CAS Spring Reinsurance Seminar

“New Capital: Same Strategies?”

David Cash – Chief Actuary, Endurance Specialty

June 7, 2004

2

The Classes of 1985, 1993 and 2001

Note: Shaded areas denote hard market periods. Real NWP is adjusted for inflation.Source: A.M. Best, Insurance Information Institute.

-10%

-5%

0%

5%

10%

15%

20%

25%

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

E

20

04

E

1985-87

1993-94

2001-04

Annual Real Net Written Premium Growth

Class of 1985:

ACE

XL

Class of 1993:

Cat Ltd.

Global Re

IPC Re

Mid-Ocean Re

Partner Re

Renaissance Re

Tempest Re

Class of 2001:

Arch

AXIS

AWAC

Endurance

Montpelier

3

The Three Hard Markets

1985: The Liability / Regulatory – Hard Market

The US insurance and reinsurance markets were hit by a combination of the following:1. Dramatic change in the legal environment in the US2. The initial emergence of Asbestos and Pollution3. Dramatic reduction in interest rates4. Only limited access to capital markets

1993: The Hurricane Andrew – Hard Market

In 1992 Hurricane Andrew caused $20 billion of insured losses – the largest insurance event ever experienced by a factor of three [Typhoon Mireille 1991].

2001: The WTC – Hard Market

The world insurance and reinsurance markets were hit by a combination of the following factors:1. WTC losses $ 50 billion2. Re-emergence of Asbestos$ 55 billion3. 1997 – 2001 Soft Market4. Equity Market Losses

> $150 billion - combined

4

The 1985 Hard Market

Sources of CapitalCapital was largely drawn from clients and from within the industry – as follows:1. ACE: Approximately $500 million raised from a group of client

companies, along with some capital provided by third parties

2. XL: Approximately $500 million raised from a group of client companies, along with some capital provided by third parties

3. Financial Reins.: Development of financial / finite reinsurance to provide capital relief without the need for imported capital

Underwriting StrategiesThe new companies were formed to be mono-line underwriters operating in a narrow market [Fortune 500 companies] focused exclusively on casualty business.

Impact on the MarketThe start up companies benefited greatly from the hard markets and showed very significant returns on capital. At the same time, their impact on the insurance market was relatively modest. After 3 – 5 years ACE and XL had accumulated sufficient capital to be forced into exploring expansion strategies.

5

The 1993 Hard Market

Sources of Capital

Capital was largely drawn from a combination of industry incumbents and private equity investors. Key differences with 1985 were as follows:1. Speed: Capital raising quick – approximately 12 months

2. Industry Sponsors: Significant industry participation in the formation of these companies: ACE, AIG, Aon, Centre, CNA, Gen Re, XL…

3. Private Equity: First significant involvement of investment banks and private equity in the formation of these companies.

4. Exit Strategies: Because of the involvement of financial investors from the outset, the companies were always considered to be “in play”

Underwriting Strategies

As was the case in 1985, these new companies were formed to be mono-line Property Catastrophe reinsurance underwriters.

Impact on the Market

The start up companies had a significant impact on the catastrophe market place, but a relatively limited impact on the broader re / insurance markets.

6

The 2001 Hard Market – The Opportunity

Sources of DislocationThe period from 1997 through 2001 brought together multiple damaging events for the industry:

1. WTC: $50 billion in losses spread through the Accident/Life, Aviation, Property, Workers Compensation insurance and reinsurance markets

2. 97 – 01 Soft Market: $100 billion of potential losses spread through out the global insurance and reinsurance markets. The casualty lines of business being most obviously affected.

3. Asbestos: $55 billion of exposure to older commercial lines underwriters

4. Equity Markets: $50 billion of investment losses – disproportionately concentrated with the European companies. Significant exposure to the underwriters of D & O / E & O business.

5. Reinsurance Credit: Following on from the above, users of reinsurance have a further exposure to unrecoverable reinsurance balances.

In short, it is easier to list those areas of the business that did not suffer during the period from 1997 – 2001, than it is to list those that did…

7

The 2001 Hard Market – The Capital

Obtaining Capital

Once again, there were some key differences as to how capital was raised in 2001:1. Speed: Capital raising was quicker – approximately 3

months start to finish. Almost all of the significant participants in the process had made the trip to Bermuda once before.

2. Private Equity: The capital raising process became a sprint to put together a credible business plan, strategic investors and an investment bank. This group then raced to capture investments from the leading private equity firms.

3. 144A Private Deals: One management team raised its money without the aid of sponsoring companies or investors – a first for the Bermuda companies.

4. Assumed Exit: Almost all of the business plans put forward in 2001 contemplated an IPO and subsequent secondary stock offerings as the liquidity event for investors.

