2016 AmTrust Financial Conference

Transcription

1 November 16, 8, AmTrust Financial Investor Services, Inc. Conference Third Quarter 2017 Financial Results CONSISTENT VISION DIFFERENTIATED MODEL SUSTAINABLE GROWTH

2 Safe Harbor Statement This supplemental presentation contains certain forward-looking statements that are intended to be covered by the safe harbors created by the Private Securities Litigation Reform Act of When we use words such as anticipate, intend, plan, believe, estimate, expect, or similar expressions, we do so to identify forward-looking statements. Examples of forward-looking statements include the plans and objectives of management for future operations, including those relating to future growth of our business activities and availability of funds, and are based on current expectations that involve assumptions that are difficult or impossible to predict accurately and many of which are beyond our control. Actual results may differ materially from those expressed or implied in these statements as a result of significant risks and uncertainties, including, but not limited to, non-receipt of expected payments from insureds or reinsurers, changes in interest rates, a downgrade in the financial strength ratings of our insurance subsidiaries, the effect of the performance of financial markets on our investment portfolio, the amounts, timing and prices of any share repurchases made by us under our share repurchase program, development of claims and the effect on loss reserves, accuracy in projecting loss reserves, the cost and availability of reinsurance coverage, the effects of emerging claim and coverage issues, changes in the demand for our products, our degree of success in integrating acquired businesses, the effect of general economic conditions, state and federal legislation, regulations and regulatory investigations into industry practices, our ability to timely and effectively remediate the material weaknesses in our internal control over financial reporting and implement effective internal control over financial reporting and disclosure controls and procedures in the future, risks associated with conducting business outside the United States, the impact of Brexit, developments relating to existing agreements, disruptions to our business relationships with Maiden Holdings, Ltd. or National General Holdings Corp., breaches in data security or other disruptions with our technology, heightened competition, changes in pricing environments, and changes in asset valuations. Additional information about these risks and uncertainties, as well as others that may cause actual results to differ materially from those projected, is contained in our filings with the SEC, including our Annual Report on Form 10-K and our quarterly reports on Form 10-Q. Any projections and statements in this supplemental presentation speak only as of the date of this supplemental presentation and we undertake no obligation to update or revise any forwardlooking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. 2

3 November 16, 8, AmTrust Financial Investor Services, Inc. Conference Q Barry Zyskind Chairman & CEO CONSISTENT VISION DIFFERENTIATED MODEL SUSTAINABLE GROWTH

4 Strategic Sale of U.S. Services and Fee Business to Madison Dearborn Partners The proposed transaction provides significant benefits to AmTrust and the business Unlocks significant shareholder value for a unique group of U.S. Service and Fee businesses Realizes significant embedded value of high-margin businesses acquired over the past several years AmTrust to share in the future success of the business through 49% equity interest in the business Maintains AmTrust s relationship with the new business and its associated premiums AmTrust will continue to be a provider of insurance coverage Newly created company will benefit from a diverse and bespoke product offering with support from AmTrust s carriers and rates Stand alone platform enhances organic growth and supports future acquisitions Dedicated management team to maximize the business s underlying growth and profitability potential Enhances access to capital and ability to pursue accretive acquisitions Enhances AmTrust s balance sheet strength and financial flexibility ~$950 million of gross cash proceeds (subject to post-closing purchase price adjustments) will enhance ability to pursue attractive underwriting opportunities Expect to generate target operating ROE (1) of 12-15% on new tangible capital Accretive to book value and tangible book value by approximately $3.50 and $6.00 respectively (2) through the gain on the transaction and reduction in goodwill and intangibles (1) Operating Return-on-Equity ( Operating ROE ) is a non-gaap measure. Please refer to the appendix for the Company s calculation of this metric and its comparison to the most directly comparable GAAP measure. (2) Tangible book value and tangible book value per share are non-gaap measures. Please refer to the appendix for the Company s calculation of this metric and its comparison to the most directly comparable GAAP measure. 4

