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willis re1sT view

Calm amid CalamiTy

1 April 2010

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TaBle OF CONTeNTsrENEWAlS – 1 April 2010introduction 3Casualty

Territory and Comments 4rates 4

Specialties line of Business and Comments 5rates 6

propertyTerritory and Comments 7rates 8rate Graphs 8

1ST ViEWThis thrice yearly publication delivers the very first view on current market conditions to our readers. In addition to real-time Event Reports, our clients receive our daily news brief, Willis Re Rise ’ n shinE, periodic newsletters, white papers and other reports.

WilliS rEGlobal resources, local delivery For over 100 years, Willis Re has proudly served its clients, helping them obtain better value solutions and make better reinsurance decisions. As one of the world’s premier global reinsurance brokers, with 40 locations worldwide, Willis Re provides local service with the full backing of an integrated global reinsurance broker.

© Copyright 2009 Willis Limited / Willis Re Inc. All rights reserved: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, whether electronic, mechanical, photocopying, recording, or otherwise, without the permission of Willis Limited / Willis Re Inc. Some information contained in this report may be compiled from third party sources we consider to be reliable; however, we do not guarantee and are not responsible for the accuracy of such. This report is for general guidance only, is not intended to be relied upon, and action based on or in connection with anything contained herein should not be taken without first obtaining specific advice. The views expressed in this report are not necessarily those of the Willis Group. Willis Limited / Willis Re Inc. accepts no responsi-bility for the content or quality of any third party websites to which we refer. Willis Limited, a Lloyd’s broker is authorized and regulated by the Financial Services Authority.

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Calm amid CalamiTyFor the first three months of 2010, the global reinsurance industry has basked in the reflected glory of 2009’s excellent financial performance, despite the softening rate environment and the slow recovery of the global economy. The fact that the 2009 results stemmed from a historical low frequency and severity of losses has been brought into sharp contrast by the exceptional number of natural catastrophe losses in the first quarter of 2010. At the time of writing, the current reported losses are likely to make the first three months of 2010 the worst ever first quarter for natural perils losses. Current estimates are in the region of US $16 billion, and sadly, there is a corresponding increase in lives lost.

The 2009 results of some of the best performing companies have been so strong that many CEOs have been trying to actively manage their investors’ expectations for 2010. While this is to be expected after such a good year, a detailed examination of companies’ 2009 results is showing some evidence of reserving stress. There are signs that earlier concerns around the quantum reserve releases over the last few years are justified; fourth quarter 2009 releases are not as plentiful as in earlier quarters. A few companies have started to show reserve strengthening in specific casualty lines, and this just may indicate the anticipated start of more general market-wide reserve strengthening in long tail lines, especially as concerns about inflation are continuing.

Another major contributor to the excellent 2009 results was the recovery of asset valuations on reinsurers’ balance sheets. With the lessons of the last 18 months clearly in mind, many companies have aggressively de-risked their investment portfolios. This has caused a move towards the perceived security of government debt, which is starting to raise concerns over excessive exposure to sovereign debt at a time when many governments are under increasing fiscal strain.

As anticipated, Merger and Acquisition activity has picked up with the recent announcement of the major merger between Harbor Point and Max Capital. At the same time, financial organizations that received Government support over the last 18 months are starting to divest themselves of their insurance assets as part of the recovery process. With both the current modest valuations and the continued difficulty of obtaining top line growth, the pace of M&A transactions is likely to pick up over the next six months.

With the implementation date for Solvency II drawing nearer, the industry’s level of debate and engagement with the European Commission is intensifying as the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) prepares the final Quantitative Impact Study (QIS 5). The inevitable tensions between industry, asking for time to complete the implementation process, along with an easing of the capital requirements, is being countered with steadfast statements from the European Commission that there can be no slippage in the planned go live date of October 2012.

Against this background of increasing uncertainty and the frequency and severity of loss activity, the reinsurance market has yet to react in terms of pricing, conditions and capacity. As detailed in this review, the 1st April 2010 renewals have continued the trend seen at 1st January 2010. We are still seeing modest risk-adjusted reductions and hardening only in specific territories and classes with consistently poor results. Issues of exchange rate volatility affecting capacity appear to have abated.

