Potential Impact of Proposed 2011 Standard Reinsurance Agreement

Potential Impact of Proposed 2011 Standard Reinsurance Agreement Analysis of Second Draft Released by Risk Management Agency on February 23, 2010 Aon Benfield 200 East Randolph Street Chicago, IL 60601 t: 1.312.381.5300 f: 1.312.381.0160 www.aonbenfield.com

Key Overview The Risk Management Agency (RMA) is a division of the USDA charged with administering the Federal Multi-Peril Crop Insurance (MPCI) program. MPCI provides the American farmer with a range of insurance policies that are designed and delivered through a partnership between the RMA and 16 private crop insurance companies. The relationship between the crop insurers and the RMA is governed by the Standard Reinsurance Agreement (SRA), a contract that defines the economics including reinsurance, gain sharing and expense reimbursement, for crop insurers participating in the program. The SRA is set to expire after the 2010 crop insurance year and is currently being renegotiated for a 2011 effective date. The RMA released an initial draft of their proposed SRA in December of 2009that presented significant structural and economic changes to the program, which in total, would have resulted in a meaningful reduction in the expected future profits for crop insurers. On February 23, 2010, the RMA issued a second draft of their proposed SRA, which maintained many of the structural changes from Draft 1 while altering elements of the gain/loss formulas, Administrative and Overhead (A&O) modification timing, as well as introducing a soft cap on commissions to be paid to crop insurance agents. These, in addition to other changes, have prompted Aon Benfield to review the potential impact on crop insurers economics. Comparisons between SRA Draft 1 and Draft 2 If Draft 2 had been in place from 1998 to 2008, crop insurers underwriting gains would have been reduced by nearly $560 million. This is an improvement over Draft 1 that would have reduced industry profits by almost $1.5 billion. Under Draft 2, the industry s average underwriting gain would have dropped to 18 percent from the current SRA average of 20 percent. As with Draft 1, the reductions in gain come from the heart of the corn belt, (IA, IL, IN, MN, NE), which has historically produced 60 percent of the industry s underwriting gains. Draft 2 would have resulted in a 24 percent reduction in underwriting gain in from 1998 to 2008. This erosion in gain is partially offset by an improvement in expected underwriting gain of 16.5 percent in the remaining 45 states (categorized as Groups 2 and 3 on the following page). The table below shows this improvement in gain is more volatile than the reduction in profit in. Historical Underwriting Gains by SRA Version and Groups Year Draft 1 Draft 2 Draft 1 Draft 2 Draft 1 Draft 2 1998 38% 25% 31% 8% 10% 10% 8% 16% 16% 1999 39% 25% 32% 4% 6% 7% -7% -1% -2% 2000 31% 19% 23% 7% 9% 10% 15% 16% 16% 2001 34% 22% 28% 4% 6% 7% 10% 13% 13% 2002 13% 6% 7% -12% -7% -7% -41% -28% -30% 2003 24% 16% 19% 9% 9% 10% 14% 15% 15% 2004 33% 21% 26% 16% 16% 17% 22% 24% 24% 2005 38% 24% 30% 31% 31% 33% 33% 34% 35% 2006 45% 27% 34% 9% 11% 11% 28% 29% 30% 2007 45% 27% 34% 26% 26% 28% 12% 17% 18% 2008 14% 9% 11% 15% 16% 17% 23% 27% 27% Mean 30% 19% 23% 13% 14% 15% 15% 18% 19% StDev 11% 7% 9% 12% 10% 11% 20% 17% 18% CV 36% 37% 39% 90% 72% 72% 137% 92% 97% Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 1

