as % 30 September 2008 SHF As % 30 September 2008 SHF US gov t Other foreign gov t Corporate Municipal /state other MBS & ABS Other Total FI USDmn ACE 19% 60% 57% 12% 87% 0% 36,010 Allied World 80% 6% 55% 3% 96% 0% 5,433 Arch Capital 32% 10% 58% 32% 108% 0% 8,446 Aspen 39% 16% 52% 0% 60% 0% 4,411 Axis Capital 28% 6% 46% 17% 86% 0% 8,450 Endurance Specialty 37% 12% 28% 0% 115% 0% 4,359 Everest Re 8% 0% 44% 75% 45% 46% 10,962 Flagstone Re 38% 0% 11% 0% 15% 0% 698 IPC Holdings 12% 3% 64% 0% 6% 12% 1,753 Lancashire Holdings 40% 4% 27% 0% 27% 15% 1,311 Max Capital 67% 0% 113% 0% 87% 0% 3,411 Montpelier Re 33% 0% 29% 3% 43% 0% 1,521 PartnerRe 21% 69% 80% 0% 68% 0% 9,775 Platinum 47% 12% 39% 20% 82% 0% 3,562 RenaissanceRe 36% 3% 24% 0% 56% 0% 3,645 Validus 38% 6% 33% 1% 57% 0% 2,595 White Mountains 19% 20% 47% 0% 64% 2% 6,160 XL Capital 35% 37% 119% 5% 110% 0% 26,501 Capital Table 7 shows shareholders funds as at 30 September Aggregate SHF of the selected group of companies decreased in the nine month period. Allied World was the only company to report an increase. Chart 10 summarises the aggregate development for the selected group. The USD3.4bn of additional capital primarily reflects capital raising exercises at XL Capital. Net income, despite catastrophe and investment losses remained in positive territory but unrealised gains reported in other comprehensive income, dividends and share buybacks more than offset the positive contributions. Companies are now adopting a more cautious strategy regarding the latter and a number have announced suspension of buyback programmes.

18 Bermuda Quarterly 9M 2008 Bittersweet PAGE 16 Table 7 Shareholders funds USD mn 31 Dec Dec Sep 08 Change 2008/07 Allied World 2,220 2,240 2,273 1% Validus 1,193 1,935 1,917-1% Lancashire Holdings 1,138 1,216 1,155-5% PartnerRe 3,786 4,322 4,085-5% Aspen Insurance 2,389 2,818 2,638-6% ACE 14,278 16,677 15,356-8% Endurance Specialty 2,297 2,512 2,269-10% Flagstone Re 865 1,210 1,084-10% Axis Capital 4,413 5,159 4,601-11% Platinum 1,858 1,998 1,772-11% Everest Re 5,108 5,685 5,037-11% RenaissanceRe 3,280 3,478 3,041-13% Arch Capital 3,591 4,036 3,517-13% XL Capital 10,131 9,948 8,660-13% White Mountains 4,455 4,713 4,062-14% IPC Holdings 1,991 2,126 1,818-14% Montpelier Re 1,493 1,653 1,414-14% Max Capital 1,390 1,584 1,274-20% Total 65,875 73,309 65,972-10% Chart 10 Development of aggregate shareholder funds USD bn Dec 2007 SHF Additional capital Net income Dividends FX Investment losses Share buybacks* 30 Sep 2008 SHF * Including preference.

