A.M. Best A.M. Best Company'sCompany's

Insurance Market Insurance Market

BriefingBriefingCanadaCanada

P&CP&C Joseph Burtone Assistant Vice President

September 8, 2010

AgendaAgenda

Rating ComponentsRating Components Canada P/CCanada P/C

A.M. Best Rating A.M. Best Rating DefinitionsDefinitions

Financial Strength Rating (FSR)

ICR to Debt Notching / Holding

Co.

FSR to Credit Market Scale / ICR

A.M. Best’s Issuer Credit Rating (ICR) is an opinion of an issuer/ entity’s ability to meet its ongoing senior financial obligations.

A.M. Best’s Financial Strength Rating is an independent opinion of an insurers financial strength and ability to meet its ongoing policy and contract obligations.

A.M. Best’s Debt Rating is an opinion of an the issuer/entity’s ability to meet its ongoing financial obligations to security holders when due.

Operating Insurance Co.

Guide To Best's Financial Guide To Best's Financial Strength RatingsStrength Ratings

B, B- FairC++, C+ MarginalC, C- WeakD PoorE Under Regulatory SupervisionF In Liquidation

Vulnerable Ratings

Secure Ratings

A++, A+ SuperiorA, A- ExcellentB++, B+ Good

FSR & ICR FSR & ICR EQUIVALENTSEQUIVALENTS

FSR ICR

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A+ aaaa-

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FSR ICR

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C++ b+b

C+ b-

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A.M. Best’s Rating EvaluationA.M. Best’s Rating EvaluationKey ComponentsKey Components

Balance Sheet Strength

Operating Performance

BusinessProfile

Best’s Rating

Balance Sheet StrengthBalance Sheet Strength

Risk Adjusted Capitalization (BCAR)Risk Adjusted Capitalization (BCAR) Foundation for financial securityFoundation for financial security LeverageLeverage Quality/Soundness of reinsuranceQuality/Soundness of reinsurance Adequacy of loss reservesAdequacy of loss reserves Quality/Diversification of assetsQuality/Diversification of assets LiquidityLiquidity

Best’s Capital Adequacy Best’s Capital Adequacy Model (BCAR)Model (BCAR)

A quantitative tool that indicates whether a A quantitative tool that indicates whether a company’s capital is appropriate for a company’s capital is appropriate for a particular rating level. BCAR by itself never particular rating level. BCAR by itself never has been the sole basis for determining any has been the sole basis for determining any Best’s Credit Rating.Best’s Credit Rating.

Important to A.M. Best’s evaluation of both Important to A.M. Best’s evaluation of both absolute and relative capital strengthabsolute and relative capital strength

It is expected that well managed and highly It is expected that well managed and highly rated companies maintain excess capital rated companies maintain excess capital

Trends are keyTrends are key

Operating Performance Operating Performance A.M. Best analysis centers on the stability and

sustainability of the company’s earningsAreas reviewed when analyzing operating performance: Underwriting, Investments Capital gains/losses Pre-tax and total operating earnings Underwriting ratio, operating ratio

Volatility is a considerationVolatility is a consideration Projections & TrendsProjections & Trends

Business Profile Business Profile Business profile is the qualitative component of Business profile is the qualitative component of

Best’s rating evaluation Best’s rating evaluation Key areas of business profile Key areas of business profile

spread of risk – geographic, product & spread of risk – geographic, product & distributiondistribution

Revenue compositionRevenue composition Competitive market positionCompetitive market position Depth and experience of managementDepth and experience of management

Drives current and future operating performance Drives current and future operating performance and may impact long-term financial strengthand may impact long-term financial strength

Risk ManagementRisk Management Risk management is the common thread that Risk management is the common thread that

links balance sheet strength, operating links balance sheet strength, operating performance and business profile performance and business profile

Where there is risk, there is uncertainty and Where there is risk, there is uncertainty and where there is uncertainty there is exposure to where there is uncertainty there is exposure to volatilityvolatility

It’s not risk avoidance, it’s risk managementIt’s not risk avoidance, it’s risk management Fundamental objective of a sound risk Fundamental objective of a sound risk

management is to manage organizations management is to manage organizations exposure to potential earnings and capital exposure to potential earnings and capital volatility and maximize value to the organizations volatility and maximize value to the organizations various stakeholdersvarious stakeholders

A.M. Best’s Rating Perspective - A.M. Best’s Rating Perspective - Bringing it all TogetherBringing it all Together

Capital strength is the foundation of all ratingsCapital strength is the foundation of all ratings Sustained, stable operating profitability ensures Sustained, stable operating profitability ensures

future strengthfuture strength Business profile is the qualitative component that Business profile is the qualitative component that

impacts the quantitative measuresimpacts the quantitative measures Well-diversified, strong business profile ensures Well-diversified, strong business profile ensures

stability and profitabilitystability and profitability

Canada Property / Canada Property / CasualtyCasualty

Overview of Canadian P&C Overview of Canadian P&C IndustryIndustry

Market is stableMarket is stable Capitalization remains strong – Capitalization remains strong –

enhanced by net income and enhanced by net income and unrealized investment gainsunrealized investment gains

