rUNNiNG ON eMPTY - Willis

willis re 1ST vIEW 1 JULY 2010

RUNNING ON EMPTY

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TABLE OF CONTENTS RENEWALS – 1 JULY 2010 Introduction Casualty Territory and Comments Rates Specialties Line of Business and Comments Rates Property Territory and Comments Rates Rate Graphs Workers’ Compensation Comments Rates

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1st View

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Running on Empty The prediction we made after the 1st April 2010 review – that one poor quarter would not be sufficient to drive any general market turn – has proven to be correct. The recent 1st June and 1st July renewals continued the pattern set at the 1st January and 1st April 2010 renewals, namely, a continued gradual decline in pricing, with only a handful of loss-driven classes and territories showing any pricing stability or upwards pricing pressure. Competition remains fierce with substantial capacity chasing premium volume in many lines of business. This is true most particularly in areas of perceived diversifying risk, such as the Middle East. Casualty pricing remains generally soft and rates continue to decline, though with some territorial variability. The Chile Earthquake and Australia Storm losses, together with other minor catastrophe losses, are probably sufficient to erode the entire 2010 (excluding the U.S.) catastrophe excess of loss premium base. Despite this, in Property catastrophe lines, there have been no general market moves to increase prices. Only Chilean-specific renewals have seen rate increases, between +40% to +70%, driven entirely by loss activity. With the losses of 2008 now a distant memory, U.S. Property catastrophe excess of loss renewals performed as expected. Buyers achieved significant rate reductions, particularly in Florida, where reinsurance markets treated the better capitalized and more geographically diversified accounts to substantial rate reductions, as high as 25%. However, reinsurers did place added emphasis on the finances of Florida companies due to performance issues in 2009, and it should be noted that there remains a price tipping point below which placements struggle. In recognition of excess capital, some companies are redistributing their capital through share buy backs and special dividends, but at the same time, major M&A activity remains muted. A number of reasons for this have been proposed. These include unattractive pricing, current low share price multiples reducing the currency of potential acquirers and uncertainties about the impact of Solvency II and other emerging regulation on companies’ capital structures. Whatever the reasons, market hardening resulting from a reduced number of players is not happening. Reinsurance capacity from capital markets is gradually increasing and the products being structured are increasingly attractive for issuers, both in terms of coverage and pricing. While capital markets are an important diversifying source of risk-hedging capacity for primary companies and a more important capacity source in retrocession markets, the drive for the current softening cycle cannot solely be laid at the doors of capital market investors in ILS products. This can be seen in certain segments, such as the Industry Loss Warranties (ILW) market for U.S. wind where catastrophe bond purchasing has actually reduced available investor capacity. While U.S. wind catastrophe bond pricing seems to have plateaued at the new level, ILS investors are still keen for sponsors to bring diversifying (i.e., non-U.S. wind) risk to the market. The continued downward pressure on catastrophe bond pricing for these other risks may result in relatively more catastrophe bond deals without U.S. wind later this year. The trio of down cycle drivers, namely, excess capital, stable investment returns and limited growth prospects, continues to weave its magic, obscuring hidden dangers lurking in the quarters ahead. Barring any major industry event which removes a considerable part of the excess capital, it seems that the global reinsurance market is unlikely to see any rating upturn in the near future. In fact, there is a growing nervousness that the longer the wait for any upturn, the more abrupt it will be when it eventually arrives. While not wishing to tempt fate, looking at the current projections of the number and intensity of third and fourth quarter 2010 North Atlantic Hurricanes from a wide spectrum of academic and meteorological organizations, the market upturn may arrive sooner than expected.

Peter C. Hearn Chief Executive Officer, Willis Re 30 June, 2010

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Casualty Territory and comments Australia – General / Employers / Professional Liability

▀ Notwithstanding some loss activity in Professional Lines business, there remains significant ▀ ▀ ▀ ▀

capacity for casualty business in the Australian and New Zealand markets. Initial quotations saw considerable variance. Most placements have been well supported, once pricing has been established. Those clients prepared to re-cycle their panel of reinsurers were generally able to obtain better terms. The benefits to buyers of subscription placements were visible this renewal. Once firm order pricing was determined and fixed, most reinsurers were prepared to follow their position.

Caribbean – Auto / Motor Liability

▀ Reinsurers are maintaining price discipline, with only minor reductions in Motor liability excess

of loss.

China – General / Employers / Professional Liability ▀ Abundant capacity is available for Chinese Liabililty business.

▀ Pricing has increased, but not to the same extent as underlying exposures, so buyers enjoyed risk-

adjusted rate reductions.

