Aliseo Reinsurance SCC

Transcription

1 September 1, 2011 BUSINESS PLAN High Excess Catastrophe Risk Retrocession Investment Opportunity Private Transaction: Aliseo Reinsurance SCC $311,000,000 - Equity Capital 3,110 - Common Shares 3,106,890 - Preference Shares A Mr. Andreas Kusay President and CEO Aliseo Reinsurance SCC Suite 1, Pasea Financial Building (Corner Harts Gap & Dayrells Road) Christ Church, BB14030, Barbados, W.I. Phone: (246) andreas.kusay@aliseo-re.com

2 Notice to Recipient These materials have been prepared by the management team of Aliseo Reinsurance SCC ( ALRE ) based upon internal sources and information from public or other sources. ALRE s agents and advisors assume no responsibility for independent investigation or verification of such information and have relied on such information being complete and accurate in all material respects. To the extent information included herein is obtained from public sources, it has been assumed that such information has been reasonably prepared on bases reflecting the best currently available information. No representation or warranty, express or implied, is made as to the accuracy or completeness of such information and nothing contained herein is, or shall be relied upon as, a representation, whether as to the past, the present or the future. The information contained herein is not intended to provide the sole basis for evaluating, and should not be considered a recommendation with respect to any transaction involving ALRE or other matter. This business plan has not been prepared with a view towards public disclosure under any securities laws and may not be reproduced, disseminated, quoted or referred to, in whole or in part, without the prior written consent of ALRE s management team. 1

3 Executive Summary Aliseo Reinsurance SCC ( ALRE or the Company ), a newly formed property retrocessional reinsurance company domiciled in Barbados, is seeking to raise capital (after transaction-related expenses) of $300 million from a select group of private investors for the purposes of participating in the very favorable opportunities existing in the global property retrocession market. All financial figures reported in this business plan represent U.S. dollars. Reinsurance is insurance that is purchased by an insurance company ( a primary insurer ) from a reinsurer as a means of risk management, to transfer risk from the insurer to the reinsurer. The reinsurer and the insurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay the insurer's losses (in terms of excess of loss or proportional to loss). The reinsurer is paid a reinsurance premium by the insurer, and the insurer issues thousands of policies. For example, assume an insurer sells one thousand policies, each with a $1 million policy limit for property coverage. Theoretically, the property insurer could lose $1 million on each policy totaling to $1 billion (the aggregate limit insured) if its business was heavily concentrated in a particular geography which suffers a major natural catastrophe such as a hurricane, typhoon or earthquake. Given that this aggregate risk exposure of the primary insurer will generally significantly exceed its capitalization, a primary insurer will be required to purchase reinsurance in the form of either quota share reinsurance or excess of loss reinsurance from a reinsurer to mitigate against the effects of large catastrophe losses. If purchased in form of quota share reinsurance, the reinsurer participates in the risk based on a pre-agreed percentage on specified contracts written by the primary insurer. For example, if the quota share participation of such reinsurer is 20%, the reinsurer participates with the primary insurer on a pro rata basis equal to 20% on all losses and receives in return 20% of the original premiums. When excess of loss reinsurance is purchased by a primary insurer, the reinsurance protection is structured in layers and provides coverage for a specified portfolio of individual insurance policies written by the primary insurer (as governed under a specified reinsurance treaty or reinsurance contract ). For example, the primary insurer may retain the first $250,000 of risk under a property policy with a $1 million policy limit and then cede (or transfer) $750,000 or the excess risk to a reinsurance company (reinsurer) as this will minimize the primary insurer s exposure. In exchange for accepting this risk by the reinsurer, the primary insurer pays the reinsurer a reinsurance premium. Reinsurance companies themselves also purchase reinsurance, a practice known as a retrocession from other reinsurance companies, which are known as a retrocessionaire". As a monoline retrocessionaire, ALRE will exclusively offer high excess of loss property retrocession coverage that provides indemnification to reinsurer clients (or retrocedants) for losses incurred under all property reinsurance contracts provided to primary insurers. A reinsurance company that buys reinsurance is a "retrocedant", which is effectively a client or customer of the retrocessionaire. In referring to itself as a being a high excess provider of retrocessional coverage, ALRE implies that it will offer coverage that provides protection to its clients at high excess of loss layers (or at high attachment points ). By purchasing retrocessional coverage structured at these high attachment points, the retrocedant is protecting their capital base against the potential of large losses from major natural catastrophes. As such, the Company will write retrocession at loss layers that will only expose ALRE to a loss in the event of a remote singleevent large catastrophe loss or series of medium-to-large catastrophe events that collectively would be considered remote. The Company believes that ALRE represents an attractive investment opportunity on a number of fronts, reflecting a combination of factors including (i) a high quality and experienced leadership / management team; (ii) ongoing attractive retrocessional market dynamics; (iii) a low cost operating platform and capital efficient structure; and (iv) the remote loss profile of its business given the high excess nature of ALRE s business. ALRE also provides global private equity investors with a high-risk adjusted return opportunity that is not correlated to the global economic environment, market interest rates or the broader capital markets, which diversifies away portfolio risk for investors. The Company projects that it has the ability to generate close to a 35% plus return on equity in its first 12 months of operations in the absence of a major natural catastrophe loss. 2

