PRESENTED AT THE:

NORTH AMERICAN BINDING AUTHORITIES CONFERENCE

SEPTEMBER 25 , 2014BY:

BERND G. HEINZE, ESQ.AAMGA EXECUTIVE DIRECTOR

Status & Future of Binding Authorities in the US

Agenda

State of the Surplus Lines MarketEvents Impacting Wholesale Insurance

ProfessionalsFederal & State regulatory developmentsOverview of US excess and surplus lines

market Issues and Opportunities Open discussion

North American Binding Authorities 2014

External Market Environment

Current Market Conditions

E&S Market Outperformed P&C Market in 2013 92.4% combined vs. 95.8% Doubled net income over 2012

19 of top 25 markets grew by more than 10% Top 25 produce 75% DWP

Lloyd’s & AIG = 30% Berkshire Hathaway = 39% growth Berkley moves from 5th to 4th ahead of Zurich

Premium increased => sustainable (?) Return to underwriting profitability Low interest rates

Current Market Conditions

E&S Market Outperformed P&C Market in 2013 Adequate pricing and underwriting integrity Growth in unique and creative product lines Stable for now…but caution on diminishing average

rate increases A/Y reserve development more favorable than P&C

market Gap shrinking:

excess capacity low interest rates and capital outlays to enhance operational efficiencies

Transformative phase of consolidation and specialization

Largest E&S Premiums by State (Top 5)

State 2013 (US$) 2012 (US$) 2011 (US$) % from 2012

California $5,305,996,906

$5,057,111,503

$4,998,686,446

4.9%

Texas $4,883,847,632

$4,339,279,902

$4,220,187,772

12.5%

Florida $4,592,462,577

$4,204,711,182

$3,730,727,071

9.2%

New York $2,911,263,983

$2,625,552,790

$2,883,087,795

10.9%

New Jersey

$1,458,333,300

$1,250,000,000

$1,096,107,216

16.7%Largest growth State (2013): North Carolina $822.3 million – increase of 42.8%

2013 S/L Stamping Office Premium

State 2013 Prem ($M)

2012 Prem (M)

% Chg

AZ $406.8 $339.8 19.7%

CA $5,187.8 $4,851.9 6.9%

FL $4,592.5 $4,116.9 11.6%

ID $76.9 $60.2 27.2%

IL $1,160.1 $1,075.4 7.9%

MN $418.8 $356.8 17.4%

MS $345.3 $307.1 12.4%

Total* $22,467 $19,449.3 15.5%

* Total of all 14 State Stamping and Surplus Lines Offices

2013 S/L Stamping Office Premium

State 2013 Prem ($M)

2012 Prem (M)

% Chg

NV $249.2 $232.1 7.4%

NY $2,944.2 $2,047.6 43.8%

OR $253.8 $227.1 11.8%

PA $1,267.4 $981.7 30.0%

TX $4,706.3 $4,015.9 17.2%

UT $179.6 $170.3 5.5%

WA $669.3 $666.5 0.4%

Total* $22.467 $19.449.3 15.5%

US S/L $37.72 $34,808 8.4%* Total of all 14 State Stamping and Surplus Lines Offices

2013 S/L Stamping Office Premium

State 2013 Prem ($M)

2012 Prem (M)

% Chg

Total* $22,467 $19,449.3 15.5%

US S/L $37.72 $34.81 8.4%

* Total of all 14 State Stamping and Surplus Lines Offices

51.7% of all US S/L Premium written in 14 states with stamping offices

Largest US MGA’s/Wholesale Broker/Lloyd’s Coverholders

Company 2013 Prem (US$)

Variance %

2013 Gross Rev (US$)

Variance %

E&S %

Risk Placement Services

$2.34 billion

14.1% $201 million

12.9% 60%

Burns & Wilcox $1.1 billion 29.4% $265 million

20.5% 70%

AmRisc, L.P. $850 million

14.1% $106 million

2.7% 65%

The Shinnerer Group

$685 million

0.1% $85.1 million

(1.3)% 5.0%

Appalachian Underwriters

$410 million

2.0% $39.2 million

0% 15%

Gresham & Associates

$399 million

15.8% $40 million 12.7% 50%

Program Brokerage $340 million

22.1% $32.6 million

20.7% 21.4%

Markel Midwest $336 million

17.7% $59.2 million

121.3% 82%

K&K Insurance Group

$282 million

17.3% $58.2 million

15.9% 5.0%

The Sullivan Group $189 million

4.6% $20.7 million

3.2% 32%

Premium Volume of 10 Largest US MGA’s

Year Premium (US$)

