REINSURANCE & FRONTING MARKET UPDATE - 2014

REINSURANCE & FRONTING MARKET UPDATE - 2014

Reinsurance & Fronting Market Update 2014 Michael Woodroffe, President

Agenda 1. Overview of Market in 2013 2. Current Captive Reinsurers 3. Reinsurance Strategies 4. Saving Money Buying Multi-Year 5. Helping Small Captives Buy Reinsurance

Market in 2013 Reinsurance capital increased from $505 billion to $525 billion by 30 th September 2013 with large amounts of capital coming into the Insurance Linked Securities sector. Total insured losses at $45 billion. Calgary Floods - CAN$1.7 billion German hail storms and floods - $5 billion US jury awards - $1.2 billion against Dow Chemical price fixing - $1.1 billion against Trans Healthcare Inc. Fla resident falls - $1 billion Briarwood Capital LLC vs Lennar Corp. Cat bond issuance increased from $6.5 billion to $7.4 billion. Companies no longer reinsuring captives - American Safety Re - in run off - Torus - division closed

Renewals: Market in 2013 Catastrophe premiums down 11% globally at the 1 st January 2014. Catastrophe premiums down 20-25% in Florida at 1 st January 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 7.5% 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 1 st January 2014.

Market in 2013 Woodroffe s Predictions in 2013 Global reinsurance supply will continue to be in excess of demand for 2013. Although market adequately capitalized there is limited choice of carrier for captive reinsurance buyer. Inflation beginning to grow around the world. Danger to the Bond Portfolios valuation for reinsurers and insurers (the ultimate loss?). Workers Comp and Transportation lines show signs of hardening in 2012 and expected to continue through 2013. Domestic insurance markets scrutinize profitability of accounts. Medical PL insurance company/captive s consolidation continues.

55+ active markets. 1,400+ international insurance companies. 803+ pure and group captives. 113+ captives writing 3 rd party 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: ABIR

Bermuda Specialist Captive Reinsures AM Best Rating Policyholder Surplus (January 8, 2014) (June 30, 2013) Alleghany Corp / Trans Re A $6.7bn Allianz A $70.01bn Allied World A $3.37bn Amlin AG. A $2.06bn Arch Capital Group Ltd. A+ $5.2bn Aspen Insurance A $3.2bn BRIT A $1.05bn Catlin A $3.56bn Everest Re A+ $6.6bn Hiscox A+ $1.39bn Maiden Holdings A- $956mm Markel A $6.32bn Montpelier Re A $1.6bn Renaissance Re A+ $3.57bn Third Point Re A- $972mm Tokio Millennium Re A++ $1.2bn XL Group plc A $11.24bn

US Specialist Captive Reinsurers AM Best Rating Policyholder Surplus (January 8, 2014) (June 30, 2012) Alleghany Corp / Trans Re A $6.7bn Arch Re A+ $5.84bn* ACE Group A+ $27.3bn* Axis Re A+ $5.56bn * Berkley Re A $4.37bn Discover Re (Travelers) A+ $24.8bn* General Re A++ $14.1bn* Munich Re America A+ $34.4mm National Indemnity A++ $191bn* Odyssey Re A $3.62bn Partner Re A+ $6.42mm* Swiss Re America (re co. ltd) A $30.13mm TOA Re A+ $626mm * Group Surplus

Healthcare Reinsurers ACE 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) Tokio Millennium Re (BDA)

Auto Reinsurers Ace Tempest (US) Allianz (BDA) Amlin (BDA) Arch Re (US) Catlin (BDA) Dorinco (US) Greenlight Re (Cayman) Hamilton Re (BDA) JRG Re (BDA) Maiden Re (US & BDA) Mainstreet Group (US) Markel (BDA & US) Odyssey Re (US) Partner Re (US) Scor Re (US) Third Point Re (BDA) Tokio Millennium Re (BDA) Trans Re / Alleghany (US)

Workers Comp Reinsurers ACE Tempest Re (US) Amlin (BDA) Arch (US) Aspen Insurance (UK) Axis Re (USA) Bermuda Catastrophe Reinsurers (BDA) BRIT (BDA) Catlin (US/BDA) Greenlight Re (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) Tokio Millennium 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!

Reinsurance Strategies 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 premium. Insist on buying Reinsurance separately Divide & conquer

Reinsurance Strategies Scrutinize 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 them.

Multi-Year Excess of Loss Client buys $10m xs $1m Umbrella from Standard markets every year. Premium is $1.5m 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.

Answer: Multi-Year Excess of Loss 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 insurer.

