A.M. Best Ratings Impact from the New Rating Methodology and Stochastic-based BCAR

A.M. Best Ratings Impact from the New Rating Methodology and Stochastic-based BCAR September 2017 Prepared by Aon Benfield

Executive Summary A.M. Best is expected to finalize new rating criteria by mid-october This includes stochastic-based BCAR, Best s Credit Rating Methodology ( BCRM ) and related specialty criteria papers Once the new criteria is adopted, all ratings will be based upon the new criteria immediately In conjunction with the finalized criteria, A.M. Best is required to publically announce any ratings that may be impacted as a result of the change in criteria These ratings will be placed under review with positive, negative or developing implications; the under review status will then be resolved over the ensuing six months Aon Benfield proactively advising clients We continue to be in close contact with clients likely to have rating pressure due to the new criteria A limited number of companies may need to consider additional reinsurance purchase to bolster capital adequacy to support their current rating prior to criteria being finalized Unlikely to be a market moving event on its own Some ratings may be impacted by other components of Best s Credit Rating Methodology (BCRM): operating performance, business profile, ERM, etc. Feedback to A.M. Best contributed to numerous positive changes for clients Such as eliminating of TVaR, change from aggregate to occurrence, reducing peak return period from 1,000-yr to 250-yr, etc. Please contact your Aon Benfield broker or Rating Agency Advisory Team members (slide 16) for any questions or assistance 1

Evolution of Stochastic-Based BCAR Criteria Aon Benfield meets with A.M. Best to discuss concerns with using Aggregate TVaR to measure cat risk A.M. Best announces stochastic-based BCAR will use an updated formula (Available Capital Net Required Capital / Available Capital) A.M. Best releases briefing discussing concern with high confidence intervals (99.8% & 99.9%); Aon Benfield s Cat Risk Tolerance Study highlights that 250-yr (99.6%) is the peak return period that most companies manage to A.M. Best releases revised stochastic-based BCAR criteria removing the higher confidence intervals and adding in the 99.6%; cat risk is added within the covariance formula on a pre-tax basis A.M. Best issues 13 draft criteria papers, including new company formations and specialty insurance procedures A.M. Best releases revised BCRM and issues remaining draft criteria papers, including terrorism and specialty insurance companies April 2015 Oct 2015 May 2016 Nov 2016 April 2017 June / July 2017 March 2015 Review & Preview conference discusses developing stochastic-based BCAR methodology; Aggregate TVaR likely going to be used to measure cat risk May 2015 A.M. Best announces use of an all perils occurrence VaR net PML to measure cat risk in new stochasticbased BCAR model webinar March 2016 A.M. Best releases draft criteria outlining the new stochasticbased BCAR with 5 confidence intervals (95% - 99.9%) June 2016 End of public comment period for draft stochastic-based BCAR criteria; Aon Benfield provides feedback based upon client input A.M. Best also issues first draft of Life/Health and Universal BCAR models March 2017 End of public comment period for revised draft stochastic-based BCAR criteria; Aon Benfield provides feedback based upon client input A.M. Best implements cat stress test on a post-tax basis to keep consistent with other surplus adjustments Aon Benfield provides feedback on specialty criteria papers Oct 2017 A.M. Best to release updated stochastic-based BCAR & BCRM criteria A.M. Best finalizes criteria; all rated companies subject to new criteria as of finalization date 2

Revised BCRM Overview Overview Revised Best s Credit Rating Methodology (BCRM) draft criteria was released July 25, 2017 and gives additional transparency to the rating process Balance Sheet Strength sets a base Issuer Credit Rating (ICR) and is further adjusted based on the components above The final ICR is the foundation for the Financial Strength Rating (FSR) A.M. Best anticipates few changes to current ratings ICR (CRT-1)* FSR aaa / aa+ A++ aa / aa- A+ a+ / a A a- A- bbb+ / bbb B++ bbb- B+ * See Appendix for Country Risk Tier (CRT) assessments Source: Best s Credit Rating Methodology (BCRM): Global Life and Non-Life Insurance Edition July 25, 2017 3

Balance Sheet Strength How to interpret stochastic-based BCAR results? The highest FSR a company can achieve from BCAR alone is an A In order to achieve a rating above an A a company must demonstrate superior attributes concerning the other risk components (e.g. operating performance, business profile, ERM, etc.) Description Proposed BCAR ICR (CRT-1) * FSR Strongest >25 at 99.6 a+ / a A Very Strong >10 at 99.6 a / a- A / A- Strong >0 at 99.5 a- / bbb+ A- / B++ Adequate >0 at 99 bbb+ / bbb / bbb- B++ / B+ Notching from other components to achieve FSR rating > A Final ICR Final FSR aaa / aa+ A++ aa / aa- A+ a+ / a A Weak >0 at 95 bb+ / bb / bb- B / B- Very Weak <0 at 95 b+ and below C++ and below Additional balance sheet strength considerations Stress tests Quality of reinsurance and appropriateness of reinsurance program Financial and operating leverage Liquidity Quality of capital Internal capital models * See Appendix for Country Risk Tier (CRT) assessments 4