5 Operational Excellence and Value Creation The sale of a portion of its U.S. fee businesses to MDP is the next step in realizing our longterm vision for AmTrust Shareholder value creation through Operational Excellence and profitable growth in our underwriting platform. Use of proceeds towards organic expansion across attractive underwriting opportunities in our core Small Commercial Business and Specialty Risk & Extended Warranty segments Remain highly selective in our risk categories and closely manage our exposures Maintain reserving and pricing discipline on new and renewal business, applying a conservative view in order to support future profitability and balance sheet strength Continued focus on technology and innovation as a driver of attractive returns Will continue to deliver returns for our shareholders through tangible book value growth, driven by our strategic and disciplined capital management process. Target Operating ROE (1) of 12-15% (1) Operating Return-on-Equity ( Operating ROE ) is a non-gaap measure. Please refer to the appendix for the Company s calculation of this metric and its comparison to the most directly comparable GAAP measure. 5

6 Q3 2017: Solid Production Performance in Core Business Underlying business trends demonstrate stability and resiliency amidst unprecedented hurricane activity in third quarter 2017 Small Commercial: Pleased with underlying business trends Workers Comp - retained over 93% of renewal accounts Workers Comp - quoting more new business submissions relative to the same quarter last year, and holding our quote to bind ratio steady Commercial Auto - our rate continued to increase in the quarter Prudent Catastrophe reinsurance program - limited exposure to events in Q3 2017, relative to the industry, demonstrates our conservative approach to cat risk Relative to the size of our cat book, we have purchased a sizeable amount of reinsurance coverage with a very low level of retention Deep commitment to taking care of policyholders, agents and brokers by our talented and loyal employee base and an industry leading customer support platform 6

7 November 16, 8, AmTrust Financial Investor Services, Inc. Conference Q Adam Karkowsky EVP & CFO CONSISTENT VISION DIFFERENTIATED MODEL SUSTAINABLE GROWTH

8 CFO Update 1. Transformative actions. Executing initiatives to strengthen balance sheet and capital base, with transformative steps taken in the quarter and year-to-date Simplifying our story and enhancing our disclosure Optimizing our reporting and consolidation processes Took swift and decisive action for strong Positioned for profitability. Normalized Q results, combined with increased caution on 2017 accident year loss picks, provides us with a higher degree of confidence in the 2017 accident year loss picks on a YTD basis Positioned for greater reserve certainty and profitability in Increased certainty. Largest business segments continue to perform profitably in prior accident years 8

9 Consolidated Financial Results Summary ($, millions, except per share amounts) (unaudited) Q Q (1) % Change Gross Written Premium $ 1,990.8 $ 2,034.1 (2.1) % Net Written Premium 1, ,216.1 (3.3) % Net Earned Premium 1, ,196.2 (0.3) % Service and Fee Income % Net Investment Income % Net Realized Gains on Investments % Total Revenues $ 1,459.0 $ 1, % Loss and Loss Adjustment Expense 1, % Acquisition Costs and Other Underwriting Expense % Other Expense % Total Expense $ 1,780.6 $ 1, % Loss Ratio % 67.8 % Expense Ratio 28.3 % 25.4 % Combined Ratio % 93.2 % Unfavorable PYD on ADC (27.4) % Adjusted Combined Ratio (2) % 93.2 % PYD not ceded to ADC (7.6) % Catastrophes losses (4.5) % (1.2) % Reinstatement and accelerated ceded earned premium (2) related to CAT reinsurance on loss ratio (1.3) % % Reinstatement and accelerated ceded earned premium (2) related to CAT reinsurance on expense ratio (0.6) % % Adjusted Underlying Combined Ratio (2) % 84.4 % (1) Restated Q financial results as provided on June 30, 2017 (2) Please see key definitions in our Appendix. 9