Single Aggregate Multi Year Limit 2009 2010 2011 2009-2012

Depth of Coverage Optional Reinstatement Reinstatement Optional

Making Reinsurance Affordable for Small and Start Up Captives

Tactics and Tricks First year policy 15 months period. Ramp up costs staggered deposit premiums. 10%, 20%, 30% and 40% Sub limit non-essential coverages Cap sideways exposures to reduce costs

Tactics 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 it.

Insurance 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. GC securities estimate that the cat bond market alone could reach $23bn by the end of 2016.

Michael Woodroffe, President Kirkway International Limited 3 Bermudiana Road Hamilton HM 08 Bermuda Tel: 441 296 5829 mw@kirkwayintl.com www.kirkwayintl.com

2014 World Captive Forum Fronting Overview Old American Capital Corporation

Fronting 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 arise 2

Fronting Overview Typical Fronting Relationship Insured Insures 100% of Risk Fronting Company Insures 100% of Risk Captive 100% of Premium 100% of Premium less Fees 3

Fronting 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 A.M. Best rating The need for other financial strength measures 4

Challenges Facing Captives While Captive formations are on the rise, 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 effect 5

Fronting Utilization & Trends Historically, 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 Carriers Fortune 500 AIG AmTrust QBE The Hartford Travlers Zurich Specialized Companion Hudson Old American SPARTA State National 6

Old 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 Tokio Millennium 7

Managing General Agents Old American Primarily Sources Business Through Specialized MGA s MGA s Present A Certain 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 risk 8

Enterprise Risk Management Old American Mitigates These Exposures Through: Initial due-diligence to ensure MGA is sufficiently funded and has proper procedures in place Adequate E&O insurance Fidelity Bond and Personal Guaranty Premium Trust Account Annual Premium Cap to control growth (i.e. adverse selection & underpricing) Semi-annual claims and compliance audits; Quarterly if necessary Semi-annual loss ratio monitoring Automated, state of the art underwriting, with systems that provide realtime data for monitoring pricing, new and renewal business written and claims handling information Aggregate CAT reinsurance 9

Texas Private Passenger Auto Market Texas Auto Market Analysis Top 10 Insurers Direct Premiums Written ($000) Entity Group 2012 State Farm Mutl Automobile Ins State Farm Mutl Automobile Ins 2,510,789 Farmers Texas Cnty Mutl Ins Co Farmers Insurance Group of Cos 1,311,818 Progressive County Mutl Ins Co. Progressive Corp. 1,279,813 Allstate F&C Insurance Co. Allstate Corp. 738,565 Government Employees Ins Co. Berkshire Hathaway Inc. 686,417 Old Amer Cnty Mutl Fire Ins Co Old American Capital Corp. 485,018 Home State County Mutl Ins Co. Home State Insurance Grp Inc. 450,042 United Services Automobile USAA Insurance Group 420,907 Allstate Indemnity Co. Allstate Corp. 400,622 Colonial County Mutual Ins Co. Nationwide Mutual Group 346,932 Source: Texas Supplemental A for County Mutuals, NAIC Annual Statements, SNL Financial, Texas Department of Insurance 10

Old American

County Mutual advantages Surcharge Rating flexibility County Mutual insurers are exempt from the Texas Insurance Code provisions prohibiting the use of surcharges for motor vehicle violations. Assessments While not specified by law, most Independent County Mutuals historically have not received TAIPA assessments. This is due to the large number of policies produced in underserved regions and earn credits for producing such policies. Regulatory & compliance County Mutual insurers eliminate procedural burdens for MGA s as they respond directly to Texas Department of Insurance (TDI) for matters involving compliance, rate, rule and form filings, complaints and licensing. Withdrawal MGA s are not subject to the Withdrawal Plan Guidelines and Restrictions imposed by the Texas Insurance Code, Chapter 827. County Mutuals still retain a significant advantage making them a desirable alternative to insurance companies wanting to write private passenger auto insurance in Texas 12

Old American advantages Endorsements OACM has twenty (20) approved endorsements for use with the standard Personal Auto Policy allowing MGA s to customize their product and coverage. Symbols & Territories OACM has developed proprietary Territory, Liability and Physical Damage Symbol Models allowing for sophisticated pricing alternatives. Analytics OACM skilled and insightful staff can provide a complete array of actuarial services including Product Development and Market Analysis, Pricing, Rate Filing Support and Regulatory Compliance. Comprehensive Audits OACM s experienced audit team provides an in-depth review and analysis of MGA s procedures to help ensure compliance at all levels of the operation. Regulatory and Legislative Involvement OACM has a strong relationship with the TDI and actively monitors legislative matters relating to Texas automobile insurers and policyholders. 13

Contact Information Andrew Kirkpatrick Vice President of Business Development (214) 561-1985 andrew.kirkpatrick@oldam.com 14