While crop insurers can expect nearly a quarter of their corn belt underwriting gain to erode under Draft 2, the potential gains in remaining states are less certain to materialize. Further, unlike Draft 1 that reduced crop insurers exposure to high severity events versus the current SRA in all Groups, Draft 2 increases the exposure to loss for in loss ratio scenarios above 100 percent and less than 220 percent. A&O expense reimbursements from the government to the crop insurers will also be affected by the proposed SRA with reductions that would have been equivalent to four to five points of underwriting gain in 2009. The potential net impact of Draft 2 is a 20 to 30 percent reduction in expected profit with an average industry profit of 18 to 20 percent decreasing to 12.5 to 16 percent under current insurer expense ratios. Reinsurance The SRA outlines the terms of stop loss reinsurance protection provided to crop insurers by the federal government via the Federal Crop Insurance Corporation (FCIC). Under the current SRA companies allocate policies in each state to one of seven FCIC reinsurance funds that provide stop loss protection. Additionally, if there are underwriting gains on policies allocated to these funds, crop insurers pay the FCIC a portion of those gains as a profit commission. The stop loss covers and profit commissions are currently applied the same way for every state. Under the proposed SRA Draft 2: FCIC offers two reinsurance fund choices, and Residual, instead of seven options applies stop losses and gain sharing on a state by state basis with different percentages based on three state groupings Significant increase in FCIC profit sharing Meaningful increase in FCIC stop loss protection for policies that were historically ceded to the in Groups 2 and 3, and above 220 percent loss ratio Policies that were historically ceded to the Developmental have increased net exposure for crop insurers from loss ratios of 100 to160 percent, if left in the new includes IL, IN, IA, MN, and NE includes AL, AR, AZ, CA, CO, FL, GA, ID, KS, KY, LA, MI, MO, MS, MT, NC, ND, NM, OH, OK, OR, SC, SD, TN, TX, VA, WA, and WI includes AK, CT, DE, HI, MA, MD, ME, NH, NJ, NV, NY, PA, RI, UT, VT, WV, and WY Residual stop losses and gain sharing on a company s national portfolio are assigned to this fund Insurers select which policies they will allocate to the Residual and all remaining policies will be distributed to the A&O reductions Soft Cap on acquisition costs equal to 80 percent of an AIP s A&O reimbursement Additionally, the FCIC currently assumes a 5 percent quota share of crop insurers net gain or loss after all adjustments have been made for stop loss and profit sharing. In the proposed agreement this quota share will increase to 7.5 percent of which 2.5 percent will be available to be distributed back to crop insurers based on the premium they write in states. Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 2

Changes in Net Gain and Loss by SRA Version and Groups SRA Underwriting Gain Sharing with FCIC Stop Loss from FCIC Loss Ratios in between 65% - 100% Loss Ratios in between 100% - 160% Buy-Up Cat Revenue Buy-Up Cat 32.90 26.25 32.90 Developmental Developmental 21.00 15.75 21.00 Assigned Risk 5.25 Assigned Risk Revenue 30.00 30.00 34.20 15.00 15.00 18.00 Loss Ratios in between 50% - 65% Loss Ratios in between 160% - 220% Buy-Up Cat Revenue 3.00 Buy-Up Cat Revenue 10.50 7.50 10.50 24.00 24.00 25.80 Developmental Developmental 7.50 4.50 7.50 12.00 12.00 13.50 