10 Consolidated Financial Results Summary (cont d) ($, millions, except per share amounts) (unaudited) Q Q (2) % Change Other Income (Loss): Interest Expense $ (22.9) $ (22.1) 3.6 % (Loss) Gain on Life Settlement Contracts, Net (0.9) 5.5 (116.4) % Foreign Currency Loss (62.8) (10.9) % (Loss) Income Before Provision for Income Taxes, Equity in Earnings of Unconsolidated Subsidiaries and Non- Controlling Interest (221.4) (290.2)% Benefit (Provision) for Income Taxes 62.6 (23.2) (369.8)% Equity in earnings of unconsolidated subsidiaries (related parties) 2.0 (100.0) Net Income Attributable to redeemable non-controlling interest and non-controlling interest of subsidiaries 0.7 (3.0) (123.3)% Dividends on preferred stock (16.6) (11.6) 43.1 % Net Income (Loss) Attributable to Common Stockholders $ (174.7) $ 80.7 (316.5) % Operating Earnings (Loss) Attributable to Common Stockholders (1) (7.5) (107.1) % Operating Diluted EPS (1) (0.04) 0.61 (106.6) % Operating ROE (1) (1.1) % 17.7 % (1) Please refer to our Appendix for reconciliations and important information about these Non-GAAP measures. (2) Restated Q financial results as provided on June 30,

11 AmTrust To Utilize the Full Benefit of the ADC Actions demonstrate the more conservative stance we have adopted across our overall book of business PYD charge of $326.9 million (pre-tax) recorded for 3Q 2017, all ceded to our adverse loss development cover agreement ( ADC ) with Premia resulting in an increase to deferred reinsurance gain on AmTrust s balance sheet YTD through 9/30/17, the Company has recorded $400M of adverse loss reserve development ceded to the ADC, including $73.1 million of charges recorded in 2Q 2017 With 3Q 2017 charge, we have utilized the full benefit of the ADC and addressed the actual and potential adverse development in accident years 2016 and prior 3Q 2017 PYD charge largely relates to development in the Company s Specialty Program segment PYD development in Programs include lines such as commercial auto and general liability that have performed below expectations and that have already been placed into runoff Also reflects development in the Small Commercial business segment and the Specialty Risk and Extended Warranty segment, with development in certain product lines in the international business Introduction of new Adjusted Book value and Adjusted Book Value per share metrics (1) Under statutory accounting, AmTrust immediately receives the full benefit of the ADC in the calculation of statutory capital Even after recognizing PYD, primarily in accident years 2013 through 2016, our core business lines remain profitable (1) Adjusted Book Value and Adjusted Book Value per Share are non-gaap measures. Please refer to the appendix for the Company s calculation of this metric and its comparison to the most directly comparable GAAP measure. 11

12 Financial Impacts and Introduction to New Adjusted Book Value (1) Metric The Company expects the following impact to its financial results from the prior year adverse loss reserve development of $326.9 million: Balance Sheet Item Reinsurance Recoverable Loss and loss adjustment expense reserves Deferred Gain on Retroactive Reinsurance (from ADC) Retained Earnings Impact June 30, 2017 Balance to increase by $326.9 million June 30, 2017 Balance to increase by $326.9 million June 30, 2017 Balance of approximately $14 million to increase by $326.9 million, offset by approximately $5 million in interest on unpaid premium and claims monitoring fees payable to Premia June 30, 2017 Balance to decrease by adverse loss development charge, on a taxeffected basis Timing 3Q2017 3Q2017 3Q2017 3Q2017 Income Statement Line Item GAAP Net Income Non-GAAP Operating Earnings (1) Amortization of Deferred Gain on Retroactive Insurance (from ADC) (1) Operating earnings, Adjusted Book Value and Adjusted Book Value per Share are non-gaap measures. Please refer to the appendix for the Company s calculation of these metrics and their comparison to the most directly comparable GAAP measures. Impact Under U.S. GAAP, $326.9 million of adverse loss development expense ceded to the ADC will be recognized immediately as a loss and loss adjustment expense, impacting GAAP net income Given the economic benefit of the ADC, the third quarter adverse loss development expense ceded to the ADC will be excluded from Operating Earnings Amortization of Deferred Gain on Retroactive Insurance (from ADC) to be excluded from Non-GAAP Operating Earnings The deferred gain under the reinsurance agreement will be amortized over the estimated claims settlement period Timing 3Q2017 3Q2017 Future periods as AmTrust s claims settle With the reporting of 3Q 2017 results, AmTrust plans to provide Adjusted Book Value and Adjusted Book Value per share (1) to reflect the economic value of the ADC Under statutory accounting, AmTrust immediately receives the full benefit of the ADC in the calculation of statutory capital 12

