REINSURANCE & FRONTING MARKET UPDATE - 2014

1 REINSURANCE & FRONTING MARKET UPDATE - 2014 REINSURANCE & FRONTING MARKET UPDATE 2014 Michael Woodroffe, of MARKET in Captive Reinsurers Money Buying Multi-Year5. Helping Small Captives Buy ReinsuranceReinsurance capital increased from $505 billion to $525 billion by 30thSeptember 2013 with large amounts of capital coming into the Insurance Linked Securities in 2013 To t a l insured losses at $45 Floods - CAN$ billionGerman hail storms and floods - $5 billionUS jury awards - $ billion against Dow Chemical price fixing- $ billion against Trans Healthcare Inc. Fla resident falls- $1 billion Briarwood Capital LLC vs Lennar Corp. Cat bond issuance increased from $ billion to $ billion. Companies no longer reinsuring captives - American Safety Re - in run off- To r u s - division closedRenewals: Catastrophe premiums down 11% globally at the 1stJanuary 2014 .

2 Catastrophe premiums down 20-25% in Florida at 1stJanuary 2014 . Dramatic changes in terms introduced late in renewal season: Unlimited hours clauses on some major programs Reinstatements pro rata as to time (some with a minimum of 50%) Terrorism included in some major programs for free Berkshire Hathaway offers to take of AON Re book automatically. Increasing competition for workers comp catastrophe REINSURANCE and conversely limited appetite for working layers. Casualty REINSURANCE renewing flat/down 5% but improvement of terms at 1stJanuary 2014 . MARKET in 2013 Globalreinsurancesupplywillcontinuetobei nexcessofdemandfor2013. Althoughmarketadequatelycapitalizedthere islimitedchoiceofcarrierforcaptivereinsu rancebuyer. Inflationbeginningtogrowaroundtheworld. DangertotheBondPortfoliosvaluationforrei nsurersandinsurers(theultimateloss?)

3 WorkersCompandTransportationlinesshowsig nsofhardeningin2012andexpectedtocontinue through2013. Domesticinsurancemarketsscrutinizeprofit abilityofaccounts. MedicalPLinsurancecompany/captive in 2013 Woodroffe sPredictions in 2013 55+ active markets. 1,400+ international insurance companies. 803+ pure and group captives. 113+ captives writing 3rdparty business. 60% of Florida and Texas Property Cat Premium. 25% of the US medical liability insurance and REINSURANCE MARKET . Write nearly $109 billion in global gross written premium. More than $170 billion Capital & Surplus. Source: ABIRAM BestRatingPolicyholder Surplus(January 8, 2014 )(June 30, 2013) Alleghany Corp / Trans ReA$ $ WorldA$ $ Capital Group +$ Insurance A$ $ $ ReA+$ HiscoxA+$ HoldingsA-$956mmMarkelA$ ReA$ ReA+$ Point ReA-$972mmTo k i oMillennium ReA++$ Group plcA$ Specialist Captive ReinsuresAM Best RatingPolicyholder Surplus(January 8, 2014 )(June 30, 2012) Alleghany Corp / Trans ReA$ ReA+$ *ACE GroupA+$ *Axis ReA+$ *Berkley ReA$ Re (Travelers)A+$ *General ReA++$ *Munich Re America A+$ IndemnityA++$191bn*Odyssey ReA$ ReA+$ *Swiss Re America(re co.)

4 Ltd)A$ ReA+$626mmUS Specialist Captive Reinsurers* GroupSurplusHealthcare ReinsurersACE Tempest (US)Amlin(BDA)Aspen (BDA and UK)Berkshire Hathaway (US)BRIT (BDA)Catlin (BDA)General Re / Genesis (US)Hiscox(BDA)Lloyd s of London (UK)Markel (BDA & US)Munich Re America (US)Montpelier Re (BDA)Renaissance Re (BDA)Swiss Re (US and Switzerland)Trans Re / Alleghany (US)To k i oMillennium Re (BDA)Auto ReinsurersAce Tempest (US)Allianz (BDA)Amlin(BDA)Arch Re (US)Catlin (BDA)Dorinco(US)GreenlightRe (Cayman)Hamilton Re (BDA)JRG Re (BDA)Maiden Re (US & BDA)MainstreetGroup (US)Markel (BDA & US)Odyssey Re (US)Partner Re (US)ScorRe (US)Third Point Re (BDA)To k i oMillennium Re (BDA)Trans Re / Alleghany (US)Workers Comp ReinsurersACE Tempest Re (US)Amlin(BDA)Arch (US)Aspen Insurance (UK)Axis Re (USA)Bermuda Catastrophe Reinsurers (BDA)BRIT (BDA)Catlin (US/BDA)GreenlightRe (Cayman)Hannover Re (GER)JRG Re (BDA)Lloyd s of London (UK)Maiden Holdings (BDA)Markel (BDA)Midwest Employers (US)National Union (US)NYMAGIC (US)Safety National (US)To k i oMillennium Re (BDA)Trans Re / Alleghany (US/BDA)Construction/GL Reinsurers ACE Tempest (BDA & USA)Allianz (BDA)Amlin(BDA)Arch Re (BDA)Aspen (BDA &UK)Berkshire Hathaway (US)Catlin (BDA)Hannover Re (GER)Lloyd s of London (UK)Partner Re (US)Signet Star (W R Berkley) (US) REINSURANCE Rollercoaster Rides Again!

