1. Finite Risk in 2003Times Change, Yet Fundamentals Remain The Same 2003 Seminar On Reinsurance Presented by David Koegel, ACAS, MAAA Enterprise Advisors/Imagine Group

2. Finite Risk Reinsurance Contracts • Usually “retrospectively rated” with contractual adjustments based on experience - premium adjustments (e.g., additional premiums, premium refunds) - coverage adjustments in subsequent years (e.g., retention increases, dual triggers) • Normally contemplate the time value of money in pricing • Always contain aggregate limits of liability • Ordinarily transfer enough risk to satisfy FAS 113 • Frequently cover multiple years and different insurance risk classes/lines of business

3. Finite Reinsurance Spectrum RISKS • Underwriting - Credit • Timing - Interest rate FORMAT TIME DIMENSION • Aggregate Excess Loss • Loss Portfolio Transfer • Quota Share FINITE SOLUTIONS • Retrospective • Prospective FUNDING • Pre-funded - Post-funded

4. Finite Risk Needs • Finite solutions address specific client needs not typically provided by the traditional reinsurance market • Lower costs in exchange for the client’s increased participation in ultimate losses • Accelerate recognition of equity in loss reserves • Reduce leverage ratios (NPW/PHS, Net Liabilities/PHS) to more acceptable levels • Stabilize unforeseen fluctuations in earnings • Improve reserve adequacy for long tail business • Narrow the gap between cost of capital and ROE

5. ROE vs. Cost of Capital: U.S. P/C Insurance: 1991 – 2002 Large gap between industry cost of capital & rate of return 10.2 pts 14.6 pts US P/C insurers averaged 6.9 points of shortfall in return relative to cost of capital since 1991 Source: The Geneva Association, Ins. Information Inst.

6. Industry Issues Workers’ Compensation • Increasing cost driven by rising medical care and wage loss payments not fully offset by declining claim frequency • Leading cause of U.S. insurer failures in 2002 as 15 of the 39 companies that failed primarily wrote WC line of business • Since the 9-11-01 (previous to which terrorism coverage was virtually free of charge) prices have risen as insurers now monitor catastrophe exposures more carefully • RMS estimates that a major San Francisco earthquake today could cause 78,000 injuries, 5,000 deaths & over $7 billion in WC losses • Residual markets in 38 states and D.C. remain a significant percentage of the total workers compensation market

7. Industry Issues Medical Malpractice • Growing losses with declining investment income widens the gap between revenues and claims • Rising claim frequency & severity, higher urban area incidences and soaring defense costs have precipitated rate increases • More expensive reinsurance further strains insurers' net income • Reduction in supply of coverage drives prices up further as insurers exit the profit elusive medical malpractice business • Cap on non-economic damages of $250,000 in California since 1975 has losses are more predictable and stabilized rates

8. Industry Issues Liability Insurance and Excess Casualty Markets • New and existing liability challenges are putting American businesses and their insurers under tremendous pressure • Cost of insuring corporate America is increasing with the rising tide of lawsuits from Enron to asbestos and mold to medical malpractice • On average, cost of the U.S. tort system consumed 2% of GDP annually since 1990, expected to rise to 2.4% by 2005 • Loss trend in excess layers is 3 times the ground-up trend and nearly 10 times the primary trend • Other difficult issues continue to plaque the industry such as construction defects, EPL, rising jury awards and terrorism

9. Finite Reinsurance Sample Transactions

10. Sample Transaction #1 - (Workers’ Compensation)Primary Objective: Lowering Cost Solution • Maintain current retention & limits. • Increase DP from $6M to $9.6M. • Reduce Reinsurer’s Margin slightly to $1.4M (15% of DP). • Increase percentage refund from years 3-7 after inception such that the net “rate on line” is reduced to 12%-35% during that time period. • In exchange for reducing the reinsurer’s downside insurance risk by $3.6M, PIC has potential for cost savings up to $3.3M. Situation PEO Ins. Co (“PIC”) has the following workers compensation reinsurance program: Coverage = $9.5M xs of $0.5M each and every loss; aggregate limit = $12M. Deposit Premium = $6M. Reinsurer’s Margin = $1.5M (25% of DP). “Rate on Line” = 40%-50% after experience refund upon commutation, the percentage of which varies from years 3-7 after inception. PIC seeks to reduce cost in exchange for reducing reinsurer’s downside insurance risk exposure.