13 Balance Sheet Highlights ($ in millions, except per share amounts) Q Q (1) Debt $ 1,287.7 $ 1,234.9 Common equity $ 3,513.2 $ 3,269.1 Total capitalization $ 4,800.9 $ 4,504.0 Total capitalization including deferred retroactive reinsurance gain $ 5,020.0 $ 4,504.0 Debt-to-capital ratio (2) 25.7 % 27.7 % Debt-to-capital including deferred retroactive reinsurance gain (2) 25.9 % 27.7 % Cash, cash equivalents and investments $ 9,632.7 $ 9,235.7 (1) Restated Q financial results as provided on June 30, (2) Debt to capital ratios calculated from debt amount net of debt issuance costs of approximately $15.3 million. 13

14 Results by Accident Year Strong and conservative reserve base provides confidence that we have mitigated the potential for future development on these accident years Accident Year Carried Loss Ratios by Product Line/Segment (does not reflect the benefit of ceding losses to the ADC) (1) Workers' Compensation (Small Commercial Segment) YTD 2017 (b)(c)(d) % 65.1% 65.1% 62.3% 62.9% 65.3% 64.2% Specialty Program (e) 93.8% 91.7% 77.2% 72.8% 72.9% 75.0% 78.9% Core Commercial Lines (Small Commercial Segment) 63.2% 60.2% 67.7% 66.3% 65.4% 64.5% 65.2% Specialty Risk & International 67.0% 77.0% 73.5% 73.1% 63.6% 70.9% 70.5% Total 70.6% 73.0% 70.5% 68.3% 65.1% 68.3% 68.8% Total Excl. Specialty Program 66.4% 69.0% 68.8% 67.0% 63.3% 67.1% 66.5% Accident Year Combined Ratios by Product Line/Segment (does not reflect the benefit of ceding losses to the ADC) (1) : Workers' Compensation (Small Commercial Segment) YTD 2017 (b)(c)(d) % 90.6% 91.3% 88.1% 89.8% 92.7% 90.4% Specialty Program (e) 122.0% 118.3% 104.4% 100.4% 101.7% 104.0% 106.6% Core Commercial Lines (Small Commercial Segment) 89.8% 85.7% 93.9% 92.1% 92.3% 91.9% 91.4% Specialty Risk & International 87.8% 95.6% 95.1% 94.4% 87.7% 96.5% 92.1% Total 95.9% 97.2% 95.3% 93.1% 91.5% 95.5% 94.0% (1) Please see Appendix for reconciliation of the YTD 2017 accident year carried loss ratios and combined ratios, which are shown excluding catastrophe losses, to their most comparable GAAP presentation. a) Workers Compensation loss ratios in accident years 2015 and 2016 reflects a shift among major writing states as well as rate activity in the heavily written states. b) Loss ratios in accident years 2016 and 2017 reflect higher carried loss ratios due to recent emergence as well as some rate pressure in major states. c) Accident year 2017 presented excluding catastrophe losses. d) Accident year 2017 total includes 0.36% of accelerated ceded premium related to catastrophe events that adversely affected the loss ratio. e) Contains several programs in lines such as commercial auto and general liability that have performed below expectations and that have already been placed into runoff. 14