United States – General / Employers LIABILITY

▀ Renewal capacity for most lines of casualty with good loss records remains plentiful. Reinsurers

▀ ▀

▀

▀

▀ ▀ ▀

▀

are concentrating on supporting the core covers of companies with consistent buying patterns across the entire market cycle. Placements for new buyers can still find some capacity, though at higher prices with less favorable ceding commissions and tighter terms and conditions. Some Speciality General Liability and Umbrella portfolios have shown loss emergence from the “hard market” years. This, combined with rate decreases, is making the placement of pro rata treaties at reasonable commission terms extremely difficult. Existing Umbrella and Excess Casualty placements are still able to gain support, provided there has not been any meaningful loss activity and renewal as expiring has been achieved for programs running well. For placements with worse than anticipated results, reinsurers have been seeking to drive improvements, but with mixed success. New Umbrella and Excess Casualty placements are able to find support, provided the management team have a proven track record and a credible business plan. For both new and renewal programs, the key remains the ability of buyers to demonstrate how their approach to the current soft market is differentiated from their peers’. Some slippage in reinsurance terms and conditions has been seen, but not on a comparable basis to prior soft markets. Larger carriers are not following the pattern of prior soft markets and are not buying down their retentions, leaving them operating largely unhedged, despite primary market conditions. Those pro rata programs running at or better than expected achieved renewal ceding commissions as expiring to possibly a 1% point increase along with some minor improvements to contractual terms and conditions. Programs performing worse than expected in some cases saw their ceding commission reduced anywhere from 1% to 5% points. Excess of loss – risk exposed programs running at or better than expected saw renewal rates as expiring to possibly -5%. Programs running worse than expected saw rate increases of 5% to 20%. Excess of loss – catastrophe loss-free programs experienced premium reductions of -5% to -10%. Programs with losses saw premium increases up to 10%.

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United States – Professional Liability

▀ New capacity has fueled reduced pricing on original D&O / E&O business in the second quarter. ▀ Treaties are renewing as expiring with reinsurance capacity relatively constant.

rates TERRITORY

Pro Rata Commission

XL – No Loss Emergence % Change

XL – With Loss Emergence % Change

Australia – General / Employers / Professional Liability

N/A

0% to -10%

0%

Caribbean – Auto / Motor Liability

0%

-5%

Loss Dependent

China – General / Employers / Professional Liability

N/A

-10%

N/A

South Africa – General / Professional Liability

N/A

0%

+10%

0% to -5%

0% to -5%

+5% to +20%

0%

0%

N/A

United States – General / Employers Liability United States – Professional Liability

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Specialties Line of Business and comments Engineering – Global

▀ Reinsurance market remains under pressure to improve treaty terms and conditions.

▀ New market entrants are increasing pressure for business, both in the reinsurance and direct

arenas.

▀ There is pressure to increase scope of cover on original business, but deductible levels remain

firm.

▀ Kleen Energy (current estimate US $150M) and Qatar Petroleum (current estimate US $80M)

losses have had minimal effect on market terms.

▀ Volume of new project business is expected to pick up later in the year.

HEaLthcare – United States

▀ Loss frequency continues to remain at historically low levels. ▀ Severity trend is evident, but again, at relatively low levels.

▀ There is an increasing number of challenges to state-by-state tort reform and less optimism that

all of these reforms will be upheld. ▀ There continues to be a migration of physicians into hospital employed / owned practices. ▀ Should frequency and severity maintain current trend levels, then the industry can expect a continuation in reserve releases, which will continue to suppress the current rating environment.

Marine and Energy – Global

▀ Marine, excluding Energy, pricing is now flat, compared to small reduction at 1st January.

▀ Retro market is now looking at increased pricing, following loss activity over the past six months. ▀ Marine and Energy Industry Loss Warranties pricing increased by approximately 60% following

“Deepwater Horizon” loss.

▀ Reinsurers now require greater transparency on liability exposure when rating energy-exposed

business.

▀ Gulf of Mexico wind coverage is available, but percieved as expensive, and there is therefore

limited take up.

Medical Excess – United States

▀ Healthcare reform’s removal of annual and lifetime maximums has sparked significant interest in

higher excess reinsurance.

▀ Numerous reinsurers are offering unlimited coverage as a result.

▀ Medical writers are now buying up to $20M / $25M, up from approximately $5M previously.

Non-Marine RetroceSsion

▀ True worldwide capacity continues to be offered by only a limited number of reinsurers, but

pricing is off approximately 7.5% year-on-year for all retrocession business.

▀ The effects of the Chile earthquake have not yet been felt, but it is clear that some retrocession

programs will be impacted.

