Nephila Capital Ltd

Presentation to PSERS Finance Committee Harrisburg, PA - June 9, 2011

Important disclosures

This material is communicated by Nephila Capital Ltd (Nephila) and distributed by Man Investments AG. To the extent that it is distributed in the United Kingdom, it is communicated by Man Investments Ltd, which is authorised and regulated by the Financial Services Authority. It is intended only for investment professionals or professional clients and must not be relied upon by any other person. This material is proprietary information of Nephila and its affiliates and may not be reproduced or otherwise disseminated in whole or in part without prior written consent from Nephila. Although we have taken every professional care in gathering this information, we do not assume any liability in the case of incorrectly reported or incomplete information.

This material does not constitute a prospectus, a request/offer, nor a recommendation/solicitation of any kind, e.g. to buy/subscribe or sell/redeem the described investment instruments or to perform other transactions of any kind. This document and all information contained herein is not intended for persons and/or organisations subject to U.S. federal, state or local law, or to any jurisdiction or legal provisions prohibiting the subscription/buying or redemption/selling of any shares/units of the described investment product whether on the basis of domicile, nationality or for any other reasons.
Please be aware that investment funds involve investment risks, including the possible loss of the principal amount invested. Please see the relevant Offering Memorandum for a detailed description of the risks in relation to each share/unit of the investment fund. Man Investments, Nephila and/or any of their affiliates may have an investment in the described investment products.

There is no guarantee of trading performance and past performance is no indication of current or future performance/results.
www.nephilacapital.com

Executive summary The investment manager Asset class overview Investment opportunity in 2011 Portfolio and performance overview

Appendix

The investment opportunity

Access an attractive asset class through a leading manager

Experience Nephila Capital is the oldest dedicated manager in the insurance linked securities (ILS) sector launched its first fund in 1998 AUM of ~ $4 billion1 SEC registered since 2004 32 people, based in Bermuda

100% employee participation in the Company equity and/or funds that Nephila manage
Investors Institutional platform Approximately 73% of Nephilas current investors are pension funds

Zero beta asset class ILS are generally not correlated with financial markets Portfolio benefits of the asset class are broadly accepted by investors and consultants

Source: Nephila Capital Ltd. 1. As of April 1, 2011. 2. Employees are either invested in the funds or management company. 3. Investhedge. Watson Wyatt: Towers Watson Defends Asset Diversity article can 4 be located at http://www.towerswatson.com/press/1738. Mercer: Mercer predicts top ten investment trends for 2010 article can be located at http://www.mercer.com.au/summary.htm?siteLanguage=1012&idContent=1368600. This reprinted article should not be construed as an offer to sell or a solicitation of an offer to buy securities or any product mentioned in this article. All data in the article was provided by Towers Watson and Mercer and has not been independently verified by Man Investments Inc.

Peak geographic areas for catastrophe reinsurance

ILS returns are generated by charging an insurance premium for taking the risk of an extremely large catastrophe (e.g. hurricane Katrina)

USA Hurricane

Primary diversification created among geographic regions (USA, Japan)

Earthquake New Madrid, USA Winterstorm Europe Earthquake Japan

Secondary diversification is obtained within a geographic region (US hurricane exposure spread among Florida, Texas & New York)

Earthquake California

Typhoon Japan

5
Source: Swiss Re Capital Markets and Nephila Capital Ltd. database. As of March 31, 2010. Figures represent potential losses by geographic/peril exposure in $ billions. 1. Earthquake Japan does not include claims that would be paid by Japan Earthquake Reinsurance Co. There can be no assurance that Nephilas strategy will generate profits.