Profitable, but declining earningsProfitable, but declining earnings Challenges in underwriting offset by Challenges in underwriting offset by

gains in financial marketsgains in financial markets Overall, companies acting prudentlyOverall, companies acting prudently

Canadian P&CCanadian P&CRisk Adjusted CapitalizationRisk Adjusted Capitalization

Weighted average BCAR score is strong up 12% at year Weighted average BCAR score is strong up 12% at year end ’09end ’09

Adversely impacted by investment markets in 2008Adversely impacted by investment markets in 2008Best Capital Adequacy Ratio (BCAR)

Weighted Averages

216.5

221.8

200.0

224.0

190.0

200.0

210.0

220.0

230.0

2006 2007 2008 2009

Year

Canadian P&CCanadian P&CRegulatory CapitalRegulatory Capital

2009 weighted average MCT score virtually 2009 weighted average MCT score virtually unchanged from 2008. BAAT score down 5.3%.unchanged from 2008. BAAT score down 5.3%.

Weighted Average BAAT & MCT(excluding ICBC and Lloyds CAB)

588.3 585.2 605.1572.9

309.0 268.3268.2283.3

200.0

300.0

400.0

500.0

600.0

700.0

2006 2007 2008 2009

Year

We

igh

ted

Ave

rag

e

Baat MCT

Canadian P&CCanadian P&CA.M. Best Financial Strength Rating A.M. Best Financial Strength Rating

Ratings DistributionRatings Distribution(Interactive Ratings Only)(Interactive Ratings Only)

Ratings have remained relatively consistent with little movement between rating categories.Ratings have remained relatively consistent with little movement between rating categories. 97% of rating units have secure ratings of which 79% were rated Excellent or Superior at YE 2009.97% of rating units have secure ratings of which 79% were rated Excellent or Superior at YE 2009.

5%

19%

47%

29%

6%

13%

52%

29%

3%

15%

49%

34%

4%

14%

51%

31%

4%

14%

53%

29%

3%

17%

48%

31%

YE 2005 YE 2006 YE 2007 YE 2008 YE 2009 June 30 2010

Vulnerable Good Excellent Superior

Canadian P&CCanadian P&CNet IncomeNet Income

2009 Net Income driven by investment gains and 2009 Net Income driven by investment gains and lower underwriting losses lower underwriting losses June 2010 Net Income approx. C$1.7 billionJune 2010 Net Income approx. C$1.7 billion

(excluding ICBC and Lloyds CAB)

4.6

5.14.9

2.12.4

1.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2005 2006 2007 2008 2009 2010_06

Year

C$ B

illio

ns

Canadian P&CCanadian P&CPre-tax ReturnsPre-tax Returns

Positive but declining returns through 2009Positive but declining returns through 2009 Driven by underwriting losses and lower Driven by underwriting losses and lower

investment returnsinvestment returnsPre-Tax Return on Equity and Revenue

(excluding ICBC and Lloyds CAB)

20.4 20.9 18.510.1 9.0 6.1

16.39.7 8.5 5.9

17.218.1

0.0

10.0

20.0

30.0

2005 2006 2007 2008 2009 2010_06

Year

Perce

nt

ROE ROR

Canadian P&CCanadian P&COperating RatiosOperating Ratios

Ratio below 100 reflective of profitability from combined underwriting Ratio below 100 reflective of profitability from combined underwriting and investment income without capital gains/lossesand investment income without capital gains/losses

(excluding ICBC and Lloyds CAB)

82.383.1

90.791.8

88.3

84.0

75.0

80.0

85.0

90.0

95.0

2005 2006 2007 2008 2009 2010_06

Year

Opera

ting R

atio

Canadian P&CCanadian P&CUnderwriting RatiosUnderwriting Ratios

Ratio below 100 indicative of profitable underwritingRatio below 100 indicative of profitable underwriting Underwriting expenses consistent over last five years ranging Underwriting expenses consistent over last five years ranging

between 28.9 and 30.5 points to the underwriting ratiobetween 28.9 and 30.5 points to the underwriting ratio 2008 and subsequent due to higher Net Loss and LAE ratios2008 and subsequent due to higher Net Loss and LAE ratios

(excluding ICBC and Lloyds CAB)

92.491.5

93.2

101.2 100.9

97.8

85.0

90.0

95.0

100.0

105.0

2005 2006 2007 2008 2009 2010_06

Year

Underw

riting R

atio

Canadian P&CCanadian P&CNet Loss and LAE RatiosNet Loss and LAE Ratios

Increase in 2008 and subsequent years due to;Increase in 2008 and subsequent years due to; More frequent and severe weather and fire lossesMore frequent and severe weather and fire losses Auto personal accident claims cost inflationAuto personal accident claims cost inflation Less favorable reserve development on prior accident Less favorable reserve development on prior accident

yearsyears

(excluding ICBC and Lloyds CAB)

63.562.0

63.4

70.7 70.7

67.7

55.0

60.0

65.0

70.0

75.0

Year

Net

Loss &

LA

E R

atio

Canadian P&CCanadian P&CAutomobileAutomobile

Personal accident net loss ratio up to 137.6 @ YE 09 and risingPersonal accident net loss ratio up to 137.6 @ YE 09 and rising Ontario auto reform – implementation 9/1/10Ontario auto reform – implementation 9/1/10 Creates concerns regarding pricing, reserving, profitability, consumer confidence.Creates concerns regarding pricing, reserving, profitability, consumer confidence.

