Portfolio Analysis & Benchmarking - For Specialty Insurance Peer Group

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Portfolio Analysis & Benchmarking For Specialty Insurance Peer Group Nov, 2010

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Disclaimer

THE SAMPLE CONTAINS EXCERPTS FROM A STUDY CONDUCTED BY SUTHERLAND GLOBAL SERVICES FOR ITS CLIENT. THE SAMPLE MAY NOT CONTAIN ALL THE PAGES OF THE ORIGINAL DOCUMENT THIS SAMPLE HAS BEEN PREPARED BY SUTHERLAND GLOBAL SERVICES INC. OR ITS ASSOCIATES OR AFFILIATES (“SUTHERLAND GLOBAL SERVICES”) EXCLUSIVELY AS AN ILLUSTRATIVE SAMPLE ONLY AND IS SENT TO AUTHORISED RECIPIENTS SOLELY FOR THE PURPOSE OF EVALUATING SUTHERLAND GLOBAL SERVICES’S SUPPORT SERVICE CAPABILITIES. THIS SAMPLE SHOULD NOT BE CONSIDERED AS AN OFFER TO SELL, A SOLICITATION TO BUY, OR AN ENDORSEMENT OR RECOMMENDATION OF ANY COMPANY. SUTHERLAND GLOBAL SERVICES DOES NOT GUARANTY THE ACCURACY, COMPLETENESS OR OTHER CHARACTERISTICS OF THE DATA / INFORMATION OF THE REPORT.

This Sample may not be reproduced or distributed (in whole or in part) to any third party without the express prior permission of Sutherland Global Services. Sutherland Global Services may also have (or have had) arrangements with entities whereby Sutherland Global Services receives or is in receipt of information relating to the subject matter of this Sample that is confidential or proprietary to a third party, and thus may not be utilized. Accordingly, Sutherland Global Services may be in receipt of relevant information that is not reflected in this Sample.

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Portfolio Analysis & Benchmarking - For Specialty Insurance Peer Group Client • The client is a leading provider of Specialty insurance based out of the U.S. with a need for benchmarking portfolio and investments, with a close peer group

Project Scope • Key objectives of the study were to identify key players in Specialty insurance in U.S. and benchmark client and its peers on a set of critical parameters, and analyze the underlying reasons behind the observed performance. Main focus of the study was on risk-return analysis and investment returns analysis

Sutherland’s Solution • SGS conducted extensive secondary research to size the U.S. P&C insurance industry, identified key players and major challenges of the industry and also identified macroeconomic indicators impacting the insurance environment. Key performance parameters were also identified • SGS then developed a proprietary framework incorporating select financial and operating parameters. The financial data of the chosen insurance players was put through this framework in order to arrive at the comparative assessment of the player vis-à-vis the industry as well as vis-à-vis other players • All financial and qualitative databases to which SGS holds subscription, were extensively used to identify key players in the insurance industry across U.S. as well as to collate the financial information for them

• Benefits to the Client • The project provided significant intelligence to the client with regards to the competitive landscape of the industry on some critical parameters, which proved to be an instrumental building block in devising its investment portfolio strategy • Identification of key peers group helped client assess its strategy against its peer group and was better able to position itself in the industry www.sutherlandglobal.com © 2010 Sutherland Global Services © 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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Methodology for evaluating Risk vs. Return Annexure 13 • •

Objective: Rate the investment portfolio at 30,000 feet view for the Risk and Return on investment (excluding realized gains/ losses) along with the risks involved Since each company had investments in different asset classes with varying risks, a customized risk score was developed based on the asset class for the respective companies. The table below provides the risk profile assumed for each of the typical asset classes:

Asset Class

Risk Profile

Fixed Investment

1

Short Term Investment

1

Equity

3

Others

9

A weighted average risk profile was arrived at using the combination of the above score and the fraction of investment by the respective company in that asset class. The risk profile for each of the companies evaluated is as follows: Company

Risk Score

Argo

1.25

RLI

1.35

Markel Corp

1.49

Alleghany

1.80

WR Berkley

1.93

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RLI exhibits better investment yields and ROAE Annexure 14 Risk* & Return (2007-09 avg)

ROAE

5.0% 4.5%

WR Berkley (1.93 4.4%)

RLI (1.35, 4.2%)

30% 20%

Return Average = 3.8%

Argo (1.25, 3.6%)

3.0% 2.5% 2.0% 1.10

10%

Markel (1.49, 3.8%)

3.5%

Risk Average = 1.6

Return

4.0%

1.30

1.50

0%

Alleghany (1.80, 2.9%)

-10% 2007

1.70

1.90

2.10

Risk

2008

2009

Argo

Markel Corp

Alleghany Corp

WR Berkley

RLI

Investment Yield, %

P/B Ratio

6.00%

2.00 5.00%

1.50

4.00% 3.00%

1.00

2.00% 2007

2008

2009

Argo

Markel Corp

Alleghany Corp

RLI

WR Berkley

Average

Source: Company Annual Report, Earnings Call Transcripts and SGS Research & Analysis