Assigned Risk Assigned Risk 1.35 2.40 Loss Ratios in less than 50% Loss Ratios in between 220% - 500% Developmental Assigned Risk RMA Draft 1 Buy-Up Cat Revenue 5.50 4.00 5.50 3.00 2.00 3.00 1.00 Underwriting Gain Sharing with FCIC Developmental Assigned Risk Buy-Up Cat Revenue 47.60 47.60 47.60 30.80 30.80 30.80 5.60 Stop Loss from FCIC Loss Ratios in between 65% - 100% Loss Ratios in between 100% - 160% Group 4 Group 4 22.75 26.25 29.75 33.25 30.00 30.00 30.00 24.00 Gain -30.85% -20.21% -9.57% 1.06% Loss -12.28% 0.00% 0.00% -20.00% Loss Ratios in between 50% - 65% Loss Ratios in between 160% - 220% Group 4 Group 4 3.00 3.00 4.50 4.50 12.00 12.00 12.00 12.00 Gain -71.43% -71.43% -57.14% -57.14% Loss -53.49% -50.00% -50.00% -50.00% Loss Ratios in less than 50% Loss Ratios in between 220% - 500% Group 4 Group 4 2.50 2.50 2.50 2.50 14.00 14.00 14.00 14.00 Gain -54.55% -54.55% -54.55% -54.55% Loss -70.59% -70.59% -70.59% -70.59% Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 3

RMA Draft 2 Underwriting Gain Sharing with FCIC Stop Loss from FCIC Loss Ratios in between 65% - 100% Loss Ratios in between 100% - 160% 26.25 33.25 33.25 39.00 27.00 27.00 Gain -20.21% 1.06% 1.06% Loss 14.04% -10.00% -10.00% Loss Ratios in between 50% - 65% Loss Ratios in between 160% - 220% 6.00 6.00 6.00 Gain -42.86% -42.86% -42.86% 27.00 12.00 12.00 Loss 4.65% -50.00% -50.00% Loss Ratios in less than 50% Loss Ratios in between 220% - 500% 2.50 2.50 2.50 Gain -54.55% -54.55% -54.55% 14.00 14.00 14.00 Loss -41.18% -70.59% -70.59% Impact of Proposed Changes on Historical Underwriting Gains and Losses under the and Proposed SRA Versions by Proposed Groups Year Premium Loss - IA, IL, IN, MN, NE Loss Ratio 1998 522,800,209 227,318,962 43% 199,617,052 130,317,154 162,801,554 38% 25% 31% 1999 556,013,929 236,741,878 43% 218,040,364 140,791,465 175,826,178 39% 25% 32% 2000 630,011,409 339,033,536 54% 197,273,870 117,331,570 144,271,643 31% 19% 23% 2001 813,175,071 405,634,885 50% 278,210,765 180,441,835 225,979,901 34% 22% 28% 2002 835,096,015 713,253,603 85% 110,144,108 53,115,283 61,286,865 13% 6% 7% 2003 946,414,114 700,967,108 74% 226,876,481 154,426,389 178,184,295 24% 16% 19% 2004 1,275,027,071 660,571,608 52% 419,723,646 264,961,369 329,022,959 33% 21% 26% 2005 1,164,305,644 462,169,928 40% 436,746,590 280,018,647 349,316,325 38% 24% 30% 2006 1,418,618,864 291,262,447 21% 638,898,176 386,196,707 478,406,933 45% 27% 34% 2007 2,286,774,909 496,041,197 22% 1,021,429,121 621,211,852 769,852,221 45% 27% 34% 2008 3,510,094,622 3,046,174,007 87% 502,831,902 320,399,466 369,691,691 14% 9% 11% Total 13,958,331,857 7,579,169,159 54% 4,249,792,075 2,649,211,738 3,244,640,566 30% 19% 23% Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 4

Year Premium - AL, AR, AZ, CA, CO, FL, GA, ID, KS, KY, LA, MI, MO, MS, MT, NC, ND, NM, OH, OK, OR, SC, SD, TN, TX, VA, WA, WI Loss Loss Ratio 1998 1,035,784,806 1,023,821,636 99% 85,469,278 99,043,471 101,732,954 8% 10% 10% 1999 1,174,712,907 1,187,736,477 101% 51,564,923 72,213,234 80,960,350 4% 6% 7% 2000 1,154,153,774 1,096,827,460 95% 85,966,223 105,140,526 116,183,390 7% 9% 10% 2001 1,474,619,508 1,526,273,725 104% 54,432,794 90,812,818 95,866,817 4% 6% 7% 2002 1,357,333,644 2,008,061,193 148% (166,858,061) (94,981,344) (93,295,564) -12% -7% -7% 2003 1,561,215,239 1,452,166,639 93% 134,293,030 137,237,456 150,367,562 9% 9% 10% 2004 1,886,282,921 1,530,625,777 81% 297,698,105 305,423,729 329,112,153 16% 16% 17% 2005 