Stochastic-Based BCAR Updates Current Model Stochastic-Based Model Capital Adequacy Ratio Adjusted Surplus Adjusted Surplus - Net Required Capital Net Required Capital Adjusted Surplus Target score varies by rating level Redundant capital if score > 0% Confidence Intervals --- 95 99 99.5 99.6 99.8 250yr EQ or 100yr Wind 20yr 100yr 200yr 250yr 500yr Catastrophe Charge By Peril All Perils Reduction to Adjusted Surplus Addition to Net Required Capital, included in covariance adjustment After-tax net PML, VaR occurrence Pre-tax net PML for baseline and after-tax for stressed, VaR occurrence Note: The 99.8 C.I. will be used within the ERM assessment 5

Proposed Stochastic-Based BCAR (Baseline) ABC Company A.M. Best - Baseline Best Capital Adequacy Ratio (BCAR) Stochastic BCAR Illustration VaR 95 VaR 99 VaR 99.5 VaR 99.6 VaR 99.8 B1 Fixed Income Securities 25,000 29,850 31,400 32,200 33,900 B2 Equity Securities 31,250 47,500 53,750 55,000 60,000 B3 Interest Rate 7,923 11,185 12,584 13,050 13,516 B4 Credit 6,586 6,852 7,134 7,267 7,417 B5 Loss and LAE Reserves 103,740 156,213 176,636 182,982 202,604 B6 Net Premiums Written 107,386 162,547 184,356 190,856 211,451 B7 Business Risk 500 500 500 500 500 B8 Catastrophe Risk 25,000 100,000 200,000 350,000 500,000 Unadjusted Required Capital 307,385 514,647 666,360 831,855 1,029,388 Covariance Adjustment 147,863 258,823 333,435 386,387 443,891 Net Required Capital 159,522 255,824 332,925 445,468 585,497 Reported Surplus 500,000 500,000 500,000 500,000 500,000 UPR Equity 8,781 8,781 8,781 8,781 8,781 Loss Reserve Equity 33,522 33,522 33,522 33,522 33,522 Fixed Income Equity (7,694) (7,694) (7,694) (7,694) (7,694) Schedule F Provision 3,387 3,387 3,387 3,387 3,387 Adjusted Policyholder Surplus 537,996 537,996 537,996 537,996 537,996 2016 Sample Stochasticbased BCAR output Highest target confidence for balance sheet assessment purposes is VaR 99.6 17% indicates Very Strong capital adequacy (see slide 6) VaR 99.8 results to be provided and used to facilitate ERM-related discussions around tailrisk scenarios Capital Adequacy Ratio 70% 52% 38% 17% -9% (APHS - NRC) / APHS 6

Proposed Stochastic-Based BCAR (Stress) ABC Company A.M. Best - Stress Best Capital Adequacy Ratio (BCAR) Stochastic BCAR Illustration VaR 95 VaR 99 VaR 99.5 VaR 99.6 VaR 99.8 B1 Fixed Income Securities 25,000 29,850 31,400 32,200 33,900 B2 Equity Securities 31,250 47,500 53,750 55,000 60,000 B3 Interest Rate 7,923 11,185 12,584 13,050 13,516 B4 Credit 8,786 9,851 10,984 11,517 12,117 B5 Loss and LAE Reserves 105,376 158,652 179,393 185,831 205,761 B6 Net Premiums Written 107,386 162,547 184,356 190,856 211,451 B7 Business Risk 500 500 500 500 500 B8 Catastrophe Risk 25,000 100,000 200,000 350,000 500,000 Unadjusted Required Capital 311,221 520,085 672,967 838,954 1,037,245 Covariance Adjustment 149,818 261,756 337,455 391,355 449,763 Net Required Capital 161,403 258,329 335,512 447,599 587,482 Reported Surplus 500,000 500,000 500,000 500,000 500,000 UPR Equity 8,781 8,781 8,781 8,781 8,781 Loss Reserve Equity 34,005 34,005 34,005 34,005 34,005 Fixed Income Equity (7,694) (7,694) (7,694) (7,694) (7,694) Schedule F Provision 3,387 3,387 3,387 3,387 3,387 Catastrophe Stress Event #1 (65,000) (65,000) (65,000) (65,000) (65,000) Adjusted Policyholder Surplus 473,479 473,479 473,479 473,479 473,479 Capital Adequacy Ratio 66% 45% 29% 5% -24% (APHS - NRC) / APHS 2016 Sample Stochasticbased Stress BCAR output Stress score allowed to drop one level from Baseline (in this example to Strong ) still supports Very Strong capital adequacy For companies with financial flexibility, stress score may be allowed to drop two levels from Baseline Stress results that drop more than one or two levels from Baseline will impact view on capital adequacy 7