5 Buy Long Multi Year contracts wherever possible, with built-in reinstatements to avoid renegotiating mid crisis. Lock in aggregate protection Protect against adverse developments from rising loss ratios across all lines. Avoid swing rated deals Stick to for flat rated contracts to avoid double whammy of deteriorating losses whilst being hit with huge additional REINSURANCE on buying REINSURANCE separately Divide & conquerReinsurance StrategiesScrutinize Security FRONTING Carrier (downgrades for Tower, Meadowbrook, QBE and others?)Review security carefully. REINSURANCE Security (American Safety Re now in run off)Avoid weak balance sheets, legacy issues and companies with no long term capital commitment. Stick with trusted Reinsurers Especially if you have built a bank of premium with StrategiesMulti-Year Excess of Loss Client buys $10m xs$1m Umbrella from Standard markets every year.

6 Premium is $ per annum. Limited frequency; one loss every five years. 3 years on, client has bought $30m worth of excess insurance with little chance of full utilization. Premium is Dead Money .Multi-Year Excess of LossAnswer: Provide client with 36 month policy with one limit of $10m xs$1m stretched over 3 years. Cost approx. $1m per annum with profit commission of 30-40% upon commutation at year 5. Use of Trigger additional premiums to reduce cash flow. Provide reinstatement of limit at clearly defined pre-agreed costs. Client saves money with no losses, saves money with average losses and has survivability and continuity at no extra cost in the event of catastrophic loss. No cap in hand return to excess Aggregate Multi Year Limit2009-2012200920102011 Depth of CoverageOptional ReinstatementOptional ReinstatementMaking REINSURANCE Affordable for Small and Start Up CaptivesTactics and Tricks First year policy 15 months period.

7 Ramp up costs staggered deposit premiums. 10%, 20%, 30% and 40% Sub limit non-essential coverages Cap sideways exposures to reduce costsTactics and Tricks cont. Make little into big multi year contracts. Mid year adjustments if uncertain about target price. Be conservative about estimated premium income. Pay as you go reinstatements only pay for cover if you need Linked Securities Cat bonds allow insurers to get REINSURANCE protection from a new pool of capital separate from traditional reinsurers such as money managers, hedge funds and pension funds. Investors capital stays in segregated collateral accounts if event occurs funds are available to make a payment, thereby virtually eliminating credit risk inherent in traditional REINSURANCE . 2013 Guy Carpenter estimate $10bn of new capital entered the REINSURANCE MARKET largely in the form of ILS, side cars and collateralized retro cover.

8 GC securities estimate that the cat bond MARKET alone could reach $23bn by the end of Woodroffe, PresidentKirkway International Limited3 BermudianaRoadHamilton HM 08 BermudaTel: 441 296 World Captive ForumFronting OverviewOld American Capital CorporationFronting Overview FRONTING Arrangement In its most common form, an insurance carrier (front) writes and issues policies, makes necessary state filings and pays premium taxes. The FRONTING company will then cede the entirety of the risk to the Captive. The FRONTING company assumes the legal obligation while economically, the risk resides with the Captive It is imperative that the interests of the Front and Captive are aligned. Otherwise, complications can arise2 FRONTING Overview Typical FRONTING Relationship3100% of Premium100% of Premium less Fees100% of RiskInsuresInsuredFrontingCompanyCaptive 100% of RiskInsuresFronting Overview Several Business Reasons Exist for FRONTING Arrangements The need for a licensed carrier in a state where the risk resides The need for a carrier with a minimum Best rating The need for other financial strength measures4 Challenges Facing Captives While Captive formations are on the rise.

9 FRONTING continues to be one of the biggest challenges facing Captives FRONTING Fees Fees can vary and their magnitude can make it difficult for the Captive to make an adequate margin or stay competitively priced in the MARKET Collateral Requirements Collateral requirements can potentially be arduous for the Captive Collateral typical takes the form of: Funds withheld from the Captive A Trust Agreement funded by investment securities of the Captive Letter of Credit issued by a bank on behalf of the Captive Financial Strength of the FRONTING Carrier Failure or downgrade of the Front will likely cause the Captive to seek an alternative, thus disrupting operations and increased costs Service issues and personnel changes can also have an adverse effect5 FRONTING Utilization & Trends Historically.

10 Captives have Utilized FRONTING Carriers for P&C Lines of Business Uncertainty around Affordable Care Act could increase the need for Employee Benefits Fronts Cyber Liability could also see expanded utilization Active FRONTING Carriers6 Fortune 500 SpecializedAIGC ompanionAmTrustHudsonQBEOld AmericanThe HartfordSPARTAT ravlersState NationalZurichOld American County Mutual About Our Company We specialize in non-standard private passenger automobile insurance, with a tradition of aiding the higher risk auto insurance needs of an underserved, economically diverse customer base. Through our partner MGA s, we offer insurance products and payment plans that provide affordable insurance for Texas customers. We partner with and grant contractual rights to approximately 25 skilled MGA s. We cede 100% of our premiums to well capitalized, A rated reinsurers, some of which include: Dorinco Main Street America Markel JRG Re TokioMillennium 7 Managing General Agents Old American Primarily Sources Business Through Specialized MGA s MGA s Present ACertain Set of Risk Exposures Such as: Misappropriating and/or absconding with funds E&O on claims handling ( REINSURANCE usually has limits on ECO/XPL claims) Regulatory Non-Compliance including Insurance Department complaints Poor record keeping Lack of underwriting standards and controls (impacts Reinsurers) Poor claims handling (impacts Reinsurers) Concentration/CAT risk8 Enterprise Risk Management Old American Mitigates These Exposures Through.