2004 $4.66 billion

2005 $4.16 billion

2006 $3.24 billion

2007 $5.25 billion

2008 $4.50 billion

2009 $4.35 billion

2010 $5.16 billion

2011 $5.45 billion

2012 $6.14 billion

2013 $7.02 billion

US MGA’s Most Common Classes of Business

General Liability: 92%Commercial Property: 92%Professional Liability: 86%Commercial Auto: 86%Employment Practices: 83%Directors & Officers: 83%

Largest US Property & Casualty Wholesalers

Company 2013 Prem (US$)

Variance %

2013 Gross Rev (US$)

Variance %

E&S %

AmWINS Group $8.1 billion 21.6% $668 million

14.9% 66%

CRC/Crump $4.99 billion

10.2% 658 million 7.6% 30%

Cooper Gay Swett & Crawford

$4.8 billion 11.6% $380 million

9.5% 55%

Ryan Specialty Group

$3.7 billion 55.7% $304 million

44.4% 83%

All Risks, Ltd. $1.1 billion 27.8% $96 million 23.9% 67%

US Risk Insurance $575 million

43.8% $55 million 11.7% 90%

ARC Excess & Surplus

$575 million

4.5% $53 million 17.8% 25%

Brown & Riding $481 million

61.9% $40 million 52.6% 68%

Worldwide Facilities $481 million

16.2% $41 million 13.6% --%

Partners Specialty $434 million

8.6% $32.8 million

8.2% 70%

Premium Volume of 10 Largest P&C Wholesalers

Year Premium (US$)

2005 $12.87 billion

2006 $17.32 billion

2007 $12.79 billion

2008 $12.39 billion

2009 $12.73 billion

2010 $12.05 billion

2011 $17.12 billion

2012 $20.82 billion

2013 $25.20 billion

US P&C Wholesalers Most Common Classes of Business

General Liability: 90%Inland Marine: 86%Umbrella/Excess: 86%Commercial Auto: 86%Commercial Liability: 83%Employment Practices: 80%Directors & Officers: 80%Product Liability: 80%

AAMGA Membership Composition - 2014

258 Wholesale Insurance members132 US and international risk bearing (80%)

and non-risk bearing (20%) Associate members

59 Business service members14 US State Stamping & Surplus Lines

Offices463 Total Corporate Members38,511 employees407 Under Forty Organisation Members

The Present

258 Wholesale Insurance/Coverholder members 78% transact business as wholesale MGA/MGU with

binding authority 29% transact business as Program

Administrators/Managers with binding authority 22.5% transact business as Aggregators with binding

authority 20% transact business as Broker Producers without

binding authority

The Present

258 Wholesale Insurance/Coverholder members 70 members each with 20 or less employees 81 members each with between 21 and 50 employees 35 members each with between 51 and 125 employees 72 members each with > 126 employees

21,877 employees227 branch offices

AAMGA Membership Composition

258 Wholesale Insurance member demographics 31.2% are 20 – 30 years old 26.7% are 31 – 40 years old 28.4% are 41 – 50 years old 13.7% are over 50 years old

57.9% are under the age of 40 years old

The Present

258 Wholesale Insurance members Underwriting facilities with delegated binding

authority Total AWP:

2013: US$22.4 billion 2012: US$20.6 billion 2011: US$19.2 billion 2010: US$16.4 billion

AWP Broked into Lloyd’s: 2013: US$3.26 billion 2012: US$2.73 billion

AAMGA Member AWP Broked Into Lloyd’s

Risks placed through Lloyd’s Brokers 2013: US$3.26 billion 2012: US$2.73 billion

2010 2011 2012 2013 -

500,000,000.00

1,000,000,000.00

1,500,000,000.00

2,000,000,000.00

2,500,000,000.00

3,000,000,000.00

3,500,000,000.00

Weighted Average

AAMGA Coverholders AWP vs. Total Lloyd's US AWP

2010 2011 2012 2013 -

1,000,000,000.00

2,000,000,000.00

3,000,000,000.00

4,000,000,000.00

5,000,000,000.00

6,000,000,000.00

7,000,000,000.00

8,000,000,000.00

TotalAAMGA

E&S Market Rates and Movements

Data – Data – Data Those who are not up-to-date with automation will have

increasing difficultiesHarmonization of:

Predictive analytics and risk models, and underwriting discipline

Coverholder AuditsRegulatory compliance and guidanceBig data and large scale aggregation of

informationDisintermediation

E&S Market Rates and Movements

Standard markets will back out of accounts that are hard to price and service

Succession & Disaster PlansBusiness Plans by line of businessContinuing Education and professional

developmentIncreasing need for new talent, enhanced training

and retaining existing professionals AAMGA’s 2015 Gamma Iota Sigma Presentation:

“Welcome to the New E&S”Differentiation & Remaining RelevantM & A

Current Forces Impacting S/L Insurance

Continued mergers and acquisitions / consolidation M&A deals of P&C entities

2014: 141 YTD 2013: 62

Aggregate deal value: $6.4 billion Small to Medium-sized deals

2012: 73 Aggregate deal value: $7.4 billion Various-sized deals

Influx of non-traditional sources of capital increases competition and adds pressure on rates

Current Forces Impacting S/L Insurance

Continued mergers and acquisitions / consolidation Appetite is still strong More players in the M&A space, especially for

MGA and Program operations Still lots of potential candidates

Aging owners Many do not have good succession plans Size matters more than ever to markets.

Current Forces Impacting S/L Insurance

Continued mergers and acquisitions / consolidation Technology and data are expensive and critical Many of the smaller firms cannot afford to keep up Value is driven by:

Specialization Profit margin Market and territorial access Talent within the operation

Industries Poised for Growth Next 10 Years

Health CareHealth SciencesEnergy (Traditional)Alternative EnergyPetrochemicalAgricultureConstruction

Natural ResourcesTech & Bio TechLight ManufacturingInsourced

manufacturingExport-Oriented

IndustriesShipping (Rail,

Marine, Trucking & Pipeline)

Insurers’ ability to capitalize on these industries varies widely

Current Forces Impacting S/L Insurance

Increasing volatility in US investment market, political atmosphere of dissention and stagnation

Increasing regulatory environment Federal State International

Increasing proliferation of regulatory activities across borders Risk-based capital standards Cooperation & Competition among regulators

Global capital standards Implementation of enforcement standards

US Federal & State Regulatory Developments Impacting

Wholesale Insurance Business

FIO Report 24 September 2014

“…the insurance industry showed increasing resilience through 2013, with strong financial performance and expanded overall growth. While the insurance market is becoming ever-more global, the U.S. domestic market remains highly competitive and an important cornerstone of the national economy.”

Michael McRaith, FIO Director

Regulatory Developments

Reauthorization of TRIA/NARAB IILegislation to allow E&S market to write

private flood coverNAIC uniform eligibility standards for surplus

line carriersNRRA implementation

US Legislative & Regulatory Activity

Post Dodd-Frank Era of Insurer RegulationNon-Admitted & Reinsurance Reform Act (NRRA)

Home State Retention of 100% of Surplus Lines Premium Increased accuracy of premium and tax revenue Non-Admitted Insurance Multistate Act (NIMA)

Five States Participating: Florida, Louisiana, Utah, South Dakota and Wyoming + Puerto

Rico Florida Clearinghouse

Surplus Lines Insurance Multistate Compact (SLIMPACT) “Uniform” Eligibility Standards & Market Security

Joint Industry Letters NAIC International Insurers Department (IID) List State White Lists

S/L Premium Tax Pre - NRRA

Policyholder

Broker

Surplus Lines Premium tax allocated by

state by share of risk

proportionately calculated to reside in each

state

A: 1.7%

B: 13.5%

C: 2.87%

D: 6.4%

E: 0.46%

F: 5.37%G: 3.9%H: 1.6%

I: 7.1

J: 6.9%

K: 11.9%

L: 15.47%

Home State: 22.8%

S/L Premium Tax Post - NRRA

Policyholder

Broker/MGA

Surplus Lines

Premium tax calculated at and paid to

Home State’s based on tax

rate and rules

Home State: 100%

Legislative & Regulatory Activity

OFAC, FATCA, COI & AML Regulations Impact on domestic vs. Lloyd’s market placements