Need for Capital in USA

Reinsurers Over-Diversify

2D Graph 1
$200

Approximate insured loss from 0.40% expected loss by region/peril

$180B

Reinsurance industry generally undercapitalized for peak US exposures, over-capitalized in other regions
Reinsurance companies overdiversify due to rating agency constraints Spreads compress as need for capital diminishes Smaller classes of insurance risk offer limited opportunity for positive expected return over time

Loss ( $ billions)

Largest need for capital is for US exposures

$150

$100

$90B

$50

$52B $42B $32B $24B $3B $1B

$0

n e e e ia m llite tion ican thquak thquak Typhoo indstor Austral Avia Sate hurr ar ar w e an US an an e US Jap ope Jap Eur Peril
Peril US US hurricane earthquake 0.40% 0.40% Japan earthquake 0.40% Japan Typhoon 0.40% European Wind 0.40% Australia Aviation Satellite Terrorism

Risk

0.40%

0.40%

0.40%

0.40%

Premium

6%

4.5%

3.5%

3.25%

3%

2%

1.5%

1%

1%

6
Source: Swiss Re Capital Markets and Nephila Capital Ltd. database. As of March 31, 2010. Figures represent potential losses by geographic/peril exposure in $ billions. 1. Earthquake Japan does not include claims that would be paid by Japan Earthquake Reinsurance Co. There can be no assurance that Nephilas strategy will generate profits.

Uncorrelated returns and diversification

Strong relative performance during crisis periods

Correlation to Nephila1 April 1, 1998 to April 30, 2011*

World stocks

World bonds

Hedge funds

Commodities

Nephila

-0.01

0.09

-0.08

-0.05

Event

Total return period

Nephila1

World stocks -51.0 %

World bonds 13.7 %

Hedge funds -19.3 %

Commodities

Financial crisis

1 July 2007 to 28 February 2009

14.6 %

-43.1 %

NASDAQ crisis/bear market

1 April 2000 to 31 March 2003

28.3 %

-47.8 %

25.3 %

2.1 %

25.0 %

World Trade Center crisis

1 September 2001 to 31 December 2002

11.8 %

-25.9 %

9.1 %

1.8 %

4.3 %

Russian crisis and LTCM crash

1 August 1998 to 30 September 1998

0.7 %

-14.2 %

4.7 %

-9.8 %

3.7 %

Source: Nephila Capital Ltd database and Bloomberg. There is no guarantee of trading performance and past performance is no indication of current or future performance/results. The periods selected are exceptional and therefore do not reflect typical performance. The dates chosen were based upon research and assessment, as explicit start and end dates for these events were not available. To a certain extent, the start and end dates of such events are subjective as different sources may suggest different date ranges, leading to different performance figures. 1Nephila is represented by Nephila Catastrophe Fund Ltd net of all fees and expenses from April 1, 1998. World stocks: MSCI World Index hedged to USD (price return). World bonds: Citigroup World Government Bond Index hedged to USD (total return). Hedge funds: HFRI Fund of Funds Composite Index. Please note that the HFRI index data over the past 4 months may be subject to change. Commodities: S&P GSCI Commodity (total return) Index. *Please note that the product performance for December 2010 is estimated.

Executive summary The investment manager Asset class overview Investment opportunity in 2011 Portfolio and performance overview

Appendix

Organization Structure

Why are we based in Bermuda?

The center of expertise for catastrophe reinsurance Largest property catastrophe reinsurance market Bermuda supplies 67% of the Florida reinsurance capacity1 Market controlled by over the counter insurance brokers (AON, Marsh & McLennan, Willis) Relationships critical, OTC reinsurance market information flow vital Established physical presence in Bermuda (10 years)

Bermuda domicile provides no tax benefits to the firm or its investors

Barriers to entry high for competing fund managers Cannot write OTC reinsurance from U.S. or London because of tax/regulatory risks

Being in Bermuda is a competitive advantage in an opaque, OTC broker driven market

10
Source: 1International Business Information Report #15, April 2008.

Executive summary The investment manager Asset class overview Investment opportunity in 2011 Portfolio and performance overview