1,795,070,787 1,123,128,638 63% 558,985,956 550,551,524 588,824,778 31% 31% 33% 2006 2,133,380,932 1,896,992,216 89% 182,329,496 227,009,040 239,655,806 9% 11% 11% 2007 2,704,360,005 1,652,986,380 61% 715,377,756 694,933,460 744,270,916 26% 26% 28% 2008 4,329,542,634 3,592,769,219 83% 655,748,724 692,760,405 727,895,829 15% 16% 17% Total 20,606,457,157 18,091,389,360 88% 2,655,008,224 2,880,144,319 3,081,574,991 13% 14% 15% Year Premium - ME, NH, VT, MA, RI, CT, NY, PA, NJ, MD, DE, WV, NV, UT, WY, HI, AK Loss Loss Ratio 1998 24,892,103 24,427,012 98% 2,030,750 3,973,999 3,930,656 8% 16% 16% 1999 30,037,372 43,039,587 143% (2,088,261) (346,144) (663,256) -7% -1% -2% 2000 31,971,537 26,585,027 83% 4,651,397 5,189,284 5,146,323 15% 16% 16% 2001 41,340,707 36,417,980 88% 4,293,592 5,395,515 5,315,531 10% 13% 13% 2002 48,034,815 113,999,733 237% (19,517,790) (13,251,703) (14,388,320) -41% -28% -30% 2003 70,827,552 61,713,473 87% 9,926,274 10,502,246 10,474,124 14% 15% 15% 2004 76,213,360 47,742,821 63% 16,485,702 17,983,728 18,444,040 22% 24% 24% 2005 68,639,143 32,366,510 47% 22,379,598 23,557,266 24,361,685 33% 34% 35% 2006 79,741,959 46,037,980 58% 22,597,969 23,236,586 23,834,548 28% 29% 30% 2007 100,617,487 84,722,062 84% 11,972,945 17,605,282 17,676,196 12% 17% 18% 2008 134,581,289 89,391,476 66% 31,195,125 36,157,881 36,990,342 23% 27% 27% Total 706,897,324 606,443,661 86% 103,927,301 130,003,940 131,121,869 15% 18% 19% Year Premium Loss Loss Ratio All s 1998 1,583,477,118 1,275,567,610 81% 287,117,080 233,334,624 268,465,163 18% 15% 17% 1999 1,760,764,208 1,467,517,942 83% 267,517,026 212,658,556 256,123,273 15% 12% 15% 2000 1,816,136,720 1,462,446,023 81% 287,891,490 227,661,379 265,601,356 16% 13% 15% 2001 2,329,135,286 1,968,326,590 85% 336,937,150 276,650,169 327,162,249 14% 12% 14% 2002 2,240,464,474 2,835,314,529 127% (76,231,743) (55,117,764) (46,397,019) -3% -2% -2% 2003 2,578,456,905 2,214,847,220 86% 371,095,785 302,166,091 339,025,982 14% 12% 13% 2004 3,237,523,352 2,238,940,206 69% 733,907,454 588,368,826 676,579,152 23% 18% 21% 2005 3,028,015,574 1,617,665,076 53% 1,018,112,143 854,127,436 962,502,788 34% 28% 32% 2006 3,631,741,755 2,234,292,643 62% 843,825,641 636,442,332 741,897,286 23% 18% 20% 2007 5,091,752,401 2,233,749,639 44% 1,748,779,822 1,333,750,594 1,531,799,333 34% 26% 30% 2008 7,974,218,545 6,728,334,702 84% 1,189,775,751 1,049,317,752 1,134,577,863 15% 13% 14% Total 35,271,686,338 26,277,002,180 74% 7,008,727,600 5,659,359,996 6,457,337,426 20% 16% 18% Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 5

Crop Insurers 2009 Portfolios Split by Groupings: Draft 2 RMA Groupings Country Mutual Insurance Company 100.0% 0.0% 0.0% Farmers Mutual Hail Insurance Company 76.7% 23.3% 0.0% CGB Diversified 57.2% 42.5% 0.4% Agro National 46.5% 52.3% 1.2% Great American Insurance Companies 44.4% 55.4% 0.2% NAU Country Insurance Company 44.2% 55.7% 0.1% ADM Crop Risk Services 43.7% 44.6% 11.7% John Deere Risk Protection 40.5% 58.9% 0.6% Heartland Crop Insurance 30.6% 69.3% 0.0% Rain and Hail Agriculture Insurance 29.7% 67.0% 3.3% Rural Community Insurance Company 28.9% 67.6% 3.4% Producers Ag 23.2% 76.0% 0.7% American Agricultural Insurance Company 23.0% 74.0% 3.0% ARMtech Insurance Services 22.2% 76.4% 1.3% Hudson Crop Insurance 13.2% 86.8% 0.0% Distribution of Net Underwriting Gain by Group The variance in gain sharing across state groups results in a change in the distribution of crop insurers net underwriting