A M Best Companys Insurance Market Briefing Canada

A. M. Best Company's Insurance Market Briefing Canada P&C Joseph Burtone Assistant Vice President September 8, 2010

Agenda Rating Components n Canada P/C n

A. M. Best Rating Definitions Operating Insurance Co. Financial Strength Rating (FSR) FSR to Credit Market Scale / ICR to Debt Notching / Holding Co. 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 Issuer Credit Rating (ICR) is an opinion of an issuer/ entity’s ability to meet its ongoing senior financial 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.

Guide To Best's Financial Strength Ratings Secure Ratings A++, A+ A, AB++, B+ Superior Excellent Good Vulnerable Ratings B, BC++, C+ C, CD E F Fair Marginal Weak Poor Under Regulatory Supervision In Liquidation

FSR & ICR EQUIVALENTS A A- a- B++ bbb B+ bbb- Secure A+ ICR B bb+ bb B- bb- C++ b+ b C+ b- C ccc+ ccccc C- Non-Investment Grade A++ aaa aa+ aa aaa+ a FSR Vulnerable ICR Investment Grade FSR

A. M. Best’s Rating Evaluation Key Components Balance Sheet Strength Operating Performance Best’s Rating Business Profile

Balance Sheet Strength Risk Adjusted Capitalization (BCAR) Ø Foundation for financial security Ø Leverage Ø Quality/Soundness of reinsurance Ø Adequacy of loss reserves Ø Quality/Diversification of assets Ø Liquidity

Best’s Capital Adequacy Model (BCAR) Ø Ø A quantitative tool that indicates whether a company’s capital is appropriate for a particular rating level. BCAR by itself never has been the sole basis for determining any Best’s Credit Rating. Important to A. M. Best’s evaluation of both absolute and relative capital strength It is expected that well managed and highly rated companies maintain excess capital Trends are key

Operating Performance A. M. Best analysis centers on the stability and sustainability of the company’s earnings Areas reviewed when analyzing operating performance: Ø Underwriting, Investments Ø Capital gains/losses Ø Pre-tax and total operating earnings Ø Underwriting ratio, operating ratio Volatility is a consideration § Projections & Trends Ø

Business Profile Ø Ø Ø Business profile is the qualitative component of Best’s rating evaluation Key areas of business profile n spread of risk – geographic, product & distribution n Revenue composition n Competitive market position n Depth and experience of management Drives current and future operating performance and may impact long-term financial strength

Risk Management Ø Ø Risk management is the common thread that links balance sheet strength, operating performance and business profile Where there is risk, there is uncertainty and where there is uncertainty there is exposure to volatility It’s not risk avoidance, it’s risk management Fundamental objective of a sound risk management is to manage organizations exposure to potential earnings and capital volatility and maximize value to the organizations various stakeholders

A. M. Best’s Rating Perspective - Bringing all Together Ø Ø Capital strength is the foundation of all ratings Sustained, stable operating profitability ensures future strength Business profile is the qualitative component that impacts the quantitative measures Well-diversified, strong business profile ensures stability and profitability

Canada Property / Casualty

Overview of Canadian P&C Industry Market is stable n Capitalization remains strong – enhanced by net income and unrealized investment gains n Profitable, but declining earnings n Challenges in underwriting offset by gains in financial markets n Overall, companies acting prudently n

Canadian P&C Risk Adjusted Capitalization n n Weighted average BCAR score is strong up 12% at year end ’ 09 Adversely impacted by investment markets in 2008

Canadian P&C Regulatory Capital n 2009 weighted average MCT score virtually unchanged from 2008. BAAT score down 5. 3%.

Canadian P&C A. M. Best Financial Strength Ratings Distribution (Interactive Ratings Only) n n 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.

Canadian P&C Net Income n n 2009 Net Income driven by investment gains and lower underwriting losses June 2010 Net Income approx. C$1. 7 billion

Canadian P&C Pre-tax Returns n n Positive but declining returns through 2009 Driven by underwriting losses and lower investment returns

Canadian P&C Operating Ratios n Ratio below 100 reflective of profitability from combined underwriting and investment income without capital gains/losses

Canadian P&C Underwriting Ratios n n n Ratio below 100 indicative of profitable underwriting Underwriting expenses consistent over last five years ranging between 28. 9 and 30. 5 points to the underwriting ratio 2008 and subsequent due to higher Net Loss and LAE ratios

Canadian P&C Net Loss and LAE Ratios n Increase in 2008 and subsequent years due to; n n n More frequent and severe weather and fire losses Auto personal accident claims cost inflation Less favorable reserve development on prior accident years

Canadian P&C Automobile n n n Personal accident net loss ratio up to 137. 6 @ YE 09 and rising Ontario auto reform – implementation 9/1/10 Creates concerns regarding pricing, reserving, profitability, consumer confidence.

Canadian P&C Personal Property n n n Frequency and severity up Intense wind, hail, rain, water damage claims Industry recognizing insurance to value (ITV), aging infrastructure, competitive pricing are concerns

Canadian P&C Commercial Property n n n Competitive pricing persists No signs of significant rate hardening Retentions up slightly

Canadian P&C Investment Income n n n Realized capital gains pulled up total investment income Continued low interest rates, potentially lower dividend and interest income in 2010 Sell off of equities in 2008 reversing for potentially higher returns

Canadian P&C Composition of Invested Assets n n C$86. 9 billion invested at YE 2009 C$74. 4 billion (85. 6%) in conservative, highly rated fixed income securities and cash C$9. 8 billion (11. 3%) in common and preferred shares Slight movement back to equities

Canadian P&C Market Review n n n Capitalization strengthened and continues to support a stable rating environment Earnings up slightly and expected to remain positive Underwriting challenges n n n Uncertainty of benefits to be derived from auto reforms in Ontario Competitive commercial lines pricing Rising property damage losses from storms and fire Aging infrastructure Regulatory intervention Below average investment returns anticipated in the near term n Putting additional pressure on underwriting discipline

Canadian P&C Market Outlook 2010 n Industry is stable n Capitalization expected to remain strong n Not anticipating significant number of rating actions n Earnings expected to remain positive but not robust due to underwriting and investment challenges n A. M. Best remaining cautious on benefits of auto reforms.