4 Business Description ALRE believes that the global property retrocession market offers excellent opportunities for a new company with a strong capital base, a disciplined underwriting approach and a skilled management team to generate attractive returns. Specifically, ALRE intends to commence writing business effective January 1, 2012 and will provide high excess property retrocessional coverage written on an annual 12- month contract basis. The Company believes that it is an opportune time to form a new property retrocessionaire given the increasingly favorable market fundamentals existing in the retrocessional market. Additionally, both the National Oceanic and Atmospheric Association, and the Tropical Meteorology Project at Colorado State University have recently predicted a very active U.S. hurricane season predicated on a continuing La Nina pattern and higher than normal Atlantic Ocean temperatures. In the event of a large natural catastrophe insured loss event during the second half of 2011, retrocessional premium rates would further increase (a market hardening ) and thus enhance potential return opportunities for investors. ALRE is incorporated under the laws of Barbados as a segregated cell company ( SCC ) and is licensed under the Barbados Exempt Insurance Act which will effectively subject it to Barbados corporate tax at the rate of 0%. A SCC legal entity is a company that has the ability (by act of Parliament) to legally segregate or wall off certain exposures into segregated cells, which provides ALRE with operational flexibility in the event of incurring significant reinsurance losses and/or raising additional capital from new investors. Barbados has an excellent reputation as an international business domicile and provides a prudent regulatory environment that meets or exceeds international best practice. It has a stable social, economic and political environment, a modern and well-developed infrastructure, an educated and highly skilled workforce and is a relatively low operating costs jurisdiction. Products and Services Initially, ALRE will exclusively offer high excess of loss retrocessional products to reinsurer clients that provide property catastrophe coverage for both natural and named perils only. ALRE s coverage will exclude losses from man-made acts or acts of terrorism. Such retrocessional coverage will be marketed to a diverse group of reinsurance companies operating across the world, including a number of the most respected and leading reinsurers operating globally. The Company s two primary retrocessional products are referred to in this business plan as the (i) Severity Cover and (ii) Aggregate Excess of Loss Cover. The features of these products are outlined below: Severity Cover ( Severity Cover ) these retrocessional contracts will provide single event worldwide retrocessional coverage to selected reinsurers. In providing single event worldwide coverage, ALRE will indemnify reinsurers for property losses resulting from individual natural catastrophe losses that may occur throughout the world during the 12-month contract period. Coverage will be offered under both Pro Rata Industry Loss Warranties ( Pro Rata ILW ) and Ultimate Net Loss ( UNL ) contract forms (see Section Contract Forms and Coverages). Pro-Rata ILWs written by ALRE will provide retrocessional protection for major catastrophe events based on industry loss indices; typically, loss indices published by Property Claims Services ( PCS ), PERILS AG and/or Sigma. These indices represent databases maintained by third-parties which track insured industry losses for major global natural catastrophes. Pro-Rata ILWs will be structured with an attachment level of $40.0 billion for catastrophe losses incurred in the United States and a $12.5 billion level for catastrophe losses incurred throughout the rest of the world ( RoW ). The attachment level refers to the point at which an accumulation of insured losses for a particular natural catastrophe triggers a loss under the contract. For example, a major hurricane catastrophe event which produces $39.9 billion of losses in the United States would not trigger any losses under ALRE s Pro-Rata ILW retrocessional product since the accumulated insured losses for that event had not reached the $40.0 billion specified loss attachment point. Severity Cover contracts written on a UNL basis will be structured to provide single event worldwide 3