▀ While the general position in the market has been that retentions have increased and there is

more than enough capacity, the last few weeks have seen increased interest in buying.

▀ Early signs are that results will be impacted by losses this year and this should have a stabilizing

effect on price.

▀ The flurry of U.S. wind-exposed Catastrophe Bonds being brought to market at pricing 30% to

40% below last spring / summer has soaked up non-traditional capacity that may have otherwise been deployed in the ILW / Retrocessional marketplace. This, combined with the worst half year for loss activity on record and predictions of an active U.S. Hurricane season, has caused a

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“technical capacity squeeze” in the ILW market and contributed to approximately a 20-30% price increase for U.S. windexposed ILW deals. This has been evident on both a first and second event basis.

Personal Accident / Life Catastrophe – Global

▀ There were six new entrants into the Accident / Life catastrophe reinsurance market. ▀ Softening effect on catastrophe rates is evident.

Political Risk – Global

▀ Pricing remains firm with price increases related to individual reinsured’s loss experience, causing some reinsureds to retain

more by way of increased deductibles.

▀ Pressure from some reinsurers to switch quota share commission structures from fixed plus profit commission to sliding

scale. ▀ Frequency of new loss advices easing. Majority of previously advised losses have or are being settled. In some instances, insured recoveries have been realized. Further recoveries are expected. ▀ Even though new reinsurers are attracted to the class, capacity remains limited. Greater preference from reinsureds for pro rata protections verses excess of loss. ▀ Lloyd’s is tightening up its regulations with regards to the definition of eligible trade-related transactions.

rates

Risk Loss Free % Change

Risk Loss Hit % Change

Cat Loss Free % Change

Cat Loss Hit % Change

-10%

0% to +5%

-10%

0% to +5%

Healthcare – United States N/A N/A Marine and Energy – Global +1.5% to +2.5% 0%

N/A

N/A

N/A

0%

0%

N/A

+20%

N/A

N/A

N/A

-7.5%

N/A

0% to -5%

-10% to -15%

N/A

+10% to +20%

N/A

N/A

Pro Rata TERRITORY Commission  Engineering – Global 0% to +1%

Medical Excess – United States 0% Non-Marine Retro N/A

+10% to +20% N/A

Personal Accident / Life Catastrophe 0% -5% to -10% Political Risk – Global 0% to -2.5% +5% to +10%

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PROPERTY Territory and comments Australia

▀ The two large catastrophe losses in the Australian market, in Perth and Melbourne, are now ▀ ▀ ▀ ▀ ▀

generally accepted to be over AUS $1B events. There was a significant amount of capacity at renewal for catastrophe, risk and pro rata business. The catastrophe renewal was reasonably flat. On a risk-adjusted basis, rates have been flat to a small discount, even on loss-affected business. The risk renewal pricing was flat to slightly reduced and there was a willingness to increase event limits. For pro rata, there was still abundant capacity; this was reflected in slightly increased commissions being made available. The adundance of capacity has seemingly suppressed any meaningful rate increases. We have seen real advantage for buyers in subscription placements, particularly for risk and pro rata placements.

Caribbean

▀ Property rates continue to come under pressure, with local markets often referring to pressure

from international insurers.

▀ Overall results remain good, ensuring continued pro rata capacity.

▀ Catastrophe excess of loss rates being held to within 5% of expiring.

China

▀ Capacity remains more than adaquate for the renewing catastrophe excess of loss programs. ▀ While pricing on average increased, it was not to the extent at which underlying exposures

increased, leading to risk-adjusted reductions, though total premium spend increased.

Latin America

▀ Chile’s main renewal season is 1st July and the insured/reinsured loss from the 27 February 2010

event has generated a significant increase in reinsurance pricing for Chile catastrophe excess of loss contracts. ▀ Excess reinsurance capacity has kept prices in the rest of Latin America relatively flat on a true risk-adjusted basis.

Mexico

▀ Market generally flat and not impacted by the effects of the Chilean quake. ▀ Significant capacity still exists for Mexico.

▀ None of the major reinsureds have open-market Fire and Allied Perils pro rata treaties. The

natural perils quota shares have renewed unchanged.

Middle East

▀ Significant oversupply of capacity from existing and new market entrants.

▀ Pro rata reinsurers are keen on offering more commission rather than capacity.

▀ Lloyd’s underwriters are showing growing appetite for excess of loss programs from Middle East

and North Africa .

United States – Florida ▀ Capacity remained plentiful.

▀ Several reinsurers increased maximum lines on quality accounts and reduced lines on lesser

quality accounts.