15 November 16, Investor Appendix Conference CONSISTENT VISION DIFFERENTIATED MODEL SUSTAINABLE GROWTH

16 Small Commercial: 3Q 2017 Results ($, millions, except per share amounts) (unaudited) Q Q (1) Change Gross Written Premium $ 1,012.7 $ % Net Written Premium $ $ % Net Earned Premium $ $ % Loss and LAE Expense $ $ % Acquisition Cost and Other Underwriting Expense $ $ % Industry Underwriting income (loss) before ceding to ADC cover $ (171.9) $ 37.9 (553.6)% Relationships Loss Ratio % 66.6 % Expense Ratio 29.3 % 26.1 % Combined Ratio % 92.7 % (1) Restated Q financial results as provided on June 30,

17 Specialty Risk & Extended Warranty: 3Q 2017 Results ($, millions, except per share amounts) (unaudited) Q Q (1) Change Gross Written Premium $ $ % Net Written Premium $ $ % Net Earned Premium $ $ % Loss and LAE Expense $ $ % Acquisition Cost and Other Underwriting Expense $ $ % Industry Underwriting income (loss) before ceding to ADC cover $ (101.9) $ Relationships 47.1 (316.3)% Loss Ratio 94.9 % 68.8 % Expense Ratio 26.2 % 20.2 % Combined Ratio % 89.0 % (1) Restated Q financial results as provided on June 30,

18 Specialty Program: 3Q 2017 Results ($, millions, except per share amounts) (unaudited) Q Q (1) Change Gross Written Premium $ $ (49.3)% Net Written Premium $ $ (50.9)% Net Earned Premium $ $ (28.1)% Loss and LAE Expense $ $ % Acquisition Cost and Other Underwriting Expense $ 56.0 $ 83.2 (32.7)% Industry Underwriting income (loss) before ceding to ADC cover $ (138.6) $ Relationships (3.9) 3,451.3% Loss Ratio % 68.5 % Expense Ratio 31.0 % 33.0 % Combined Ratio % % (1) Restated Q financial results as provided on June 30,

19 Service & Fee Income: 3Q 2017 Results ($ in Millions) (unaudited) (1) Business Q Q (1) % Growth AMT Warranty $ 35.6 $ % AmTrust Specialty Equipment (2.9) 7.6 (137.6)% AmTrust 1 Solutions NM Car Care % NCCI Assigned Risk % Industry Distribution (68.6)% Relationships NGHC Services % First Nonprofit (24.1)% Fee income re-class 37.9 NM Other % Total $180.5 $ % 1 Formerly AMCS or AmTrust Consumer Services 2 Distribution includes: Insco-Dico, BTIS and OwnerGUARD (1) Restated Q financial results as provided on June 30,

20 Q Investment Management (unaudited) Asset Allocation Asset Allocation MBS 13.5% Cash & Short Term 17.4% Munis 9.5% Equities & Other 2.2% US Treasury & Gvmt 4.0% Foreign Gvmt 2.0% CLO / CDO 6.6% U.S. Treasury AAA AA A BBB 4.3% 6.9% 95.4% Investment grade 24.9% 29.1% 30.2% Corporate Bonds 44.9% BB B Other 0.9% 0.2% 3.5% As of September 30, 2017, the weighted average duration of our fixed maturity securities was approximately 4.44 years and had an average yield of 3.2%. 20