gains. As shown in the following table, under the current SRA, more than 60 percent of the crop insurance industry s gains are from. These states have historically been the least volatile and most consistent producers of net underwriting gain. As a result, the industry has produced stable underwriting returns. The impact of Draft 2 would alter the distribution of the industry s net underwriting gains by evenly distributing between and the significantly more volatile Groups 2 and 3. This heightened volatility is at least partially offset by the increased loss sharing in high loss ratio scenarios for Groups 2 and 3 by the FCIC. Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 6

SRA Year Net Gain % of Total Gain Net Gain % of Total Gain Net Gain % of Total Gain 1998 199,617,052 69.5% 85,469,278 29.8% 2,030,750 0.7% 1999 218,040,364 81.5% 51,564,923 19.3% (2,088,261) -0.8% 2000 197,273,870 68.5% 85,966,223 29.9% 4,651,397 1.6% 2001 278,210,765 82.6% 54,432,794 16.2% 4,293,592 1.3% 2002 110,144,108-144.5% (166,858,061) 218.9% (19,517,790) 25.6% 2003 226,876,481 61.1% 134,293,030 36.2% 9,926,274 2.7% 2004 419,723,646 57.2% 297,698,105 40.6% 16,485,702 2.2% 2005 436,746,590 42.9% 558,985,956 54.9% 22,379,598 2.2% 2006 638,898,176 75.7% 182,329,496 21.6% 22,597,969 2.7% 2007 1,021,429,121 58.4% 715,377,756 40.9% 11,972,945 0.7% 2008 502,831,902 42.3% 655,748,724 55.1% 31,195,125 2.6% Total 4,249,792,075 60.6% 2,655,008,224 37.9% 103,927,301 1.5% Draft 2 Year Net Gain % of Total Gain Net Gain % of Total Gain Net Gain % of Total Gain 1998 162,801,554 60.2% 101,732,954 37.6% 3,930,656 1.5% 1999 175,826,178 66.7% 80,960,350 30.7% (663,256) -0.3% 2000 144,271,643 52.1% 116,183,390 42.0% 5,146,323 1.9% 2001 225,979,901 66.7% 95,866,817 28.3% 5,315,531 1.6% 2002 61,286,865-119.2% (93,295,564) 181.5% (14,388,320) 28.0% 2003 178,184,295 52.1% 150,367,562 44.0% 10,474,124 3.1% 2004 329,022,959 49.1% 329,112,153 49.1% 18,444,040 2.8% 2005 349,316,325 36.8% 588,824,778 62.0% 24,361,685 2.6% 2006 478,406,933 63.7% 239,655,806 31.9% 23,834,548 3.2% 2007 769,852,221 50.9% 744,270,916 49.2% 17,676,196 1.2% 2008 369,691,691 32.9% 727,895,829 64.7% 36,990,342 3.3% Total 3,244,640,566 50.3% 3,081,574,991 47.8% 131,121,869 2.0% Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 7

Residual The following exhibits present the historical results for the industry from the Assigned Risk. Using the Assigned Risk as a proxy for the proposed Residual, we analyzed the prospective gains and losses for the industry under the proposed SRA. Assigned Risk as Residual Year Premium Loss GLR Pre SRA Gain/ (Loss) Post SRA Net Gain/ (Loss) NLR Post Proposed SRA Draft 1 Net Gain/ (Loss) NLR Post Proposed SRA Draft 2 Net Gain/ (Loss) 1998 292,518,578 450,034,515 153.8% (157,515,937) (486,286) 100.8% (7,875,797) 102.7% (3,937,898) 102.7% 1999 551,610,582 925,121,371 167.7% (373,510,789) (1,800,413) 101.6% (18,675,539) 103.4% (9,125,048) 103.3% 2000 720,412,713 1,120,094,955 155.5% (399,682,242) (816,186) 100.6% (19,984,112) 102.8% (9,992,056) 102.8% 2001 648,401,290 996,793,540 153.7% (348,392,250) (1,786,209) 101.4% (17,419,613) 102.7% (8,709,806) 102.7% 2002 669,114,132 1,222,886,372 182.8% (553,772,240) (3,903,818) 102.9% (27,688,612) 104.1% (13,082,787) 103.9% 2003 855,776,281 1,043,502,885 121.9% (187,726,604) (554,440) 100.3% (9,386,330) 101.1% (4,693,165) 101.1% 2004 948,089,046 1,049,991,387 110.7% (101,902,341) 1,161,275 99.4% (5,095,117) 100.5% (2,547,559) 