The Art of Risk Management during the Global Credit Crisis from a Direct Insurer’s Perspective10th September 2009

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Amlin - Background

A leading independent insurer operating in the Lloyd’s, UK, continental European and Bermudian markets with combined gross premiums of over £1,043 million in 2008

Specialist in insurance and reinsurance for commercial enterprises writing a diverse portfolio of property, marine, aviation, liability and motor classes

Listed on the London Stock Exchange since 1993 and one of the largest pure non-life insurance stocks in London with a market capitalisation of £1.7 billion

Acquired Fortis Corporate Insurance in July 2009 with a portfolio of marine, property, liability and motor risks in the Netherlands, Belgium and France and combined gross premiums of €763 million in 2008

Strong balance sheet with approx. £600m of available capital in excess of regulatory requirements. Ratings are shown below.

Agency Syndicate 2001 Amlin Bermuda ACI

AM Best A+ (Superior) A (Excellent) Not rated

Moody’s A1 (Stable) A2 (Stable) Not rated

Fitch Not rated Not rated A- (Positive)

S&P 4 (Stable) A (Stable) A- (Stable)

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2008 business mix by operating division

36%

20%

12%

12%

9%

8%3%

Marine %Energy 20Cargo 16Yacht 15War & terrorism 13Bloodstock 11Liability 11Hull 9Specie 5

Reinsurance %Catastrophe 59Property 19Proportional 12Marine 6Special risks 4

Amlin Bermuda %Catastrophe 60Proportional 20Property 16Special Risks 3Marine 1Other 1

ACI %Marine 49Fire 16Liability 15Fleet 8Captives 7Engineering 5

Amlin UK %Motor 46Employer’s liability 18Professional indemnity 16Products liability 9Commercial package 8Financial institutions 3

P&C %Property 53US casualty 14Auto 14Accident & health 13

Trade credit 6

Aviation %Airline 30General aviation 25Airports liabilities 23Products 12Space 11

Amlin (including ACI) wrote £1.7bn of gross premiums in 2008, of which approximately 65% was direct business.

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Trends in risk management & insurance buying

Recent years have seen a paradigm shift in companies’ attitudes towards and understanding of risk management: it is now a matter discussed at board level and taken extremely seriously by senior management

Companies now have a broader view of their risk universe, and a knowledge that these risks can be addressed in a wide range of ways and with a number of instruments, of which insurance is just one

Insurance remains the key means of balance sheet protection, and the strains of the current economic environment have weakened balance sheets and increased demand for insurance

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Trends in risk management & insurance buying

Insurance buyers are increasingly sophisticated, and recent economic events have only served to heighten awareness of counterparty risk, with two main effects noted:

– the so-called ‘flight to quality’ – preferential selection of the more robustly capitalised insurers

– syndication of risk – the subscription market allows buyers to spread and therefore dilute counterparty risk

The credit crisis has enhanced the value of insurance broking expertise:– helping to match the structure of a programme to their client’s financial situation– providing expert advice on insurer security– ability to spread risk across insurers

Amidst all this economic ‘noise’ it is still important to remember that natural catastrophes can happen at any time (even during a recession), as Windstorm Klaus and the L’Aquila earthquake have recently shown

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Why the insurance industry is well positioned relative to other financials

Comparatively low ratio of invested assets to equity

Risk generally taken on the liability side, not asset side

Largest liability (loss reserves) have no covenants = no “run on the bank”

Matching of assets to liabilities = ability to hold to maturity

Economic distress less a negative on operating results

Depository institutions 10:1

Investment banks 25:1

Special investment vehicles 35:1

Life insurers 8:1 – 10:1

Property/casualty (re)insurers 2.5:1 Source: Dowling & Partners

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State of European direct insurance business

Pricing remained weak in Q109 but improved a little in Q209 and is expected to continue to do so in 2010 (according to Europe’s largest 4 primary insurers AXA, Allianz, Zurich and Generali): there is broad consensus that we have reached the bottom of the pricing trough

Levels of capital in 2009 appear to be repairing – some evidence of increased share repurchase activity

Suggests that pricing upturn likely to be a response to slim or negative underwriting margins rather than a shortage of capital. Evidence that some markets have already turned:

– Aviation

– UK motor fleet

Reliance on investment returns no longer feasible with an increased emphasis now on gross underwriting return

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Increased focus on underwriting profit

As investment returns have declined since the mid 1980s so the importance of delivering positive gross underwriting returns has increased. The chart below shows the decline in investment income for Dowling & Partners’ universe of P&C insurers:

9%

12%

15%

14%

13%

17%

24%

23%

24% 25

% 26%

26%

25%

28%

26% 27%

31%

29%

25% 27

%

26%

25%

25%

21%

20%

18% 19

%

17%

16%

13%

12% 12

%

12%

13%

14%

11% 13

%

12%

11%

11%

94%

121%

148%

140%

128%

162%

243%

239%

231%

235%

229%

218%

196% 20

8%

202%

206%

242%

244%

231%

232%

228%

216% 22

2%

206%

206%

191%

187%

159%

142%

118%

109%

107% 11

7%

136% 14

8%

133%

128%

120%

109%

106%

0%

50%

100%

150%

200%

250%

300%

5%

10%

15%

20%

25%

30%

35%

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

A20

08E

INDUSTRY NET INVESTMENT INCOMENII/Beginning Surplus & Ending Reserves/Surplus

NII/Beginning Surplus

Net Reserves/Beginning Surplus

Source: Dowling & Partners

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The credit crisis and its impact on underwriting performance

Reduced asset values and economic activity lowers sums insured, thus diluting the top-line effect of rate increases

Increased claims activity– economic hardship claims (fraud, arson etc.)– anecdotal evidence that increased redundancies and work stress are driving up

Workers’ comp/employer liability claims– with increased incentives for companies and individuals to improve stretched

cashflows claims now being made more urgently

Some evidence of an increase in D&O and E&O claims but little reported by the large European insurers as yet

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Responses of Direct Insurers

De-risking of investment portfolios

A more risk-based approach to underwriting

Less acceptance of poor performance

Rate increases where needed / demand for gross underwriting profit

Improvement in service

Counterparty risk analysis

Opportunities for growth where space is created by large corporations’ difficulties

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Solvency II and regulatory background

Solvency II is the new solvency regime for all EU insurers and reinsurers, due to come into effect in 2012

Solvency II is based on three pillars:1. Quantitative capital requirements and rules for investments2. Supervisory review and internal evaluation of risks and controls3. Disclosure relating to risk and performance

The essence of the Solvency II requirements is pillar 2. which will enforce a direct and more visible relationship between capital and levels of risk and return

The aim is to achieve a consistency of approach across the EU leading to sustainability of insurers’ financial security

Political engagement with the financial services industry is likely to lead to further regulation

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Amlin’s risk management emphasis

Underwriting risk– Diverse and balanced portfolio– Control over catastrophe exposures– Pricing discipline– Long tail class reserving– Product line size and use of reinsurance

Investment / market risk– Risk controls on asset allocation to preserve balance sheet for underwriting

Credit risk– Reinsurance security

Investment in models for assessment of risk

1313

Amlin’s strong balance sheet and stable team

Net tangible assets up 12.5% to £1.11 billion in 2008 (2007: £0.98 billion)

Investments and cash up 8.7% to £2.9bn in 2008 (2007: £2.7bn)

Experienced and stable underwriting team: voluntary turnover of 4.2% in 2008; senior underwriters have 22 years average industry experience

Voluntary Turnover

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2002 2003 2004 2005 2006 2007 2008

Senior underw riters

Overall

Net Asset Growth

383

719

870983

1,106

0

200

400

600

800

1,000

1,200

2004 2005 2006 2007 2008

£m

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Amlin & ACI

The acquisition of ACI provides an excellent fit with our declared strategy:

Expansion of the non-catastrophe portfolio

Gives Amlin a strong platform in the continental European market, where opportunities to acquire a significant foothold and dominant market share are rare

Provides access to a new customer base with diversified distribution

Creates opportunities for organic growth as well as a platform for further acquisitions if opportunities arise

Business mix is predominantly in lines where Amlin has established underwriting expertise and resource

Strong local management team with established track record

Transaction expected to be ROE accretive in 2009 and will contribute to Amlin’s cross cycle target ROE of at least 15%1

1 This statement does not constitute a profit forecast and should not be interpreted to mean that the earnings per share in the first full financial year following the Acquisition, or in any subsequent period, would necessarily match or be greater than those for the relevant preceding financial year

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Amlin’s proposition to buyers

A specialist insurer for commercial clients and brokers

Emphasis on excellence of service

Consistent approach to underwriting and pricing

Strong balance sheets

Strong risk management capability to ensure financial stability

Long-term client relationships based on sustainable model of fair pricing for reliable coverage