Following the historically high level of losses during the first three months of 2010, it is likely that, for the first time in a number of years, the first quarter 2010 reinsurance industry results will be worse than those of their primary insurance company clients. Adding to reinsurer difficulties is the fact that the largest losses are coming from smaller markets, where they are less able to generate significant premium volumes to accelerate post-loss payback. At the same time, losses in the first quarter of the year leave reinsurers exposed to the historically more loss-prone third and fourth quarters. Furthermore, some forecasters are now predicting a more active than usual North Atlantic Hurricane Season.

While one poor quarter, which is an earnings issue for reinsurers, will not be sufficient to trigger a general market turn on its own, it is likely to stiffen reinsurers’ resolve on renewals later in the year as the size of the recent catastrophe losses develop and back year reserve releases reduce. This is balanced by the remaining reinsurance capacity oversupply and the continuing difficulties companies face in achieving real top line growth to offset claims and expense increases. Against this background, absent any other major losses, buyers who will be renewing loss-free programs later in the year can continue to budget for stability or modest reductions in their reinsurance costs.

Peter C. HearnChief Executive Officer, Willis Re31 March, 2010

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CasualTyTErriTory ANd CommENTSJApAN – GENErAl / EmployErS / profESSioNAl liABiliTy

No significant changes in contractual wordings. Stable capacity with no increased demand from buyers leading to flat renewal.

JApAN – pErSoNAl ACCidENT Broadly stable capacity, though limited number of reinsurers unable to manage the treatment of infectious disease under original Japanese policy form.Original premium base largely stable, leading to flat or slightly reduced risk-adjusted renewals.

KorEA – GENErAl / EmployErS / profESSioNAl liABiliTyGrowth in exposures but significant softening in pricing. Ample capacity as individual program limits modest. Without any notable casualty losses, reinsurance pricing softened at a much faster rate compared to property. Certain companies increased retention levels to further reduce costs.No capacity issues.

UNiTEd STATES – GENErAl / profESSioNAl liABiliTyMarket remains disciplined and appears to be hardening in the face of increased loss emergence from prior years.Established programs that have not seen deterioration in results are renewing as expiring while others are facing significant rate increases or reduction in ceding commissions.The market continues to view start-ups skeptically.

rATES Xl – No loss Xl – With loss pro rata Emergence EmergenceTErriTory Commission % Change % Change

Japan – General / Employers / professional liability N/A 0% N/A

Japan – personal Accident N/A 0% to -2.5% N/A

Korea N/A -10% to -25% N/A

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speCialTiesliNE of BUSiNESS ANd CommENTSAEroSpACE – GloBAl

Greater degree of rating stability evident within both Aviation direct and reinsurance markets. More modest degree of pricing adjustment being applied to loss-affected layers, but this is very account-specific, dependent upon loss record, layer attachment and changes to underlying exposure profile. Renewal pricing at 1 April more reflective of changes to underlying exposure. Continued degree of scrutiny being applied to underlying pricing of General Aviation business, where supported by risk excess and proportional capacity. Dulles Jet Centre loss, cause for some concern, but full extent and quantum of loss yet to be established.

ENGiNEEriNG – GloBAlContinuing slight softening in pro rata terms and conditions. Additional capacity available for technically resourced underwriting offices. More capacity available, as specialist reinsurers target regional business rather than global accounts. Excess of Loss programs continue to be placed on a Risk / Event combined basis. Excess of Loss pricing is coming under pressure with reductions of up to 10%. Direct terms and conditions for Engineering and Construction Accounts remain under pressure with benefits from the global stimulus packages still to be seen.

HEAlTHCArE – UNiTEd STATESLoss trends continue to be favorable, resulting in continuing profitability. Prior year loss releases exacerbate the good performance, as evidenced by very healthy calendar year results. Recently enacted tort reforms are being challenged and, in some cases, overturned. At the same time, it is too early to accurately predict the effect on loss patterns in the affected states. Competition continues to increase and original pricing continues to fall. Reinsurance capacity remains abundant and strong.