100.5% 2005 917,528,906 712,325,041 77.6% 205,203,865 5,917,815 96.5% 30,780,580 96.6% 15,390,290 96.6% 2006 1,076,489,350 1,305,722,360 121.3% (229,233,010) 1,187,311 99.4% (11,461,651) 101.1% (5,730,825) 101.1% 2007 1,457,032,119 930,565,923 63.9% 526,466,196 13,235,867 95.0% 77,979,632 94.6% 38,989,816 94.6% 2008 1,859,223,389 1,944,541,361 104.6% (85,317,972) 3,802,314 98.9% (4,265,899) 100.2% (2,132,949) 100.2% All Years 9,996,196,386 11,701,579,710 117.1% (1,705,383,324) 15,957,230 99.2% (13,092,457) 100.1% (5,571,988) 100.1% 8,539,164,267 Total without 2007 NLR 2,721,363 99.8% (91,072,090) 101.1% (44,561,804) 101.0% The Residual contemplated in Draft 2 applies the gain and loss sharing formulas on a national basis as opposed to the state by state basis under the current SRA. Given that volatility is higher, especially for lower quality business in the Assigned Risk and presumably the Residual going forward, we investigated at the state level whether applying gain and loss sharing on a national basis would materially affect outcomes. Looking at the historical Assigned Risk gross and net losses, we compared the actual results versus applying the stop losses and gain sharing on a national basis. As shown on the following graph, the net effect tended to increase net loss positions, although in one instance, the outsized profit year of 2007, net profits would have been higher under the national application. Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 8

Comparison of Net Results of Assigned Risk in SRA Draft 2 Given the lower recoveries expected from a national Residual versus a state level Assigned Risk, companies will have to evaluate the benefits of allocating business into the Residual. Depending on the loss distribution of historical Assigned Risk business, it may be worthwhile for a company to keep that business in going forward to capture potential gains if the potential losses do not materially impact the company s net loss distribution. Considering that business will, under Draft 2, present greater exposure to net loss ratios under certain return periods, it may be that some formerly Assigned Risk business if placed into going forward, will not materially impact upper return period losses and add to marginal profit over time. Expense Reimbursement Under the terms of the current SRA, the government pays the insurers an expense reimbursement, similar to a ceding commission, on the MPCI premium they write. This reimbursement is meant to cover A&O expenses and is applied as a percentage based on policy parameters set forth in the SRA. The proposed SRA modifies the current A&O structure by applying the A&O percentages against an adjusted premium figure based upon a pre-set reference price for the major commodities (not against the MPCI written premium). MPCI policy premium is in part determined based upon the futures price of the insured commodities near the time of policy issuance. In recent years, these prices have increased along with prices on a number of non-agricultural commodities. The proposed rules would effectively adjust A&O reimbursement based upon a longer term average price for the major commodities. The net effect will be a reduction in expense reimbursement to crop insurers as outlined below. The proposed reference prices range between 25 and 55 percent below the prices for the major insured commodities over the past several years. Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 9

