Global Reinsurance Segment Review

The Capital Challenge

September 2013

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Exhibit 12 Brazil Reinsurance Ceded as a Percentage of Primary Market's Direct Premium (2008-2012)

Premium (BRL Billions)

BESTS SPECIAL REPORT

70 60 50 40 30 20 10
Our Insight, Your Advantage.

80

10

Global Reinsurance
8 7 6 5 4 3 2 1 (% of Direct Premium)

Segment Review August 26, 2013

The Capital Challenge: Reinsurance Capacity Overshadows Market

from SUSEP as of July 12, 2013.

Third-party capital intensifies competition.

Despite 0 a subpar operating climate, global reinsurers have managed to squeeze out0 2008 2011 2012* relatively reasonable returns 2009 on capital and 2010 compensate investors while sustaining Direct Premium Ceded Reinsurance Premium Reinsurance Premium as % of Direct Premium organic growth in capacity. Quite an accomplishment, especially considering all the * 2012 isobstacles gross of reinsurance (BRL 932.2 million). various they commission have and continue to navigate. Source: SUSEP website (Statistics System); data reflects industry totals and financial statements available Over the past two-and-a-half years, catastrophes worldwide have inflicted approximately USD 190 billion in insured losses, according to Swiss Res Sigma. For global Exhibit 13 reinsurers, these wereSegment primarily a drag on earnings, as balance sheets remained Brazil Local events Reinsurer Profit/Loss (2008-2012) robust. The challenge of managing loss accumulation from global was eviIRB Brasil Resseguros' monopoly ended in 2007, but it maintains acatastrophes dominant dent in 2011, and since 2008 reinsurers have faced numerous hurdles due to a weakshare of the local reinsurance market's profit margin. ened global economy: deteriorating investment returns; more volatile investments; sup2012 pressed growth opportunities; increased client retentions and competitive pricing. Now another hurdle has materialized on the horizon in the form of third-party capital. With excess capacity prevalent among the traditional reinsurers, pricing in the market 2010 is already very competitive.This is most evident in longer tail casualty classes, leaving IRB only mar2009shorter tail specialty and property classes up for the chase. While the capital Other kets historically have provided capacity out on the tail for property/catastrophe risk, 2008 generally in the form of catastrophe bonds, industry loss warranties (ILWs) and other collateralized structures, it now 200 appears investors, asset managers and bankers are 0 100 300 400 500 600 showing more interest in the lower layers of catastrophe programs, as well as in other BRL Millions specialty and casualty classes. Source: SUSEP website (Statistics System); data reflects financial statements available as of July 12, 2013. Various reinsurance brokers have reported that as much as USD 45 billion of additional capacity has entered the reinsurance market in recent years, representing 14% of the current global property limit. Hedge funds, pension funds, endowments and trusts looking for a bigger slice of the pie are lured by the relatively favorable returns, float
2011

Contents

Top 50 . . . . . . . . . . . . . . 7 Top 50 Ranking. . . . . . . . 8 Lloyds Trends. . . . . . . . 11 Brazil & Latin America . . 12 Asia/Pacific. . . . . . . . . . 17 Middle East & North Africa .20 Regulation. . . . . . . . . . . 24 Outlook. . . . . . . . . . . . . 26

Exhibit 1 Global Reinsurance Shareholders Equity Plus Share Repurchases (2008-2Q 2013 YTD)
250 Total Shareholders' Funds 200 6.3 USD Billions 16.3 20.4 Share Repurchases 25.8 29.8

Analytical Contacts

150 100 50

Robert DeRose +1 (908) 439-2200 Ext. 5453 Robert.DeRose@ambest.com Greg Reisner +1 (908) 439-2200 Ext. 5224 Greg.Reisner@ambest.com

4.0

Editorial Management
Al Slavin

0 2008

2009

2010

2011

2012

Note: Excludes Lloyd's in all years and Alterra in 2Q 2013 YTD. Source: A.M. Best data & research

2Q 2013 YTD

Copyright 2013 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. No part of this report or document may be distributed
in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, refer to our Terms of Use available at the A.M. Best Company website: www.ambest.com/terms.

Exhibit 2 Global Reinsurance Net Premium vs. Shareholders Equity (2007-2012)

Special Report
250 200 150 100

Exhibit 1 Global Reinsurance Shareholders Equity Plus Share Repurchases (2008-2Q 2013 YTD)
Total Shareholders' Funds Share Repurchases

Global Reinsurance

A few hedge funds have chosen to enter the reinsurance market directly by forming new reinsurance companies, which certainly has drawn attention. However, with hedge-fund50 backed companies, not all of the capital is dedicated to providing reinsurance capacity.A substantial portion of that capital supports investment risk. Other investors have found it 0 easier to collaborate with traditional reinsurers or collateralized facilities that already have 2008 2009 2010 2011 2012 2Q 2013 the operational infrastructure, relationships and, most important, the intellectual YTD Note: Excludes Lloyd's in all years and Alterra in 2Q 2013 established YTD. Source: A.M. Best data &to research capital succeed at building a profitable underwriting portfolio.

Exhibit 2 Global Reinsurance Net Premium vs. Shareholders Equity (2007-2012)

(USD Billions)

Over the past year, numerous new sidecars have been formed by traditional reinsurers.Third party or managed capital is being spun as affording additional financial and operational flexibility.This source of 250 capital provides additional underwriting 200 capacity to better serve clients and com150 plements the traditional balance sheet and 100 risk appetite. Managed capital therefore 50 0 should allow the reinsurer greater flexibil2007 2008 2009 2010 2011 2012 ity with capital resources throughout the NPW Shareholders' Equity underwriting cycle and provides a low-risk Source: A.M. Best data & research source of income in the form of management fees and profit sharing.This revenue offsets fixed operating costs that otherwise would fall to the bottom line.

PH3 Stickiness of Some Capacity Questionable Exhibit 3 The bad news is that more capacity only makes reinsurance pricing more competitive, especially demand for cover is declining. Global Reinsurance when Year-to-Date Stock Price ChangeThe for stickiness Select of this capacity also remains questionable. The traditional market has long prided itself on enduring, deep Reinsurers (2013)

USD Billions

and uncorrelated risk that the reinsurance business offers. However, industry headlines 25.8 29.8 may be aggrandizing the true reinsurance20.4 appetite of this third-party capital. Front-line 6.3 16.3 sources indicate that capital is entering methodically and precisely, not just rushing in 4.0blindly.

relationships. Should this additional source of capacity decide to exit quickly, the Prices as client of Aug. 5, 2013

out of markets as opportunities arise and are careful not to overstay their welcome. That strategy has its place in the markets, and the key differences need to be understood. Many market observers would expect that over time the vast majority of hedge fund participants will move in and out of the reinsurance sector, while a minority of hedge funds may make a longer term commitment. Source: A.M. Best research
Ar As ch pe Am n lin Be rk Al sh lie ire d Ha Axi th s aw a En Ca y du tli ra n Ge nce n Gr er Ha een ali nn lig ov ht Ko er R re e an M Re ap M fre M aid on en tp el M ier M S& un A i D Pa ch R rtn e e Pl r Re at inu m Ev Q er BE es tR Re e nn ais RG an A ce R SC e S To wi OR kio ss M Re ar ine V ali W hit du e s Al Mou X leg n L ha tain ny s Co rp

S&P 500 seriously contemplated YTD % Price some Change explaining Avg Reinsurers % Change underwriter might have to do! Reinsurers have 65 58.6 60 57.5 this reputational risk and should continue to do so. As is the case with SAC Re, a com55 panys affiliation can greatly influence its destiny. 50 45 Some market observers believe that hedge funds are the biggest36.8 influence on the rein40 35 32.5 likely pension funds, which control vast amounts of surance market. Actually, its more 32.3 33.9 30 27.9 26.7 in the 26.3 capital. These funds have been quietly involved reinsurance sector for some time. 24.4 23.3 23.1 25 22.9 22.8 21.9 20.4gain 20.4 They have slowly taken 18.5 the time to learn the industry, accumulate knowledge and 20 15.9 15.6 14.7 19.7 some comfort with the sectors cyclical characteristics and profitability. In addition, 12.2 13.5 15 10.3 8.8 10 pension funds are6.6 typically long-term investors, which is more in line with reinsur5.8 5 ance market1.6 fundamentals. Hedge funds typically are deemed to be1.6 fast money, but that 0 should not be construed as criticism. Many hedge funds, not necessarily all, dart in and -5 -3.0 -0.4

(% Change)

Exhibit 4 Global Reinsurance Issued Sidecars and Cat

Special

250 200 Report 150 100 50 From0a

(USD Billions)

(USD Billions)

Global Reinsurance Net Premium vs. Shareholders Equity (2007-2012)

250 200 150 100 50 0

Global Reinsurance
2007 2008 2009 NPW 2010 2011 2012 Shareholders' Equity

reinsurers perspective, this just might be the wave of the future where capital 2007 2008 2009 2010 2011 Source: 2012 A.M. Best data & research management includes managing third-party capital. The jury is still out on this, but tradiNPW Shareholders' Equity tional reinsurers that dont have a long history of managing third-party capital are wading Source: A.M. Best data & research into the water.This suggests that management teams believe third-party capital likely could linger in the reinsurance sector for some time, and that they understand a basic tenet the best money managers attract the most capital.PH3 This subtle variation paints a different mind3 set than the disposable reinsurers established Exhibit after Hurricanes Katrina, Rita and Wilma in

PH3 Global Reinsurance Year-to-Date Stock Price Change Exhibit 3 Reinsurers (2013) Global Reinsurance Year-to-Date Stock Price Select Prices as Change of Aug. 5,for 2013 YTD % Price Change Avg Reinsurers % Change 65 Reinsurers (2013)
Prices as of Aug. 5, 2013
65 60 55 50 45 40 35 32.3 33.9 30 24.4 25 22.9 20.4 18.5 20 15.6 15 8.8 10 6.6 5 1.6 0 -5 -3.0 -0.4 YTD % Price Change 60 55Reinsurers % Change Avg 50 58.6 57.5 45 40 35 32.3 30 24.4 25 22.9 20.4 32.5 20 27.9 15.626.7 15 23.3 23.1 8.8 10 (% Change) 14.7 5 12.2 10.3 0 -5 57.5 58.6 S&P 500

33.9 36.8 18.5 21.9 1.6 5.8 6.6 13.5

32.5 23.1 26.7

(% Change)

23.

