Market Analysis Update: Endurance Acquisition of Montpelierthoughtleadership.aonbenfield.com/Documents/20150903-ab-analytics... · 1. As of 12/31/2014, pro forma for transaction,

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Market Analysis Update: Endurance Acquisition of Montpelier September 2015

Risk. Reinsurance. Human Resources.


Table of Contents Executive Summary 3

Pro Formas on the Combined Entity 4

Organizational Structure and Branding 5

Underwriting Appetite and Strategy 6

Business Continuity and Contacts 6

Management and Staffing 7

Risk Tolerance 9

Rating Agency Reaction 10

Appendix I - Acquisition Rationale 12

Appendix II - Five Year Financial Highlights 13

Market Analysis Update: Endurance Acquisition of Montpelier 2


Executive Summary On July 31, 2015, Endurance Specialty Holdings Ltd. (Endurance) announced the closing of its acquisition of Montpelier Re Holdings Ltd. (Montpelier), following the receipt of all necessary regulatory and shareholder approvals.

The transaction, previously announced on March 31, 2015, valued Montpelier at ~$1.9 billion, or 1.28x fully converted book value as of December 31, 2014. Financing included $1.4 billion of newly issued Endurance shares (~75% of transaction), and $451 million of cash (funded via special pre-closing dividend from Montpelier). Pro forma ownership of the combined entity was split Endurance 68% / Montpelier 32%.

The combined company will have a larger financial profile, with pro forma shareholders’ equity of $4.1 billion, total capital of $5.5 billion (based on YE2014 figures), and gross premiums written (GPW) of $3.6 billion (vs. Endurance YE2014 GPW = $2.9 billion). Pro forma financial leverage increases moderately, with debt-to-total equity rising from 16.6% to 20.6% and debt-to-capital from 14.2% to 17.0%.

Bermuda-based Montpelier was founded in November 2001, with an IPO following in 2002. Montpelier focused on short-tail U.S. and international catastrophe reinsurance (~30% of GPW). It also provided specialty re/insurance (e.g. casualty, aviation, space, personal accident, workers’ compensation catastrophe). Montpelier was organized into three different business segments:

Montpelier Bermuda: Montpelier’s Bermuda-based reinsurance company specializing in property catastrophe reinsurance

Montpelier at Lloyd's (Syndicate 5151): Montpelier’s Lloyd’s operations

Blue Capital Management Limited: Montpelier’s collateralized reinsurance operations

The acquisition of Montpelier provides Endurance with enhanced scale, expanded distribution capabilities, and a profitable in-force portfolio. More specifically, in addition to increasing Endurance’s overall property cat reinsurance book of business, the deal gives it an established Lloyd’s platform and sizeable third-party asset management franchise (Blue Capital). Annual run-rate cost savings are estimated to exceed $70 million as compared to the $60 million originally estimated. This represents approximately 57% of Montpelier’s 2014 G&A expenses. There is also potential for enhanced capital management over time (~$300-500 million).

Going forward, the organization will continue to be branded as Endurance.



Pro Formas on the Combined Entity The graphs and tables below show pro forma financial information* for the combined company. The acquisition provides meaningfully greater scale in reinsurance, with premiums up ~35%. The overall business mix will nearly be equally balanced between insurance (53%) and reinsurance (47%).

*Notes:

1. As of 12/31/2014, pro forma for transaction, excluding purchase accounting adjustments and transaction expenses 2. Based on Endurance closing share price of $64.30 as of 3/30/2015 and 45.5 million fully-diluted Montpelier common

shares 3. Pro forma includes redemption of $150 million Montpelier preferred shares and related $6 million charge, plus declared

dividends, if any, to the date of redemption.