5 retrocessional coverage for actual (i.e. will not be based on an industry loss index) ultimate net losses of a retrocedant relating to individual natural catastrophe events. These contracts will be structured to provide retrocessional coverage for actual losses of the retrocedant that have been incurred from a natural catastrophe in the United States that produces insured industry losses of approximately $40.0 billion and natural catastrophes throughout the rest of the world which produce insured losses of approximately $12.5 billion. Aggregate Excess of Loss Cover ( AXL Cover ) ALRE s other main product is known as the aggregate excess of loss cover, or AXL Cover. This retrocessional product will offer aggregate excess of loss protection for natural perils only. Unlike the Severity Cover product which is designed to protect against a remote single catastrophe loss event, the AXL Cover is designed to protect the client against a series of medium-to-large catastrophes in the same contract year, which would otherwise produce substantial losses for the retrocedant in the aggregate. These contracts will be customized for each reinsurer based on the client s desired per event retention levels and its aggregate exposures. Losses under the AXL cover will be triggered only in the event of an aggregate of multiple medium-to-large worldwide catastrophe losses. Each AXL cover contract will be structured with qualifying minimum and/or maximum per event losses which then aggregate and trigger covered losses after the AXL attachment point (or deductible) has been reached. AXL covers will typically be written on a UNL contract form (see Section Contract Forms and Coverages). The Company believes that by offering both Severity Cover and AXL Cover contracts, ALRE will be in a position to achieve optimal diversification across the blended reinsurance portfolio. ALRE anticipates that up to 50% or more of the Severity Cover product offering (translating to approximately $75 to $100 million of aggregate retrocessional limit) will be sold directly to blue chip global reinsurers, which have already been identified and who have long-standing relationships with the Company s founders. In fact, two of the leading reinsurance companies operating globally (Munich Re and Hannover Re) have each already committed to carving out for ALRE up to $50.0 million of their respective retrocessional programs for the January 1, 2012 renewal period at the Company s anticipated premium pricing levels. The Company believes that these direct relationships with major reinsurance buyers are a competitive advantage for ALRE, and substantially reduces execution risk. For the remainder of the business, ALRE will source business directly through global reinsurance intermediaries and other industry sources. In fact, Aon Benfield (the leading global reinsurance intermediary in property retrocessional) has recently expressed confidence that it will be able to place 100% of ALRE s initial anticipated AXL Cover product aggregate limit of $194 million on January 1, 2012 (see Section 2.7 Calculation of Fully-Collateralized Aggregate Limits) at the projected premium rates and expected loss probabilities that are outlined in this business plan. Following the commencement of operations, the Company will continue to examine the potential introduction of additional retrocessional products where market opportunities are present to earn attractive returns on capital or diversify risk exposure. This may include Second Loss per event covers, which operate on a similar basis to the Severity Cover but only trigger in the event of at least two losses of a given magnitude. The Company s premium rates will not be regulated and will be determined based on market forces, unlike that of primary insurers which must seek regulatory approval to charge certain premium rates in most markets. The Market ALRE believes that the current market demand for property retrocession coverage significantly exceeds the supply of property retrocession capacity (which is driven primarily by the unavailability of capital). The dynamics that have led to a market imbalance for retrocessional coverage and corresponding favorable retrocessional market trends include the following: The catastrophe losses in the first half of 2011 in Japan, New Zealand and Australia have caused a significant diminution of capacity in the retrocession market. While additional capital has been raised in the retrocession market during the course of 2011, this will only partially replace that which has been lost, or is required to be held to cover potential reserve increases for these catastrophe events; 4