11. Sample Transaction #1 - (Workers’ Compensation)Primary Objective: Lowering Cost

12. Sample Transaction #2 - (Medical Malpractice)Primary Objective: Recognizing Reserve Equity Solution • Aggregate excess of loss coverage attaching at a level below forecast. Limit = $14M. Retention = $30M (60% LR). Premium = $10M on a funds withheld basis accruing interest at 6% per year. Reinsurer’s Margin = $1M. • Structure protections include: (i) reduced reinsurer’s share if UNL in excess of Retention > Limit; (b) cap on claims contributing to subject UNL; (c) adjustments to coverage if credit covenants breached; (d) financial incentives to commute; (e) offset. • NDIC & local regulator flexibility can facilitate cost effective coverage not otherwise available for less troubled lines of business. Situation NewDocs Ins. Co. (“NDIC”) is confident their Loss Ratio will not exceed 70% after reflecting time value of money imbedded their long-tail reserves for the current accident year. NDIC believes regulators will allow reserve discounting, but not before five years of operating experience. Their current year forecast is as follows: Subject Net Earned Premium = $50M. Ultimate Loss & LAE Ratio = 85% ($42.5M). NDIC seeks an aggregate cover, on a funds withheld basis, that will reduce it’s reported Loss Ratio up to 15%, at a cost not > $1M. NDIC is open to structure protections that contain the reinsurer’s downside risk so long as reinsurance accounting is granted

13. Sample Transaction #3 - (Liability & Excess Casualty)Primary Objective: Reducing Leverage Ratios Solution • Split layer aggregate excess of loss coverage Layer A = 30% xs 70% LR Layer B = 30% p/o 50% xs of 100% LR Premium = 30% of SNEP = $45M Ceding Commission = 10% at 95% or greater LR, sliding to 20% at 85% LR Reinsurer’s Margin = 5% of Ceded Premium = $2.25M • Alternative structure considered is a quota share with 2nd layer in excess of a retained loss ratio corridor above expected. • LTLIC’s leverage ratios can drop to 1.9:1 & 5.6:1, respectively, freeing up capacity to write new targeted business. Situation Long-Tail Lines Ins. Co. (“LTLIC”) has unacceptably high premium & reserves to surplus ratios. LTLIC has thought about purchasing a finite cover in the past but the need to reduce underwriting leverage wasn’t as great as is currently. Their current year forecast is as follows: Subject Net Earned Premium = $150M. Ultimate Loss & LAE Ratio = 100%. Net Written Premium/Surplus = 3:1. Net Reserves/Surplus = 7:1. LTLIC seeks a quota share or aggregate excess of loss cover to significantly reduce it’s net leverage ratios.

14. Sample Transaction #3 - (Liability & Excess Casualty) Primary Objective: Reducing Leverage Ratios Assumptions: SNEP = $150M; Reserves = $350M; PHS = $50M Estimated Ultimate Loss Ratio = 100% ($150M) 150% Loss Ratio ($225M) 30% part of 50% ($75M) xs of 100% LR 70% LTLIC ($52.5M) 30% Reinsurer ($22.5M) Layer B Reinsured Layers 100% Loss Ratio ($150M) 30% of top layer in 1st 100% LR (30% xs 70% LR) Layer A 30%Reinsurer ($45M) 70% Loss Ratio Proposed Terms: Ceded Premium = 30% SNEP = $45M Ceding Commission = 10% ($4.5M) at 95% LR or greater, sliding to 20% ($9M) at an 85% LR Limit = 150% ({30%+15%}/30%) of Ceded Premium = $67.5M Margin = 5% of Ceded Premium = $2.25M 70% LTLIC ($105M) 60%

15. Speaker Contact Information • Dave Koegel • The Imagine Group • Enterprise Advisors, Inc. • One Liberty Plaza, 6th Floor • New York, NY 10006 • Phone: 212-707-0823 • Fax: 212-707-0801 • E-mail: dkoegel@imagine.bm • Web Site: www.theimaginegroup.com