2011 References Prices Compared to Historical Base Prices Proposed Ref Price 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Corn 2.83 3.99 4.04 4.78 3.76 2.38 2.28 2.53 2.42 2.29 2.49 2.26 2.92 10 yr Avg Difference -29.1% -30.0% -40.8% -24.7% 18.9% 24.1% 11.9% 16.8% 23.7% 13.9% 25.2% -3.2% Soybean 7.07 9.23 8.80 13.36 8.09 6.18 5.53 6.72 5.26 4.50 4.67 5.32 6.84 Difference -23.4% -19.7% -47.1% -12.6% 14.4% 27.8% 5.2% 34.5% 57.2% 51.5% 32.9% 3.3% Wheat 4.31 5.42 8.77 5.93 4.35 3.50 3.40 3.36 3.53 2.76 2.97 3.18 4.18 Difference -20.5% -50.9% -27.3% -0.9% 23.1% 26.8% 28.3% 22.1% 56.2% 45.1% 35.5% 3.2% There was no cotton premium in in 2009. Groups 2 and 3 Proposed Ref Price 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Corn 2.97 3.99 4.04 4.78 3.76 2.38 2.28 2.53 2.42 2.29 2.49 2.26 2.92 10 yr Avg Difference -25.6% -26.5% -37.9% -21.0% 24.8% 30.3% 17.4% 22.5% 29.8% 19.5% 31.4% 1.6% Soybean 7.43 9.23 8.80 13.36 8.09 6.18 5.53 6.72 5.26 4.50 4.67 5.32 6.84 Difference -19.5% -15.6% -44.4% -8.2% 20.2% 34.3% 10.6% 41.3% 65.2% 59.3% 39.7% 8.6% Wheat 4.53 5.42 8.77 5.93 4.35 3.50 3.40 3.36 3.53 2.76 2.97 3.18 4.18 Difference -16.4% -48.3% -23.6% 4.1% 29.4% 33.2% 34.8% 28.3% 64.1% 52.5% 42.5% 8.5% Cotton 0.60 0.72 0.52 0.77 0.59 0.60 0.50 0.68 0.59 0.43 0.59 0.61 0.59 Difference -16.7% 15.4% -22.1% 1.7% 0.0% 19.3% -11.6% 2.4% 38.9% 1.7% -1.1% 2.1% If these reference prices were in place in 2009, crop insurers A&O reimbursements would have decreased by at least 20 percent. The proposed 2012 reference prices are lower than the proposed prices for 2011, and would be a further reduction of A&O reimbursements compared to the recent years. These four crops accounted for 76 percent of the 2009 MPCI Premium 2009 MPCI Premium % of Premium At Average A&O After Ref Price Avg A&O 18.00% Corn 3,396,176,680 38.0% 611,311,802 439,958,604 (171,353,198) Soybeans 1,982,018,826 22.2% 356,763,389 295,362,986 (61,400,403) Wheat 1,088,576,365 12.2% 195,943,746 100,849,226 (95,094,519) Cotton 332,060,009 3.7% 59,770,802 68,966,310 9,195,508 New A&O at Reference Price Total MPCI 8,940,798,518 76.0% 1,609,343,733 792,561,936 (318,652,613) -19.80% 14.44% -3.56% Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 10

Percentage Reduction in 2009 A&O if Draft 2 2011 References Prices had been in effect Allowable acquisition costs by as a percentage of Premium under Draft 2 2011 Reference Prices Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 11

Potential Impact on Private Reinsurance The crop insurance market is supported by a number of private reinsurers. These reinsurers write both stop loss and quota share treaties. In recent years, an increased number of reinsurers have started to write crop reinsurance, primarily attracted by the low volatility and diversification of this line of business. As a result, terms and conditions for crop reinsurance have become more competitive and insurers have benefited from lower pricing. ly, quota share reinsurance is generally priced at low single digit expected margins by reinsurers. Reinsurers may be unwilling to support their renewal treaties at the expiring terms given the erosion in expected economics under the proposed SRA. Reinsurers may either discontinue their support for crop insurance or demand lower ceding commissions and profit commissions for continued support. This will in turn put pressure on crop insurers that will face the squeeze of reduced A&O reimbursement and lower private reinsurance ceding