CAS Spring Reinsurance Seminar

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• CAS Spring Reinsurance Seminar
• New Capital Same Strategies?
• David Cash Chief Actuary, Endurance Specialty

June 7, 2004
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The Classes of 1985, 1993 and 2001
Annual Real Net Written Premium Growth
1985-87
1993-94
2001-04
Class of 1985 ACE XL
Class of 1993 Cat Ltd. Global Re IPC
Re Mid-Ocean Re Partner Re Renaissance
Re Tempest Re
Class of 2001 Arch AXIS AWAC
Endurance Montpelier
Note Shaded areas denote hard market periods.
Real NWP is adjusted for inflation. Source A.M.
Best, Insurance Information Institute.
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The Three Hard Markets

• 1985 The Liability / Regulatory Hard Market
• The US insurance and reinsurance markets were
  hit by a combination of the following
• Dramatic change in the legal environment in the
  US
• The initial emergence of Asbestos and Pollution
• Dramatic reduction in interest rates
• Only limited access to capital markets
• 1993 The Hurricane Andrew Hard Market
• In 1992 Hurricane Andrew caused 20 billion of
  insured losses the largest insurance event ever
  experienced by a factor of three Typhoon
  Mireille 1991.
• 2001 The WTC Hard Market
• The world insurance and reinsurance markets were
  hit by a combination of the following factors
• WTC losses 50 billion
• Re-emergence of Asbestos 55 billion
• 1997 2001 Soft Market
• Equity Market Losses

gt 150 billion - combined
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The 1985 Hard Market

• Sources of Capital
• Capital was largely drawn from clients and from
  within the industry as follows
• ACE Approximately 500 million raised from a
  group of client companies, along with some
  capital provided by third parties
• XL Approximately 500 million raised from a
  group of client companies, along with some
  capital provided by third parties
• Financial Reins. Development of financial /
  finite reinsurance to provide capital relief
  without the need for imported capital
• Underwriting Strategies
• The new companies were formed to be mono-line
  underwriters operating in a narrow market
  Fortune 500 companies focused exclusively on
  casualty business.
• Impact on the Market
• The start up companies benefited greatly from
  the hard markets and showed very significant
  returns on capital. At the same time, their
  impact on the insurance market was relatively
  modest. After 3 5 years ACE and XL had
  accumulated sufficient capital to be forced into
  exploring expansion strategies.

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The 1993 Hard Market

• Sources of Capital
• Capital was largely drawn from a combination of
  industry incumbents and private equity investors.
  Key differences with 1985 were as follows
• Speed Capital raising quick approximately 12
  months
• Industry Sponsors Significant industry
  participation in the formation of these
  companies ACE, AIG, Aon, Centre, CNA, Gen Re,
  XL
• Private Equity First significant involvement of
  investment banks and private equity in the
  formation of these companies.
• Exit Strategies Because of the involvement of
  financial investors from the outset, the
  companies were always considered to be in play
• Underwriting Strategies
• As was the case in 1985, these new companies
  were formed to be mono-line Property Catastrophe
  reinsurance underwriters.
• Impact on the Market
• The start up companies had a significant impact
  on the catastrophe market place, but a relatively
  limited impact on the broader re / insurance
  markets.

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The 2001 Hard Market The Opportunity

• Sources of Dislocation
• The period from 1997 through 2001 brought
  together multiple damaging events for the
  industry
• WTC 50 billion in losses spread through the
  Accident/Life, Aviation, Property, Workers
  Compensation insurance and reinsurance markets
• 97 01 Soft Market 100 billion of potential
  losses spread through out the global insurance
  and reinsurance markets. The casualty lines of
  business being most obviously affected.
• Asbestos 55 billion of exposure to older
  commercial lines underwriters
• Equity Markets 50 billion of investment losses
  disproportionately concentrated with the
  European companies. Significant exposure to the
  underwriters of D O / E O business.
• Reinsurance Credit Following on from the above,
  users of reinsurance have a further exposure to
  unrecoverable reinsurance balances.
• In short, it is easier to list those areas of
  the business that did not suffer during the
  period from 1997 2001, than it is to list those
  that did

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The 2001 Hard Market The Capital

