How to Live to Be 100:I th P t /C ltIn the Property/Casualty

Insurance Industryy115th NAMIC Annual Convention

September 20, 2010pSan Diego, CA

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute ♦ 110 William Street ♦ New York, NY 10038Tel: 212.346.5520 ♦ Cell: 917.453.1885 ♦ bobh@iii.org ♦ www.iii.org

Presentation Outline

The Life Cycle of Businesses: Lessons from the Natural WorldCharacteristics of the World’s Oldest BusinessesP/C Centenarians: Who Lives to Be 100+ and Why?Why Do Insurers Fail?Secrets of the Ancients: Leadership Attributes of 100+ Year Old InsurersLesson from the Financial CrisisTop Challenges for the Decade AheadQ&A

2

Lessons from Nature: What Would Darwin Would Say?

Longevity in the Business World Has Parallels in the Natural WorldHas Parallels in the Natural World

3

On the Life Cycle of Businesses: Lessons from Nature

Most Businesses, Like Living Species, Eventually Become Extinct99 5% of all living species to ever exist on Earth are now extinct; The99.5% of all living species to ever exist on Earth are now extinct; The proportion is higher for business and extinctions occur over a much compressed timespan.Changes in the natural environment (not external forces like humans) were responsible for almost all e tinctionsresponsible for almost all extinctionsThis means that despite millions of years of evolution and adaptation, virtually every species eventually confronts a change in its environment to which it cannot adaptIt is the same in business

Business Cycle Gives Rise to “Creative Destruction”Mass extinctions in business are commonEconomy is constantly reinventing itselfNew industries and businesses spring from the ashes of the previous ggeneration, fill voids and occupy niches

Mass Extinction: Surge in Business Bankruptcy Filings Amid Crisis Since 2007

00 277

81,2

3582

,446

3 549

43

90,000

% Change Surrounding Recessions

1980-82 58.6%1980-87 88 7%

694

8,12

569

,30

62,4

3664

,004 71,2 8

63,8

5363

,235

64,8

5371

,570

,662

,304

52,3

7451

,959

53,5

4954

,027

367

4 99 0 1 546 60

,837

60,000

70,000

80,0001980 87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*

43,6 48

5 5 5

44,3

37,8

8435

,472

40,0

938

,540

35,0

3734

,317

39,2

0,6

95 28,3

2243

,5

29,0

59

30,000

40,000

50,000

Th 60 837 b i b k t i i 2009 19

0

10,000

20,000

,There were 60,837 business bankruptcies in 2009, up

40% from 2008 and the most since 1993. 2010:H1 bankruptcies totaled 29,059, down 4% from H1:2009, but

still very high by historical standards.

0

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910

:H1

The Crisis Will Destroy Hundreds of Thousands of Businesses, But Few to

5Source: American Bankruptcy Institute; Insurance Information Institute

None Property/Casualty Insurers

Private Sector Business Starts,1993:Q2 – 2009:Q4*

6 220 22

322

022

022

1

18220

230

(Thousands)

4 199 20

420

295 96 96

206

206

201

198

206

206

203

211

205

212

200 20

520

420

497

203 20

920

1

320

1 204

202

210 21

220

921

6 2 2 221

0 212

204

2 120

920

719

93

203

200

210

220

175

186

7418

018

6 192

188

187 18

918

6 190 19

419

1 1 9 19 19

192 1

192

192

193

191 19

317

7 180

180

190

200

180 000 businesses started in1 17

171

169

160

170180,000 businesses started in

2009:Q4, the best quarter in 2009. 2009 was the slowest year for new

business starts since 1993.

15093 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Business Starts Are Down Nearly 20% in the Current Downturn,

6

y ,Holding Back Most Types of Commercial Insurance Exposure

*Latest available as of September 12, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

Lessons from History: What Types of Business Live a VeryWhat Types of Business Live a Very Long Time (500+ Years) and Why?