21 Non-GAAP Reconciliations and Key Definitions 1) References to operating earnings/(loss) attributable to AmTrust common stockholders ("Operating Earnings/(Loss)"), operating earnings/(loss) per diluted share ("EPS"), and operating return on common equity are non-gaap financial measures. Operating Earnings/(Loss) is defined by the Company as net income (loss) attributable to AmTrust common stockholders less net realized gain on investments, non-cash amortization of intangible assets, non-cash interest on convertible senior notes, foreign currency loss, gain resulting from decrease in ownership of equity investment in unconsolidated subsidiaries (related party), gain on sale of policy management system, gain on acquisition, one time retroactive reinsurance premium payment and associated claims monitoring fee at net present value in 2017, unfavorable prior year reserve development under the ADC and related deferred gain on retroactive reinsurance in 2017 and the income tax impact on certain of these aforementioned adjustments (2). Operating Earnings/(Loss) should not be considered an alternative to net income (loss). Operating earnings/(loss) per diluted share is defined by the Company as Operating Earnings/(Loss) divided by the weighted average diluted shares outstanding for the period and should not be considered an alternative to earnings/(loss) per diluted share. Operating return on common equity is defined by the Company as Operating Earnings/(Loss) divided by the average common equity for the period and should not be considered an alternative to return on common equity. The Company believes Operating Earnings/(Loss), operating earnings/(loss) per diluted share, and operating return on common equity are more relevant measures of the Company's profitability because Operating Earnings/(Loss), operating earnings/(loss) per diluted share, and operating return on common equity contain the components of net income (loss) upon which the Company's management has the most influence and excludes factors outside management's direct control and non-recurring items. The Company's measure of Operating Earnings/(Loss), operating earnings/(loss) per diluted share, and operating return on common equity may not be comparable to similarly titled measures used by other companies. Please refer to the following reconciliation: Reconciliation of return on common equity to operating return on common equity: Three Months Ended September 30, As restated Return on common equity (26.1)% 13.5 % Less: Net realized gain on investments 3.7 % 1.4 % Non-cash amortization of intangible assets (4.1)% (3.0)% Non-cash interest on convertible senior notes (0.3)% (0.3)% Foreign currency loss (9.4)% (1.8)% Gain resulting from decrease in ownership percentage of equity investment in unconsolidated subsidiary (related party) % % Gain on acquisition % % Gain on sale of policy management system 27.9 % % One time retroactive reinsurance premium payment and associated claims monitoring fee at net present value (0.6)% % Deferred gain on retroactive reinsurance (48.2)% % Tax effect of adjustments reflected above (1) 6.0 % (0.5)% Operating return on common equity (1.1)% 17.7 % 21

22 Non-GAAP Reconciliations and Key Definitions ($, millions, except per share amounts) (unaudited) Q Q (2) Net income (loss) to AFSI common stockholders $ (174.7) $ 80.7 Less Net realized gain on investments Non-cash amortization of intangible assets (27.5) (18.2) Non-cash interest on convertible senior notes (1.7) (1.6) Foreign currency loss (62.8) (10.9) Gain on sale of policy management system One time retroactive reinsurance premium payment and associated claims monitoring fee at net present value (4.0) Deferred gain on retroactive reinsurance (322.9) Tax effect of adjustments reflected above (1) 40.5 (2.9) Net operating earnings (loss) attributable to AmTrust common share (1) $ (7.5) $ Operating diluted earnings (loss) per share (1) $ (0.04) $ 0.61 Average common shares outstanding diluted (1) The Company calculated the income tax effect of certain adjustments using the U.S. federal statutory income tax rate of 35%. Specifically, realized gain on investments, one time retroactive reinsurance premium payment and associated claims monitoring fee at net present value, and unfavorable prior year reserve development and related deferred gain on retroactive reinsurance are predominantly U.S. sourced and, therefore, are subject to tax at 35%. In addition, gain on acquisition is both U.S. and foreign sourced gain that is ultimately subject to tax at 35%. The Company does not report non-cash amortization of intangible assets, non-cash interest on convertible senior notes, or foreign currency loss net of tax. For additional information, please refer to the Company s responses to comment letters received from the SEC, which were filed on December 14, 2016 and January 20, 2017 and are available publicly (Form CORRESP). (2) Restated Q financial results as provided on June 30, 2017 (3) Excludes non-controlling interest and preferred stock. 22