6 Solvency II / Basel II frameworks will require insurers and reinsurers in the future to acquire reinsurance protection or to hold capital to cover 1:200 / 1:1000 year loss events, respectively; Rating agencies are requiring increased levels of capital to support insurance and reinsurance business written in catastrophe exposed areas (e.g. $120 of capital for $100 of coverage). Given the significant effects of recent losses, there is now further concern over future rating agency scrutiny, which is likely to result in the need for reinsurers to purchase additional retrocession coverage; In recent years, the three principal risk modeling companies have significantly changed their modeled loss profiles, firstly after Hurricane Katrina (2005), and now again, as a result of Hurricane Ike (2008). This has raised projected losses in many cases by 100% or more, both for wind exposed and earthquake exposed areas; and Reduced capital allocation to retrocessional business by traditional publicly-traded reinsurers due to investor / analyst concerns about concentrated catastrophe exposure. This imbalance between the market demand for property retrocession and the supply of retrocession capacity is expected to continue and lead to a continuing attractive rate environment for retrocessionaires. Given that the Company plans to commence writing business effective January 1, 2012, ALRE will also be strongly positioned in the event of an active 2011 U.S. Hurricane season, which would likely produce further significant increases in premium rates from the current rate levels (also known as a hardening market) and tightening of retrocession contract terms. As a result, the property retrocession market is expected to provide very attractive opportunities for a well-capitalized company such as ALRE, which will offer AAA credit equivalent fully-collateralized reinsurance protection to its clients. Competition ALRE also believes that the Company s business plan encompasses low levels of execution risk due to Management s industry leading relationships and direct access to blue chip clients such as Munich Re, Swiss Re and Hannover Re, with substantial capacity already earmarked for these leading global reinsurance participants. The retrocession market comprises only a small number of retrocessionaires, the majority of which offer only a limited product range. As a result, many retrocession buyers feel that they have an over-concentration of exposure to existing retrocessionaires, and therefore welcome the arrival of a new, highly reputed and professional, collateralized retrocessionaire with whom to diversify some of their credit risk. The Company s competitive advantage largely encompasses the industry relationships of its leadership team, as well as its ability to offer fully-collateralized reinsurance protection that is the equivalent of providing AAA credit protection to its clients. The Company will face competition from major U.S., U.K. and Bermuda based reinsurers and certain Lloyd s syndicates, most of whom have greater financial, marketing and management resources than ALRE. However, the ability to offer fully-collateralized retrocessional coverage levels the playing field with larger and more heavily capitalized companies which rely on financial strength ratings from rating agencies such as Standard & Poor s and A.M. Best to compete. There are two primary categories of retrocessional providers that will be in direct competitions with ALRE which include (i) highly rated companies with an A.M. Best financial strength rating of A- or better and/or S&P rating of A- or better; or (ii) stand-alone companies posting collateral ( fully collateralized vehicles) such as the structure in which the Company will employ. Some of ALRE s competitors will be specialty reinsurance companies, as well as reinsurance companies owned by large financial institutions. Thus, retrocession is written by both monoline retrocessionaires such as ALRE as well as traditional multi-line reinsurance companies. However, in ALRE s view, traditional reinsurers are not well suited to write highexcess retrocessional coverage since traditional rated companies typically will be required by rating agencies such as S&P to hold $120 of capital for every $100 of aggregate reinsurance limit provided to clients. This contrasts with the Company, which will have the ability to provide $100 of aggregate reinsurance limit for only approximately every $75 of capital maintained to collateralize the limit. 5