Longevity in the Business World Requires Focus, Long-Term ObjectivesRequires Focus, Long Term Objectives

7

Number of Firms More than 500 Years Old, by Industry*

Total NumberThe brewery

industry appears to have

BENEATH THE SURFACEM t f th i

3535

40

appears to have the greatest

longevity with 35 firms 500+

Most of these companies are:

1. Family Owned2 Hi hl f d28

1925

30

35 35 firms 500+ years old. 2. Highly focused on one

specific business3. Have some geographic 19

7 5 410

15

20g g p

focus (product or client)

5 4 2 2 2 2 10

5

wery otel

rant

Wine

acy ary

Glass

per

Sake

port

hers

Brewe

HotRest

aura W

iPharm

aCon

fectio

na Gla

Pap SakTra

nspo Othe

Source: http://en.wikipedia.org/wiki/List_of_oldest_companies

Characteristics of Firms That Stand the Test of Time

1. Business Model: Highly FocusedFirms tend to remain true to core businessAvoid businesses you don’t understandSome diversification is usually good, but leads to an exponential increase in complexity and unforeseen interactions across units

2. Ownership Structure: There Exists Some Concept of MutualitySome of the world’s oldest firms are family owned (artisans, craftsman)Others have some form of cooperative arrangement (agricultural)Such organizations also exhibit altruistic behavior, a proven survival trait

3. Communal Interest: A Concern for the Greater Common GoodPerpetual of the species (i e the industry) is evident in behaviorsPerpetual of the species (i.e., the industry) is evident in behaviorsConcept of mutuality extends beyond organization to communal interestA strong willingness to work for the common good

Characteristics of Firms That Stand the Test of Time (cont’d)

4. Growth: Tend to Grow SlowlyAs with living species, the longest lived businesses in the world tend to grow only slowly, if at all

5 Size: Tend to Be Small Relative to Competition5. Size: Tend to Be Small Relative to CompetitionSize seems to matter when it comes to species longevity: smaller = longerAlso true among living species (e.g., bacteria, insects)

6. Profitability: Tend Not to Be the Most ProfitableObject of continuous profit maximization is not consistent with longevityA “will to survive” is still necessaryA “will to survive” is still necessary

World’s Oldest Insurance Companies

Who’s Truly Endured?

11

World’s Oldest Insurance Companies, by Age and Country*

322368Bilsener (Germany)

Lloyd's (UK)321

300266

258

y ( )Gjensidige (Norway)

Royal & SunAlliance (UK)Dolleruper (Germany)

Philadelphia Contributionship (USA)254

243222218

p p ( )Möreler Brandgilde (Germany)

Storebrand (Norway)Ostangler (Germany)

CIGNA (USA)

The oldest insurance

companies are more likely to

216216

210200

( )Baltimore Equitable (USA)

Mutual Assurance (USA)Providence Mutual (USA)

The Hartford

more likely to be mutuals

197191189186

Neuendorfer (Germany)Gilmore & Associates (USA)

Hickok & Boardman (USA)Clerical Medical (Germany) 86

0 50 100 150 200 250 300 350 400

C e ca ed ca (Ge a y)

*Insurers’ age calculated as number of years from inception date to 2010Source: http://en.wikipedia.org/wiki/List_of_oldest_companies; III research.

# of Years Old

World’s Oldest Insurance Companies, by Age and Country* (cont’d)

184185Standard Life (UK)

Ci i ti E it bl (USA) 184184184

182

Cincinnati Equitable (USA)HEK (Germany)

Schweizerische Mobiliar (Switzerland)Vermont Mutual (USA) 182

171170

169

Vermont Mutual (USA)Lakeland Insurance

HüttenerNew York Life (USA) 169

168167167

New York Life (USA)Atlantic Mutual

Frederick MutualHolyoke Mutual (USA)

The oldest insurance

companies are more likely to167

163162

160

o yo e utua (US )Southern Mutual

Macomber, Farr and Whitten (USA)Aetna

more likely to be mutuals

145 150 155 160 165 170 175 180 185 190*Insurers’ age calculated as number of years from inception date to 2010. Source: http://en.wikipedia.org/wiki/List_of_oldest_companies

# of Years Old

The Centenarians: Who Lives to Be 100+ in the P/C Insurance World?