Balance Sheet($billion as of December 31, 2014) Endurance Montpelier Pro FormaCash and Invested Assets 6.7 3.2 9.3 Total assets 9.6 3.6 13.0 Common Equity 2.8 1.5 4.1 Total Equity 3.2 1.9 4.5 Total Debt 0.5 0.4 0.9 Total Capital 3.7 2.1 5.5

Capitalization Endurance Montpelier Pro FormaDebt to common equity ratio 19.2% 27.2% 22.8%Debt to total equity ratio 16.6% 21.3% 20.6%Debt to capital ratio 14.2% 19.8% 17.0%Debt and preferred to capital ratio 25.8% 27.1% 24.8%



Organizational Structure and Branding The organization will continue to be branded as Endurance, and the Montpelier name will not be retained. Montpelier was organized into three different business segments:

Montpelier Bermuda

Montpelier at Lloyd's (Syndicate 5151)

Blue Capital

The purpose of each of these segments and the continuity plans are outlined below.

Business Segment Description Outlook

Montpelier Reinsurance Limited (Montpelier Bermuda)

- Class 4 Bermuda insurer incorporated in November 2001 - Principal operating company of the Montpelier group - Underwrites global property and casualty re/insurance with a particular focus on property catastrophe - It also writes property specialty and other specialty (e.g. aviation liability, marine, workers' comp, terrorism)

- Will retain financial strength ratings and capital through 2015 - It is expected that most of the business written on Montpelier Bermuda paper will be renewed on Endurance Specialty Insurance Ltd. paper

Montpelier at Lloyd’s, Syndicate 5151

- Syndicate 5151 was established in 2007 - Focuses on non-cat exposed products including: property, engineering, marine hull and liability, cargo and specialty casualty classes - 2014 GPW was $273 million

- Managing agent has been rebranded Endurance at Lloyd’s Limited - Will become part of the insurance operations and work closely with existing Endurance London operations - Capacity for 2015 is £180 million

Blue Capital Management Limited (Blue Capital)

- Formed in 2012 as an asset management platform offering cat reinsurance-linked investment products to investors - Offers collateralized reinsurance to the global marketplace - $625 million third-party AUM at January 1, 2015

- Will be part of the Endurance reinsurance operations - Adam Szakmary was promoted to CEO and remains portfolio manager of Blue Capital



Underwriting Appetite and Strategy The acquisition expands Endurance’s product and distribution capabilities. Endurance indicated that there will not be significant changes to the type of business written going forward vs. what was written in the past by both companies. The overall percentage of reinsurance to insurance will rise modestly from 41% to 47%, with insurance still representing slightly more than 50% of the book.

Endurance indicated that the two companies had mostly similar underwriting strategies and risk appetites in catastrophe reinsurance, as each focused on regional as well as national accounts.

The addition of Lloyd’s Syndicate 5151 will help Endurance deliver a broader range of products and provide access to additional geographies.

The addition of established third-party capital management franchise Blue Capital increases Endurance’s capital base and enables it to better leverage capital and offer enhanced reinsurance products.

Endurance is preserving all underwriting business units from Montpelier, which expands Endurance’s scope of products to now include:

Marine & Specialty Lines (Lloyd’s)

US Facultative Property (Lloyd’s)

Reps & Warranties Insurance (US)

Direct & Facultative Property (Bermuda)

Collateralized Cat Reinsurance (Blue Capital)

Business Continuity and Contacts Montpelier staff retained by Endurance have moved to the Endurance offices in Bermuda, London, New York, and Chicago locations. With the acquisition, Endurance has added a new office in Woburn, Massachusetts.

Ceding insurers should contact their underwriters directly. Montpelier staff who have been retained by Endurance have been issued new phone numbers and email address but they can be reached using their legacy Montpelier contact information during a transition period. Alternate contacts are as follows:

Bermuda – David Bigley at 441.278.0947 or [email protected]. London – Richard Housley at 44 207.337.2930 or [email protected]

No changes will be made to in-force business, but upon renewal business written by Montpelier Bermuda will likely be renewed on Endurance Specialty Insurance Ltd. paper. Montpelier will retain its ratings and capital through December 2015. As a result, Endurance believes that there is no need for novations at this time. However, given the change in control of Montpelier, terminations under the Special Termination clause may apply. Clients should consider their rights under reinsurance agreements and take any actions that they deem necessary.


mailto:[email protected]


Management and Staffing In connection with the Montpelier acquisition, Endurance appointed to its Board of Directors three Montpelier directors, Morgan Davis, Nicholas Marsh, and Ian Michael Winchester.