0.50 0.00 2007

2008 Argo Alleghany Corp RLI

2009

PE Sep 2010 Markel Corp WR Berkley

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Both Markel and WR Berkley have been maintaining higher results from their fixed maturity portfolio and have adapted well to the changing economic conditions by shifting their portfolios… Annexure 15

Observations

Markel Investment Yield by Invst Type, %, 2009 90%

9.6%

2.2%

-0.1%

100%

% of Total Inv Income

5.00%

Markel: •

Fixed Income, constituting over 90% of overall returns, has been in the range of 4.6 - 5.5% over the past 3 years.

4.00% 3.00% 2.00%

4.60%

Markel has been holding consistently about 73% (+-0.5%) of its portfolio in

3.70%

1.00%

1.80%

fixed maturities over the past 3 years. Given the unstable economic

1.10%

0.00%

conditions, Markel shifted the allocation of fixed maturity portfolio from -0.90%

-1.00%

corporate bonds to government and municipal bonds in 2009. •

Total

Inv in Affliates

Short Term Inv

Fixed Maturity

Equity

-2.00%

Equity investments constituted, one of the highest in the peer group, 25% in 2007, and has decreased to 19% in 2009. The average yield for the 3 years has been only 2.3%

90% is >A rated

Company also took initiatives to boost invest returns by investing in diversified businesses over the years – bakery equipment, dredging, housing communities, laminated furniture products etc. Results, though, have been

WR Berkeley Investment Yield by Invst Type, %, 2009 6.00%

89.0%

3.6%

7.3%

100%

5.00%

% of Total Inv Income

mixed till recently WR Berkley: •

Returns from Fixed Income which constitutes over 89% of total investment income for 2009, have been in the range of 4.4 to 5.1% over the past 3

4.00%

years 3.00% 2.00%

4.38%

5.06%

WR Berkley has reduced its equity allocation from 6.1% in 2007 to 3.1% in 2009

3.02% 1.00%

4.26%

The company maintains a unusually high ‘Other’ portfolio (mainly arbitrage securities) in the range of 9.6% to 11.6% yielding results in the range of 3.0

Total

Others

Equity

Fixed Maturity

0.00%

to 5.8%. The increase in investment income in 2009, was due to higher returns for both the arbitrage account and for the core bond portfolio

Source: Company Annual Report, Earnings Call Transcripts and SGS Research & Analysis www.sutherlandglobal.com © 2010 Sutherland Global Services © 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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….while in terms of risk return RLI has been a better performer generating higher returns with low risk Annexure 16 Observations

RLI Investment Yield by Invst Type, %, 2009 88.1%

11.1%

0.8%

% of Total Inv Income

100%

5.00%

RLI: •

Fixed Income, constituting over 88% of overall returns, has been always in the range of 4% over the past 3 years.

4.00%

RLI’s equity portfolio has yielded substantially higher returns than its peers; however due to the credit crisis (equity returns decreased from

3.00%

2.00%

16.6% in 2008 to 11.1% in 2009) •

4.25%

21.4% in the last 3 years. However, it reduced its equity allocation to 14% 3.03%

(17.3% in 2008) so as to reduce the volatility of its portfolio & increased

3.87%

1.00%

fixed investments to 80% in 2009 (76.8% in 2008) •

0.57%

During 2009, net investment income decreased by 15% due to changes in asset allocation, a falling interest rate environment as well as dividend

Total

Others

Equity

0.00% Fixed Maturity

RLI, like Markel, also has a high equity portfolio in the range of 14.2 to

reductions •

Fixed income portfolio remained diversified with investments in treasury, government sponsored agency, corporate, municipal, mortgage-backed

All are >A rated

and asset-backed securities

Source: Company Annual Report, Earnings Call Transcripts and SGS Research & Analysis www.sutherlandglobal.com © 2010 Sutherland Global Services © 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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RLI given its superior underwriting capability and investment yield leads the peer group in terms of stock performance Annexure 17 Stock Performance

130 120 110 100 90 80 70

60 50

Argo

Markel

Alleghany

WRB

Sep-10

May-10

Jan-10

Sep-09

May-09

Jan-09

Sep-08

May-08

Jan-08

Sep-07

May-07

Jan-07

40

RLI

Source: Bloomberg and SGS Research & Analysis www.sutherlandglobal.com Š 2010 Sutherland Global Services Š 2010 Inc.,Sutherland All rights reserved. Global Services Privileged Inc., and Allconfidential rights reserved. information Privileged of Sutherland and confidential Globalinformation Services Inc. of Sutherland Global Services Inc. 29 January 2013

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Thank You

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