Characteristics of An Exclusive C fClub of Insurers

14

100+ Year Old Insurers as a Share of All P/C Insurers

Nearly 13% of P/C insurance companies (1-in-8) today is 100+ years old. This is a surprisingly high percentage.

Insurers at Least 100 Years Old, 12.7%(287)

Insurers Less than12.7%

Insurers Less than 100 Years Old,

87.3%(1,979)

87.3%

Odds of a Human Living to 100Born 1900: ~0 25% (1-in-400)

15Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; CDC

Born 1900: 0.25% (1 in 400)Born Today: ~2% (1-in-50)

Decade of Formation for P/C Insurers at Least 100 Years Old in 2010

Of the Centenarian p/c insurers in existence today, 70% were formed since 1870. There

was a post-Civil war spike in formations in the 1870s and another in the 1890s

6065

60

70

80

As of Jan. 1, 2010 there were 287 P/C that were at least 100 years old.

37 3840

50

9 10

22 2016

10

20

30

31 0 0 04 2

0

10

1750-59

1760-69

1770-79

1780-89

1790-99

1800-09

1810-19

1820-29

1830-39

1840-49

1850-59

1860-69

1870-79

1880-89

1890-99

1900-09

16

Decade Of Formation

Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

100-Year-Old Insurers: Independent vs. Part of Group/Holding Company

The number of 100-year-old insurers that are independent vs. part of a more diversified group structure is split almost evenly.

Independent, 48.8%(140)

51.2% 48.8%Part of Holding

Company, 51.2%(147)

17Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

100-Year-Old Insurers: Some Are Shell Companies or Are in Runoff

Approximately 12% of “existing” 100-year old insurers had net written premiums greater than zero, suggesting they were either unused shell

companies or in runoff and not actively writing new business.companies or in runoff and not actively writing new business.

NPW Equal or Less Than Zero, 12.2%(35)

12.2%

NPW Greater than Zero, 87.8%(252)

87.8%

18Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

100-year-old Insurers: Mutual vs. Stock vs. Reciprocal

The vast majority (62.4%) of 100-year-old insurers are mutual insurers, while stock insurers account for 35.9% of the total.

1 4%0.3%

Reciprocal, 1.4%,(4)

Other, 0.3%,(1)

35 9%

1.4%

Mutual, 62.4%,(179)

62 4%

35.9% ( )

Stock, 35.9%,(103)

62.4%

19Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

100-Year Old Insurers: Share of Total Industry NWP 1998 vs. 2008

19982008100-yr insurer

NWP

15.6%

NWP$44.33 Billion

16.5%

100-yr insurer NWP

$73.14 Billion

28.3%

6.9%

48.4%Total P/C industry NWP

$283.91 Billion

Total P/C industry NWP

$444.10 Billion

The market share of 100-year-old insurers as a % of total P/C industry NWP remained stable over the decade ending in 2008 (latest available)

20

Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; A.M. Best

remained stable over the decade ending in 2008 (latest available)

100-year-old Insurers: Share of Total Industry Admitted Assets 1998 vs. 2008

19982008100-yr insurer

assets

17.5%

assets$183.74 Billion

19.0%

100-yr insurer assets

$306.65 Billion

28.3%

6.9%

48.4%Total P/C industry assets

$1,048.62 Billion

Total P/C industry assets

$1,617.31 Billion

The market share of 100-year-old insurers as a % of total P/C industry assets has increased slightly over the years

21Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC; A.M. Best

has increased slightly over the years.

Distribution of 2008 NWP by Decile

21.7"Centenarians" All P-C companies

Median NWP ($Million)

$1,3

2

$1,200

$1,500 There are a small number of large Centenarian insurers, mostly part of larger groups, that

make the median NWP size of this group larger

5

$690

.7

$600

$900for the top 50% of companies by size;

Centenarians tend to be somewhat larger among the smaller-sized firms.