commissions as well as a reduced share of lower expected profits. Stop loss reinsurance provides catastrophic protection net of the FCIC reinsurance. To the extent that the proposed SRA increases the FCIC s share of losses in high loss years, there may be a reduced demand among crop insurers for private stop loss reinsurance. This may be offset, however, by the increase in net losses to crop insurers in when loss ratios are between 100% and 220%. Since this business is predominantly allocated to the, these losses may materially impact crop insurers overall net loss distributions. Furthermore, as companies evaluate the pro s/con s of versus the new Residual they may elect to keep a greater portion of their formerly Assigned Risk business net, increasing the exposure to their private stop loss treaties. This may increase the demand for the private stop loss protection. But given that the FCIC will be retaining more loss on the extreme loss events under Draft 2, the net loss distribution ceded to stop loss providers is likely to have a more limited exposure to the extreme loss scenarios that are current drivers of high severity net losses. This may put overall downward pressure on pricing, which may be exacerbated if reinsurers that are currently predominantly quota share providers start to write stop loss reinsurance in the wake of the anticipation of deteriorated quota share economics. At some point, the markets will find equilibrium as reinsurers exit, unwilling to support premium levels below their minimum pricing. Crop insurers will need to evaluate benefits of potentially lower stop loss premiums relative to the reduction in their overall expected profits. The marginal impact of reduced ceded stop loss reinsurance premium may not keep pace with the reduction of insurers net gains and as a result, will add additional pressure to crop insurance profitability. Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 12

About Aon Benfield As the industry leader in treaty, facultative and capital markets, Aon Benfield is redefining the role of the reinsurance intermediary and capital advisor. Through our unmatched talent and industry-leading proprietary tools and products, we help our clients to redefine themselves and their success. Aon Benfield offers unbiased capital advice and customized access to more reinsurance and capital markets than anyone else. As a trusted advocate, we provide local reach to the world s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial, and rating agency advisory, and the right professionals to advise clients in making the optimal capital choice for their business. With an international network of more than 4,000 professionals in 50 countries, our worldwide client base is able to access the broadest portfolio of integrated capital solutions and services. Learn more at aonbenfield.com. Contact Information For more information, please contact a member of the Aon Benfield team including: Joseph Monaghan joseph.monaghan@aonbenfield.com +1 312.381.5336 Copyright 2010 Aon Benfield Inc. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The analysis and comments in this summary are based upon Aon Benfield s preliminary analysis of publicly available information. 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. Aon Benfield reserves all rights to the content of this document. 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. Potential Impact of Proposed 2011 Standard Reinsurance Agreement Page 13