2016 Stochastic-Based BCAR Medians The table below summarizes the results of 125 stochastic-based BCARs estimated by Aon Benfield and consists of U.S. property and casualty companies Median of Aon Benfield Population Rating 95 99 99.5 99.6 99.8 A++ / A+ 68 56 47 42 35 A 76 64 59 58 48 A- 68 55 45 41 32 B++/B+ 67 54 42 37 20 All 72 59 52 49 38 8

Example of Rating Each Component Description Proposed BCAR BCAR - ICR BCAR - FSR Strongest >25 at 99.6 a+ / a A Very Strong >10 at 99.6 a / a- A / A- Strong >0 at 99.5 a- / bbb+ A- / B++ Adequate >0 at 99 bbb+ / bbb / bbb- B++ / B+ Weak >0 at 95 bb+ / bb / bb- B / B- Very Weak <0 at 95 b+ and below C++ and below +2 Notches from Other Components Final - ICR Final - FSR aaa / aa+ A++ aa / aa- A+ a+ / a A Rating Components of BCRM Balance Sheet Strength (i.e., a / a-) ERM (+1 / -4) 0 ICR aa- / a+ Operating Performance (+2 / -3) +1 Comprehensive Adjustment (+1 / -1) 0 FSR A+ / A Business Profile (+2 / - 2) +1 Rating Enhancement (+4 / -4) 0 Balance Sheet Strength = a or a- from achieving the Very Strong BCAR assessment Operating Performance = +1, historical operating performance is strong and consistent, trends are positive, and volatility is low Business Profile = +1, market leader, diversified, and strong management team ERM = 0 given capabilities are appropriate for risk profile Comprehensive Adjustment = 0, given company's strengths and weaknesses have been accurately captured throughout the rating process Source: Best s Credit Rating Methodology (BCRM): Global Life and Non-Life Insurance Edition July 25, 2017 9

Appendix Other BCRM components Operating Performance Business Profile Enterprise Risk Management (ERM) Other Adjustments Country Risk 10

Operating Performance (+2 to -3) Aon Benfield s feedback on draft criteria - Operating Performance: Align operating performance metrics to each assessment of operating performance (e.g. +2 ) and explain how A.M. Best measures and assesses volatility of operating results Assessment Notches Key Characteristics Very Strong +2 Strong +1 Adequate 0 Marginal -1 Weak -2 Very Weak -3 Historical operating performance is exceptionally strong and consistent Trends are positive and prospective operating performance is expected to be exceptionally strong Volatility of key metrics is low Historical operating performance is strong and consistent Trends are neutral/slightly positive and prospective operating performance is expected to be strong Volatility of key metrics is low to moderate Historical operating performance and trends are neutral Prospective operating performance is expected to be neutral Volatility of key metrics is moderate Historical operating performance have been inconsistent Trends are neutral/ slightly negative with some uncertainty in prospective operating performance Volatility of key metrics is moderate to high Historical operating performance is poor Trends are slightly negative and prospective operating performance is expected to be poor Volatility of key metrics is high Historical operating performance is very poor Trends are negative and prospective operating performance is expected to be very poor Volatility of key metrics is high Source: Best s Credit Rating Methodology (BCRM): Global Life and Non-Life Insurance Edition July 25, 2017 11

Business Profile (+2 to -2) Aon Benfield s feedback on draft criteria - Business Profile: Provide additional guidance on how results from the sub-assessments of business profile fit into the overall business profile assessment Assessment Notches Key Characteristics Very Favorable +2 Market leadership position is unquestionable, demonstrated, and defensible with high brand recognition Distribution is seen as a competitive advantage; Business lines are non-correlated and generally lower risk Management capabilities and data management are very strong Favorable +1 Neutral 0 Limited -1 Very Limited -2 Market leader with strong business trends Good control over distribution Diversified operations in key markets that have high to moderate barriers to entry with low competition Strong management team that is able to meet projections and utilize data effectively Not a market leader, but is viewed as competitive in chosen markets Some concentration and/or limited control of distribution Moderate product risk but limited severity and frequency of loss Use of technology is evolving and its business spread of risk is adequate Lack of diversification in geographic and/or product lines Control over distribution is limited and undifferentiated Faces high/increasing competition with low barriers to entry and elevated product risk Management is unable to utilize data effectively or consistently in business decisions Faces high competition and low barriers to entry High concentration in commodity or higher-risk products with very limited geographic diversity Weak data management; Country risk may factor into its elevated business profile risks Source: Best s Credit Rating Methodology (BCRM): Global Life and Non-Life Insurance Edition July 25, 2017 12