51.5

$102

.1

$248

.5

0.2 .2 3.3

6.4

12.8

23.4

41.4

$80.

1

$164

.6

0.1 .0 2.7

4.9

11.4

23.0$300

$600

$$0 $1 $3 $6 $1 $2 $ $$0 $1 $2 $4 $1 $2$0

Lowest 2d 3d 4th 5th 5th 4th 3d 2d Highest

22

Note: 25 companies per decile for centenarians; 227 per decile for all p/c industrySource: NAIC Annual Statement data, via Highline

lowest lowest lowest lowest highest highest Highest Highest

Distribution of 2008 Surplus by Decile

1,90

9.6

$2,000

"Centenarians" All P/C IndustryMedian Surplus ($Million)

There are a small number of large Centenarian $15.

3

$1,500

There are a small number of large Centenarian insurers, mostly part of larger groups, that make the median size of this group by PHS larger for the top 50% of companies by size;

6 6.8

277.

6

3 4 3 4 .1 209.

6

$78 5

0 3$500

$1,000 Centenarians tend to be somewhat larger among the smaller-sized firms.

$59.

$11 $

$1.4

$3.8

$7.4

$12.

3

$20.

4

$32.

3

$57.

$98 $ 2

$1.4

$2.4

$5.0

$8.5

$16.

0

$32.

3

$0

Lowest 2d 3d 4th 5th 5th 4th 3d 2d HighestLowest 2dlowest

3dlowest

4thlowest

5thlowest

5thhighest

4thhighest

3dHighest

2dHighest

Highest

23

Note: 25 companies per decile for centenarians; 225 per decile for all P-CSource: NAIC Annual Statement data, via Highline

Distribution of 1998-2008 NWPChange, by Decile

.8%"Centenarians" All P-C

Median Rate of Change

1918

1400%1600%1800%2000%

Centenarian insurers tend to grow more slowly than the industry overall and across

% 483%

% 9% 60.6

%

600%800%

1000%1200%1400% virtually all sizes of firm

107%

138% 20

4%

4

% %

10.7

%

38.4

%

62.9

%

90.6

%

138.

0%

220.

9 4

%

-9%

18%

46%

61%

82%

-200%0%

200%400%600%

-91.

1%

-29.

2

-50200%

Lowest 2dlowest

3dlowest

4thlowest

5thlowest

5thhighest

4thhighest

3dHighest

2dHighest

Highest

24

Note: 24 companies per decile for centenarians’ 163 per decile for all P-C industry 1998-2008Source: NAIC Annual Statement data, via Highline

Distribution of 1998-2008 SurplusChange, by Decile

.0%

900%1000%

Centenarians All P-C

Median Rate of Change

%4%

722.

500%600%700%800%900%

92%

124% 16

6% 291 %

9.7%

40.4

%

62.9

%

91.8

%

130.

0%

186.

4% 288.

4

3% 32%

50%

65%

100%200%300%400%500%

-45.

8% -6.9

%

1 4

-42% -11%

1 3 5-100%

0%100%

Lowest 2d 3d 4th 5th 5th 4th 3d 2d Highestlowest lowest lowest lowest highest highest Highest Highest

Centenarian Insurers Surplus Expanded Less Quickly Relative to Other Insurers

25

Note: 24 companies per decile for centenarians; 163 per decile for all p-c 1998-2008Source: NAIC Annual Statement data, via Highline

to Other Insurers

Premium to Surplus Ratios, “Centenarians” vs. Current P-C Industry, 1998 and 2008

$0.95$1.00"Centenarians" Current P-C Industry

NWP/Surplus

$0.85

$0.72 $0.69

$0 60

$0.70

$0.80

$0.90

$0.30

$0.40

$0.50

$0.60

$0.00

$0.10

$0.20

1998 20081998 2008

Premiums are a rough measure of risk accepted; surplus is funds beyond reserves to pay unexpected losses. The larger surplus is in relation to premiums—the lower the ratio of premiums to surplus—the greater the

26

“Centurians” are companies at least 100 years old with positive NWP in 2008 Sources: National Association of Insurance Commissioners’ Annual Statements, via Highline; I.I.I. calculations

p e u s t e o e t e at o o p e u s to su p us t e g eate t ecapacity to handle the risk it has accepted.