19 Bermuda Quarterly 9M 2008 Bittersweet PAGE 17 Financial strength ratings Despite the difficulties experienced in the third quarter, most of the ratings action comprised affirmations of current ratings. However, the problems experienced by the financial markets did precipitate comments from the rating agencies on both XL Capital and New Castle Re. Standard & Poor s (S&P) affirmed the ratings of Allied World Assurance Co. Holdings Ltd and its subsidiaries on 29 September At the same time, S&P removed the ratings from CreditWatch, where they had been placed with negative implications on 1 July The outlook was revised to stable. The affirmation of the ratings and revision of the outlook were in response to the group s acquisition of Darwin Professional Underwriters Inc, which S&P believes will provide greater diversification and stability to group earnings. The ratings of Hiscox Insurance Company (Bermuda) Ltd. were upgraded to A from A- by A.M. Best on 17 September The outlook for the ratings was stable. The upgrade occurred due to A.M. Best s view that Hiscox Bermuda s risk-adjusted capitalisation is stronger and has stabilised earlier than anticipated following its 2005 start. 8 On 5 August, Standard & Poor s removed the ratings of XL Capital Ltd. (XL) and its subsidiaries from CreditWatch, where they had been placed with negative implications on 3 July The ratings were affirmed, as was the negative outlook. The ratings actions followed the successful execution of XL s capital plan and the closing of its agreement with Syncora Holdings (formerly Security Capital Assurance or SCA). 9 On 25 August 2008, A.M. Best also removed XL from under review with negative implications; affirming the group s financial strength ratings and assigning a stable outlook. 10 This action also reflected the resolution of XL s agreement with Syncora. On 10 October 2008, S&P again affirmed its ratings of XL and its subsidiaries, with negative outlook. This affirmation was in response to XL s announcements of sharp decline in the value of its investment portfolio in the third quarter and losses relating to Hurricanes Ike and Gustav. 11 A.M. Best issued a comment on 16 October 2008 that it would be leaving the ratings of XL and its subsidiary companies unchanged, despite the losses disclosed in the group s 3Q 2008 results. 12 A.M. Best commented on 13 November 2008 that the ratings and outlook of New Castle Re would remain unchanged, despite the challenges faced by their primary investors, Citadel Kensington Global Strategies Fund Ltd and Citadel Wellington LLC. 13 The material losses reported by the funds, and the associated decision to withdraw from collateralised reinsurance in the form of sister company CIG Re, did not merit a change in either ratings or outlook. 7 Standard & Poor s, Press release, 29 September A.M. Best, Press release, 17 September Standard & Poor s, Press release, 5 August A.M. Best, Press release, 25 August Standard & Poor s, Press release, 10 October A.M. Best, Press release, 16 October A.M. Best, Press release, 13 November 2008

20 Bermuda Quarterly 9M 2008 Bittersweet PAGE 18 Table 7 Financial strength ratings as at 28 November 2008 Standard & Poor s; A.M. Best; Fitch & Moody s Standard & Poor's A.M. Best Fitch Moody's ACE Tempest Re A+ A+ AA- Aa3 Aeolus NR NR NR NR Allied World A- A NR A2 Amlin Bermuda A A NR A2 Arch Reinsurance A A A+ A2 Argo Re NR A NR NR Ariel Reinsurance NR A- NR NR Aspen Insurance A A NR A2 AXIS Specialty A A NR A2 CastlePoint Reinsurance Co NR A- NR NR Catlin Insurance A- A NR NR Endurance Specialty Insurance A A A A2 Everest AA- A+ AA- Aa3 Flagstone Reinsurance NR A- A- A3 Hannover Re Bermuda AA- A NR NR Harbor Point Re A- A NR NR Hiscox Insurance Co (Bermuda) NR A A NR IPCRe A- A NR NR Ironshore Insurance NR A- NR NR Lancashire Insurance NR A- NR NR Max Bermuda NR A- A A3 Montpelier Re A- A- A- NR New Castle Re NR A- NR NR Norton Re NR NR NR NR Partner Re AA- A+ AA Aa3 Platinum Underwriters NR A A NR Renaissance Re AA- A+ A A2 Top Layer Re AA A+ NR NR Validus Re NR A- NR A3 White Mountains Re A- A- A NR XL Re A+ A A+ A1

21 Bermuda Quarterly 9M 2008 Bittersweet PAGE 19 publications are available on request from Recent titles are listed below. European Quarterly December M 2008 A Lost Year Benfield European Quarterly October H 2008 Challenging Times Benfield Bermuda Quarterly September H 2008 The Inevitable Lloyd s Update July 2008 Reformation Benfield Bermuda Quarterly June Q 2008 Take the Strain Benfield European Quarterly April 2008 FY 2007 Waiting Game Benfield Bermuda Quarterly March 2008 FY 2007 Balancing Act Global Reinsurance Market Review January 2008 Changing the Game Benfield European Quarterly November M 2007 Out with the Old Benfield Bermuda Quarterly November M 2007 Return of Capital