▀ Wide disparity in quotes due to reinsurers’ differing views on weighting of various catastrophe

models in pricing and flight to quality accounts.  of 11

▀ Property quota share market started to gain strength for both catastrophe-exposed and structured deals. ▀ Strong multiple year catastrophe excess market.

▀ Collateral markets provided traditional capacity, but were strong in supporting aggregate, reinstatement premium

protection, and top and drop structures.

United States – LONDON MARKET

▀ Catastrophe pricing down on a risk-adjusted basis 10% to 15% in Florida. ▀ Catastrophe pricing for nationwides down less; capacity is tight. ▀ Risk pricing off 5% to 10%.

▀ Capacity available for the right risk at the right price.

United States – Nationwide

▀ Nationwide accounts saw price softening on existing layers.

▀ Garnering new capacity on existing accounts came at a cost.

▀ European-based reinsurers have reduced capacity due to the dollar strengthening against the euro.

Venezuela

▀ The price movement for catastrophe excess of loss followed that of the rest of Latin America, other than Chile, i.e., flat-to-a-

small increase.

▀ The pro rata treaties have been subject to much negotiation in view of the 100% devaluation on 8th January 2010 of the

official rate of exchange; setting maximum net retention levels has been complex in order to allow for devaluation / inflation while still allowing for ceded premiums not to fall significantly.

rates

Pro Rata Commission

Risk Loss Free % Change

Risk Loss Hit % Change

Cat Loss Free % Change

Cat Loss Hit % Change

0% to +2.5%

0% to -5%

0%

0% to -5%

0%

+1%

-5% to -10%

+10%

-5%

N/A

N/A

N/A

N/A

-10% to -12.5%

N/A

0% to -2%

0%

+5% to +12.5%

0%

+40% to +70%

0%

0%

Loss dependent

0% to -3%

0% to +5%

+2.5% to +5%

-20%

0%

-20%

N/A

0%

0%

+10%

0%

0%

United States – Florida

-1% to +5%

-5% to -12.5%

0% to -5%

-5% to -25%

N/A

United States – London Market

N/A

-5% to -10%

+5% to +15%

-10% to -15%

N/A

United States – National

0% to +1%

-5% to -10%

0%

-5% to -10%

0% to +10%

Venezuela

0% to -1%

0%

+5% to +10%

0% to +3%

N/A

TERRITORY  Australia Caribbean China

Latin America Mexico Middle East South Africa

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Property catastrophe pricing trends The charts on this page display Estimated Year-to-Year Property Catastrophe Rate Movement.

Venezuela 600 500 400 300 200 100

10 20

20

98

96

94

92

0

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08

10

06

06

20

04

04

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00

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02

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92

90 19

10 20

08

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19

08

0

06

0

06

100

04

100

04

200

02

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02

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00

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98

400

96

500

94

500

92

600

90

600

90

20

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20

united states – NaTIONWIDE

Mexico

19

98

0 96

0

90

100

10

100

08

200

06

200

04

300

02

300

00

400

98

400

96

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92

600

90

600

94

Caribbean

92

Australia

U.S. Workers’ Compensation Territory and comments

▀ Overall, the market for Workers’ Compensation remains stable. Working layers, especially reinsurance capacity attaching

below $5M, has experienced modest hardening, but this is offset with continued softening in the catastrophe capacity.

▀ In the working layers, medical inflation trends continue to create modest headwinds for reinsurers. Where there is pricing

pressure, reinsurers often will agree to maintain stable up front pricing in exchange for backloading premium (i.e., adding or increasing reinstatement premium). Quite often, in the beginning stages of a hardening market, we would expect to see aggregate limits tightening, however, capacity as well as other terms and conditions, remain stable. ▀ The catastrophe market has softened every year since 2002 (the first renewal after September 11 terrorist attacks.) Costs for this capacity continue to drop, although most of the cost decrease at July 1 is in response to decreases in the underlying payrolls. As an industry, this payroll decrease is roughly 5%. The recalibration of the catastrophe earthquake models has had minimal influence on reinsurance pricing, although some buyers have adjusted their catastrophe capacity in response to modeling results. Capacity remains plentiful.

rates TERRITORY

United States

Contact Us

Pro Rata Commission

XL – No Loss Emergence % Change

XL – With Loss Emergence % Change

N/A

0%

+3% to +10%

Ingrid Booth The Willis Building 51 Lime Street London EC3M 7DQ +44 (0) 20 3124 7182 [email protected]

Will Thoretz One World Financial Center 200 Liberty Street, 3rd Floor New York, NY 10281 +1 212 915 8251 [email protected]

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