The Endurance management team remains unchanged, led by chairman and CEO, John Charman. Michael McGuire serves as chief financial officer. Joan deLemps serves as chief risk officer, although she will soon be retiring (unrelated to the Montpelier acquisition).

Endurance has confirmed that about 50% of the Montpelier staff are being retained in the ongoing Endurance operations. Consistent with many acquisitions, some of the Montpelier staff are not being retained. This includes Montpelier CEO Chris Harris and his direct reports as well as underwriters and other operational staff across the organization.

Insurance Segment The insurance operation continues to be led by John Kuhn, CEO of Global Insurance. The table below shows the leaders of the four main insurance sub-segments along with underwriting lines/teams:

Bermuda Insurance International Insurance U.S. Insurance ARMtech

John Kuhn – Chief Executive Officer, Global Insurance

Graham Evans – Chief Executive Officer, International Insurance

Doug Worman – Chief Executive Officer, U.S. Insurance

Michael Smith – President & Chief Executive Officer

Comm’l. Mgmt. Liability Endurance Pro Excess Casualty Financial Institutions Healthcare Liability Property Direct & Fac.

Energy Financial Institutions Management Liability Marine & Specialty Professional Indemnity Property

Comm’l. Mgmt. Liability Commercial Property Contract Binding Op’s Endurance Pro Excess Casualty - E&S Excess Casualty - Retail Financial Institutions Global Weather Healthcare Liability Inland Marine Ocean Marine Primary Casualty - E&S Property - E&S Surety Bond Transactional Risk

MPCI Crop Hail Livestock Risk Protection (ARMtech is the fifth largest underwriter of U.S. federally sponsored crop insurance.)



Reinsurance Segment The reinsurance management team remains the same. Effective January 1, 2016, Stephen Young, chief underwriting officer and head of global catastrophe reinsurance, will succeed the retiring Jerome Faure as CEO of global reinsurance Mr. Young will retain his role as head of global catastrophe reinsurance.

The Endurance Re global leadership team will report to Mr. Young upon his assumption of the role of CEO, global reinsurance. This includes the leaders identified below and on the following page. Note that Chris Donelan, president and chief underwriting officer, Endurance Re U.S., who will also assume the additional role of chief underwriting officer, head of global casualty reinsurance.

Underwriting Leadership Stephen Young Chief Underwriting Officer & Head of Global Catastrophe Reinsurance Chris Donelan President & Chief Underwriting Officer, Endurance Re U.S. Rene Lamer Chief Executive, Singapore Branch, Head of Asia Pacific Catastrophe Reinsurance Peter Mills Chief Underwriting Officer, Head of Global Specialty Re & Europe P&C Re Global Operations & Actuarial Leadership Andy Bubniak Portfolio Management, Endurance Re Scott Edwards Chief Operation Officer, Endurance Re Nicholas Leccese Chief Pricing Actuary, Endurance Re

Endurance at Lloyd’s Graham Evans was appointed CEO of Endurance at Lloyd’s (EAL), in addition to serving as CEO of Endurance International Insurance. Richard Housley has assumed the role of chief underwriting officer of EAL and Active Underwriter of Syndicate 5151, along with his current role as global head of property insurance.

Blue Capital Adam Szakmary was promoted to CEO and portfolio manager of Blue Capital, following the resignation of former CEO Bill Pollett.



Risk Tolerance In the lead-up to completing the transaction with Montpelier, and effective July 15, Endurance purchased an additional $100 million of aggregate excess of loss retrocession for its catastrophe portfolio. This was done to further protect the balance sheet as the company combines the portfolio with Montpelier's.

The impact of this additional purchase can be seen in the probable maximum loss (PML) table below, which was included in the 2Q2015 financial supplement. Notably, the largest 1-in-100 year event PML as of July 1, 2015 declined to 8% of total equity, compared to 10% as of January 1, 2015. [For comparative purposes, Montpelier’s largest 1-in-100 year event PML as of January 1, 2015 was $263 million, or 16% of total equity (excluding non-controlling interests).]

Endurance expects the aforementioned exposure will increase when the portfolios are combined, however, the pro forma PMLs are expected to remain well inside Endurance’s risk tolerances and close to recent levels. Management indicated that the largest 1-in-100 year event PML will be in the 10% to 15% range, which would be consistent with recent historic numbers.