14.7 12.2 26.3 22.8 10.3 20.4 15.9 19.7 -3.0 -0.4 1.6

Source: A.M. Best research

2005. Currently, the traditional reinsurers move is both defensive and offensive. Exhibit 4 Reinsurers want to demonstrate success Global Reinsurance Issued Sidecars and Cat at managing Exhibit 4 third-party capital, because Bonds (2006-2013 YTD) if the market continues toIssued evolve in that Global Reinsurance Sidecars and 12Cat direction, they need the ability to point to Bonds (2006-2013 YTD) Cat Bonds Sidecars an established track record. 10
12 Cat Bonds Sidecars 8 A year 10 ago,A.M. Best stated that overall, the (re)insurance market seems to be 6 8 functioning in solid though unspectacular fashion, a statement that is still valid today. 4 6 Can a transition to easier days with hand2 4 pay take place without it first getsome ting worse? It will continue to take a great 0 2 2006 2007 2008 2009 2010 2011 deal of discipline.Traditional reinsurance companies may be able to emerge from 0 Source: A.M. Best research 2007 2010by 2011 2012 2013 this soft2006 market in a 2008 strong2009 position YTD sharing the brunt of any future losses with Source: A.M. Best research third-party capital, a vast majority of which then quickly exits.That will be the trial by fire. Until the staying power of recent third-party capital is tested by the wrath of a major loss, reinsurers will jockey for position to make sure they have a horse in that race. USD Billions USD Billions

Ar As ch pe Am n lin Be rk Al sh lie ire d Ha Axi th s aw a En Ca y du tli ra n Ge nce Gr ner Ha een ali nn lig ov ht Ko er R re e an M Re ap M fre M aid on en tp el M ier M S& un A i D Ar Pa ch R rtn e As ch er pe Pl Re at Am n inu lin Be m Al Ev rks Q l i er h ed E es Bir t R e H Ax Re a e nn th is aw ais RG a A an ce End Ca y Re u tlin ra SC n To Swi OR Ge ce kio ss G ne re ra M Re ar Han enli li ine n gh ov t Va W lid K er R hit o u r e s ea e n Al Mou X leg n L M Re ap ha tain ny s M fre Co M aid rp on en . tp el M ie M S& r un A i D Pa ch R rtn e e Pl r Re at inu m Ev Q er BE es tR Re e nn
Source: A.M. Best research

2012

2013 YTD

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Global Reinsurance

Given the greater pricing pressure that abundant capacity has placed on some of the most attractive margin business, A.M. Best can only contemplate the near-term effect to be thinner underwriting profits.That, combined with lackluster investment yields, makes achieving a reasonable return on equity a challenging proposition.There is the hope that fee income and profit share on managed capital may help close the gap. It is argued that while pricing is under pressure, perhaps the traditional reinsurers have commanded too much rate on line.This new capacity may cut off the peaks and bring greater stability to pricing for the foreseeable future.Time will tell. While the January and April renewal period seemed to progress in orderly fashion, June and July renewals in Florida and southern states gave way to the pressure of excess capacity and stagnant demand. U.S. property catastrophe pricing is reported to be off by as much as 20%.This class and region has been the bread and butter for the traditional reinsurance sector since the hard market peaked in 2006, and it remains a leading opportunity relative to other classes and regions in the world. Historical results demonstrate that global reinsurers have done a commendable job in cycle management since 9/11. It now seems this endeavor will become even more challenging.

Cycle Management: The Key to Long-Term Success

In this challenging market environment, prudent cycle management remains the most important factor to long-term success.This cannot be overemphasized. Global reinsurers have successfully executed on this strategy in recent years, perhaps because of the

Exhibit 5 Global Reinsurance US/Bermuda, European Big Four & Lloyds Trend Summary (2008-2Q 2013 YTD)
(USD Billions) 2008 NPW (Non-Life only) Net Earned Premiums (Non-Life only) Net Investment Income Realized Investment Gains / (Losses) Total Revenue Net Income Shareholders' Equity Loss Ratio Expense Ratio Combined Ratio Favorable Loss Reserve Development Net Investment Ratio Operating Ratio 2009 2010 2011 2012 $119.5 $120.9 $128.0 $137.0 $146.6 116.9 127.8 126.7 133.4 143.7 25.9 31.0 24.3 26.0 27.3 (12.3) (4.2) 10.6 2.4 7.6 175.1 206.0 227.9 226.4 250.4 3.4 141.5 65.2% 29.8% 95.0% -7.6% 22.2% 72.8% 24.1 184.3 58.9% 30.6% 89.5% -3.9% 24.2% 65.3% 20.3 193.9 4.9 194.3 24.9 218.4 60.7% 31.3% 92.0% -6.1% 19.0% 72.9% 2Q 2013 5yr Avg YTD* $59.2 $130.4 55.4 129.7 10.9 26.9 (4.4) 0.8 102.8 217.1 10.7 174.3 59.2% 30.1% 89.3% -4.5% 19.6% 69.6% 15.5 186.5 64.9% 30.9% 95.9% -5.8% 20.7% 75.1%

63.8% 76.1% 31.6% 31.3% 95.4% 107.4% -4.9% 19.2% 76.2% -6.3% 19.5% 87.9%

Return on Equity (Annualized) Return on Revenue (Annualized) NPW (Non-Life only/Annualized) to Equity (End of Period) Net Reserves to Equity (End of Period) Gross Reserves to Equity (End of Period)
Note: 2Q 2013 YTD data excluded Lloyds and Alterra. Source: A.M. Best data & research

2.1% 1.9% 84% 357% 405%

14.6% 11.7% 66% 297% 332%

10.6% 8.9% 66% 293% 327%

2.5% 2.2% 71% 298% 327%

12.1% 12.5% 67% 264% 293%

12.0% 20.8% 68% 299% 325%

8.3% 7.1% 70% 298% 332%

20 15 10 5

91.0 83.1 15.8

(USD Billions)

Non-Life Gro 10.2 9.7

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Global Reinsurance
6.1 5.1 4.3 4.2

tough lessons learned in the late 1990s. Many reinsurers were badly burned by the severe financial and operational ramifications of adverse loss-reserve development that 0 resulted from poorly underwritten and priced casualty business written during that period.The bleeding that emerged from that time continued into the first half of the next decade and strained some balance sheets, so much so that some reinsurers could not participate fully in the subsequent hard casualty cycle that began in 2001. For those reinsurers that were able to leverage capacity in the following years, the opportunity Source: A.M. Best data research was enormous and continues to pay dividends in the form of & favorable reserve runoff. Over the past five years, favorable reserve development has cumulatively contributed approximately $37 billion to the bottom line for the segment and added approxiExhibit 6 mately four points to the average annual Global Reinsurance Return on Equity return on equity (ROE). It would be foolUS/Bermuda, Lloyd's & European Big Four ish to believe this benefit will continue (2008-2Q 2013 YTD) indefinitely, but the roller-coaster ride of US & Bermuda Market European "Big Four" 30 the past serves as a powerful reminder Five-Year Average Lloyd's that reinsurers must continue to care25 fully chart their course.
Re Re 's Re Re y ich ss er wa yd S. E . n Llo at ha SC OR Ko re a Sw i un nn ov hir eH M
20

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Ev

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aR e

Reinsurers have used several key cycle 15 management strategies to manage or 10 improve capital efficiency in the current market dynamic.Third-party capital 5 seems to be emerging as a predomi0 nant tool in todays tool box. Mergers and acquisitions have been used, but -5 2008 2009 2010 2011 2012 2Q 2013 YTD in a limited way to build larger balance sheets, augment the top line and Note: Excludes Lloyd's 2Q 2013 YTD; data unavailable at date of publication. Big Four includes Munich Re, Swiss Re, Hannover Re and SCOR. repatriate excess capital to investors. Source: A.M. Best data & research Expansion or diversification into fledgling business opportunities also has Exhibit 9 increased as companies look to offset the pressures associated with excess capacity Global Reinsurance Total Shareholders' Funds chasing fewer opportunities in mature markets. Share repurchases continue to be the most favored capital management tool, providing reinsurers with a throttle on available by Region* (2012) capacity suitable to current market conditions. Since 2008, there have been approximately $30 billion of share repurchases through June 30, 2013. Other
(%)

Be rk s

Ha

There have been relatively few visible M&A and Transatlantic Re/Alleghany, Harbor Point/Max Re and Alterra/Markel. Each transaction Switzerland expanded the scope of existing businesses. LowBermuda shareMarket valuations, difficulty in structur13% 10% ing mutually agreeable terms and conquering cultural issues remain as key obstacles to additional deals. Still, A.M. Best does expect activity to increase as share valuations improve and excess capacity builds, further fueling competition as the global economy continues to stabilize. Some reinsurers have placed small bets on new ventures or classes of business such as Asia - Pacific agriculture (crop) insurance, accident and health, mortgage insurance, or even entered 22% emerging markets such as Latin America, China, the Middle East and Africa, either directly Americas* or through investments and joint ventures.These opportunities generally present diversifi- 28% cation benefits and help stabilize the top line as core businesses come under competitive London pricing pressure and shrinking demand. It appears management is doing 7%its homework before making these strategic decisions, assessing downside risks and acquiring the
Note: Region determined by the domicile of ultimate parent. *Americas includes the United States, Canada and Latin America. Americas 5 Total Shareholders' Funds excludes non -reinsurance subsidiaries of Berkshire Hathaway. Source: A.M. Best data & research

Markets 10% transactions: Validus Re/IPC

Germany 10% Flagstone,

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Global Reinsurance

needed expertise to profitably manage these operations and investments.These steps are necessary to assure the bottom line does not suffer as a consequence. As previously discussed, reinsurers feeling the competitive pressure from capital market participants increasingly have sought to partner with this capacity rather than fight it. Using this lower cost capacity has enabled reinsurers to better control market share, if not retain or gain it. Sourcing profitable risk is the main value-added quality that traditional reinsurance companies provide to third-party capital.These days, sourcing risk is just as hard, if not harder, than sourcing capital.The added revenues from management fees and profit sharing from these ventures, while not a fortune, enhance reinsurers earnings and solidify the overall client relationship by affording additional capacity at pricing that otherwise would not be obtainable.