7 ALRE s most significant competitors are likely to include Aeolus, Alterra, Credit Suisse, DE Shaw, Everest Re, Lancashire, Limit Syndicate (QBE), London Life (Great-West Life), Manufacturers P&C Limited (Manulife) and National Indemnity (Berkshire Hathaway). Most of these competitors offer a diverse number of insurance and reinsurance products unlike ALRE, which will focus exclusively on the global property retrocessional markets. From the perspective of indirect competition for ALRE s products, financial institutions have also created alternative capital market products that compete with traditional reinsurance products, such as reinsurance securitization products such as sidecars and catastrophe bonds. These products offer reinsurers with the opportunity to transfer risk and gain capital relief for a portion of their aggregate reinsurance exposure as an alternative to direct retrocessional coverage. Operations The Company s operations will be exclusively focused on providing retrocessional coverage to its reinsurer clients. Therefore, ALRE s primary operations will comprise marketing activities, underwriting and product pricing, and claims management in the event of reinsured losses. Given the high-excess nature of the Company s retrocessional products, ALRE s business model inherently has a low loss frequency, but high loss severity profile. Accordingly, the Company will be able to operate effectively without a significant operations infrastructure. ALRE s business will be managed by a few key executives that have very strong reputations and longstanding relationships in the global reinsurance industry. As such, the Company believes it can execute its business plan with a very small employee base initially targeted at seven employees. No employees will be unionized and key executives including ALRE s President and CEO, Chief Underwriting Officer, and Chief Financial Officer will earn most of their overall targeted compensation through eligible performance bonuses based on the profitability of ALRE s business. All employees of the Company are based out of office facilities which are leased in the parish of Christ Church, Barbados and comprise approximately 1,200 square feet. All significant operational activities must be conducted by ALRE s employee base in Barbados in order to ensure the tax-advantaged incorporation status of the Company. Reflecting the nature of its business, ALRE intends on operating with a very low base cost structure relative to its capital base. The Company has projected its base operating costs at approximately $2.5 million per annum, or less than 1.0% of its planned beginning capital level. The Company s primary base expenses will be compensation and employee benefits, marketing and promotion costs, professional services, travel and entertainment expenses and trustee fees. The Company will also incur expenses for commissions paid to reinsurance intermediaries on that portion of ALRE s business that is sourced from brokers; however, such brokerage commissions are effectively passed through to ALRE clients based on a gross-up in the base retrocessional premium rate. As a new company, ALRE has and will incur a modest level of start-up expenses prior to writing its first retrocessional contract effective January 1, Such expenses are not anticipated to exceed $1 million, and represent salaries and other start-up expenses incurred by the Company since its formation in 2010 through the end of 2011 prior to writing its first retrocession contracts. Management Team ALRE has assembled an experienced team of professionals to operate and govern its business. The day-to-day operations of the Company will be led by Mr. Andreas Kusay, an experienced and well respected market leading reinsurance executive, who has over 20 years of reinsurance market expertise. This includes a very impressive track record over the period of as Chief Executive Officer of Manufacturers P&C Limited (a subsidiary of Manulife Financial), a major company participating in the global property retrocession market. During Andreas Kusay s tenure at Manufacturers P&C Ltd., his business unit generated returns on aggregates averaging 36.5% per annum. Following departing Manufacturers P&C Limited in 2008 as a result of internal management reorganizational alignment, Mr. Kusay acted as a Senior Consultant to the Insurance Futures Exchange 6