PML as of July 1, 2015 July 1, 2014 July 1, 2013

Zone Peril

10 Yr Return Period

25 Yr Return Period

50 Yr Return Period

100 Yr Return Period




U.S. Hurricane 112 157 200 265 362 284 350 Europe Hurricane 69 109 125 220 343 345 331 California Hurricane 40 120 171 229 354 250 284 Japan Hurricane 45 96 118 129 181 158 230 Northwest U.S. Windstorm - 5 34 98 166 91 89 Japan Typhoon 18 88 132 154 222 163 137 U.S. Earthquake 30 45 59 74 93 78 89 Australia Earthquake 1 9 34 77 116 121 87 New Zealand Earthquake 1 6 15 34 72 35 23 Australia Earthquake 5 17 35 56 81 88 58 New Madrid Earthquake - - - 10 84 6 7

Estimated Occurrence Net Loss as of July 1, 2015



Rating Agency Reaction The rating agencies generally view the acquisition as positive, but also acknowledge the potential for integration and execution risk.

On August 3, 2015, S&P affirmed all ratings on Endurance and its core operating subsidiaries. This reflected S&P’s view that the Montpelier acquisition would enhance the group's distribution channel capabilities and that its increased market presence and larger pro-forma balance sheet should somewhat shield it from increasingly competitive market conditions. While S&P cited potential integration and execution risk related to the acquisition, its concerns were partially mitigated by Endurance's rapid integration of Montpelier and the latter’s relatively narrow lines of business and few operating offices. S&P said it expects the Endurance group to maintain capital adequacy in the “AA” range. S&P views Endurance’s enterprise risk management (ERM) capabilities as strong.

At the same time, S&P raised Montpelier’s long-term counterparty credit rating to “BBB+” from “BBB” and then withdrew it. S&P also affirmed the “A-“ financial strength rating of Montpelier Reinsurance Ltd. on CreditWatch Positive (since March 31, 2015). The latter reflected S&P’s expectation that this legal entity will be merged into Endurance Specialty Insurance Ltd. by the end of 2015.

On May 28, 2015, AM Best affirmed the various ratings of Endurance and its subsidiaries. The outlook for all ratings is stable.

AM Best stated, “The ratings reflect Endurance's strong level of risk-adjusted capitalization, specialty-focused diversified business profile, solid operating performance, experienced management team and its strong enterprise risk management (ERM) program. Endurance continues to execute its strategy of providing specialty insurance and reinsurance, while the management team works toward transforming the company by increasing its scale and market presence. However, there continues to be market challenges that need to be overcome, as rates remain soft, capacity is plentiful and investment yields are low, which can impact overall profitability. While the market environment remains competitive, Endurance continues to adhere to its strict underwriting guidelines and declines business that does not meet its underwriting criteria.”

The table below displays the ratings of Endurance entities listed on Aon Benfield’s MarketReView portal.

Rating Outlook Rating Outlook Rating Outlook Rating OutlookEndurance Specialty Holdings Ltd.* bbb Stable BBB+ Stable Baa2 Stable -- --Endurance Specialty Insurance Ltd. A Stable A Stable A3 Stable -- --Endurance Reinsurance Corp. of America A g Stable A Stable A3 Stable -- --Endurance Worldwide Insurance Limited A g Stable A Stable -- -- -- --Endurance at Lloyd's Syndicate 5151** A Positive A+ Stable -- -- AA- StableMontpelier Reinsurance Ltd. A Stable A- Watch Pos -- -- A Stable*Issuer credit/default rating for holding company**Syndicate ratings = Lloyd's Market Financial Strength Ratings

Company Name

Ratings as of August 25, 2015A.M. Best S&P Moody's Fitch



Contact Information Mike Shaffer Mike McClane Market Analysis, Americas Market Analysis, Americas Aon Benfield Analytics Aon Benfield Analytics +1.952.886.8389 +1.215.751.1596 [email protected] [email protected]

Mike Van Slooten Market Analysis, International Aon Benfield Analytics +44.207.7522.8106 [email protected]

About Aon Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker, best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/manchesterunited to learn about Aon’s global partnership with Manchester United.