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Global Reinsurance

The Top 50 Reinsurers: Reserve Releases, Diversity Drive Results

There was some movement among the ranks of global reinsurers during 2012, as premium growth was mixed compared with 2011. Despite a number of loss events in 2012 (including Superstorm Sandy, U.S. tornadoes, wildfires and severe droughts), most reinsurers delivered underwriting profits and solid earnings. Combined ratios for most were below 100, driven in part by continued reserve releases and well-diversified books of business. Capacity for the industry remains strong, as outside investors continued to pour money into catastrophe bonds, sidecars and other structured products. In 2012, close to $8 billion in capital went into sidecars and cat bonds alone, compared with about $6 billion in 2011. Such investments in 2013 are on track to beat 2012 figures. Some noted movements within the ranking included Arch Capital Group Ltd., which moved up five spots in 2012 to reach No. 30. The company increased premiums by 28%, mainly on growth across all reinsurance lines of business, but particularly due to the full year of premiums from other lines, which included mortgage reinsurance and significant growth in property, excluding cat and casualty reinsurance. These opportunities are somewhat unique, but being selective and opportunistic is in Archs DNA. Lloyds secured fourth place, moving up from fifth in 2011, as premiums grew 16%, an increase attributed to growth in treaty reinsurance and facultative property. At the same time, Berkshire Hathaway slipped to fifth place, in part due to the end of its 20% quota-share agreement with Swiss Re. The full impact of that change was tempered by new opportunities Berkshire found in Asia after the cat losses in 2011. Tokio Marine moved up four spots in 2012 to reach No. 22. The company continued to focus on growing international business, particularly in commercial specialty and in standard reinsurance lines in the United States. Also worth noting in the ranking are companies that lowered premiums slightly in 2012, likely through continued underwriting discipline under current market conditions. American Agricultural Insurance Co., Axis Capital, Maiden Holdings, MS&AD, Validus and Platinum Underwriters all dropped several spots in the ranking as they employed cycle management and elected to slightly reduce premiums compared with 2011. Companies that exited the ranking included Flagstone, which was acquired by Validus, and Ariel, which was sold in pieces to several companies. It appears that Enstar a significant run-off specialist will enter reinsurance through its recently announced acquisitions of Arden Re (formerly Ariel) and Torus. It will be interesting to see how much scale Enstar can gain. Newcomers to the top 50 include Milli Re from Turkey and Wilton Re. Given the abundant capacity in the industry heading into 2013, rates continue to be under some pressure, particularly for areas that have experienced no losses over the past few years. Overall returns are increasingly dependent on underwriting as interest rates remain at historical lows and pricing continues to show signs of softness.The Jan. 1 renewal season saw pricing flat to increasing in the low single digits. April pricing was up slightly, particularly for loss-impacted contracts. However, June1 renewals
7

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Global Reinsurance

Exhibit 7 Top 50 Global Reinsurance Groups

(USD millions)

Ranked by gross premium written in 2012.

Reinsurance Premiums Written Life & Non-Life Non-Life only Gross $37,251 31,723 18,208 15,785 15,059 12,576 8,233 6,708 5,113 4,712 4,311 3,577 3,319 2,979 2,776 2,364 2,265 2,256 2,155 2,044 2,017 1,966 1,860 1,830 1,719 1,700 1,592 1,552 1,365 1,282 1,280 1,228 1,179 1,154 1,119 1,070 955 899 882 864 765 760 735 648 608 576 570 542 509 495 Net $36,167 25,344 16,231 11,371 15,059 11,286 7,907 6,471 3,390 4,567 4,081 3,456 3,268 2,979 2,534 2,209 1,675 1,466 1,821 1,916 1,972 1,579 1,614 1,815 1,719 N/A 1,278 1,103 792 1,227 819 1,157 948 1,009 1,087 1,025 284 727 882 765 389 748 616 586 501 518 565 502 477 462 Gross $22,539 19,468 10,201 15,770 9,668 6,146 4,184 5,113 3,910 4,311 3,577 43 958 2,758 2,008 2,265 1,890 2,155 2,044 1,981 1,966 1,860 1,830 1,645 1,700 1,592 1,552 1,301 1,282 1,221 1,228 1,179 1,154 1,119 1,070 955 899 864 765 760 735 618 608 565 570 509 344 Net $22,038 15,117 9,060 11,358 9,668 5,558 4,090 3,390 3,768 4,081 3,456 43 958 2,520 1,885 1,675 1,174 1,821 1,916 1,955 1,579 1,614 1,815 1,595 N/A 1,278 1,103 745 1,227 772 1,157 948 1,009 1,087 1,025 284 727 765 389 748 616 562 557 508 565 477 316 Ratios1 Loss 61.2% 53.1 70.7 56.0 N/A 65.4 N/A 58.6 79.7 58.5 65.9 70.6 N/A 62.3 82.1 58.4 67.1 67.3 80.4 57.0 74.1 N/A 63.5 61.5 52.5 N/A 59.6 30.4 67.2 50.9 72.0 56.1 58.4 55.5 62.8 55.2 86.3 57.8 N/A 73.4 73.2 69.0 46.5 60.2 N/A 77.2 32.4 N/A 60.5 81.1 Expense Combined 30.0% 91.2% 30.0 83.1 25.4 96.0 34.9 91.0 N/A 99.9 29.0 94.3 N/A N/A 41.7 100.4 18.1 97.9 29.3 87.8 27.9 93.8 20.3 90.9 N/A N/A 23.7 86.0 22.7 104.8 28.6 86.9 32.1 99.2 29.6 97.0 27.6 108.0 27.6 84.6 24.5 98.6 N/A N/A 19.9 83.4 27.9 89.4 12.0 64.5 N/A N/A 27.3 86.9 27.4 57.8 44.8 112.0 29.3 80.2 28.6 100.6 29.3 85.4 31.9 90.3 23.1 78.6 32.0 94.8 22.3 77.4 13.1 99.4 33.7 91.5 N/A N/A 29.1 102.5 29.4 102.7 26.1 95.1 34.5 81.0 32.0 92.2 N/A N/A 30.0 107.2 30.1 62.5 N/A N/A 40.0 100.5 26.2 107.3

2013 Ranking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

1 Non-life only. 2 Net premiums written data not reported, net premiums earned substituted. 3 Lloyds premiums are reinsurance only. GPW for certain groups within the rankings also may include Lloyds Syndicate GPW when applicable. 4 Total shareholders funds includes Lloyds members assets and Lloyds central reserves. 5 Loss reserve and expense ratio detail not available on a GAAP basis. 6 Fiscal year-end March 31, 2013. 7 Excluded 40% of premiums related to affiliated business. 8 Total shareholders funds includes catastrophe and price fluctuation reserves. 9 Ratios are as reported and calculated on a gross basis. 10 Non-affiliated reinsurance information only available on a gross basis. 11 Data and ratios based on U.S. statutory filing. 12 Total shareholders funds includes equalization and unexpired risk reserve. N/A Information not applicable or not available at time of publication. Source: A.M. Best data & research

Company Munich Reinsurance Co.2 Swiss Reinsurance Co. Ltd. Hannover Rueckversicherung AG 2 Lloyds 3,4 Berkshire Hathaway Inc. 5 SCOR S.E. Reinsurance Group of America Inc. China Reinsurance (Group) Corp. Korean Reinsurance Co. 6 PartnerRe Ltd. Everest Re Group Ltd. Transatlantic Reinsurance Co. London Reinsurance Group Inc. Assicurazioni Generali SpA General Insurance Corporation of India 6 XL Group plc QBE Insurance Group Ltd. MAPFRE RE, Compania de Reaseguros, S.A. 7 The Toa Reinsurance Co., Ltd. 6,8 Odyssey Re Holdings Corp. R+V Versicherung AG 9 Tokio Marine Holdings, Inc. 6,8 Catlin Group Ltd. Axis Capital Holdings Limited Caisse Centrale de Reassurance MS&AD Insurance Group Holdings, Inc. 6,8,10 Amlin plc RenaissanceRe Holdings Ltd. IRB - Brasil Resseguros S.A. Arch Capital Group Ltd. Deutsche Rueckversicherung AG Aspen Insurance Holdings Ltd. White Mountains Insurance Group, Ltd. Validus Holdings, Ltd. Endurance Specialty Holdings, Ltd. ACE Ltd. American Agricultural Insurance Co.11 Alterra Capital Holdings Ltd. Pacific LifeCorp Maiden Holdings, Ltd. ACR Capital Holdings Pte, Ltd. 6 Allied World Assurance Co. Holdings, AG Montpelier Re Holdings Ltd. African Reinsurance Corp. NKSJ Holdings, Inc. 6,8 Milli Reasurans Turk Anonim Sirketi 12 Platinum Underwriters Holdings Ltd. Wilton Re Holdings Ltd. W.R. Berkley Corp. Central Reinsurance Corp.

Total Shareholders Funds $36,248 34,026 8,909 31,204 191,588 6,358 6,910 7,026 1,275 6,934 6,734 4,331 715 29,830 5,012 11,856 11,417 768 2,157 3,679 2,527 35,196 3,512 5,780 2,330 28,740 2,411 3,507 1,140 5,169 273 3,488 4,258 4,455 2,711 27,531 440 2,840 9,497 1,015 699 3,326 1,629 609 19,857 548 1,895 1,540 4,336 477

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Be rk sh

ire

Source: A.M. Best data & research

Exhibit 8 Global Reinsurance Market Top 15 Ranked on Non-Life Exhibit 6 Gross Premium Written (2012) Global Reinsurance Return on Equity 120% 25 22.5 108.0 104.8 US/Bermuda, Lloyd's & European Big Four 99.9 100.4 99.2 97.9 96.0 94.3 93.8 100% 91.2 19.5 90.9 87.8 91.0 (2008-2Q 2013 YTD) 20 84.6
83.1 15.8 30
(USD Billions)

