REINSURANCE UPDATE
CAGNY MEETING
June 2003
Chris Milton & Rich Skolnik
AIG
Global
Reinsurance

Current & Future
Reinsurance Climate
• Reinsurance Market Players
• Capacity
• Price
• Contract Terms
• Credit Risk
• Rating Agency vs. Regulator
AIG
Global
Reinsurance

Reinsurance Market Players
• Old Money vs. New Money
• Bermuda vs. Europe vs. USA
• Legacy Problems for Old Money
– Asbestos
– Reserve deficiencies
• Growing Pains for New Money
– Staffing
– Distribution
AIG
Global
Reinsurance

• Quality vs. Quantity
– Casualty
– Property
– Specialty
• Conditions
• Future Considerations
Capacity
AIG
Global
Reinsurance

Price
• Soft Market
• Hard Market
• Transition Between the Two
• Cyclic Nature
AIG
Global
Reinsurance

Contract Terms
• Reinsurers Try to Tighten
• Ceding Companies Try to Loosen
• Control Issues
• Collection Issues
AIG
Global
Reinsurance

Credit Risk in Reinsurance
Transaction
• Quality of Reinsurers’ Credit
• Preference in Collection
• Other Collection Problems
– Willingness to Pay
– Ability to Pay
• Counterparty Risk
- Admitted vs. Non-Admitted
- Collaterization
AIG
Global
Reinsurance

Rating Agency vs. Regulator
• Rating Agency Requirements and Concerns
• Regulatory Requirements & Concerns
• How the Two Coordinate or Don’t
AIG
Global
Reinsurance

AIG
Global
Reinsurance
Lloyd’s Market Highlights
• Creation of a Franchise Structure
• Transition From the Current 3-year Accounting to Annual
Accounting
• The Phasing Out of Unlimited Liability
• 2002 Markets Combined Ratios
– Lloyd’s:
Global Report)
98.6% (Source: Lloyd’s of London
– European Reinsurers: 105.1% (Source: CSFB 13/03/03)
– US Total P&C:
03/24/03)
108.3% (Source: Business Insurance
– US Reinsurers: 121.3% (Source: RAA 03/26/03)

Strict investment criteria
AIG
Global
Reinsurance
Lloyd’s Chain of Security
Individual
Members
Premiums
Trust Funds
Funds at Lloyd's
40% of OPL*
Other Personal
Wealth
Corporate
Members
Premiums
Trust Funds
Funds at Lloyd's
40% + of OPL*
2002 2001 Change
$m
26,767 19,600 36.6%
13,974 11,200 24.8%
438 474 -0.8%
Central Fund 903** 526 71.7%
Insurance of the Central Fund
* Overall Premium Limit. Ratios are minimum's from 2002, subject to a Risk Based Capital loading
** Plus $690m callable from Members
*** Annual limit of cover = $562m, subject to $160m annual excess point (with maximum of $802m aggregate cover over 5 years)
562*** 508 10.6%
Source: Lloyd’s global results and annual report 2002

The Global Reinsurance Market is
Dominated by a Few Key Players
AIG
Global
Reinsurance
2001 ($ in millions)
18000
16,611
15,429
16000
14000
12000
10000
8000
6000
9,991
7,047
4000
2000
0
6,287
Net Reinsurance Premiums Written
Top 5 Reinsurance Groups
Estimated Global Premiums
% Total
55,365
96,808
57.2%
Munich Re Group
Swiss Re Group
Berkshire Hathaway Re
Group
Employers Re Group
Hannover Re Group
Source: S&P

Key Concerns of Credit Risk
Management Process
AIG
Global
Reinsurance
• Reporting Issues: Exposures are Measurable Only Once a Year
• Resources Needed to Monitor 250 + Reinsurers (Screening Model)
• Choices of Quality Reinsurers are Limited as Industry is
Concentrated
• What Should be the Maximum Aggregated Recoverable Exposure per Reinsurer?
• Rating Agencies Inability to Forecast a Reinsurer’s Downfall
• Curtailment of Cessions to a Reinsurer May Help Realize the
Prophecy

Credit Risk Mitigants
• Strict Minimum Security Criteria
•
Guarantees
• Collateral
•
Diligent Monitoring of Reinsurers
• Credit Triggers in Reinsurance Agreements
- Ratio Tests
- Rating Downgrades
- 20% Decline in PHS
- Minimum RBC Ratio
- Change in Ownership
AIG
Global
Reinsurance

New Bermuda Start -Ups
Axis Specialty
Allied World Assurances Co Ltd.
Arch Reinsurance Ltd.
Montpelier Reinsurance Ltd.*
Endurance Specialty Insurance Ltd.
Olympus Reinsurance Company Ltd.
DaVinci
Aspen Insurance Ltd.
TOTAL
$1.7 billion
$1.5 billion
$1.0 billion
$1.1 billion
$1.2 billion
$500 million
$500 million
$200 million
$7.7 Billion
AIG
Global
Reinsurance
*Includes $200 million in capital raised in October 2002.
Source: A.M. Best Co. data

Capital Increase in Established
Bermuda Companies since 9/11
Company
Partner Re Group
Form
Preferred Stock
ACE Bermuda Insurance Ltd. Common Stock
XL Capital Group Common Stock
Debt
Renaissance Reinsurance Ltd. Common Stock
Preferred Stock
PXRe Group
Everest Re Group
Preferred Stock
Common Stock
Debt
AIG
Global
Reinsurance
Capital Raised
$400 million
$1.1 billion
$725 million
$1.6 billion
$233 million
$150 million
$150 million
$346 million
$200 million
Source: A.M. Best Co. data

AIG
Reinsurance
Worldwide
Rating Distribution as of Dec. 31, 2001 Rating Distribution as of May 21, 2003
50
45
40
35
30
25
20
15
10
5
0
AAA AA A BBB BB
Source: Standard & Poor’s
B CCC NR

Reasons for Recent Downgrades of
Reinsurers Worldwide
AIG
Global
Reinsurance
• Asbestos
• Reserve Deficiencies
• Management Issues (e.g., transitions)
• Reinsurance Uncollectibles
• Investment Write-Downs
• Adverse Development
• Missed/Shifting Earnings Targets

Combined Ratio:
Reinsurance vs. PC Industry
AIG
Global
Reinsurance
Reinsurance All Lines Combined Ratio
130
120
110
100
90
170
160
150
140
 2001’s combined ratio was the worst-ever for reinsurers
 2002 was bad as well

Clearly pressure on reinsurers to improve performance
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

AIG
Global
Reinsurance
Trends and Future Concerns
• 70% of the World’s Reinsurance Premium Suffered a Downgrade in the Past Year
• 8 of the Top 15 Reinsurers Have a Negative Outlook
• Virtually All Have Raised Equity or Hybrid Capital Since
September 11th
• Deteriorating Investment Results
• Recognition of Prior Period Reserve Deficiencies
• Asbestos Losses Continue to Materialize
• Stagnant Mergers and Acquisition Market
• Foreign Markets’ Retrenchment
• S&P’s Negative Outlook for the Reinsurance Industry