Appendix

11

A developing asset class

Market evolution 1800s to current date

Since the mid 1850s, catastrophe risk has been transferred from insurance companies to reinsurance companies In 1994, catastrophe risk also began to be packaged into securities
1994 to present Insurers (Allstate, Royal Sun Alliance, Tokio Marine, QBE)

1800s to 1993

Insurers
(Allstate, Royal Sun Alliance,
Tokio Marine, QBE)

Catastrophe risk

Catastrophe risk

Reinsurers Swiss Re, Munich Re, Berkshire Hathaway

Reinsurers Swiss Re, Munich Re, Berkshire Hathaway

Capital markets Bonds and options

12

Schematic illustration. Source: Nephila Capital Ltd. Database.

Catastrophe bond issuance1

Natural catastrophe bonds only

Cat risk packaged into bonds, rated securities, sold directly to pensions, etc. Cat bond market is growing but represents only 8% of annual notional cat risk traded Access to other market segments crucial for optimal portfolio construction

8,462

8000

Issued Outstanding

12000 10000

6000

5,696 5,025

$ in millions

6000
3,480 2,980 2,388 2,500

4000

4000 2000

2000
1,125 714 742 825 967 990 1,143 1,015

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$ in millions
13

8000

Source: 1Swiss Re Capital Markets. As of March 31, 2011. Any descriptions or information involving investment process or strategies is provided for illustration purposes only, may not be fully indicative of any present or future investments, may be changed at the discretion of the investment manager and are not intended to reflect performance.

Overview of instruments traded

~ $200B of catastrophe exposure trades each year, broken down as:

Instrument

Annual Notional Traded

Duration

Barriers to entry

Catastrophe Bonds

$4 B

2-3 years

Very low Goldman Sachs, Merrill Lynch

ILW (Industry Loss Warranties)

$6 B

6-12 months

More difficult than bonds, but easiest of OTC instruments

Traditional reinsurance

$150 B

12 months

High barriers: must have broad sourcing resource, significant analytical capabilities

Retro

$5 B

12 months

More difficult than ILWs, much easier than traditional reinsurance

These trade as reinsurance contracts, not securities. Need a reinsurance company to transact.

Private transactions

$10-$20 B

12-24 months

Very high barriers, need significant size and superior creditworthiness to participate (Berkshire, collateralized)

Quota Share or ILS Portfolios

n/a

12-24 months

Low barriers, as simply paying a reinsurer to access their platform

14

Texas
Portfolio Benefits of Traditional Reinsurance Contracts

Company 1

Company 7

Company 2

Company 6

Company 3

Company 4

Company 5
15

Portfolio composition
Responding to changing market dynamics

Nephila rotates opportunistically among the most attractive market segments

Historical net sector exposure (Nephila Fund Ltd)1
140 %

Relative value and arbitrage opportunities

2005 2006 2007 2008 2009 2010

120 % 100 %
9% 13% 45% 54% 74% 39% 47%

22% 61%

Cat bonds

80 % 60 %

ILWs
40 % 20 %
33% 12% 23% 11% 10% 17%

9% 45%

4% 45% 39%

Reinsurance
0% -20 % -40 %
2005

7% -1% 2

4%

6%

Retro

-28%

2006

2007

2008

2009

2010

Attractively priced segment of the market Fairly priced segment of the market Poorly priced segment of the market

Catastrophe bonds Industry loss warranties Reinsurance Retrocession

Country weighted industry loss (CWIL)

Source: Nephila Capital Ltd database. As of October 1, 2010. The sector allocations are designed to reflect the expected long-term risk exposure to each sector relative to the other sectors in the portfolio. The percentages are based on estimates of the risk of each sector for the current portfolio. The portfolio structure and constituents are regularly reviewed by the investment management team and sector allocations will change accordingly. There are risks inherent in futures trading programs. Represents 1% net short position. Any descriptions or information involving investment process or strategies is provided for illustration purposes only, may not be fully indicative of any present or future investments, may be changed at the discretion of the investment manager and are not intended to reflect performance.