23 Non-GAAP Reconciliations and Key Definitions 2) References to Tangible Book Value and Tangible Book Value per share are non-gaap financial measures. Tangible Book Value is calculated as stockholders' equity less goodwill and other intangible assets. Tangible Book Value per Share is Tangible Book Value (defined above) divided by common shares outstanding as of August 1, 2017 of approximately million shares. We believe that these measures are useful because they enable investors to evaluate the ongoing performance of the Company without regard to transactional activities and purchase accounting. The Company's measure of tangible book value and tangible book value per share may not be comparable to similarly titled measures used by other companies. As a result of the transaction, the Company currently expects a pro-forma increase in book value per share and tangible book value per share of approximately ~$3.50 and ~$6.00 respectively. Below is a reconciliation of the pro-forma increase in Tangible Book Value as a result of the transaction, to the pro-forma increase in GAAP Book Value, and on a respective per share basis assuming approximately million common shares outstanding as of August 1, 2017 (1). ($ in millions, except per share amounts) Pro-Forma Impact Total Enterprise Value $1,150 Equity Value of AmTrust's 49% ownership interest (201) Total Gross Cash Proceeds to AmTrust $949 Adjustments for Debt-Like and Other Items (2) (63) Total Cash Proceeds to AmTrust, Less Adjustments $886 Total Cash Proceeds, plus AmTrust 49% Equity Value 1,087 Increase in AmTrust GAAP Net Book Value (Total Cash Proceeds plus AmTrust 49% Equity Value, Less Book Basis of $310m, Less $100m in assumed tax expense (3) ) $677 Goodwill & Intangible Assets Deconsolidated from AmTrust (4) $482 Increase in AmTrust Net Tangible Book Value $1,159 Increase in AmTrust GAAP Net Book Value per share $3.46 Goodwill & Intangible Assets Deconsolidated from AmTrust, per share $2.47 Increase in AmTrust Net Tangible Book Value per share $5.92 Note: Totals may not foot due to rounding differences (1) Transaction close estimated in First Half of (2) Current estimates of adjustments for debt-like and other items include incremental net working capital adjustments and approximately $38M in earn-out payment obligations; estimates are subject to variability resulting in a pro-forma book value per share increase range of $ $3.77 and a tangible book value per share increase range of $ $6.24. (3) AmTrust assumes an estimated tax liability of $100 million associated with this transaction, subject to variability. (4) Estimate of goodwill and intangibles based on GAAP carve-out financials, as of June, 30, 2017, for the portion of the U.S. Fee Businesses being sold, subject to change based on a disposition valuation analysis. 23

24 Non-GAAP Reconciliations and Key Definitions 3) References to Adjusted Book Value per Common Share is defined by the Company as stockholders' equity reduced by preferred stock and non-controlling interest plus the deferred reinsurance gain on an after tax basis from ADC. Management believes that this non-gaap measure are useful in providing investors with meaningful measures of the Company's underwriting capital. Deferred reinsurance gain from ADC reflects the deferred reinsurance gain resulting from the prior year adverse loss reserve development expenses ceded to the ADC entered into with Premia Holdings Ltd. in June 2017, less related recoveries. The related recoveries under the reinsurance agreement will be earned into income as amortization of deferred gain over the estimated claims settlement. The Company's measure of Adjusted Book Value per Common Share may not be comparable to similarly titled measures used by other companies. ($ in thousands, except per share amounts) (unaudited) 9/30/ /31/2016 Stockholders' Equity $ 3,694,461 $ 3,465,613 Less: Preferred stock 913, ,750 Less: Non-controlling interest 181, ,510 GAAP Book Value 2,599,410 2,355,353 Add: Deferred reinsurance gain net of tax (*) 219,085 Adjusted Book Value $ 2,818,495 $ 2,355,353 Common shares outstanding 195, ,508 Book Value Per Common Share $ $ Impact of deferred reinsurance gain from ADC, per share $ 1.12 $ Adjusted Book Value Per Common Share $ $ * The Company calculated the income tax effect of certain adjustments using the U.S. federal statutory income tax rate of 35%. Specifically, realized gain on investments, one time retroactive reinsurance premium payment and associated claims monitoring fee at net present value, and unfavorable prior year reserve development and related deferred gain on retroactive reinsurance are predominantly U.S. sourced and, therefore, are subject to tax at 35%. In addition, gain on acquisition is both U.S. and foreign sourced gain that is ultimately subject to tax at 35%. The Company does not report non-cash amortization of intangible assets, noncash interest on convertible senior notes, or foreign currency loss net of tax. For additional information, please refer to the Company s responses to comment letters 24 received from the SEC, which were filed on December 14, 2016 and January 20, 2017 and are available publicly (Form CORRESP).