JApAN – mAriNECapacity for Japanese cargo proportional treaties is still plentiful despite the impact on premium income resulting from the economic downturn. Terms for treaties are consistent with last year.Both hull and cargo excess of loss contracts achieved price reductions for clean business. Cargo exposures reduced. Capacity for both classes remains high. Capacity for hull proportional treaties remains constant, despite recent loss years, but the pricing for these treaties continues to see reducing commission levels.

NoN-mAriNE – rETroCESSioNProperty catastrophe retrocession rates are off 5%.Buyers increasing retentions as balance sheets strengthen.Limited new collateralized capacity coming to the market.Industry Loss Warranty activity currently low.

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rATES risk risk Cat Cat pro rata loss free loss Hit loss free loss HitTErriTory Commission % Change % Change % Change % Change Aerospace – Global 0% 0% 0% to +10% 0% to -5% N/A

Engineering – Global 0% to +1% -10% N/A -10% N/A Japan – marine 0% to -5% N/A N/A -3% to -7.5% N/A

Non-marine retro N/A N/A N/A -5% N/A

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prOperTyTErriTory ANd CommENTSiNdiA

Capacity still available for all excess of loss.Pricing on risk excess of loss, even post loss, is competitive. Pro rata capacity continues to be limited. Terms and Conditions are much tougher in regard to all Surplus Treaties. Imposition of sliding scale commissions on Surplus treaties.

JApAN No significant loss activity. Efforts to improve original underwriting ongoing. Pro rata commissions stable. Supply of pro rata capacity increasing. Enhanced data quality from some cedants.

JApAN EArTHqUAKEJapanese economic climate reducing non-life earthquake exposures. Earthquake pro rata exposures and incomes reducing. Earthquake pro rata capacity stable. Net retained exposures also reduced, but some additional purchase by mutual sector. Some improvements in data quality. Modeling results reducing to reflect reduction in original exposures.

JApAN WiNd ANd floodNon-life company exposures flat to reducing. Mixed buying patterns by non-life companies. Some cedants purchasing either additional vertical cover or reducing co-reinsurance, others adopting more stable purchasing patterns.Some additional purchase by mutual sector. Capacity has remained stable, with some increases in view of improved rate of exchange situation for sterling-denominated reinsurers.

KorEAThere were several notable fire losses in the market over the last 12 months which were shared via co-insurance with three to four companies.Another benign catastrophe year instigated considerable pressure from cedants to reduce reinsurance pricing.Certain companies increased retention levels to further reduce costs.No dramatic capacity issues, although certain reinsurers felt price movements were too great and stepped away from some long-term relationships.

UNiTEd STATES – NATioNWidE ANd rEGioNAlFirm orders were down -10 to -15% on a risk-adjusted basis for loss-free regional programs and -5% to -10% for nationwide programs. Market support was strong with no evidence of a shortage of capacity. Gulf regionals buying less cover due to capping of residual market assessment exposure. Continued Hurricane Ike development still an issue for some carriers.

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rATES risk risk Cat Cat pro rata loss free loss Hit loss free loss HitTErriTory Commission % Change % Change % Change % Change india 0% to -5% -10% 0% to 5% -10% N/A

Japan 0% 0% N/A N/A N/A

Japan Earthquake 0% N/A N/A -2% to -5% N/A

Japan Wind and flood N/A N/A N/A -2% to -5% N/A

Korea 0% 0% to -10% +5% to +10% 0% to -10% N/A

United States – Nationwide N/A -5% to -10% 0% -5% to -10% N/A

United States – regional N/A -10% to -15% 0% -10% to -15% 0%

propErTy CATASTropHE priCiNG TrENdS

JApANThe charts on this page display Estimated Year-to-Year Property Catastrophe Rate Movement.

UNiTEd STATES – NATioNWidE

0100200300400500600

1990 92 94 96 98

2000 02 04 06 08 10

0100200300400500600700800

1990 92 94 96 98 2000 02 04 06 08 10

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