15 10 5 0 10.2 9.7

European "Big Four" Lloyd's

25 Non-Life Gross Premium 20 (%) 6.1 5.1 15 10 5 4.2 3.9 3.6 2.8

4.3

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rtn e

at ha

er es

Tr an

Llo

Ind

ss

er

aR e

SC OR

Ko re a

Sw i

Ch in

ov

un

of

To

nn

hir eH

Ha

-5

Ev

Pa

GI C

Be rk s

2008

2009

2010

2011

Od

ys

se

2012

yR e

tR e

sR e

wa

yd

S. E

Re

Re

's

Re

Re

rR e

ia

Source: A.M. Best data & research

Note: Excludes Lloyd's 2Q 2013 YTD; data unavailable at date of publication. Big Four includes Munich Re, Swiss Re, Hannover Re and SCOR. Source: A.M. Best data & research

saw prices decline as much as 20% for some programs.The bright spot remains Exhibit 6 some specialty lines such as marine and offshore energy. Property cat pricGlobal Reinsurance Return on Equity ing is expected to remain under some US/Bermuda, Lloyd's & European Big Four pressure absent any major event. In an (2008-2Q 2013 YTD) attempt to improve returns, companies US & Bermuda Market European "Big Four" 30 continue to strategically shift portions of Five-Year Average Lloyd's their investment portfolios into higher 25 return investments, which includes alter20 native investments.
(%) 15 10

Exhibit 9 Global Reinsurance Total Shareholders' Funds by Region* (2012)

Other Markets 10% Bermuda Market 10% Germany 10% Switzerland 13%

Some companies continued to repurchase their own shares during 2012, 5 although not at the same pace as in previous years. Companies thus far 0 Asia - Pacific in 2013 are again aggressively buying 22% -5 back 2009 shares and increasing dividends. 2008 2010 2011 2012 2Q 2013 YTD Americas* Valuations, although better than one 28% Note: Excludes Lloyd's 2Q 2013 YTD; dataare unavailable date of publication. or two years ago, still at below the Big Four includes Munich Re, Swiss Re, Hannover Re and SCOR. London industrys long-term average. For Source: A.M. Best data & research 7% those companies still below book value, share buybacks remain a way to Note: Region determined by the domicile of ultimate parent. Exhibit 9 *Americas includes the United States, Canada and Latin America. Americas improve valuations and earnings per Total Shareholders' Funds excludes non -reinsurance subsidiaries of Berkshire Global Reinsurance Total Shareholders' Funds share. Merger and acquisition (M&A) Hathaway. by Region* (2012) Source: A.M. Best data & research activity is expected to remain muted.
Other Looking forward, the overall market Germany Markets environment remains challenging, and companies for the most part are realistic 10% 10% about the returns they can achieve in theExhibit current 10 market. Pricing is not expected to improve for the Jan. 1 renewal, absent any major event. Management teams Switzerland Global Reinsurance Gross Premium Written Bermuda Market 10% 13%

by Region* (2012)
Americas* 17%

ov er Re Ha th aw ay SC OR S. E. Ko re an Re Ev er es tR e Ch i na Re Pa

ic h M un

Sw i

ss

Global Reinsurance

US & Bermuda Market Five-Year Average 80% 60% 40%

Combined Ratio

YE 2012 Combined Ratio

2.3

2.2

2.0

20% 0%

2Q 2013 YTD

Other 1%

Switzerland 15%

27%
Note: Region determined by the domicile of ultimate parent. * Americas includes the United States, Canada and Latin America, and gross premium of National Indemnity & General Re Corp. (subsidiaries of Berkshire Hathaway). Source: A.M. Best data & research

Special Report

Global Reinsurance

Exhibit 10 Global Reinsurance Non-Life Gross Premium Written by Region (2012)

Switzerland 14% London 13%

agree that reinsurance pricing still needs to improve, particularly for some casualty business where rates remain below profitable levels. Reinsurers thus far have maintained a rational and disciplined approach to the market. Returns are expected to be around 8% to 10% for the next 12 months, and companies certainly will strive to deliver results at the doubledigit end of that range. Performance anxiety is real, and that round number of 10% continues to be a threshold that is both tangible and psychological. Companies seem to be focused on profitable underwriting and strong enterprise risk management, as opposed to gaining market share and growing premium. Some M&A activity continued as 2012 saw a number of deals create stronger and more diversified companies. Managing risk exposure however, should remain the focus for the combined entities to avoid the past missteps by some that led to higher than expected losses for certain events.

Asia-Pacific 14%

Other Markets 9%

Bermuda Market 14% Americas 12% Germany 24%

Note: Region determined by the domicile of ultimate parent. *Americas includes the United States, Canada and Latin America. Americas also includes GPW of National Indemnity & General Re Corp. (subsidiaries of Berkshire Hathaway). Source: A.M. Best data & research

Exhibit 17 Global Reinsurance Premium Cession Rates in Select Regions (2002-2011)

60 50 40 30 Indian Subcontinent 20 Developed 10 CIS 2002 2003 2004 2005 2006 2007 2008 2009 Far East Levant GCC

2010

2011

GCC (Bahrain, KSA, Kuwait, Oman, Qatar, UAE) Indian Subcontinent (India, Pakistan) Far East (Malaysia, Thailand, Vietnam)
Source: Best's Statement File Global

Levant (Jordan, Lebanon, Turkey) CIS (Kazakhstan, Russia, Ukraine) Developed (France, Germany, UK)

Exhibit 11 Brazil Reinsurance Local Reinsurer Market Share (2008-2012)

Admitted and occasional reinsurers have gained a larger share of ceded 10 premium since Brazil's reinsurance market opened in 2008.
(BRL Billions) 6

Special Report

Global Reinsurance

Lloyds Premium Up; Market Eyes Developing Countries

Lloyds is a significant writer of catastrophe and reinsurance business, with reinsurance representing 38% of gross premium in 2012 and direct insurance accounting for the balance. Reinsurance premiums increased nearly 11% in 2012, supported by rate increases in areas exposed to the natural catastrophes of 2011. While these losses led to a firming of reinsurance rates in loss exposed regions of the world, excess reinsurance capacity prevented a broader market hardening. At the beginning of 2013, general market conditions were similar to those prevailing at the start of 2012 with excess capacity and a generally difficult rating environment overall, albeit with another strong improvement in catastrophe-affected areas of business. At the same time, there are few signs of recovery in the global economy, and weak conditions persist in the more developed economies, reducing the demand for some lines of insurance and continuing the prospect of increased recession-related claims. Lloyds goal is that by 2025 the portion of its business from developing economies will exceed 25% of gross written premiums. This new strategic direction is part of Vision 2025, an approach launched in May 2012 that aims to position Lloyds as the global centre for specialist insurance and reinsurance. Based on its analysis of potential growth in developing countries, Lloyds has identified Mexico, India and Turkey as priority countries, alongside Brazil and China, where Lloyds already has reinsurance licenses. Subject to market demand, the initial focus will be on these countries, but Lloyds has indicated that other, smaller developing countries, such as Colombia, Vietnam and Poland, may present attractive opportunities.

2012 Performance Boosted by Prior-Year Reserve Development

In contrast to 2011s series of natural catastrophes in the Asia-Pacific region, 2012 had few major catastrophe events, apart from the grounding of the Costa Concordia, an earthquake in Northern Italy and Hurricane Isaac until Superstorm Sandy struck the eastern seaboard of the United States and became the most costly U.S. catastrophe since Hurricane Katrina in 2005. Losses from these events were the main drivers of an accident-year combined ratio of 97.9 for Lloyds reinsurance sector. On a calendar-year basis, the combined ratio was reduced to 91.0 by favorable development of prior years reserves. Positive reserve development reduced combined ratios for Lloyds main classes of business. For property and reinsurance, prior-year releases improved the combined ratio by 8.2 and 6.9 percentage points respectively. Reserves for the 2011 catastrophes remained stable overall in 2012. Lloyds U.S.-domiciled business consists primarily of reinsurance and surplus lines. In Canada, Lloyds writes primarily direct business, with reinsurance accounting for a much smaller share. In 2012, as measured by combined ratio, Lloyds outperformed the U.S. property and casualty industry, U.S. reinsurers and comparable European reinsurers, while performance was comparable to that of a peer group of Bermudian reinsurers.

11

Exhibit 17 Global Reinsurance Premium Cession Rates in Special Report Select Regions (2002-2011)
60 50

Global Reinsurance

Despite a Crowded Market, Brazil Is Still a Draw

GCC

Abundant 40

reinsurance capacity and the prevalence of coinsurance agreements in Brazils primary market are softening the near-term growth outlook for its reinsurFar East ers. A sense of weariness exists among underwriters contemplating profitability in 30 a crowded reinsurance segment that has weakened pricing. Yet the increasing preIndian Subcontinent Levant mium volume in Latin Americas largest primary market still is proving difficult to 20 resist. Developed
10 CIS

Brazils to catastrophe such2009 as hurricanes or earthquakes, leaves 2002 limited 2003 exposure 2004 2005 2006 2007risks, 2008 2010 2011 it well positioned as a diversity play relative to other emerging markets in Latin AmerGCC (Bahrain, KSA, Kuwait, Oman, Qatar, UAE) Levant (Jordan, Lebanon, Turkey) Indian Subcontinent (India, Pakistan) CISneed (Kazakhstan, Russia,out Ukraine) ica. Perhaps more important, the countrys to build infrastructure before hostEast (Malaysia, Thailand, Vietnam) Developed (France, Germany, UK) ing theFar 2014 FIFA World Cup and 2016 Olympic Games remains a catalyst in the overall Source: Best's Statement File Global economy. Low insurance penetration, vast offshore oil reserves and a growing middle class also factor into long-term growth forecasts for insurers and reinsurers.

Exhibit 11 Brazil Reinsurance Local Reinsurer Market Share (2008-2012)

Admitted and occasional reinsurers have gained a larger share of ceded premium since Brazil's reinsurance market opened in 2008.
(BRL Billions) 6 5 4 3 2 1 0 2008 2009 2010 2011 2012 Local Reinsurers Admitted & Occassional

Source: SUSEP website (Statistics System); data reflects industry totals and financial statements available from SUSEP as of July 12, 2013. Individual breakout of admitted and occassional figures not available.

Premium (BRL Billions)

Pricing Exhibitaround 12 Julys renewal season was flat to down 5%, with insurers able to secure additional capacity on a treaty basis under Brazil Reinsurance Ceded as a Percentage ofterms unavailable a year ago. This reflects the growth in their own portfolios. It is not yet clear whether an imbalance Primary Market's Direct Premium (2008-2012) exists between this years reinsurance premium prices and the amount of coverage 10 80 being purchased, which in some cases may be excessive for underlying risk. The 9 70 existence of coinsurance arrangements also has generated potential accumulation 8 60for reinsurers placing treaty-based cover under this scenario, should a signifirisks 7 cant50 event coincide across separate treaties within a single reinsurers portfolio. 6 While 5 40 reinsurers would prefer facultative coverage, demand for this is driven downward by abundant capacity for treaty business. 4 30
(% of Direct Premium) 20 These developments outline the growth trajectory of Brazils reinsurance market 2since 10 opened five years ago, ending the monopoly held by IRB Brasil Resseguros1 S.A. it first 0 2008 Direct Premium 2009 2010 12 Ceded Reinsurance Premium 0 2011 2012* Reinsurance Premium as % of Direct Premium 3

* 2012 is gross of reinsurance commission (BRL 932.2 million). Source: SUSEP website (Statistics System); data reflects industry totals and financial statements available from SUSEP as of July 12, 2013.