8 ( IFEX ) where he supported the development of IFEX s exchange traded property catastrophe futures business. For the past twelve months, Mr. Kusay has also been dedicated to formulating ALRE s retrocessional business plan with the goal of replicating his previous success and taking advantage of favorable market opportunities in the retrocessional reinsurance market. Mr. Kusay continues to have close relationships with all major reinsurance brokerage firms throughout the world and has maintained strong ties with senior executives of leading reinsurance companies operating globally. In addition to his role as President and CEO of the Company, Mr. Kusay will be key in producing business for ALRE as the result of his strong relationships with blue chip reinsurance companies all over the world. Mr. Kusay will also be actively involved in the Company s underwriting process and monitor ALRE s reinsurance portfolio in tandem with the Company s Chief Underwriting Officer. The Company will also benefit substantially from the involvement of Mr. James Bryce, who is a founding shareholder and Chairman of ALRE s Board of Directors. Mr. Bryce will add substantial value to ALRE through his vast complementary experience and strong industry relationships, and will support the promotion of the Company in global reinsurance markets. Most recently until 2009, Mr. Bryce served as President and CEO of IPC Holdings, Ltd. which he co-founded in 1993 and which was a leading publicly traded reinsurance company focused on global property catastrophe reinsurance. Mr. Bryce was the first employee of the company, which was formed by private investors with an initial capitalization of $300 million following Hurricane Andrew in IPC Holdings, Ltd. was listed as a publicly traded company on NASDAQ in 1996, and had subsequent capital raising offerings following 9/11, and Hurricane Katrina. Capital grew to $2 billion, and net income grew from $15 million in 1993 to $400 million in 2004 and In total, Mr. Bryce has approximately 40 years of combined experience in the insurance and reinsurance industry The Company s other key executives will include ALRE s Chief Financial Officer (Mr. Manoj Karnani) and Chief Underwriting Officer (Mr. Mark Tinslay), each of whom average over 20 years of experience in insurance and reinsurance. The Chief Financial Officer will govern the financial affairs of the Company and will coordinate with ALRE s external auditors, regulatory officials and investors on financial and compliance manners. The Company s Chief Underwriting Officer will be responsible for product design, interfacing with reinsurance companies, Lloyd s Syndicates and the reinsurance brokerage community, monitoring submissions, product pricing, underwriting, and risk management. Mr. Tinslay has an extensive background in retrocessional markets and is acquainted with every major retrocession account worldwide and has knowledge specific to each account. He also has an in-depth understanding of market clauses and issues, through his technical and contract wording background and more recently, dealing with collateralized markets on areas such as collateral and release provisions. The Company s management believes that it has appropriate contingency plans in place, which if necessary, could replace any of the top executives of ALRE in a manner in which it can continue to successfully operate. ALRE will have employment agreements in place for all of its senior executives which provide a compensation package comprised of a base salary plus a benefit package and a performance bonus element based on the profitability of the Company. Risk/Opportunity The Company s primary risks relate to the high-loss severity profile of its business model as well as its status as a newly-formed entrant to the global retrocessional reinsurance markets. ALRE has no operating history and cannot make any assurances that it will achieve all aspects of its business plan or achieve desired returns on equity. The risks associated with achieving the desired financial returns for investors primarily relates to (i) successfully deploying $300 million of capital at attractive premium rates and (ii) the occurrence of natural catastrophes. While the nature of ALRE s business protects reinsurer clients against losses from natural catastrophes (sometimes referred to as Acts of God ), Management believes its business model encompasses a number of features which will mitigate the potential for losses and substantial impairments of capital including the following: 7

9 ALRE s attachment points for its Severity Cover product will be set at what are generally considered to be remote levels; approximately $40.0 billion for the U.S. and $12.5 billion for the rest of the world; ALRE will limit its aggregate exposures by geographic zones and individual exposures to reinsurer clients to diversify the risk; while ALRE s products are described generically as worldwide in scope, certain of the constituent contracts may be more limited either geographically or by peril thus providing additional diversification; By writing a portion of its business in Pro-Rata ILW contract form, the Company will avoid basis risk and avoid potential coverage disputes that otherwise would be inherent in reinsuring against actual losses of the retrocedant; and, By offering a combination of its Severity Cover and AXL Cover products, ALRE achieves a balanced portfolio which reduces the probability of total loss of its capital base in any given year. While it is difficult to model the probability of a total loss of capital due to its start-up nature, the Company believes this probability would likely be close to only 1.0% (based on management estimates). With respect to the risks associated with capital deployment, Management believes that ALRE s execution risk is limited due to the strength of the leadership team. Both Andreas Kusay and James Bryce have long standing industry relationships with leading reinsurance companies and intermediaries operating globally and are highly regarded in the industry. Furthermore, the Company has already earmarked approximately $ million of retrocessional capacity from two leading global reinsurance companies, Munich Re and Hannover Re, with which Andreas Kusay has had active business discussions. Furthermore, the Company has strong commitments from three other reinsurance companies, Nephila, Platinum Re and Renaissance Re, which reduces execution risk significantly. In addition, Management believes that its modest initial capital level of approximately $300 million is optimally aligned with its ability to generate sufficient business at attractively priced premium rates. Capital Requirements The Company believes that its initial targeted capital level of approximately $300 million represents an optimal level of capitalization to take advantage of favorable risk-adjusted return opportunities in the retrocessional market while minimizing the execution risk of not deploying capital at attractive premium rates or chasing business. It is currently anticipated that ALRE will pay out up to 100% of its net income in dividends annually in order to maintain its current market capacity near its initial levels and allow the Company s investors to reallocate dividends received from ALRE into other investment opportunities. In the event that market opportunities arise to increase the scale of the Company s business (such as in the event of additional shortages of retrocessional capacity or following large global catastrophe losses), Management (subject to the approval of ALRE s Board of Directors) may chose to maintain higher capital levels to take advantage of such opportunities. With $300 million of capital to deploy in retrocession operations, the Company projects that it will immediately have the ability to provide annual retrocessional market capacity ( aggregate limit ) of approximately $400 million to potential clients. Based on its projected business mix and anticipated premium rates, ALRE projects it has the ability to write over $100 million of reinsurance premiums in its first 12 months of operations. The Company will immediately be cash flow positive starting in January 2012 and will not require any increases in working capital to commence ALRE s initial operations or conduct business on an ongoing basis. 8

