Walking the Tightrope of Risk In the Insurance Business

1. Walking the Tightrope of Risk In the Insurance Business Houston Marine Insurance Seminar September, 2014 Rupert Atkin CEO, Talbot Underwriting

2. Tightrope of Risk in Insurance • Starting a Lloyd’s business - Posgate127/126/700/701 1982 - Catlin 1003 1985-1990 - Atkin 1183 1990-today • 1990£6,000,000 capacity,2 people 2014 £625,000,000 capacity, 300 people • What makes a successful Lloyd’s business? FEAR/SUCCESS COMPLACENCY/FAILURE FEAR/SUCCESS COMPLACENCY/FAILURE Page 2

3. Tightrope of Access to and Management of Capital • Balance between investor return and capital adequacy for external constituencies • 1991 Annual Venture, Individual Capital, Not paid up. Line size geared to credit at the bank. Only possible in Lloyd’s. • 1997 Venture Capital, top line growth at wrong time in cycle. Solved one problem created another. Syndicate 1183 did not trade for 2000/2001, after 3 very difficult years of resisting merger. • 2001 9/11 – Fell off tightrope, complacency had overcome fear, needed to recapitalise within 2.5 months. • $120m from the trade capital/private equity. Innovative layered structure. Again, only possible in Lloyd’s. RETURN ON CAPITAL INVESTOR, RISK APPETITE Page 3

4. Tightrope of Access to and Management of Capital Dowling & Partners Securities LLC • Lloyd’s is better valued with divergence growing since end of 2010. Page 4

5. Tightrope of Access to and Management of Capital Dowling & Partners Securities LLC • Only 3 non-Lloyd’s businesses break into the Lloyd’s valuation range. Page 5

6. What Drives Value? • Acquisition of capital and management of return are key drivers of value. Value Generated by ROE, not Loss Ratio Low correlation between longer term underwriting and market pricing. London Market combined ratios (five year average to 2013) Pricing multiples vs. combined ratios Page 6 Source : PWC

7. Lloyd’s Oversight • Outsized losses of the few, threaten viability of the whole. • Oversight of start ups – new rules. • PMD formed – Business Plan Challenge - New Products - Broker fees • Solvency II Capital Modelling. • “I work in Insurance vs I work in Lloyd’s.” ENTREPRENURIAL FLAIR REGENERATION REGULATORY OVERSIGHT STABLE PERFORMANCE Page 8

8. Current Trading Conditions • Current conditions: • Capital Modelling has crushed the cycle and volatility. • Consequently the pricing freedom that comes with distressed opportunities will be hard to find – explains change in Berkshire Hathaway. • Modelling creates new risks • Enemies of judgement? • Systemic Risk as a result of limited choice? • Patchy record of forecasting loss but tool of rating agencies; still art as well as science. OVERSUPPLY OF CAPITAL CAPITAL MODEL DISTRESSED OPPORTUNITY WHERE ARE THE LOSSES RISK SELECTION Page 8

9. Current Trading Conditions (2) CAPITAL MODEL • Berkshire Hathaway/Aon transaction - Beginning of a new world or flawed transaction? Innovation/Reinvention? - Portfolio underwriting, Enemy of risk selection and Aggregate control • Portfolio underwriting because business better controlled as a result of capital modelling. • Risk selection among classes which are hard to model. • - ILS, Hedge Fund, Pension money can only play in modelable business. Will they ever meet a client? • Experts, individual decisions, client’s needs and problems solved is Lloyd’s sweet spot. PORTFOLIO UNDERWRITING DISTRESSED OPPORTUNITY RISK SELECTION Page 9

10. Distribution – The Brokers’ Tightrope • Lloyd’s Syndicate 1183 is Talbot’s only platform. • 100% business through brokers. • Who is the broker working for? • Larger brokers seeking to generate income from their underwriters as well as their clients – is this their tightrope? • Clients must pay for the value they derive from brokers. • Fees must reflect this value. • Tightrope for carriers as well – pay to play if yes - business withers if no? Paying for services we do not want to have access to business. • Brokers have overtaken Underwriters in their management of technology and data (GRIP, WillPlace). Lloyd’s has a seam of gold, yet to be mined. Xchanging/Central Services Refresh. • “Aon’s proposition is geared around creating tangible value for clients. Aon has invested heavily in recent years in developing the systems and tools to enable it to do this.” CLIENT? BROKER AS AGENT FEES FEES CARRIER? Page 10

11. The Underwriting Tightrope • Lloyd’s Capital gearing, minimal investment return – underwriting decisions are key to profitability. • How to say “no” but still attract the best business is an art. • Past: Unfettered Judgement, Generalists. Present: Underwriting Authorities, Models, Specialists. • Onshore exposures drive need for modelling but not substitutes for judgement (Thai Floods). • Pricing and exposure models – vital tools and constantly improving, but remain imperfect. • Importance of Interpreting Models by peril/geography. Validus Research as a competitive tool. Restores expert judgement, avoids systemic risk. UNDERWRITER PLEASE SHOW ME ALL YOUR BEST BUSINESS NO, CAN’T HELP MR. BROKER BUSINESS PLAN, PRICING MODEL FLAIR, EXPERTJUDGEMENT Page 11

12. The Regulatory Tightrope • Syndicates have 3 masters: Lloyd’s, PRA, FCA. • Fines no longer offset expenses, go straight to Exchequer. • Acknowledged duplication, accountable to different Masters – Bank of England and Government. • PWC: 72% costs increase; 41% Stifle Innovation; 49% prevented from pursuing opportunity. • Lloyd’s Performance Management Directorate key to market revival. Regulator as enabler. • Conflict between caring for investors and caring for policyholders. Has Regulator given up? • Overseas Policyholders subject to UK expectations – to be changed? PRA ADEQUATE PRICING FOR SOLVENCY, NO UNDUE RISK. UNDERWRITER FCA POLICYHOLDER PROTECTION TCF Page 12

13. Vision 2025 • Preservation: London based, subscription, International market, Central Fund, Global Licences, Rating, Broker P & C focused market. • Aspiration: Capital, people, Business attracted from High Growth Economies to reach 25%. • Broker sensitivity BUT focus on new business, help us find it! Attractive status quo, well priced business. London Market Brokers What can we be? Increase High Growth Economies business to 25%. More competitive pricing. Local Brokers. Page 13

14. Lloyd’s Market Association • Cross Membership of LMA Board with Council and Franchise Board. Helps communication between market and corporation on strategy and many other topics. • All managing and members agents are members. • 2000 practitioners support panels. • 4000 users of Lloyd’s Wordings Repositories. • Shared services: • Credit control • Coverholder Audits • Exposure Data Standardisation/Data Cleansing • Cat Modelling Page 14

15. Marketing The Insurance Industry • Contribution to the economy: taxes, employment, investment management. • Reputation is driven by reputation on settlement of claims, inevitable link with Personal lines. • Claims free policy frees policyholder from uncertainty and fear. • Claims free policy ensures ships sail, planes fly, cars are driven, buildings are built and money is lent. • Claims free policy offers capital relief to banks. • Claims free policy can still benefit insured through Insurers/Surveyors/Engineers showing their knowledge of other policyholders losses to prevent/reduce risk of loss, pre hurricane planning, business continuity. • Policy with claims can result in loss prevention measures for the future. - Attack on Sri Lanka Airport - Piracy in Malacca Straits and off Somalia, Well Control. Page 15