Source: Source:

Best's Best'sStatement StatementFile File Global Global

Special Report Exhibit Exhibit 11 11

Global Reinsurance

Admitted and occasional reinsurers have larger Admitted and occasional reinsurers have gained gained a a larger share share of ceded in 2010 with since 1939. The road to an open reinsurance market tookof a ceded detour premium since Brazil's reinsurance market opened in 2008. premium since Brazil's reinsurance market opened in 2008. legislation that required 40% of reinsurance premium be ceded to locally based (BRL (BRLBillions) Billions) reinsurers. Insurers also are prohibited from ceding more than 20% of premium to off6 shore reinsurance affiliates, but a key exception involves the surety business, a line that 6 factors heavily into Brazils build out. Local Admitted & LocalReinsurers Reinsurers Admitted &Occassional Occassional
5 5 4 M&A 4 Should Tick Upward

Brazil Brazil Reinsurance Reinsurance Local Local Reinsurer Reinsurer Market Market Share Share (2008-2012) (2008-2012)

There are now 14 local reinsurers approved to operate in Brazil, with the balance of 3 3 the reinsurance market composed of admitted and occasional reinsurers, and the latter primarily serving in a retrocession role.There is a market expectation that merger and 2 2 acquisition activity will tick upward in this admitted and occasional segment, which 1 1 includes more than 100 registered companies and 15 to 20 Lloyds syndicates. Smaller companies contending with administrative costs and competitive pricing may be forced 0 0 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 to find local partners or exit the market. Local players seeking cheaper capital also may Source: SUSEP website (Statistics System); data reflects industry totals and financial statements available Source: SUSEP website (Statistics System); data reflects industry totals and financial statements available benefit by pairing with a foreign reinsurer that has a less figures formidable market presence. from not fromSUSEP SUSEPas asof ofJuly July12, 12,2013. 2013.Individual Individualbreakout breakoutof ofadmitted admittedand andoccassional occassionalfigures notavailable. available.

Exhibit Exhibit 12 12 Brazil Reinsurance Brazil Reinsurance Ceded Ceded as as a a Percentage Percentage of of Primary Market's Direct Premium (2008-2012) Primary Market's Direct Premium (2008-2012)
80 80 70 70 Premium(BRL (BRLBillions) Billions) Premium 60 60 50 50 40 40 30 30 20 20 10 10 0 0 2008 2008 Direct DirectPremium Premium 2009 2010 2009 2010 Ceded CededReinsurance ReinsurancePremium Premium 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 (%of ofDirect DirectPremium) Premium) (%

0 0 2011 2012* 2011 2012* Reinsurance ReinsurancePremium Premiumas as% %of ofDirect DirectPremium Premium

**2012 2012is isgross grossof ofreinsurance reinsurancecommission commission(BRL (BRL932.2 932.2million). million). Source: Source:SUSEP SUSEPwebsite website(Statistics (StatisticsSystem); System);data datareflects reflectsindustry industrytotals totalsand andfinancial financialstatements statementsavailable available from fromSUSEP SUSEPas asof ofJuly July12, 12,2013. 2013.

Exhibit Exhibit 13 13 Brazil Brazil Local Local Reinsurer Reinsurer Segment Segment Profit/Loss Profit/Loss (2008-2012) (2008-2012)

IRB IRB Brasil Brasil Resseguros' Resseguros' monopoly monopoly ended ended in in 2007, 2007, but but it it maintains maintains a a dominant dominant share share of of the the local local reinsurance reinsurance market's market's profit profit margin. margin.
2012 2012 2011 2011 2010 2010 2009 2009 2008 2008 0 0 100 100 200 200 300 300 BRL BRLMillions Millions 400 400 500 500 600 600 IRB IRB Other Other

Source: Source:SUSEP SUSEPwebsite website(Statistics (StatisticsSystem); System);data datareflects reflectsfinancial financialstatements statementsavailable availableas asof ofJuly July12, 12,2013. 2013.

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Local reinsurers have maintained a steady market position with 59% of the BRL 5.53 billion in reinsurance premium generated in 2012 (see Exhibit 11), according to data from Superintendencia de Seguros Privados (SUSEP). In 2011, local reinsurers held a 57% share of the BRL 5.52 billion in reinsurance premium. As an aside, reinsurance commissions totaled BRL 932 million in 2012 (a comparable figure for 2011 was unavailable), according to SUSEP. It should be noted that some reporting and accounting anomalies may exist within publicly available SUSEP data. The level of reinsurance premium as a percentage of the primary markets direct premium has hovered at just under 9% since 2008, according to an A.M. Best review of company financial statements filed with SUSEP.This level of reinsurance penetration held steady as direct market premium climbed from BRL 42.9 billion in 2008 to BRL 73.2 billion in 2012, a cumulative increase of 70% (see Exhibit 12).This illustrates how, despite a modest percentage of ceded reinsurance premium, the overall premium volume in Brazils insurance market remains attractive.

IRB Still Dominates, Preps for Expansion

Despite the opening of Brazils local reinsurance market to competition, IRB has maintained a dominant market position and held its No. 29 spot in A.M. Bests 2012 global ranking of top 50 reinsurers based on gross premium written. IRB generated gross premiums of BRL 2.4 billion in 2012, which was equivalent to 37% of the reinsurance premium ceded from Brazils direct market. IRBs Exhibit 14 share of the local reinsurance segBrazil Local Reinsurers Earned Premium & Loss ment in 2012 was far more proRatios (2012) nounced at slightly more than 65%. (BRL Millions) The company notched a net profit Earned Premium Claims Incurred Loss Ratio of BRL 397.1 million in 2012, which Y/Y % Market Y/Y % Rank Company 2012 Change Share 2012 Change 2012 2011 was 79.3% of the overall net profit 1 IRB 1,850.7 10.9 62.2 1,664.5 40.0 89.9 71.2 generated from the local reinsurer 2 Munich Re 354.9 -22.5 11.9 307.2 -17.6 86.6 81.4 segment (see Exhibit 13), according 3 Ace 206.8 37.9 6.9 90.3 22.3 43.6 49.2 4 Mapfre 190.7 18.4 6.4 302.9 145.7 158.8 76.5 to SUSEP filings.
5 6 7 8 9 10 11 J. Malucelli XL Austral AIG Swiss Re* Alterra* Terra Re* Total 172.8 89.9 82.8 16.2 6.4 4.9 0.1 2,976.2 4.1 7.1 700.9 1,852.4 n/a n/a n/a 10.3 5.8 3.0 2.8 0.5 0.2 0.2 0.0 143.2 68.4 83.2 8.5 1.6 3.9 0.1 2,673.5 579.4 1.2 778.1 2,144.7 n/a n/a n/a 44.0 82.9 76.1 100.4 52.1 24.7 79.0 67.2 89.8 12.7 80.6 91.6 45.3 n/a n/a n/a 68.8

Note: 2012 financial statements on file with SUSEP for Allianz Global Corporate & Specialty Resseguros Brasil and Zurich Resseguradora Brasil S.A. reflect no earned income. BTG Pactual received SUSEP authorization on Feb. 26, 2013. * 2011 financial statements unavailable through SUSEP website. Source: SUSEP website (Statistics System); data reflects financial statements available as of July 12, 2013.

IRBs earned premium increased almost 11% to BRL 1.9 billion in 2012, more than five times the earned premium of the secondlargest local reinsurer, Munich Re (see Exhibit 14). IRB also reported a return on equity of 18.7% last year, lower than the 23.7% reported for 2011.

IRB has continued with its transition into a competitive market environment and has cleared necessary regulatory hurdles to privatize. This move coincides with IRBs plan to expand beyond Brazils borders and provide an international reinsurance platform for multinational insurers operating within Brazil.This has required IRB to dedicate a team to catastrophe assessment and to license catastrophe modeling software, an operational aspect that required less emphasis given the less volatile catastrophe exposures in a Brazil-focused portfolio. In June 2012, IRB acquired a 4.8% stake in Africa Re.A.M. Best understands the relationship between IRB Brasil-Re and Africa Re to be strategic, owing to the reciprocal arrangement between the two entities to support development in their corresponding markets.
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In addition to operating in Argentina, IRB has signed up as a reinsurer in Peru, Mexico, Colombia, Paraguay, Uruguay and Ecuador, and is in the process of obtaining registration in Venezuela, according to the companys annual report.The challenge in this next phase will be gaining scale as a foreign reinsurer without strong brand awareness or the transitional glide path to market competition that IRB experienced under legislation in Brazil. Brazils local reinsurance market added a few new players in 2012, some of which had familiar corporate brands such as Allianz Global Corporate and Specialty Resseguros Brasil S.A.; Alterra Resseguradora Do Brasil S.A. (since acquired by Markel); Swiss Re Brasil Resseguros S.A.; and Zurich Resseguradora Brasil S.A.Two additional new players Terra Brasis Re and BTG Pactual Resseguradora S.A. have added distinctive local flavor to Brazils reinsurance market.

Two New Reinsurers Bring Local Touch

Terra Brasis is a privately owned, start-up reinsurance company domiciled in the country. Brazil-based financial conglomerate Brasil Plural is the majority shareholder, and the World Banks International Finance Corp. is a minority shareholder.Terra Brasis has a modest level of market-facing capacity, starting with BRL 100 million in policyholders surplus.The company was licensed on Oct. 4, 2012 and is focused on writing a diverse book of property, casualty and life reinsurance business as a local reinsurer in Brazil. BTG Pactual, which was authorized as a local reinsurer on Feb. 26, 2013, is a subsidiary of Banco BTG Pactual, a leading Latin America investment bank founded in Rio de Janeiro. BTG will target the primary insurance market with cover for engineering and oil projects, in addition to civil liability on construction projects.The company also has indicated it will partner with international reinsurers on products. As Brazils reinsurance market matures, customer loyalty and personal relationships still have a role but may have become less crucial for insurers seeking the most profitable path to deploy capital. Reinsurers have grown stricter on requiring data, the quality of which continues to improve. As Brazil and other Latin America countries move to align their respective regulatory schemes with international standards, added capital requirements are expected to generate opportunity for reinsurers in the form of higher cession rates and needed technical expertise. Non-life cession rates on a regional basis had declined over the past decade, driven down by softer rates and companies shifting to nonproportional schemes. Reinsurers also stand to benefit from rising cession rates in reinsurance-intensive lines of business such as surety and engineering.