16
16 of 44

Access across capital structure

Value proposition: less competition at the top

Typical reinsurance program Nephila collateralizes most of its reinsurance transactions All positions have limited liability
Selective layers (5-10 major players)
USD 60 bn

Private layer Private layer

2% default probability, pays ~ L+10% 2% default probability, pays ~ L+10%

Less competition

Larger credit risk concern for super-catastrophes reduces the number of acceptable counterparties Insurers are willing to pay more for fully collateralized coverage so these layers offer better value and less cyclical pricing

USD 40 bn (Katrina)

Top layer
~5% default probability, pays ~ L+16%

Nephila is a preferred counterparty and market leader in offering collateralized coverage due to their ability to offer deals of significant size

Credit risk Industry loss

USD 25 bn

Middle layer
10% default probability, pays ~ L+22%

More competition

Competitive layers: (30-40 reinsurers)

Most traditional reinsurers and hedge funds are overweight bottom and middle layers to generate ROEs consistent with their cost of capital/target returns Pricing is generally less attractive and more cyclical because there are more participants

USD 10 bn (Ike)

Bottom layer
20% default probability, pays ~ L+32.5%

Retention/deductible
17
Source: Nephila Capital Ltd database. Any descriptions or information involving investment process or strategies is provided for illustration purposes only, may not be fully indicative of any present or future investments, may be changed at the discretion of the investment manager and are not intended to reflect performance.

Executive summary The investment manager Asset class overview Investment opportunity in 2011 Portfolio and performance overview

Appendix

18

Current Market Conditions

Spread widening post Japan

Series of mid-sized losses impacting reinsurers and causing spike in non-peak or cold spot earthquake pricing: (Chile earthquake, two New Zealand earthquakes and Australian floods) Japan earthquake changing structure and pricing in the market Changes in US hurricane catastrophe models will increase demand for reinsurance at June 1 Net result: - spreads for non-peak earthquake coverage have widened 2-3x - spreads for Japan earthquake have widened 2-3x - spreads for US earthquake ILWs have widened 25-35% - spreads for US hurricane ILWs are quoted 20-30% wider Nephila provided ~ $500m of liquidity to distressed counterparties immediately after the Japan quake - opportunities in retro and ILW markets, generally at higher expected losses - distressed trades allocated to Palmetto, Juniper & Triton Catastrophe Funds Cold spots and Japan situation providing opportunity for broader portfolio diversification without sacrificing expected return and without adding materially to the tails of the distribution
19

Non-Peak Earthquake Pricing Development

30 $3bn ILW $5bn ILW 25

20
ROL (%)

Entered market
15

10

Pre Chile

Post Chile

Post New Zealand 1

Post Australia

Post New Zealand 2

20

Sample Trades post Japan Quake

Region

Strike price

Pre-Event price

Post-Event price

Japan Quake

USD 10 B

4.75 %

15 %

Japan Quake

USD 25 B

3%

8%

Japan Quake

USD 50 B

n/a

5%

(0.40% expected loss)

USA Quake

USD 20 B

7.25%

10.5%

USA Quake

USD 30 B

5%

7.75%

Cold spots and Japan situation providing opportunity for broader portfolio diversification, without sacrificing expected return.
21

Executive summary The investment manager Asset class overview Investment opportunity in 2011 Portfolio and performance overview

Appendix

22

Palmetto Fund Ltd overview

Target net return of 8%-10% over time, expect ~10%-12.5% over next 12 months Very diversified, high position count 182 total positions Expected loss per position: 2-3% Relative value focused, averaged ~ 2.50% RV profits per yr over last 5 years

Maximum risk capital of 25% of equity at 99% confidence level

Well positioned to take advantage of current spread-widening for both US and worldwide exposures Position level risk reports (monthly) and investment letters (quarterly) provided to all investors

23

Palmetto Fund Ltd portfolio

Objective Inception Return objectives Assets under management1 Number of positions