Result

4 out of 5 members of the “Class of 01” were public by mid 2003 – versus 3 out of 7 from the “Class of 93”.

8

The 2001 Hard Market – The Opposition

Asset Coverage / Total Liabilities [excl. Real Estate and Equity]

Note: Asset Coverage = Reinsurance recoverables + prepaid reinsurance premiums + cash and investments

[excl. real estate and equity] + funds held under reinsurance treaties + accounts receivables.

Total Liabilities = gross life and non-life loss reserves + funds held under reinsurance treaties +

reinsurance payables + other accounts payable/other accrued liabilities + net deferred tax liabilities +

total financial leverage [Debt].

Source: Dowling & Partners – Based on June 30, 2003 data

Asset Coverage / Tot. Liabilities (excl. Equity/Real Estate)

492%

259%227%

196% 180% 169% 157% 145% 136%116% 113% 107% 106% 104% 100% 96% 92% 91% 83% 78%

0

100

200

300

400

500

600%

IPC Re

MontRe

AxisAllied W

rld

Endurance

PXRe

Ren Re

ArchEverest Re

OdysseyRe

PartnerRe

Ace Ltd

XL Capital

GE Global

Converium

HannoverRe

SCOR

Swiss Re

Munich Re

Allianz

9

The 2001 Hard Market – The Challenge

20+ Lines of Business

AccidentAviationCasualty TreatyClashDirectors and OfficersEnergyErrors and OmissionsFidelity / SuretyInternational TreatyMarineMedical MalpracticeProgram BusinessProperty Ind. RiskProperty CatastropheProperty TreatyTerrorUmbrellaWar RiskWC CatastropheWorkers Compensation…

1,500+ Employees

Arch 860

Axis 308

AWAC 117

Endurance 245

Montpelier 49

As of March 31,2004

4 Countries

$18 Billion of Premium

Arch $ 5.723 Billion

Axis $ 4.426

AWAC $ 2.996

Endurance $ 3.121

Montpelier $ 1.751

Gross Written Premium 2002 + 2003 Combined

10

The 2001 Hard Market – The Strategies

Areas of Strategic Importance

Given the size and breadth of the market dislocation, the Class of 01 faced multiple strategic decisions in the first two years of operations:

1. Underwriting: Property versus Casualty versus Specialty, Insurance versus Reinsurance, US Market versus International Market.

2. Operations: Operating companies, operating locations, staffing, infrastructure and expense management.

3. Technology: The Class of 93 demonstrated that using technology in a distinctive manner could create lasting shareholder value.

4. Acquisitions: Acquisitions of businesses, balance sheets and underwriting teams.

5. Investors: The need for an early valuation by the public equity markets combined with the need for an orderly transition of ownership by the public markets made this a critical discipline.

The following slides set out some of the basic issues associated with the above items.

11

Underwriting – “Underwriters, Pick Your Markets…”

Specialty / Syndication Markets

Large limit [$100+ million] volatilebusiness

Expected returns of + 25% Specialist underwriting skills Includes: Aviation, Energy, Fortune

500 Liability, Fortune 500 Property,Hospital Professional Liability,Property Catastrophe, Marine…

Distribution 5 - 10 global brokers Requires material investment in

infrastructure and technology Located primarily in Bermuda, London

and NY Largest Market: Bermuda

Auction Markets

Medium limit [$10 million] stablebusiness

Expected returns of + 10% Includes: Working layer reinsurance

and middle market wholesaledinsurance…

Distribution spread across 10 - 30wholesale brokers

Low barriers to entry, business canonly tolerate a modest investment ininfrastructure and technology

Located primarily in the US Largest market US domestic

reinsurers and middle market insurers

Retail / Distribution Markets

Low limit, High transaction volume Expected returns of 15+% Requires broad geographic footprint,

specialist production skills andunderwriting/administration systems

Includes: Middle / Retail marketcommercial and personal insurance

Distribution 1,000+ middle market andretail brokers

Requires material investment ininfrastructure and technology

Located in the US, UK and potentiallyEurope.

Largest market large US CommercialInsurers

Solutions / Acquisitions Markets

Large limit [$100+ million], complexbusiness

Expected returns of 15+% Includes: Acquisitions, structured/

financial re/insurance… Typically on a direct, or near direct

basis, includes financial intermediaries Moderate barriers to entry, requires

staff with significant transactionexperience

No particular center of gravity,possibly NY

Largest market US insurance andreinsurance markets

Capital Markets

Source of original funding, andintended recipient of any excesscapital generated by companies.

Capital

Flows

Reinsurance

Flows

Phase 1: Initial inflow ofcapital into the industry.