Enterprise Risk Management (+1 to -4) Assessment Notches Key Characteristics of ERM Very Strong +1 ERM framework is sophisticated, time/stress-tested and embedded across the enterprise. Risk management capabilities are excellent and are suitable for the risk profile of the company Adequate 0 ERM framework is well-developed and is adequate given size and complexity of its operations. Risk management capabilities are good and are adequate for the risk profile of the company Marginal -1 ERM framework is developing; certain key elements of the framework are not yet in place or have proven inadequate given the complexity of its operations. Some risk management capabilities are not aligned with the risk profile of the company Weak -2 ERM framework is emerging and management is still developing formal risk protocols. Risk management capabilities are insufficient given the risk profile of the company Very Weak -3 to -4 There is limited evidence of a formal ERM framework in place. Risk management capabilities contain severe deficiencies relative to risk profile of the company Aon Benfield s Risk Impact Worksheet Tool Source: AM Best Review Preview Conference, 2017 13

Other Adjustments The comprehensive adjustment allows flexibility in adjusting the ICR for special cases Assessment Notches Key Characteristics Positive +1 None 0 Negative -1 The company has uncommon strengths that exceed what has been captured throughout the rating process. The company's strengths and weaknesses have been accurately captured throughout the rating process. The company has uncommon weaknesses that exceed what has been captured throughout the rating process. The rating enhancement impacts non-lead rating units Enhancement Notches Key Characteristics Typical Lift +1 to +4 Neutral 0 Typical Drag -1 to -4 The non-lead rating unit either receives explicit support from the broader organization or is deemed materially important within the broader organization as demonstrated by its level of integration. The non-lead rating unit does not have explicit support from the broader organization and is not considered materially important within the organization. The non-lead rating unit is negatively impacted by its association with the weaker affiliates of the broader organization. Source: Best s Credit Rating Methodology (BCRM): Global Life and Non-Life Insurance Edition July 25, 2017 14

Country Risk Adjustment Country risk plays an important role in determining the balance sheet strength Table below show ICR limitations based on stability in the country of domicile, referred to as Country Risk Tiers (CRTs) Blended CRT used for global operations Balance Sheet Assessment CRT-1 CRT-2 CRT-3 CRT-4 CRT-5 Strongest a+ / a a+ / a a / a- a- / bbb+ bbb+ / bbb Very Strong a / a- a / a- a- / bbb+ bbb+ / bbb bbb / bbb- Strong a- / bbb+ a- / bbb+ bbb+ / bbb / bbb- bbb / bbb- / bb+ bbb- / bb+ / bb Adequate bbb+ / bbb / bbb- bbb+ / bbb / bbb- bbb- / bb+ / bb bb+ / bb / bb- bb / bb- / b+ Weak bb+ / bb / bb- bb+ / bb / bb- bb- / b+ / b b+ / b / b- b / b- / ccc+ Very Weak b+ and below b+ and below b- and below ccc+ and below ccc and below The CRT adjustment also impacts operating performance and business profile assessments Source: Best s Credit Rating Methodology (BCRM): Global Life and Non-Life Insurance Edition July 25, 2017 15

Contact List Pat Matthews Head of Rating Agency Advisory +1.215.751.1591 patrick.matthews@aonbenfield.com Kathleen Armstrong Managing Director, Americas +1.513.562.4508 kathleen.armstrong@aonbenfield.com Sifang Zhang APAC Head of Rating Agency Advisory +852.2861.6493 sifang.zhang@aonbenfield.com Kelly Superczynski Head of EMEA Analytics +44 (0) 20 7086 2175 kelly.superczynski@aonbenfield.com Raymond Lui Canada and Caribbean Rating Agency Advisory +1.416.598.7320 raymond.lui@aonbenfield.com Aon Benfield, a division of Aon plc (NYSE: AON), is the world s leading reinsurance intermediary and full-service capital advisor. We empower our clients to better understand, manage and transfer risk through innovative solutions and personalized access to all forms of global reinsurance capital across treaty, facultative and capital markets. As a trusted advocate, we deliver local reach to the world s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial and rating agency advisory. Through our professionals expertise and experience, we advise clients in making optimal capital choices that will empower results and improve operational effectiveness for their business. With more than 80 offices in 50 countries, our worldwide client base has access to the broadest portfolio of integrated capital solutions and services. To learn how Aon Benfield helps empower results, please visit aonbenfield.com. Aon Benfield 2017. All rights reserved. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. This analysis is based upon information from sources we consider to be reliable, however Aon Benfield does not warrant the accuracy of the data herein. The content of this document is made available on an as is basis, without warranty of any kind. Aon Benfield disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Members of the Aon Benfield Analytics team will be pleased to consult on any specific situations and to provide further information regarding the matters discussed herein. 16