Exhibit 15 Latin America A.M. Best-Rated Reinsurance Companies

Ratings as of Aug. 16, 2013.
Bests Financial Strength Rating (FSR) AB++ AAABests LongTerm Issuer Credit Rating (ICR) abbb aaaFSR & ICR Rating Action Affirmed Assigned Affirmed Affirmed Affirmed

Domicile Brazil Brazil Mexico Panama Panama

Source:

Company IRB-Brasil Resseguros S.A. Terra Brasis Resseguros Reaseguradora Patria, S.A.B. Barents Re Reinsurance Co. Inc. QBE del Istmo Reinsurance Co. Inc.
Bests Statement File Global

AMB # 085590 092722 086054 091083 078448

Bests FSR & ICR Outlook Stable Stable Positive Positive Stable

Rating Effective Date Dec. 19, 2012 May 9, 2013 July 31, 2013 Sept. 27, 2012 Jan. 10, 2013

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Low Penetration Persists in Latin America

With the exception of Chiles mature market, the level of insurance penetration in Brazil and other Latin America markets remain below 3%, and in some cases even below 2%.These positive growth indicators are bolstered further by the infrastructure gap that Latin America countries are trying to bridge via spending projects.Yet this upside for reinsurers is tempered by challenges to profitability that arise from competitive pressure on underwriting results, the low interest rate environment and pockets of regulatory uncertainty. According to Guy Carpenter & Co., rates in Latin America and the Caribbean decreased at July 1 renewal because of a high level and diversity of reinsurer offerings.The exception noted by Guy Carpenter was Argentina, where market conditions were affected by heavy flooding in April and regulatory restrictions. Argentinas insurance market remains susceptible to political volatility.This was evident during 2011from government actions that prohibited insurers from ceding business to foreign reinsurers. A subsequent regulation required all insurers to liquidate and transfer foreign investments back to Argentina, while reinsurers were allowed to keep a level of foreign investments and capital not to exceed 50% of the companys total capital. Venezuela represents another market where an expanding middle class can fuel the industrys growth, but it is subject to political dynamics.Yet some reinsurers still pursue these markets with eyes wide open, hoping to be agile enough to skillfully build market share despite the potential for more fluid market dynamics. Like Brazil, Mexico represents a significant portion and more established component of Latin Americas insurance industry.An insurance law adopted this year marks further progress in efforts to modernize the countrys regulatory scheme.A strong element of risk management based principles will foster stronger capital and reserve measures. Mexicos primary market remains soft but is viewed as stable and increasingly professional. New capital requirements are expected to increase demand for reinsurance coverage and spur merger and acquisition activity. With insurance penetration of just 2.12%, Colombias market has demonstrated its potential with growth of 14.9% in 2012. Non-life business accounted for 54% of $8.76 billion in premium written last year. Colombias insurance market is opening to nonadmitted writers under a bilateral free-trade agreement reached with the United States, an aspect that underscores Latin Americas business friendly environment. Government officials announced plans in April for a $2.7 billion stimulus package that would drive economic growth and create an estimated 300,000 new jobs. Projected spending on construction projects is $630 million, generating reinsurance opportunities in construction risks and surety bonds.

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Asias Reinsurers Are Looking to Grow Again

Reinsurers in Asia have resorted to capital replenishment following large catastrophe losses while the regions growth prospects remain a lure for many reinsurers. Most Asian reinsurers results turned negative following large-scale catastrophes, particularly the 2011 Thailand flooding. Singapore, a major reinsurance hub in Asia-Pacific, reported significant deterioration in the combined ratio of reinsurers to 239.8 in 2011 from 95.1 in 2010. Natural catastrophes in 2011 brought significant losses to many Asian reinsurers. Interestingly, many of these reinsurers, except for a few players, quickly restored their balance sheet strength in terms of risk-based capital through raising new capital, issuing subordinated debt or reducing asset risks. Companies have also avoided writing pure catastrophe business. Capitalization of Asias reinsurers significantly eroded in 2011, with the widest capital and surplus drop of 86% and 57% for the Thailand-based Thai Re and Asian Re, according to A.M. Best data. Nevertheless, most reinsurers restored capital, changed their risk appetite and focused on underwriting and financial strength during the past year.

Exhibit 16 Asia/Pacific A.M. Best-Rated Reinsurance Companies

Ratings as of Aug. 16, 2013.
Bests Financial Strength Rating (FSR) A++ A++ A A A AAAA+ AAAAB++ AA A AA A B- u B+ Bests LongTerm Issuer Credit Rating (ICR) aa+ aa+ a a a aaaaaaaaabbb aa a+ aa a bb- u bbb-

Domicile Australia Australia China China China Hong Kong Hong Kong India Japan Malaysia Malaysia Malaysia Malaysia Philippines Singapore Singapore Singapore Singapore South Korea Taiwan Thailand Vietnam

Company General Reinsurance Australia Ltd. General Reinsurance Life Australia Ltd. China Life Reinsurance Co. Ltd China Reinsurance (Group) Corp. China P&C Re Peak Reinsurance Company Ltd. Taiping Reinsurance Company Limited General Insurance Corp. of India The Toa Reinsurance Co. Ltd. ACR ReTakaful Berhad Asia Capital Reinsurance Malaysia Sdn Labuan Reinsurance (L) Ltd. Malaysian Reinsurance Berhad National Reinsurance Corp. of Philippines Asia Capital Reinsurance Group Pte. Ltd. Samsung Reinsurance Pte Ltd SCOR Reinsurance Asia-Pacific Pte Ltd Singapore Reinsurance Corp. Ltd. Korean Reinsurance Co. Central Reinsurance Corp. Asian Reinsurance Corp. PVI Reinsurance Company

AMB # 086052 086652 090957 090955 088692 091406 085029 086041 085179 090060 090756 086913 078303 086771 078461 091577 088684 085224 085225 086496 085568 091541

Bests FSR & ICR Outlook/ Implications Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Developing Positive

FSR & ICR Rating Action Affirmed Affirmed Affirmed Affirmed Affirmed Assigned Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Downgraded Affirmed

Rating Effective Date June 11, 2013 June 11, 2013 Sept. 12, 2012 Sept. 12, 2012 Sept. 12, 2012 Dec. 28, 2012 Oct. 18, 2012 Feb. 21, 2013 May 30, 2013 Dec. 20, 2012 Dec. 20, 2012 Dec. 12, 2012 Dec. 13, 2012 April 18, 2013 Dec. 20, 2012 Nov. 15, 2012 May 2, 2012 Nov. 21, 2012 Feb. 28, 2013 July 30, 2013 June 13, 2013 April 11, 2013

u Denotes rating under review Bests Statement File Global Source:

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For instance, Japans Toa Re took a series of capital replenishment actions, including issuance of 30 billion yen (US$302 million) in subordinated notes in March 2012, reducing risk exposures in its investment assets and underwriting portfolio. Korean Re enhanced its capital position with a disposal of its treasury stocks worth around 134 billion won (US$120.3 million), together with reduction of underwriting risks during its 2011 fiscal year. Malaysias Labuan Re restored its financial position through issuance of US$55 million subordinated bonds and revisions of underwriting guidelines, risk control and further risk retrocession. For new capital investment, Canadas Fairfax Financial Holdings acquired around 25% of Thai Re for US$70 million in January 2012. Japans leading trading company, Marubeni Corp., invested about a 22% stake in Singapore-based ACR Capital Holdings to become one of its major shareholders in May 2012. Companies became quite proactive in anticipation of a hardening market. Credit awareness in the market has also increased substantially over the years and those reinsurers worked quickly to avoid a downgrade in credit quality. However, with additional reinsurance capital, the hardening of the market was less than many would have expected, except in catastrophe business. Capital deployment into the reinsurance industry has grown, with a recent influx of capital estimated in the double-digit range. Asias increased capacity has come from both newly established regional writers and regional expansion from existing global reinsurers. Bermuda reinsurers and Lloyds have also become notable additions to the Singapore market over the past two years. In the past, a clear softening would be visible after a benign catastrophe year, such as 2012 in Asia with additional capacity, but companies are more underwriting focused, and the extent of softening is mild. Asia players have been quite disciplined for terms and conditions, which differs from previous cycles of strong capital influx. Current conditions could be explained by low investment return, along with the expectation of a continuing low-yield environment, which has made companies more underwritingfocused.This will reduce the volatility of operating performance, although there would not be a steep increase in profitability as the companies could expect.

Asia Growth and Challenges

Strong economic growth, low insurance penetration and risk diversification from existing mature markets leave Asias emerging markets well positioned to attract industry players. Buyers have increasingly used reinsurance as a form of risk transfer and commission gearing, as well as part of their capital management on balance sheets, in solvency transactions and loss portfolio transfers. More direct insurance companies are looking to diversify their reinsurers, thus increasing demand and a greater awareness of credit risk. Credit risk associated with reinsurance recoverables is a substantial factor for direct insurers, particularly in the wake of catastrophe loss. For instance, continuous deterioration of underwriting results of Malaysia-based Best Re has led to a rise of credit risk
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on its buyer, South Koreas Hanwha General Insurance. Hanwha Insurance recorded a sharp increase in credit risk associated with reinsurance recoverables due to the downward rating of Best Re on Dec. 18, 2012. Global reinsurers see Asia as a diversification play given their peak exposures in the United States, Europe and Japan, along with Australia as an additional increasingly aggregated peak zone. The 2011 catastrophes highlighted the need of reinsurers to quantify exposures in a region that lacks the full suite of vendor catastrophe models and where data transparency can often be lacking. Natural disasters are a challenging factor for Asia-Pacific writers and have affected a large population in Asia but the corresponding insurance impact remains comparatively low.The industry is in need of products that improve penetration levels on a widespread basis across emerging Asia.

