National Trends In the Insurance Marketplace

1. National Trends In the Insurance Marketplace Presentation to Yellowstone July 2007

2. Introduction • Me • The insurance cycle • The operating environment – some history, the current situation and outlook • Managing the cycle • Managing the cycle – a different approach • What about Yellowstone?

3. The Insurance cycle • What is it? • When analysing decades of insurance and reinsurance pricing it is evident that it follows a cyclical pattern. • The pattern is characterised by peaks and troughs. • Not all classes are at the same stage through the cycle.

4. Current Market Cycle The chart below is an assessment of the stage in the cycle where each of Aspen’s lines of business is currently trading Marine Hull, Energy PD & Specialty Liability US Cat US Casualty International Casualty & ARA Casualty Market Cat Exposed Pro Rata US Property Insurance Marine RI & US Risk Non Cat Pro Rata Specialty RI US Casualty Insurance Aviation RI & International Cat International Risk UK Liability & IPF Aviation UK Commercial Property All Classes Declining or Trending Downwards

5. Insurance Cycle Drivers • The main forces acting upon the insurance cycle are: • Capital availability • Investment market returns • Interest rates • Market competition – need for growth and market share influencing pricing, terms and conditions • Note: catastrophes influence shape of the cycle but do not generate the overall pattern

6. Comparative Historical Results Insurance industry consistently underperforms rest of the market. Why invest?

7. See the cycle – some tough results and the lies within

8. Operating Environment – Insurance Industry • Best results in terms of ROE for 20 years. Probably unsustainable. • Property rates remain strong especially in cat arena. Casualty rates had a delayed decline due to Katrina but are still trending down. • New capacity is entering the market place with the class of 2005 (7.7bn) now beginning to assert themselves. Overall 30bn was raised in 2005/2006 mostly by existing companies offsetting 2005 losses. • The insurance regulatory environment has remained steady with no increased burden • Competitive environment has increased as “diversification” is now needed more than ever in order to operate and maintain ratings • Some consolidation in the industry is happening

9. Operating Environment - Macro • We now live in complex times – • rapid population growth • Rapid catch up in developing world • Complex lives and financial instruments • Stress on the environment and resources leading to economic concerns • Many competing areas of concern and attention at a socio economic level

13. Operating Environment - focus on USA • Tort reform has reduced frequency considerably and got rid of “frivolous cases” in many states. Severity seems to be on the increase. • Economic indicators are good despite potential for a “correction” in the system e.g. housing market • Margins are perceived to be healthy despite downturn in rates – enough not to impinge financial strength and ratings = danger zone who will get it wrong? • The industry now needs to manage a downward trend in the cycle

14. Managing the cycle • The dichotomy is: • When presented by soft market conditions underwriters should reduce their writings and withdraw from the market • But • Investors and Analysts like to see top line growth and this is important to maintaining share price integrity and capital backing • So there are two opposing and competing forces at work

15. Managing the cycle • Diversification helps to balance insurance companies against the negative impact posed by the cycle – classes of business and geographic spread • Financial strength is key • Recognising where to optimise returns as opposed to maximising returns – enhance underwriting models and zone in on exposures and correct experience factors • Recognising break point in any given sector before it is too late. What is break point? • Choosing clients and distribution channels carefully • Managing costs – acquisition costs and internal expenses are a major factor in combined ratio

16. Managing the Cycle • Warning signs should be: • Adverse reserve increases - as per the end of the last soft cycle • Barriers to exit remain strong • Rating agency downgrades e.g. Alea, Converium, CNA Re • Large scale withdrawal from major market leaders e.g. St Paul out of med mal • Failure of competitors and receivership

17. Managing the cycle – a different approach • Captives – off shore and domestic domiciled • Risk Retention Groups • Mutual Insurance Companies • Not for Profit friendly societies • Associations looking for alternative solutions • As long as regulatory framework tolerates

18. Managing the cycle – a different approach • What do these offer? • Stable and bespoke product in terms of pricing not following the cycle peaks and trough as much. Budgetary certainty. Experience based premiums once mature. • Ability to build surplus which is owned by the members • Through building surplus retain more exposure • Actively manage exposures and bring resources to bear where they are most needed – risk management tailored to jurisdiction and relevant exposure base. Deliver a better product. • Local team approach to handling litigation – the individual lawyers, judges, jury, procedures and so forth. This can’t be bought and is invaluable. • Access to reinsurance markets providing a different dynamic to the risk transfer process

19. Managing the cycle – a different approach • Examples of where this has worked before: • NABRICO companies • Long Term Care • CAMICO • AICA • Barreau Du Quebec • Various physician RRG • Large hospital captives • Lawyers Mutual Ins Co California

20. Managing the cycle – a different approach • There is some give and take with this approach. • To have certainty means that the temptation to move in the soft cycle out of the group must be dealt with and removed from the equation – three musqueteers • The temptation to consolidate with other RRGs should also be approached with extreme caution – there are not always aligned agendas and levels of maturity • When (if) things go wrong e.g. large loss – stick together and be constructive – dedication is required • Long term game = long term gains and this gets away from the 5yr private equity 20% minimum return model that causes so many of the issues for the industry. • Dedicated customer owned capital if looked after properly and nurtured correctly can be an excellent risk transfer mechanism • Turn risk into an asset.

21. What about Yellowstone? • Yellowstone is not yet mature but is getting there. • A cautious approach to reserves should protect surplus. Remember that casualty classes have “sting in the tail” - scorpion • Grow with caution – protect what you have • Price stability and integrity is key to future success – don’t be tempted to follow the market – do your own thing according to realistic objectives. • With cautious reserving and in time obvious redundancy in reserves i.e. releases then reinsurers will gain greater confidence in the account and price accordingly. • By being less reliant on outside support in the primary level the benefit is that member hospitals can continue to purchase insurance and deliver healthcare without the distressing and distracting burden of seeking insurance or reinsurance in times of little or no capacity.

22. What about Yellowstone? • Continue to search for better healthcare delivery – better product = better outcomes • Look at what others are doing in the industry and seek feedback • You have challenged status quo with new RRG Insurance Exchange. Build on this and remain focused on collective risk and claims management.