25 Non-GAAP Reconciliations and Key Definitions 4) For the year to date 2017 period, accident year carried loss ratios and combined ratios exclude the impact of catastrophe losses and are presented on a non-gaap basis. Below is a reconciliation of the year to date 2017 accident year loss ratio and combined ratio, presented excluding catastrophe losses, to their GAAP presentations:. Accident Year 2017 Carried Loss Ratio and Combined Ratio: YTD 2017 Adjusted Accident Year Loss Ratio (2) Impact of Excluding Catastrophe Losses Reinstatement and accelerated ceded earned premium related to catastrophe reinsurance YTD 2017 GAAP Accident Year Loss Ratio Total 68.3% 2.7% 0.4% 71.5% Reinstatement and YTD 2017 YTD 2017 Impact of accelerated ceded GAAP Accident Adjusted Excluding earned premium Year Combined Accident Year Catastrophe related to Ratio Combined Losses catastrophe Ratio (2) reinsurance Total 95.5% 2.7% 0.5% 98.8% Note: Totals may not foot due to rounding.

26 Non-GAAP Reconciliations and Key Definitions (1) Adjusted Combined Ratio represents the combined ratio excluding unfavorable prior year reserve development ceded under the ADC, for which the Company has ceded risk under retroactive reinsurance and not reflecting the economic benefits of the coverage. (2) Adjusted Underlying Combined Ratio represents the adjusted combined ratio excluding the impact of unfavorable prior year reserve development not ceded under the ADC, catastrophe losses and reinstatement and accelerated ceded earned premium (5) on catastrophe reinsurance that may be obscured by including unfavorable prior year reserve development, and the impact of catastrophe losses that may cause the Company s loss trends to vary between periods as a result of their incidence of occurrence and magnitude, thereby significantly impacting the combined ratio. (3) Deferred Reinsurance Gain from ADC reflects the deferred reinsurance gain resulting from prior year adverse loss reserve development expenses ceded to the ADC entered into with Premia Holdings Ltd. in June 2017, less related recoveries. The related recoveries under the reinsurance agreement will be earned into income as amortization of deferred gain over the estimated claims settlement period. (4) Adjusted Underlying Loss Ratio represents the loss ratio excluding unfavorable prior year reserve development ceded under the ADC, unfavorable prior year reserve development not ceded under the ADC, catastrophe losses and reinstatement and accelerated ceded earned premium (5) on catastrophe reinsurance that may be obscured by including unfavorable prior year reserve development, and the impact of catastrophe losses that may cause the Company s loss trends to vary between periods as a result of their incidence of occurrence and magnitude, thereby significantly impacting the loss ratio. (5) Reinstatement and accelerated ceded earned premium is defined by the Company as the acceleration of premiums related to the purchase of XoL reinsurance that is typically expensed on straight-line basis but were accelerated in the quarter due to the Company s current loss estimates projecting that such coverage will be fully exhausted from the quarter s catastrophes. 26