Capacity and Competition

Asia-Pacific accounted for 14% of total global nonlife reinsurance gross written premium, according to A.M. Bests 2012 ranking on global reinsurers. China Re (No. 8) and Toa Re (No. 19) each held their respective ranking from the prior year, while Korean Re moved up one spot to No. 9. Much of Asian reinsurers premium growth is driven by market growth rather than competition, yet a growing number of players with a regional focus in Asia have limited impact on reinsurance terms and conditions. Terms and conditions are still driven more by total capacity allocated to the region by local and global players. In aggregate, an oversupply of capacity has generally kept prices competitive for ceding companies.

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Global Reinsurance

MENA Reinsurance Demand Continues Despite Shift Toward Higher Retentions

International reinsurers play an important role in the Middle East and North Africa (MENA) insurance markets, providing capacity and technical expertise to local market participants, particularly on high-value risks. Primary insurers dependence on reinsurance support remains high among companies based in the region. MENA insurance markets generated more than USD 30 billion of premiums in 2012, with the vast majority of high-value commercial risks ceded into the international reinsurance market. Despite the regions economic slowdown in recent years, owing to depressed world financial markets, potential growth in commercial risks, such as infrastructure and energy, is expected to remain and continue to create opportunities for reinsurers. Most markets within the MENA region are open, with limited restrictions on reinsurance activities. However, there are initiatives to foster growth and retain business within the region. Mandatory cessions are important to the dynamics of some markets, such as in Algeria and Morocco. In these countries, local players are obliged to cede a proportion of their reinsured premiums to the state reinsurers.This emphasizes the states involvement and intention to retain some of the risks within a country, or to support the country in case of natural catastrophes. Another mechanism in place to encourage retention is the establishment of long-standing local and regional reinsurance companies, in addition to reinsurance pools, whereby shareholders or pool members are largely local or regional insurance companies. In these cases, the companies may have vested interests in serving the local market and supporting the regional reinsurance markets. Some jurisdictions, such as Saudi Arabia, are introducing specific rules whereby an increasing proportion of total premiums must be retained within the country.This encourages higher participation in risks among local participants. Moreover, in many jurisdictions, most business must be placed through a local participant or sponsor. Despite these market dynamics, the MENA insurance markets are still young and depend on international reinsurance support, with local and regional reinsurers generally acting as followers in such markets. Primary insurers have tended to maintain low retentions, relying heavily on the reinsurance market, in particular for commercial risks.This is in part a result of insurers encountering challenges in developing technical expertise, and partly due to the increased reinsurance commissions available.They have tended to be risk averse in part, while reinsurance commissions received have tended to cover the majority, if not all, of the commissions that insurers have been required to pay to agents. Despite insurers beginning to retain increasing amounts of business in recent years, the dependence on reinsurance remains high, with many risks being fronted locally and ceded to the international market. For international reinsurers with greater capacities and expertise, the MENA insurance market has presented opportunities to diversify risk into countries perceived to have low exposures to natural catastrophes. Although there are indications that some reinsurers have more recently been seeking to reduce their exposure to the region, plenty of reinsurance capacity remains in the market. Furthermore, the expansion of regional
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Bermuda Market 10%

9%

Special Report

Germany 27%
Note: Region determined by the domicile of ultimate parent. * Americas includes the United States, Canada and Latin America, and

Global Reinsurance

players operating within the Indian subcontinent, the Asia-Pacific territories and Africa gross premium of National Indemnity & General Re Corp. (subsidiaries of Berkshire has brought additional capacity to the Hathaway). market.
Source: A.M. Best data & research

MENA Market Strategies Vary

Strategies adopted by reinsurers to penetrate the MENA markets vary considerably. Five years Exhibit 10 with the vast majority of commercial risks ago, reinsurers tended to operate from a distance, placed through the London market. However, the dynamics of the landscape have changed Global Reinsurance Non-Life Gross Premium materially. The introduction of financial free zones, such as the Dubai International Financial Written by Region (2012) Centre (DIFC) and Qatar Financial Centre (QFC), have helped open the market and encouraged international participants to establish operations in the region.This has been the case London Switzerland 13% 14% major insurance institutions in particular for reinsurers and brokers, with most having some form of regional presence. Proximity to the market is seen as increasingly important to understanding the markets char9% Asia-Pacific 14% companies and cedents; and demonstrating a keen acteristics; creating closer ties between willingness to support the market.While some reinsurers have left the market, overall the number of participants and capacity continue to increase. A growing amount of business is being placed directly within the MENA region, with this trend likely to continue.Bermuda For reinsurMarket ers, risk selection is critical, with risk management practices of clients and cedents 14% being important to the quality of risk underwritten. Cession rates vary significantly among 12% MENA insurers, although in general the level of business ceded has gradually decreased in the past few years.A.M. Bests analysis of 130 companies based in the Gulf Cooperation Council (GCC) countries ofGermany Bahrain, Kuwait, Oman, Qatar, 24% Saudi Arabia and the United Arab Emirates (UAE) shows that in 2002 more than 60% of direct premiums written were ceded (see Exhibit 17). However, in 2011, cession rates for compaNote: Region determined by the domicile of ultimate parent. nies in this data set were less than*Americas 40% ofincludes risks. the United States, Canada and Latin America. Americas The reduction in part indicates a change in Best the data markets mix of business, with health care Source: A.M. & research playing an increasingly important role in insurers profiles. The retention on medical remains high, and therefore primary insurers have improved Exhibit 17 their overall retention. For Global Reinsurance Premium Cession Rates in commercial risks, retention is gradually improving as Select Regions (2002-2011) companies seek to increase expertise and retain larger 60 lines, yet insurers are still GCC largely dependent on rein50 surers. A.M. Bests analysis compares the performance of 1,766 companies in 19 countries over nine years. The data show that while GCC companies have improved retention ratios, they continue to cede the largest proportion of their premiums compared with other markets. Premium
40 30 Indian Subcontinent 20 Developed 10 CIS 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Far East Levant
also includes GPW of National Indemnity & General Re Corp. (subsidiaries of Berkshire Hathaway).

Other Markets

Americas

GCC (Bahrain, KSA, Kuwait, Oman, Qatar, UAE) Indian Subcontinent (India, Pakistan) Far East (Malaysia, Thailand, Vietnam)
Source: Best's Statement File Global

Levant (Jordan, Lebanon, Turkey) CIS (Kazakhstan, Russia, Ukraine) Developed (France, Germany, UK)

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Exhibit 11 Brazil Reinsurance Local Reinsurer Market Share (2008-2012)

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Global Reinsurance

cession levels are approximately double those of the 111 companies that comprised the data set for the Commonwealth of Independent States (CIS) Kazakhstan, Russia and Ukraine and the 1,191 entities analysed in the developed markets of France, Germany and the United Kingdom. The MENA market largely utilizes proportional reinsurance, although there has been a gradual shift toward nonproportional cover in recent years. Within the region there is extensive use of bouquet treaties, whereby most non-life lines are placed together under the same treaty to service group multirisk accounts.This makes pricing the treaty for the whole portfolio more critical, factoring in both under- and overperforming lines. In most cases, health care is placed separately. Historically, MENA insurers have benefited from reinsurance rates that have been among the lowest in emerging markets. While reinsurance prices have been under pressure in recent years, it is likely that prices are starting to increase in the short term. For rates to materially increase there would need to be a major shock to the reinsurance market.This could be triggered by a major catastrophe in the region, or a series of large losses on high-value risks, such as in energy and infrastructure risks. Medical business has historically been written on a proportional basis. However, the level of competition in medical has contributed to losses among many insurers and reinsurers.The latter may have suffered more in some instances because of the outwards commission structures attached to these treaties. As a result, reinsurers are dictating terms more aggressively as they threaten to remove capacity, move from treaties to excess-of-loss cover, reduce commissions or shift to sliding-scale commissions.The dominance of medical in the region makes it important for the markets to have reinsurers continued support. In the medium term, MENA insurers are under pressure to maintain greater focus on technical profitability, given depressed investment returns.There is pressure from reinsurers to increase rates, enforce stricter terms or reduce commission levels, which will further encourage companies to concentrate more on gross rather than net profitability. Furthermore, insurers are taking active steps to improve profitability, with increased retentions as one measure. They are also performing back-testing (sometimes with the assistance of third parties) on their reinsurance utilization to see the overall benefits of reinsurance coverage, aiming to leverage their positions to negotiate improved terms and conditions.

Retakaful Trends
Retakaful operators represent an important sector of the MENA reinsurance market, although these tend to be young companies finding it difficult to establish themselves and create a balance between market franchise and profitability. Rather than distinguish themselves through targeting new, untapped market segments, Retakaful operators tend to compete directly with their conventional counterparts. Given that some existing conventional reinsurers benefit from strong reputations and economies of scale, Retakaful operators find it difficult to establish profitable operations. Moreover, pressure from shareholders to service capital can lead to the pursuit of premium income through pricing practices. Retrocession should ideally be placed with Retakaful companies, but in reality, a lot of the risk is ceded to conventional reinsurers, as Retakaful operators have insufficient capacity to support large and volatile commercial risks or lack the ratings required by the ultimate insureds.

Ratings Issues for MENA Reinsurers

All A.M. Best-rated reinsurers based in the MENA region have secure Financial Strength Ratings
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(FSRs).The highest rating achieved at present is an FSR of A (see Exhibit 18). In all but two instances, the outlook for the FSR and Issuer Credit Rating (ICR) is stable. Most reinsurers in the MENA countries are now underwriting business outside of the region. While the markets continue to expand, reinsurers will find opportunities to grow but need to ensure underwriting is adequately controlled. MENA insurers operating in countries that have suffered from regional political and economic instability have seen their top lines affected. However, many A.M. Best-rated Middle Eastern reinsurers have shown resilience in their operating performances due to their diversified portfolios and flexible business continuity plans. Reinsurers have felt obliged to support affected markets during the turbulent period however, after the initial unrest, policy wording has materially tightened in the region, driven by the international reinsurance markets desire to alleviate uncertainty or conflict arising from strike, riot and civil commotion (SRCC) definitions. Furthermore, in relation to the uncertainty of natural catastrophes across the world and the increased frequency of regional catastrophe events, focus has increased on introducing event limits in the region.This should provide further protection to reinsurers in the event of a major adverse loss scenario.These issues over the past few years have highlighted the need for greater transparency in policy wording and conditions offered in MENA markets. MENA markets allow reinsurers to diversify into relatively less catastrophe-prone territories.While insurers seek to increase their retention levels, reinsurers will continue to play an important role in the market. As the complexity of the market develops, the presence of reinsurers and proximity to clients in the region will remain important.