Sources: Endurance Specialty Holdings Ltd., Montpelier Re Holdings Ltd., A.M. Best Company Inc., Standard & Poor’s Financial Service LLC, Moody’s Investor Service, Fitch Ratings and Aon Benfield Analytics

Copyright 2015 Aon Inc. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Benfield's preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Benfield disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Benfield reserves all rights to the content of this document.





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Appendix I - Acquisition Rationale Endurance’s rationale for the acquisition of Montpelier included the following:

• Transaction creates an enterprise with over $3.6 billion of annual gross premiums written• Increased size allows organization to better capitalize on distribution relationships and

more effectively compete across all market conditions

• Good-sized and scalable Lloyd’s platform expands distribution and product capabilities and provides access to new markets to further accelerate Endurance’s London market insurance growth strategy

• Addition of established third party capital management franchise (Blue Capital) expands market presence, enhances capital flexibility and provides stable source of income

• Montpelier’s attractive property catastrophe business complements existing reinsurance • Insurance to remain above 50% of the combined diversified portfolio

• Meaningful transaction synergies, including more than $70 million of annual run-rate cost • Expected to be immediately accretive to EPS and ROE, excluding non-recurring

integration and transaction costs• Neutral to book value per share and modestly dilutive to tangible book value per share• Potential for enhanced capital management over time

• With common shareholders’ equity of $4.1 billion and total capital of $5.5 billion, the combined company will have a substantially improved financial profile

• Larger, stronger balance sheet better positions combined company to pursue growth, withstand volatility and manage capital

• Montpelier maintains high quality business in lines where Endurance has significant underwriting and management expertise

• Similar corporate cultures and view of risk• Straightforward corporate and organizational structure

Increased Scale and Market Presence

Diversified Platform

Across Products and

Geographies

Financially Attractive

Stronger BalanceSheet and

CapitalPosition

ManageableIntegration Risk



Appendix II - Five Year Financial Highlights The tables below display key five-year financial information of Endurance and Montpelier.

Endurance (US$mn) 2010 2011 2012 2013 2014 5-Yr Avg Assets 7,979 8,293 8,795 8,978 9,645 -- Debt 528 528 527 527 528 -- Liabilities 5,131 5,681 6,084 6,092 6,460 -- Preferred Equity 200 430 430 430 430 -- Total Equity 2,848 2,611 2,711 2,887 3,185 -- Debt / Total Equity 18.6% 20.2% 19.5% 18.3% 16.6% 18.6% GPW 2,053 2,467 2,549 2,665 2,894 -- NPW 1,764 1,980 2,029 2,049 1,934 -- Pre-tax Net Income 372 (117) 166 318 349 -- ROE 12.9% -3.4% 6.1% 11.1% 11.5% 7.6% Loss Ratio 59.6% 84.6% 75.5% 60.5% 52.1% 66.5% Expense Ratio 29.1% 28.3% 26.8% 29.7% 33.9% 29.6% Combined Ratio 88.7% 112.9% 102.3% 90.2% 86.0% 96.0%

Montpelier (US$mn) 2010 2011 2012 2013 2014 5-Yr Avg Assets 3,219 3,500 3,810 3,759 3,629 -- Debt 328 328 399 399 407 -- Liabilities 1,591 1,950 2,181 1,872 1,715 -- Preferred Equity - 150 150 150 150 -- Total Equity 1,629 1,549 1,629 1,887 1,915 -- Debt / Total Equity 20.1% 21.2% 24.5% 21.2% 21.3% 21.6% GPW 720 726 735 706 740 -- NPW 669 624 616 603 651 -- Pre-tax Net Income 211 (116) 228 211 245 -- ROE 12.6% -7.2% 14.3% 12.0% 13.0% 8.9% Loss Ratio 48.3% 98.3% 46.4% 21.1% 29.4% 48.7% Expense Ratio 33.7% 32.8% 34.6% 35.0% 36.2% 34.5% Combined Ratio 82.0% 131.1% 81.0% 56.1% 65.6% 83.2%