Phase 2:Build out ofsubsidiaryplatforms.

Phase 3: Begin toreinsure difficult tooriginate business.

Phase 4: Investin those lines ofbusiness requiringmore time, effortand infrastructureto originate.

Phase 5:IMPORTANT,remember toreturn excesscapital.

Insurance Markets Capital Markets

12

20+ Lines of Business

AccidentAviationCasualty TreatyClashDirectors and OfficersEnergyErrors and OmissionsFidelity / SuretyInternational TreatyMarineMedical MalpracticeProgram BusinessProperty Ind. RiskProperty CatastropheProperty TreatyTerrorUmbrellaWar RiskWC CatastropheWorkers Compensation…

1,500+ Employees

Arch 860

Axis 308

AWAC 117

Endurance 245

Montpelier 49

As of March 31,2004

4 Countries

$18 Billion of Premium

Arch $ 5.723 Billion

Axis $ 4.426

AWAC $ 2.996

Endurance $ 3.121

Montpelier $ 1.751

Gross Written Premium 2002 + 2003 Combined

Operations – “What’s a work permit ?”

I. T.

I. P. O

S. E. C.

N. A. I. C.

F. S. A.

S. O.

A.M.B. and S&P

+

= An Operational Headache

13

Technology – “The Good, the Bad and the Ugly…”

3. Third Party Data 4. Underwriting and Financial Data1 & 2 Underwriting Workstation

A

naly

st

Data from

Client

UnderwritingSystem

PricingSystem

FormalAnalysis

U

/W

Data from

Client

DataMart

DataMart

DataMart

Reporting Data Mart

DataMart

Data from

Client

Data from

ClientAcc

ount

T A

Interface

FinancialSystem

Insurance System

Data Created by U/ Wand Pricing Process

DataMart

DataMart

Financial / Production Data

DataMart

Third Party Data used inDecision Process

Flow of Information back to U/ W and Pricing Flow of Information back to Finance and TA’s

14

Acquisition Strategy – “Make me an offer, any offer…”

+

200+ Acquisition Opportunities in 30 months

=+

0

1,000

2,000

3,000

4,000

5,000

6,000

01-Jan-97 09-Jan-99 16-Jan-01

Valu

ati

on

NASDAQ Composite

March 2000

Sept. 11 Tragedy

A.M. Bests - Upgrades versus Downgrades

91 80 77 7657

5977

148 151188

250

200

150

100

50

0

50

100

150

1999

2000

2001

2002

2003

<-

Dow

ngra

des

|

U

pgra

des

->

Upgrades

Downgrades

Asset Coverage / Total Liabilities [excl. Real Estate and Equity]

Asset Coverage / Tot. Liabilities (excl. Equity/Real Estate)

492%

259%227%

196% 180% 169% 157% 145% 136%116% 113% 107% 106% 104% 100% 96% 92% 91% 83% 78%

0

100

200

300

400

500

600%

IPC Re

MontRe

AxisAllied W

rld

Endurance

PXRe

Ren Re

ArchEverest Re

OdysseyRe

PartnerRe

Ace Ltd

XL Capital

GE Global

Converium

HannoverRe

SCOR

Swiss Re

Munich Re

Allianz

Asset Coverage / Tot. Liabilities (excl. Equity/Real Estate)

492%

259%227%

196% 180% 169% 157% 145% 136%116% 113% 107% 106% 104% 100% 96% 92% 91% 83% 78%

0

100

200

300

400

500

600%

IPC Re

MontRe

AxisAllied W

rld

Endurance

PXRe

Ren Re

ArchEverest Re

OdysseyRe

PartnerRe

Ace Ltd

XL Capital

GE Global

Converium

HannoverRe

SCOR

Swiss Re

Munich Re

Allianz

15

Capital – “Haven’t I answered this question already ?”

Value derived from Capital ManagementCapital management is a distinct discipline and one that has the potential to significantly enhance or diminish shareholder value. Raising the initial capital is the easy part – it’s managing the capital that is the hard part:

1. Go to Bermuda: The other easy part, all the capital goes to the same place.

2. I. P. O.: This represents the first step on a 4 – 5 year journey culminating in a fully public shareholder base. For most companies, this work was done at the end of 2002 – in the middle of renewal season.

3. Debt Issuance: A necessary part of right sizing the capital base – requires additional due diligence meetings with up to 20 banks.

4. Rating Agencies: Constant, unrelenting interaction…

5. Public Ownership: No more hassles with Private Equity, now it is just the analysts, the shareholders, the accountants and the regulators you have to deal with.

6. Excess Capital: The big test for all market participants – will companies give the money back, rather than burn it up in the next soft market…