Exhibit 18 Middle East & North Africa A.M. Best-Rated Reinsurance Companies
Ratings as of Aug. 16, 2013.
Bests Financial Strength Rating (FSR) B+ AB++ AB++ AB+ B++ A B+ B+ ABests LongTerm Issuer Credit Rating (ICR) bbbabbb+ abbb+ abbbbbb a bbbbbbaBests FSR & ICR Outlook Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Negative Stable FSR & ICR Rating Action Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Affirmed Assigned Affirmed Affirmed Affirmed

Domicile Algeria Bahrain Bahrain Bahrain Kuwait Kuwait Lebanon Morocco Qatar Tunisia Turkey United Arab Emirates
Source:

Company Compagnie Centrale de Reassurance ACR ReTakaful MEA B.S.C. (c) Arab Insurance Group (B.S.C.) Trust International Insurance & Reinsurance Co. B.S.C. (c) Trust Re Al Fajer Retakaful Insurance Co. K.S.C. (Closed) Kuwait Reinsurance Co. K.S.C. (Closed) Arab Reinsurance Co. S.A.L. Societe Centrale de Reassurance Q-Re LLC Societe Tunisienne de Reassurance Milli Reasurans Turk Anonim Sirketi Gulf Reinsurance Ltd.
Bests Statement File Global; Ratings as of Aug. 16, 2013.

AMB # 090777 090059 085013 086326 088954 085585 089190 084052 092611 083349 085454 088930

Rating Effective Date July 18, 2013 Dec. 20, 2012 Dec. 18, 2012 Aug. 30, 2012 July 10, 2013 April 25, 2013 Dec. 11, 2012 July 10, 2013 Nov. 26, 2012 July 10, 2013 April 5, 2013 Aug. 2, 2013

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Offshore Reinsurance Tax Plan Still Bears Watching

In April 2013, a proposal to end some tax benefits enjoyed by most international (re) insurers doing business in the United States found its way into President Obamas budget. A month later, a bill to enact a similar measure was again introduced in the U.S. House and Senate.This long-standing tussle among domestic and foreign reinsurers can be characterized by one of baseball philosopher Yogi Berras famed quotes:its dj vu all over again. This subject has been argued for at least a decade, with very intense positions on both sides. What has changed is the charged political atmosphere surrounding this chapter in the ongoing debate. The thirst for reducing effective corporate tax rates is far from limited to the insurance industry or even U.S. soil. As momentum for tax reform in the United States builds, so does concern among offshore interests that the loophole benefiting foreign reinsurers with U.S. affiliates may be tightened within broader tax-reform legislation, as opposed to a stand-alone bill. Another new aspect is the evolving presence of third-party capital as a reinsurance solution, and whether this may quiet a rallying cry that foreign reinsurers capital is needed to help sustain affordable pricing levels in catastrophe-prone areas.

Exhibit 19 Global Reinsurance U.S. & Bermuda Market Trend Summary (2008-2Q 2013 YTD)
(USD Billions) NPW (Non-Life only) Net Earned Premiums (Non-Life only) Net Investment Income Realized Investment Gains / (Losses) Total Revenue Net Income Shareholders Equity (End of Period) Loss Ratio Expense Ratio Combined Ratio Favorable Loss Reserve Development Net Investment Ratio Operating Ratio Return on Equity (Annualized) Return on Revenue (Annualized) NPW (Non-Life Only/Annualized) to Equity (End of Period) Net Reserves to Equity (End of Period) Gross Reserves to Equity (End of Period)
* 2Q 2013 YTD excludes Alterra. Source: A.M. Best data & research

2008 $51.6 52.1 7.6 (6.0) 55.9 (0.5) 67.6 64.2% 29.4% 93.6% -7.3% 14.6% 79.0% -0.7% -0.9% 76% 168% 215%

2009 $50.3 51.1 8.2 0.8 63.1 12.4 88.4 56.1% 29.7% 85.8% -6.1% 16.0% 69.8% 16.0% 19.7% 57% 134% 167%

2010 $52.6 52.4 8.1 2.2 65.7 11.2 95.1 61.8% 30.9% 92.7% -6.2% 15.4% 77.3% 11.9% 17.1% 55% 128% 158%

2011 $55.0 54.4 7.6 (0.1) 64.6 0.9 93.7 77.3% 30.0% 107.3% -6.0% 14.0% 93.3% 1.0% 1.5% 59% 138% 169%

2012 $56.7 55.5 7.1 2.2 68.6 10.1 101.7 63.4% 29.8% 93.1% -5.8% 12.7% 80.4% 10.6% 14.8% 56% 130% 158%

2Q YTD 2013* $31.1 26.3 3.1 0.2 33.3 5.7 96.5 56.1% 30.6% 86.7% -6.3% 11.8% 74.9% 11.8% 34.6% 64% 134% 160%

5yr Avg $53.2 53.1 7.7 (0.2) 63.6 6.8 89.3 64.7% 30.0% 94.7% -6.3% 14.5% 80.1% 7.7% 10.8% 60% 138% 171%

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Although this legislative issue warrants ongoing surveillance, A.M. Best does not believe the matter will lead to any ratings revisions over the near term. Depending on the final outcome, companies likely will continue to seek operating alternatives to ensure tax and capital efficiency if and when the tax benefits for foreign companies are eliminated. Some companies already have reacted, while others will continue to take steps that mitigate the impact of any potential tax exposure. The current administration has tried but failed to eliminate this tax benefit in previous budget proposals. The opposition on this issue has the support of many members of Congress, particularly from states that have considerable exposure to natural catastrophes. Their concern is the possibility that a tax increase could lead to increased costs for (re)insurance coverage or possibly a decrease in allocated (re) insurance capacity for less profitable risks. Accordingly, any resolution of this issue still could be years away. Over the past several years, there have been various initiatives to increase insurance capacity for catastrophe-prone states, the most recent being the relaxation of collateral requirements in some states for foreign (re)insurers operating within those jurisdictions.The proposed elimination of the existing tax benefits would be in direct opposition to such initiatives.

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Global Reinsurance

Global Re Outlook Remains Stable; Industry Positioned to Bear Uncertainty

Despite increasing challenges, the rating outlook on the global reinsurance segment is being held at stable, supported by continued strong risk-adjusted capitalization, judicious enterprise risk management practices and a slow improvement in the global economic environment, underpinned by the United States, which represents the worlds largest insurance market. A disciplined underwriting posture has enabled reinsurers to produce reasonable underwriting profits and benefit from favorable loss-reserve development, while helping to mitigate the continuing weakness in investment earnings. From a capital perspective, global reinsurers are well capitalized and capable of absorbing significant losses from a combination of events.The fragility in the global economy continues to present a meaningful level of uncertainty and challenges. Assuming continued stabilization in the global economy and a normal level of global catastrophe losses, A.M. Best expects reasonable organic growth in reinsurers capital for 2013, supported by core earnings and new opportunities presented by their primary insurance and specialty (re)insurance operations, and tempered by mark to market adjustments due to rising interests rates and capital management strategies. However, A.M. Best remains concerned that reinsurance pricing, terms and conditions may come under increasing pressure as excess capacity continues to build and the convergence between capital market capacity and traditional reinsurance capacity evolves. Furthermore, while loss-reserve releases have helped to bolster profits and likely will continue to do so, this crutch will provide steadily decreasing support. The continuing low interest-rate environment, however, appears to be reinforcing a focus on underwriting discipline, which should translate into a positive for the segment. Pricing, terms and conditions are important aspects of the overall equation, given that operating performance helps drive balance sheet strength. With operating returns pressured by low investment yields, underwriting profits must drive overall earnings for the foreseeable future.

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Contributors

Robert DeRose, Oldwick Greg Reisner, Oldwick Scott Mangan, Oldwick Mariza Costa, Oldwick Al Slavin, Oldwick Mahesh Mistry, London

Richard Hayes, London David Drummond, London Yvette Essen, London Vasilis Katsipis, Dubai Iris Lai, Hong Kong

Published by A.M. Best Company

Special Report
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Copyright 2013 by A.M. Best Company, Inc., Ambest Road, Oldwick, New Jersey 08858. ALL RIGHTS RESERVED. No part of this report or document may be distributed in any electronic form or by any means, or stored in a database or retrieval system, without the prior written permission of the A.M. Best Company. For additional details, see Terms of Use available at the A.M. Best Company Web site www.ambest.com. Any and all ratings, opinions and information contained herein are provided as is, without any expressed or implied warranty. A rating may be changed, suspended or withdrawn at any time for any reason at the sole discretion of A.M. Best. A Bests Financial Strength Rating is an independent opinion of an insurers financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a companys balance sheet strength, operating performance and business profile. The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance policy and contract obligations. These ratings are not a warranty of an insurers current or future ability to meet contractual obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurers claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. A Financial Strength Rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. A Bests Debt/Issuer Credit Rating is an opinion regarding the relative future credit risk of an entity, a credit commitment or a debt or debt-like security. It is based on a comprehensive quantitative and qualitative evaluation of a companys balance sheet strength, operating performance and business profile and, where appropriate, the specific nature and details of a rated debt security.Credit risk is the risk that an entity may not meet its contractual, financial obligations as they come due. These credit ratings do not address any other risk, including but not limited to liquidity risk, market value risk or price volatility of rated securities. The rating is not a recommendation to buy, sell or hold any securities, insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. A.M. Best does not offer consulting or advisory services. A.M. Best is not an Investment Adviser and does not offer investment advice of any kind, nor does the company or its Rating Analysts offer any form of structuring or financial advice. A.M. Best does not sell securities. A.M. Best is compensated for its interactive rating services. These rating fees can vary from US$ 5,000 to US$ 500,000. In addition, A.M. Best may receive compensation from rated entities for nonrating related services or products offered. A.M. Bests Special Reports and any associated spreadsheet data are available, free of charge, to all BestWeek subscribers. Nonsubscribers can purchase the full report and spreadsheet data. Special Reports are available through our Web site at www.ambest.com/research or by calling Customer Service at (908) 439-2200, ext. 5742. Briefings and some Special Reports are offered to the general public at no cost. For press inquiries or to contact the authors, please contact James Peavy at (908) 439-2200, ext. 5644. SR-2013-046

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