Asset Class Distribution of Admitted Assets,“Centenarians” vs. All P/C Insurers, 2008

Bonds Stocks Cash Other

20.9%

5.9% 20.6%52.6%All P/C Insurers

%20.8%

3.2% 21.3%53.7%Centenarians

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

27

Note: 25 companies per decileSource: NAIC Annual Statement data, via Highline

Why Do Insurers Fail?Why Do Insurers Fail?

Leading Reasons Why Most Insurers Don’t Make it to 100

28

P/C Insurer Impairments, 1969–2009

705 of the 11 are Florida companies (1 of these

Since most failures are due to inadequate pricing, underreserving

and excessive growth (factors under management control) the leading

49 50 4855

60 58

49 504750

60

5 is a title insurer)management control), the leading cause of death in the p/c insurance

industry amounts to suicide

34 36

3134

4

4129 31

435

30

40

50

815

12 11 9 913 12

199

16 14 13

1612

18 19 1814 15

10

20

30

8 7 9 9 9 7 65

0

10

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Source: A.M. Best; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009

115

120

1.8

2.0Combined Ratio after Div P/C Impairment Frequency

110

115

Rat

io

1.2

1.4

1.6

Impair

100

105

Com

bine

d

0.6

0.8

1.0

rment R

ate

90

95

0 0

0.2

0.4

0.6

2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969

90

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* 0.0

g

Impairment Rates Are Highly Correlated With Underwriting Performance

30Source: A.M. Best; Insurance Information Institute

p g y gand Reached Record Lows in 2007/08

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009

Despite financial market turmoil and a soft market

in 2009, 76% of ratings actions by A.M. Best

11 9%

actions by A.M. Best were affirmations;

just 2.9% were downgrades and 3.2%

were upgradesOther – 216

3.8%2.4%

11.9%75.7%

pg

Affirm – 1,375

Initial 44Under Review – 69

2.9%3.2%

Downgraded –53

Upgraded – 59Initial – 44

P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses

31

.Source: A.M. Best.

pAre Anticipated in the Industry’s Risk Management Strategy

Five Deadliest Sins for P/C Insurance Companies

OPERATIONAL ISSUES

1. Underpricing/Underreserving (~38% of failures)p g g ( )Leading cause of p/c insurer death according to A.M. Best

2. Excessive Growth (~14%)( )Too much growth too fast (organically or via M&A) can be fatal

3. Excessive Catastrophe Exposure (~8%)( )Too much underpriced exposure, too little reinsurance, insufficient diversification

4 I t t P bl ( 7%)4. Investment Problems (~7%)Investments are too risky, too illiquid or insufficiently understood

5 Affiliate Problems ( 8%)5. Affiliate Problems (~8%)Non-core operations can cause problems for parent (e.g., AIG)

Source: I.I.I. research.

Reasons for US P/C Insurer Impairments, 1969–2008

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.

Investment Catastrophe Losses Play a Much Smaller Role

3.7%4 2%

Investment Catastrophe Losses Play a Much Smaller Role

Reinsurance Failure

Mi

Sig. Change in Business

4.2%9.1%

7.0% 38.1% Deficient Loss Reserves/Inadequate Pricing

Investment Problems

Misc.

7.9%

38.1% Inadequate Pricing

Affiliate Impairment

7.6%

8.1% 14.3%Catastrophe Losses

33Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008

Rapid GrowthAlleged Fraud

U.S. P/C Insurance-RelatedM&A Activity, 1988–2009

$56$60 140Transaction Values

$35$40

$40

$50

($ B

illio

n)

100

120

Num

be

Number of Transactions

$19 $20

$35

$16

$31

$20

$30

ctio

n Va

lue

60

80

er of Transa

$2$5

$1 $0 $0

$9$14

$16

$4$8

$12

$2$3 $3 $5$6

$10

$20

Tran

sac

20

40

ctions

$$0

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090

2010: No Mega Deals So Far, Despite Record Capital Slo Gro th and Impro ed$ Value of Deals Down 78%

34

Note: U.S. Company was the acquirer and/or target.Source: Conning Research & Consulting.