10 The table below illustrates the expected use of proceeds from this transaction along with ALRE s anticipated share capital and outstanding shares following the equity raise: Mr. Andreas Kusay and Mr. James Bryce collectively will ultimately own 40,000 shares of ALRE for a total investment of $1 million to seed the Company as founding shareholders. The primary use of this seed capital was to cover initial start-up expenses. ALRE will also initially retain a small amount of working capital, some of which will be utilized to pay legal expenses associated with the formation of the Company. It has been assumed that new investors will control approximately 99% of the Company s total shares outstanding following completion of the transaction including the purchase of newly issued ALRE shares and shares held by initial shareholders. For the foreseeable future, ALRE plans to operate with an all equity capital structure. All shareholders will be party to a shareholders agreement, which together with the by-laws of the Company, will define the rights and obligations of the holders of ALRE s shares including the transfer of shares, ALRE s corporate governance and related matters. Financial Summary As a start-up company, ALRE does not have historical data to use as a basis for financial projections. The financial data presented below are based on certain assumptions regarding capital, premiums, losses and expenses. As a high-excess global property catastrophe retrocessionaire, ALRE s business model will have a high loss severity, but low loss frequency profile. As such, it is difficult to project reinsured losses in any given year as the occurrence of reinsured losses must be viewed to some degree as a binary event (the full loss or no loss scenario) or be measured over a reinsurance cycle (the mean loss scenario). Based on actual and estimated catastrophe model loss probabilities (see Section 2.4 Catastrophe Modeling and Loss Probabilities) associated with ALRE s planned attachment points, the probability of the Company incurring no loss in a given year is 83.7% with respect to ALRE s Severity Cover product and 90% for ALRE s AXL Cover product. Therefore, it is probable that the Company will not incur reinsured losses in most underwriting years. However, when ALRE does incur losses, they will likely be severe in nature with actual losses being dependent on correlation factors between ALRE s products and the type and severity of the natural catastrophe event (e.g. large event or series of mediumto-large events). Therefore, the Company s ability to project future results is constrained by the unpredictable nature of anticipating when large catastrophe loss events will occur. As such, ALRE has presented multiple scenarios in this business plan with the objective of illustrating potential financial results for the Company going forward. From a summary level perspective, the Company has presented two distinct scenarios in which to evaluate potential financial returns. This Summary Financial Model presents scenarios that include (i) a mean loss scenario which purports to illustrate average annual financial results over a multiple year, long-term reinsurance cycle assuming the occurrence of reinsurance losses based on statistical catastrophe model loss event probabilities and (ii) a no loss scenario which reflects a binary assumption that no single-event (or series of events in the case of the AXL Cover) will attach the Company s reinsurance limits. 9