Forced Place InsuranceNational Association of Insurance Commissioners

Transparency & Regulatory Issues Surplus Lines Task Force

NCOIL International Regulatory Task ForceRegular liaising with US House & Senate, and all

governmental agencies

US Litigation, Regulatory & Amicus Curiae Activity

Hull & Company v. Superior Court of CAGold & Silver v. Lexington Insurance

Company Essex Insurance Company v. ZotaWA Department of Transportation v. James

River Insurance CompanyWI, CO, NJ, NY, MA, FL, OK, CA challenges

to freedom of rate and form

US Litigation, Regulatory & Amicus Curiae Activity

“Faulty workmanship” constituting a covered “occurrence” under CGL policies - cases and regulations in CO, GA, SC & HI

Delaware retroactive increase to surplus lines tax

Utah premium audit lawIllinois increase in surplus lines tax

Legislation & Regulatory Affairs

International: Lloyd’s Audit Scope Central Services Refresh Tribunalization process of new coverholders Coverholder guidance TCF Standards & Policyholder Complaint

Procedures AML/Conflict of Interest Guidance Lloyd’s Meet the Market: Boston, Chicago,

Toronto Canadian MGA’s

Collaborative Efforts with Lloyd’s

Regular communications / joint presentations with Lloyd’s and Lloyd’s US on matters impacting Coverholders and domestic wholesale market

LMA, LiiBA, MGAA reciprocal membership in AAMGA

10th February 2014 LMA Presentation at Lloyd’s

North American Binding Authorities 2014

Internal Market Developments

Automation & Technology

Increasing investment in automation Agency management systems to drive efficiencies

Excess & Surplus Lines Working Group Vision for straight through processing Web service ACORD XML – Property & G/L

ER3001 Reporting standard for XML with some modifications

Validation at time of processing

Automation & Technology

Benefits: Validation completed at time transaction is processed Time saved preparing month-end bordereaux Access to data is in real-time Themes:

Faster: Real time XML exposure reporting

Smarter: Built-in rules and validation

Together: Keeping respective interests harmonized and

synchronized

Automation & Technology

AAMGA Automation Conference 21-23 March 2015 – Seattle, WA

AAMGA Automation Committee Monthly conference calls Working group Liaising with other industry automation entities

IIABA Agent’s Council on Technology E&S Joint Working Group Lloyd’s Automation Conference

Emerging Risks, Issues & Trends

Foresight and knowledge sharing are essential to navigate a future in which

change is the only constant

AAMGA Initiatives

Emerging Risks Committee Drones Autonomous cars 3-D Printers CME’s

AAMGA Initiatives

Outreach to entire wholesale market and related affinity groups Latin American Association of Insurance Agents Chinese American Insurance Agents Association National African American Insurance Agents Lloyd’s Market Association Managing General Agents Association (UK) London & International Insurance Brokers Association

Bringing wholesale insurance network under common umbrella

Issues & Opportunities

Issues & Opportunities

Balancing: Lloyd's objectives in establishing model Wordings that will

protect the franchise and ensure uniform interpretation and application of compliance standards, with

Coverholders in the United States being afforded the opportunity to access the Lloyd's trading platform without burdensome/non-essential regulations that do not add to the operational transfer of risk or the quality of underwriting

Issues & Opportunities

The consistency of inconsistencies: Varying Interpretation(s) of Lloyd’s Guidance Hurricane Sandy coverage declination letters and

claim practices Time and process required to renew and approve new

Coverholder Contracts Prospect for expedited procedures or a form of

Continuous Contracts

The Way Forward

Standardized audit scope and the performance of auditors

Mutually beneficial solutions to enhance affordability, efficiencies and expediency of placing business into Lloyd’s

Continued expediting of tribunalization of new Coverholders

Partnering on provision of technology solutions to afford greater access and efficiencies

Issues & Opportunities

Temper proportionate and consistent application of balanced regulatory and claims requirements

Prospect of regulatory compliance and enforcement of sanctions impeding creative solutions to specialized risks and the freedom of rate and form

The Way Forward

Coverholders remain committed to the Lloyd’s trading platform and franchise Improve market modernisation, access, intelligence and

support

Fostering of relationship and efforts with London Brokers and Lloyd’s

Embracing the principles articulated in Vision 2025Enhancing diversity and inclusion initiatives to

better represent the entire wholesale underwriting community

Open Discussion

Thank You

Bernd G. Heinze, Esq.610 Freedom Business Center

Suite 110King of Prussia, PA 19406

610.992.0022 (o)610.992.0021 (fax)bernie@aamga.org

www.aamga.org