Geographically diversified portfolio of remote catastrophe risk (low expected loss, high industry loss) January 2001 8-10% over 3-month US T $387 million 182

Total Notional Exposure (% of NAV)* As of April 30, 2011

50%

Exposure by Instrument (% of Notional)** As of April 30, 2011

Long
40%

Hedge
16%

Net
20% 19%

18%

30%

14% 24%
20%

14% 15%

100%
28%
10%
% of NAV

32%

Reinsurance
0%
) d ke ke nd nd rils rils rils ind loo rnia Wi Wi Pe Pe Pe qua qua tW lifo &F an All All All ast arth arth eas Ca ind Jap US US rthe and uth exaE nE W x a nt No rni e( So eal nt e ean Jap lifo Eve US uak US wZ rop Ca Eve /Ne 2nd rthq Eu Ea 2nd alia str US Au

ILW

CatBonds

Retro

CWIL

Source: Nephila Capital Ltd. database. 1. As of April 30, 2011. *The Total Notional Exposure (% of NAV) may not sum to 100% as exposure can be double counted by geography and/or peril. **The Long and Hedge are expressed as a percentage of the overall absolute value of notional outstanding. The Net takes into account the netting effect of the offsetting hedges in each category and is expressed as a % of net notional.Portfolio allocations are selected by, and will vary at the sole discretion of, the Funds investment manager and are subject to availability and market conditions, among other things.

24

Executive summary The investment manager Asset class Investment opportunity Portfolio and performance overview

Appendix: additional information

25

Institutional investor base

Strong representation of pension fund capital worldwide

Existing pension fund investors have increased their capital commitments in light of recent spread widening
Endowments 3% Family Office / Hedge Fund 5%

Fund of Funds 15%

Insurance Companies 3% Manager 1%

Pension Funds 73%

26

Private Transactions

Much of the reinsurance market transacts on a syndicated basis, but there is a large, attractive private transaction market that exists for certain market participants (well-rated, large firms) Berkshire Hathaway has dominated the private transaction market historically because: they can execute large notional transactions they have a very strong credit rating (AA+) Private transactions provide multiple benefits: pricing power over a counterparty: either better absolute returns or better risk-adjusted returns transactions are core to the insurer and therefore less impacted by cyclicality in pricing often provide portfolio diversification benefits otherwise not available in the market (state pools) increases deal flow and lends itself to a more strategic relationship with brokers & counterparties As Nephila has grown AUM, it has been invited to this private transaction market because: we can execute large notional transactions we provide very strong credit rating (either 100% collateralized with US t-bills or AA paper)

27

Benefits of Scale
Private transactions 2006 - present

Nephila has transacted 65 deals of $40M or larger since 2006 20 of these transactions have been for $75M or greater These 65 deals represent over $4B of notional traded These transactions are effectively private cat bonds All of the trades provided one of the previously mentioned benefits for the portfolios

SIZE (USD) Greater than 150M 100M to 150M 75M to 100M 50M to 75M 40M to 50M

NUMBER 3 8 9 29 16

TOTAL (USD) 533M 857M 758M 1,585M 680M

Counterparty Type
2% 18% 5% 9%
Australian Insurer BDA Insurer
EU Insurer

6%
19% 22%

EU Reinsurer FL Insurer Lloyds Syndicate State Pool

19%
Please refer to Nephila paper Benefits of Scale for fuller discussion and case studies