• Obtaining Capital
• Once again, there were some key differences as
  to how capital was raised in 2001
• Speed Capital raising was quicker
  approximately 3 months start to finish. Almost
  all of the significant participants in the
  process had made the trip to Bermuda once
  before.
• Private Equity The capital raising process
  became a sprint to put together a credible
  business plan, strategic investors and an
  investment bank. This group then raced to
  capture investments from the leading private
  equity firms.
• 144A Private Deals One management team raised
  its money without the aid of sponsoring
  companies or investors a first for the Bermuda
  companies.
• Assumed Exit Almost all of the business plans
  put forward in 2001 contemplated an IPO and
  subsequent secondary stock offerings as the
  liquidity event for investors.
• Result
• 4 out of 5 members of the Class of 01 were
  public by mid 2003 versus 3 out of 7 from the
  Class of 93.

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The 2001 Hard Market The Opposition
Asset Coverage / Total Liabilities excl. Real
Estate and Equity
Note Asset Coverage Reinsurance recoverables
prepaid reinsurance premiums cash and
investments excl. real estate and equity
funds held under reinsurance treaties accounts
receivables. Total Liabilities gross life and
non-life loss reserves funds held under
reinsurance treaties reinsurance payables
other accounts payable/other accrued liabilities
net deferred tax liabilities total financial
leverage Debt. Source Dowling Partners
Based on June 30, 2003 data
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The 2001 Hard Market The Challenge
1,500 Employees Arch 860 Axis
308 AWAC 117 Endurance
245 Montpelier 49 As of March 31,2004
20 Lines of Business Accident Aviation Casualty
Treaty Clash Directors and Officers Energy Errors
and Omissions Fidelity / Surety International
Treaty Marine Medical Malpractice Program
Business Property Ind. Risk Property
Catastrophe Property Treaty Terror Umbrella War
Risk WC Catastrophe Workers Compensation
4 Countries
18 Billion of Premium Arch 5.723
Billion Axis 4.426 AWAC 2.996 Endurance
3.121 Montpelier 1.751 Gross Written Premium
2002 2003 Combined
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The 2001 Hard Market The Strategies

• Areas of Strategic Importance
• Given the size and breadth of the market
  dislocation, the Class of 01 faced multiple
  strategic decisions in the first two years of
  operations
• Underwriting Property versus Casualty versus
  Specialty, Insurance versus Reinsurance, US
  Market versus International Market.
• Operations Operating companies, operating
  locations, staffing, infrastructure and expense
  management.
• Technology The Class of 93 demonstrated that
  using technology in a distinctive manner could
  create lasting shareholder value.
• Acquisitions Acquisitions of businesses, balance
  sheets and underwriting teams.
• Investors The need for an early valuation by the
  public equity markets combined with the need for
  an orderly transition of ownership by the public
  markets made this a critical discipline.
• The following slides set out some of the basic
  issues associated with the above items.

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Underwriting Underwriters, Pick Your Markets
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Operations Whats a work permit ?
I. T. I. P. O S. E. C. N. A. I. C. F. S. A. S.
O. A.M.B. and SP

An Operational Headache
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Technology The Good, the Bad and the Ugly
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Acquisition Strategy Make me an offer, any
offer

200 Acquisition Opportunities in 30 months


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Capital Havent I answered this question
already ?

• Value derived from Capital Management
• Capital management is a distinct discipline and
  one that has the potential to significantly
  enhance or diminish shareholder value. Raising
  the initial capital is the easy part its
  managing the capital that is the hard part
• Go to Bermuda The other easy part, all the
  capital goes to the same place.
• I. P. O. This represents the first step on a 4
  5 year journey culminating in a fully public
  shareholder base. For most companies, this work
  was done at the end of 2002 in the middle of
  renewal season.
• Debt Issuance A necessary part of right sizing
  the capital base requires additional due
  diligence meetings with up to 20 banks.
• Rating Agencies Constant, unrelenting
  interaction
• Public Ownership No more hassles with Private
  Equity, now it is just the analysts, the
  shareholders, the accountants and the regulators
  you have to deal with.
• Excess Capital The big test for all market
  participants will companies give the money
  back, rather than burn it up in the next soft
  market