Net Loss and LAE Ratio Trend(private insurers only)

68.6

80.4

94.6

116.6

137.6 141.3

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2005 2006 2007 2008 2009 2010_06

Year

Ne

t L

oss a

nd

LA

E R

atio

Auto - Liability Auto - Personal Accident Auto - Other

Canadian P&CCanadian P&CPersonal PropertyPersonal Property

Frequency and severity upFrequency and severity up Intense wind, hail, rain, water damage claimsIntense wind, hail, rain, water damage claims Industry recognizing insurance to value (ITV), aging infrastructure, competitive pricing are Industry recognizing insurance to value (ITV), aging infrastructure, competitive pricing are

concernsconcerns

Net Loss and LAE Ratio Trend(excluding ICBC and Lloyds CAB)

69.566.4 66.7

75.8 75.9

59.2

50.0

55.0

60.0

65.0

70.0

75.0

80.0

2005 2006 2007 2008 2009 06_2010

Year

Net

Loss a

nd L

AE

Ratio

Canadian P&CCanadian P&CCommercial PropertyCommercial Property

Competitive pricing persistsCompetitive pricing persists No signs of significant rate hardeningNo signs of significant rate hardening Retentions up slightlyRetentions up slightly

Net Loss and LAE Ratio Trend(excluding ICBC and Lloyds CAB)

64.3

52.1

56.2

66.2

64.2

68.2

50.0

55.0

60.0

65.0

70.0

2005 2006 2007 2008 2009 06_2010

Year

Net

Loss &

LA

E R

atio

Canadian P&CCanadian P&CInvestment IncomeInvestment Income

Realized capital gains pulled up total investment incomeRealized capital gains pulled up total investment income Continued low interest rates, potentially lower dividend and interest Continued low interest rates, potentially lower dividend and interest

income in 2010income in 2010 Sell off of equities in 2008 reversing for potentially higher returnsSell off of equities in 2008 reversing for potentially higher returns

Investment Income Trend(excluding ICBC and Lloyds CAB)

0.2

2.6 2.93.3 3.3

3.1

1.9

0.2

-0.5

1.1 1.01.2

3.74.1 4.3

2.8

3.3

2.1

-1.00.01.02.03.04.05.0

Year

C$

Billio

n

NII R G/(L) Total Inv Income

Canadian P&CCanadian P&CComposition of Invested AssetsComposition of Invested Assets

C$86.9 billion invested at YE 2009C$86.9 billion invested at YE 2009 C$74.4 billion (85.6%) in conservative, highly rated fixed income C$74.4 billion (85.6%) in conservative, highly rated fixed income

securities and cashsecurities and cash C$9.8 billion (11.3%) in common and preferred sharesC$9.8 billion (11.3%) in common and preferred shares Slight movement back to equitiesSlight movement back to equities

Non Aff iliated Invested AssetsCanadian P&C

As of Dec. 31, 2009(excludes ICBC & Lloyds CAB)

Comm. Shrs.7.3%

Pref. Shrs.4.0%

Other2.4%

RE / Mort0.7%

Trm Dep, Bnds & Debents.

80.8%

Cash4.8%

Canadian P&CCanadian P&CMarket ReviewMarket Review

Capitalization strengthened and continues to Capitalization strengthened and continues to support a stable rating environmentsupport a stable rating environment

Earnings up slightly and expected to remain positiveEarnings up slightly and expected to remain positive Underwriting challengesUnderwriting challenges

Uncertainty of benefits to be derived from auto reforms in Uncertainty of benefits to be derived from auto reforms in OntarioOntario

Competitive commercial lines pricingCompetitive commercial lines pricing Rising property damage losses from storms and fireRising property damage losses from storms and fire Aging infrastructureAging infrastructure Regulatory interventionRegulatory intervention

Below average investment returns anticipated in the Below average investment returns anticipated in the near termnear term Putting additional pressure on underwriting disciplinePutting additional pressure on underwriting discipline

Canadian P&CCanadian P&CMarket Outlook 2010Market Outlook 2010

Industry is stableIndustry is stable Capitalization expected to remain Capitalization expected to remain

strongstrong Not anticipating significant number Not anticipating significant number

of rating actionsof rating actions Earnings expected to remain positive Earnings expected to remain positive

but not robust due to underwriting but not robust due to underwriting and investment challengesand investment challenges

A.M. Best remaining cautious on A.M. Best remaining cautious on benefits of auto reforms.benefits of auto reforms.