US Insurer

28

North Carolina
Portfolio Benefits of Traditional Reinsurance Contracts

Company 1

Company 7

Company 2

Company 6

Company 3

Company 4

Company 5
29

Key professionals

Frank Majors, CFA Mr. Majors is a Principal and co-founder of Nephila. Since 1997 Mr. Majors primary role has been as portfolio manager of the funds managed by Nephila. He formulates investment strategy and oversees risk management. Mr. Majors has been active in the reinsurance markets in New York, London and Bermuda during his career. He began his career as a reinsurance broker in New York in June 1991, with Willcox, Inc. (now part of Guy Carpenter). In 1993 he joined Willis in New York, transferring to Willis London in 1995 and then Bermuda in 1999. Mr. Majors attended Vanderbilt University on a National Merit Scholarship, receiving his B.A. in Economics in 1990 and an M.B.A. in Finance from the Owen Graduate School of Management at Vanderbilt University in 1991. Mr. Majors also is a holder of the CFA designation. Greg Hagood Mr. Hagood is a Principal and co-founder of Nephila. Since 1997 Mr. Hagoods primary responsibility has been as portfolio manager, along with Mr. Majors, of the funds managed by Nephila. He coordinates all discussions with capital providers, strategic relationships and oversees operations management. Mr. Hagood began his career with AT&T, and in December 1993 joined Bear, Stearns & Co. in New York where he managed the mortgage servicing trading desk. Mr. Hagood was responsible for trading and brokering mortgage servicing portfolios, advising on mortgage banking mergers and acquisitions and structuring hedging instruments for institutional clients. Mr. Hagood left Bear, Stearns & Co. in February 1997 to join Willis Group Ltd. in London, specifically to start what is now Nephila Capital. Mr. Hagood was a licensed broker at Lloyds of London and received his B.S. in Finance from the University of Tennessee in 1990. Barney Schauble Mr. Schauble joined Nephila in 2004 as a Principal. Mr. Schaubles primary responsibilities include investor relations, risk sourcing, and other business development projects, as well as portfolio management. Mr. Schauble began his career in New York in 1994 as a broker for Marsh, and later moved to Guy Carpenter (Marshs reinsurance broking subsidiary). Mr. Schauble left Guy Carpenter in 1996 to join Goldman, Sachs & Co as part of their new Risk Markets effort, which was focused on securitising insurance risks and other areas of intersection between insurance and capital markets. He was transferred to London in 1999, where he co-headed the European effort, before returning to New York in 2002. His responsibilities as a Vice President in Risk Markets included client coverage, product development, syndication and distribution for a variety of structured products such as risk-linked securities, weather derivatives, and credit derivatives. Mr. Schauble joined XL Capitals Weather & Energy subsidiary in 2003, and was appointed head of marketing for the weather business. At XLWE he was responsible for managing a global team, originating weather risk management business and hedging XLWEs excess weather risk with insurance and capital markets counterparties. Mr. Schauble attended Harvard College and received his B.A. in Economics in 1994; he wrote his senior thesis to explore the concept of investing in bonds linked to property catastrophe reinsurance risk. Steve Glassman Mr. Glassman joined Nephila in 2010 as a Managing Principal and Chief Management Officer. He will be involved in all aspects of Nephila's business, with a focus on strategy, structured products and the management of human resources and business processes.Mr. Glassman joined Nephila after spending over 22 years with Merrill Lynch/Bank of America in New York, working in the real estate group, primarily in the commercial real estate space. Steve was most recently the COO of the Global Real Estate Principal Investments (GREPI) group; working with all infrastructure and support partners to ensure proper controls, infrastructure and management was in place to support the global real estate platform. In addition, up until March 2009, Mr. Glassman was the head of Asset Management (Americas) for GREPI for approximately ten years. Prior to these responsibilities, he managed the Structuring and Transaction Management group for GREPI (Americas) structuring and executing senior debt, mezzanine debt, bridge equity and equity investments. He has structured transactions and managed assets in the US, Europe, Asia, Mexico and Canada. Prior to joining GREPI, he managed a team of Merrill Lynch professionals in advising clients in the disposition of sub- and non-performing residential loans and real estate. Mr. Glassman was a co-founder of Bayhead Advisors, LLC, which was formed in 1995 to invest in CBOT PCS Catastrophe Options. Mr. Glassman 30 received his BA in Economics from Vanderbilt University.
Additional biographies are available at www.nephilacapital.com