11 In contrast to the inherent difficulty in forecasting incurred losses in any given year, ALRE does have the ability to project premiums, investment income on collateral, retrocessional limits to be offered, and expenses with a relative degree of precision. The table below presents the Summary Financial Model which displays the mean loss and no loss scenarios for each of the Company s two major retrocessional products on a stand-alone basis and on a blended portfolio basis: The Summary Financial Model presented above assumes initial share capital of $300 million after transaction-related items. The total initial net share capital of $300 million plus projected premiums written, less projected operating expenses and acquisition costs, produces the maximum total reinsurance limits that can be offered by ALRE based on its planned capital levels (see Section 2.7 Calculation of Fully-Collateralized Aggregate Limits). The blended return in the table above reflects the sum of the projected financial data for ALRE s two major retrocessional product offerings, which is effectively weighted by the capital that is assumed to be allocated to each product type. Despite an assumed even allocation of capital between the Severity Cover and AXL Cover product offerings, the total projected reinsurance limit offered will differ by product type due to differences in premium rate assumptions which impact the level of premium leveraged into the reinsurance limit being offered. Furthermore, the illustrative projected total reinsurance limit offered will vary when comparing the mean loss and no loss scenarios due to varying premium rate assumptions. Overall, Management is confident that it can generate a return on equity in its first twelve months of operations approaching 35% 10

12 (assuming the absence of major natural catastrophes) and returns on equity approaching 20% over a multiple-year, reinsurance cycle. The table below presents the Company s pro forma income statement assuming a no loss scenario over the first five years of ALRE s operations: The variability in annual results throughout the five-year no loss pro forma financial statement presented above reflects changing premium rate assumptions, which impact the amount of reinsurance capacity that ALRE can offer in any one year as well as its premium revenues. The change in the premium rate assumption reflects the assumption that after a number of years of no major catastrophe loss events, the market for retrocessional coverage will experience a gradual softening market (i.e. declining premium rates reflecting a build-up of industry excess capital). Given the relatively straight-forward nature of the Company s business and its short-tail profile focused exclusively on property retrocessional coverage, ALRE s principal assets and liabilities will include its cash and invested assets and any loss reserves established in the event that the Company incurs losses which are unpaid at the end of a period. The Company s invested assets will be comprised effectively of short-term investments in U.S. Treasury obligations or government agency securities and will be mostly, if not all, held in a trust accounts designated by clients to support ALRE s reinsurance obligations. 11

13 The table below presents the Company s pro forma balance sheet assuming a no loss scenario over the first five years of ALRE s operations: The five-year pro forma balance sheet presented above reflects the Company s current intention to distribute 100% of its net income to its investors in the form of dividends and therefore maintain aggregate reinsurance capacity near its initial planned levels. In addition to these illustrative scenarios presented in this Executive Summary, ALRE has presented 10- year pro forma financial statements on both a no loss scenario and on an as if scenario. The as if scenario purports to illustrate financial results that would be generated going forward in the event of a repeat of the catastrophe loss event sequences which occurred during the 10-year periods of and (see Section Year Pro Forma Financial Statements). Valuation In general, insurance and reinsurance companies are valued based on their return on equity profile, balance sheet quality, earnings generation and franchise value. Since 2000, the global reinsurance industry has produced a compounded average return on equity of 8% - 9% as reported by Holborn, an independent reinsurance broker. Similarly, the average return on equity for the United States property & casualty insurance industry was only approximately 9.0% over the five-year period of This compares to an average projected return on equity profile for ALRE approaching 20% or greater. 12

14 Relative to other companies in the global reinsurance and insurance markets, Management believes that ALRE offers investors an attractive risk-adjusted return opportunity at attractive valuation levels. The table below presents implied valuation analysis based on the proposed terms of the ALRE capital raise: As displayed in the table above, the ALRE transaction as contemplated implies an investment being made by new investors at a slight premium to beginning net asset value, reflecting initial start-up and transaction-related expenses. The implied price / earnings ratios in the table above have been displayed for both the no loss scenarios and the mean loss scenarios (which is based on catastrophe modeling statistics), consistent with the Summary Financial Model presented in the Financial Summary section above. The implied price / earnings ratio of 3.02 times earnings for the no loss scenario also illustrates that it would take approximately three years for investors to recover their original investment. The amounts reported in the line implied return on investors capital are calculated by taking the projected return on equity for each scenario divided by the assumed price / book multiple at exit. This basic calculation purports to illustrate the annual internal rate of return for investors at the implied valuation; however, such figures assume that earnings are fully reinvested in the business at the implied internal rate of return whereas the Company initially anticipates paying out up to 100% of its profits in the forms of dividends annually. 13