Record Capital, Slow Growth and Improved Financial Market Conditions

$in 2009, Volume Up 7%

Leadership Attributes Found in pInsurers that Reach 100+ Years

Secrets of the Ancients

35

Leadership Attributes Inherent in Long-Lived Insurance Companies1. Management Acts as a Steward of the Enterprise

Objective is to pass a healthy firm safely and securely to the next generation of management and policyholders

2. Management Financial IncentivesIn line with the goal of providing the protection purchasedTh i t i ll 3rd t ( h h ld ) t tThere is typically no 3rd party (shareholders) to compensate

Objective if public company is to maximize profits

CEO (total) comp is a smaller multiple relative to average employee

3. Nimble: Environment for Small Insurers Can & Does ChangeNot likely first to change, but adaptation occurs within reasonable timeframe

4. Customer Focus & Relationship DrivenCustomer is the #1 priorityCommitted to agency form of distribution, with 21st century enhancementg y y

5. RegulationIn favor of comprehensive but local regulation (contrast with banks)

What Do I Admire in an Insurer and Its Management?1. A Firm Whose Management’s Incentives are Strictly

Aligned With the Insurer’s Principal StakeholdersCustomers agents employees communityCustomers, agents, employees, communityThese include financial and operational objectives

2 M t I K l d bl2. Management Is KnowledgeableManagement of small, long-lived insurer is no less knowledgeable about industry trends, opportunities and threats than larger competitorscompetitors

3. Intuitive and Comprehensive Understanding of Enterprise Risk ManagementRisk Management

Much is made of ERM today, but long-lived insurers practiced it well before it had a name

What Do I Admire in an Insurer and Its Management?4. CEO is Willing to Seek Advice and Counsel

No imperial CEOs; Self-aggrandizement is rareCEO is a listener and consensus builder

5. Commitment to Core ConstituenciesCustomer is the #1 priorityCommitted to agency form of distribution, with 21st century enhancement

6. Lack of a “Wandering Eye”Disciplined enough to stick with the business you know, but also adapting to changing business conditions and seizing opportunities as necessary

Lessons from the Financial CrisisLessons from the Financial Crisis

What Have the Past Two Years Taught /C ?the P/C Insurance Industry?

39

Lessons All Financial Industries Must Learn from the Recent Financial Crisis1. Risk Management Matters

2 Getting Involved in Businesses You Don’t Understand2. Getting Involved in Businesses You Don t Understand Can Be Fatal

3. Too Rapid Growth Can Kill Quickly3. Too Rapid Growth Can Kill Quickly

4. Management Financial Incentives Can Pervert Risk Management Controlsg

5. Support of Comprehensive and Appropriate Regulation is Vital to Longevity of Financial Services Enterprisesg y p

6. Keeping “Skin in the Game” is Critical

7. Never Lose Sight of What is in the Best Interest of the Customer

What Some Troubled Insurers Learned From the Financial Crisis

Bottom Line:

Adherence to Sound Risk Management Makes a Big Difference

Keeping Skin in the Game Matters

Taking Inordinate Risk on the Investment Portfolio to Earn a Few More Basis Points in Yield is Dangerous

Involvement in Non Core Business Can Cause Serious ProblemsInvolvement in Non-Core Business Can Cause Serious Problems

Tail Probabilities Matter and May Often Be Underestimated

Can’t Substitute Liquidity for CapitalCan t Substitute Liquidity for Capital

Regulatory Vacuums and Regulatory Arbitrage are Dangerous

Taking Government Money Can Be Like Making a Deal With the Devil

41

g y g

Source: Insurance Information Institute

How P/C Insurance Industry Stability Has Benefitted Consumers

Bottom Line:

Insurance markets – unlike banking – are operating normally

The basic function of insurance – the orderly transfer of risk from li t t i ti i t t dclient to insurer – continues uninterrupted

This means that insurers continue to:Pay claims (whereas 287 banks have gone under as of 9/10/10)y ( g )

– The promise is being fulfilledRenew existing policies (banks are reducing and eliminating lines of credit)W it li i (b k t i l d b i hWrite new policies (banks are turning away people and businesses who want or need to borrow)Develop new products (banks are scaling back the products they offer)Compete intensively (banks are consolidating reducing consumer choice)

42

Compete intensively (banks are consolidating, reducing consumer choice)

Source: Insurance Information Institute

5 Challenges for the Next 10 Years5 Challenges for the Next 10 Years

Staying Alive: The Decade Ahead

43

#1.Maintaining Adequate Reserves

and Pricingand Pricing

Historicall Fail re to Adeq atelHistorically Failure to Adequately Reserve and Price is the #1 Killer of

Insurance Companies44

Insurance Companies

P/C Reserve Development, 1992–2011E

23.2$25

$30

$B)

6

8 Impac

Prior Yr. ReserveDevelopment ($B)

Prior year reserve releases totaled

$8.8 billion in the first half of 2010 up

11.7 13.79.9

7.3$

$10

$15

$20

e R

elea

se ($

2

4

6 ct on Com

b

Impact onCombined Ratio

first half of 2010, up from $7.1 billion in

the first half of 2009

2.3

-2.1 -2.6-6 6

-4.1

1

6 7 -5$10

-$5

$0

$5

rYr.

Res

erve

-2

0

ined Ratio (

-8.3 -6.6-9.9 -9.8

-6.7-9.5

-14.6-16 -15-$20

-$15

-$10

2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 E E

Prio

r

-6

-4

(Points)

92 9 94 9 9 9 9 9 0 0 02 0 0 4 0 0 0 0 0

10E

11E

Reserve Releases Are Continuing Strong in 2010 But Should Begin to Taper Off in 2011

45

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.

Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1

.1 115.

9

114.

7

1.8

2 2 .0 2.3

4115.

7

4115

120

105.

6

107.

8

110.

107.

3

100.

1

8.3 10

0.9 10

5.1

101.

9 105.

9

1

107.

8 11

107.

4

108.

3

105.

3 109.

2

109.

2

110. 11

100.

8

6 0 100.

6

.4

105.

5

105.

7 109.

4

106.

9

108.

4

106.

4

105.

8

101.

6

105

110

115

1 98

92.4 95

.5

96. 6

96.0 1

93.9 97

.

90

95

100

80

85

92 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E

Calendar Year Accident Year

Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases

46

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.

Underwriting Gain (Loss)1975–2010:H1*

$

$35 Cumulative underwriting deficit f 1975 th h

($ Billions)

$5

$15

$25 from 1975 through 2009 is $445B

-$25

-$15

-$5

$55

-$45

-$35

$ 5The industry recorded a $5.1B underwriting

loss in 2010:H1 compared to $2.1B in

2009:H1

Large Underwriting Losses Are NOT Sustainable

-$55

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

* Includes mortgage and financial guarantee insurers.Sources: A.M. Best, ISO; Insurance Information Institute.

in Current Investment Environment

P/C Insurance Industry Combined Ratio, 2001–2010:H1*

As Recently as 2001, Insurers Paid Out

Nearly $1 16 for Every

Relatively Low CAT L

Heavy Use of Reinsurance Lowered Net

Relatively Low CAT LNearly $1.16 for Every

$1 in Earned Premiums

Losses, Reserve Releases

Cyclical

Lowered Net Losses Losses,

Reserve Releases

115.8120

Best Combined

Ratio Since 1949 (87 6)

Cyc caDeterioration

Lower CAT Losses,

More Reserve R l

99 3 100.1101.0100.8100.1

107.5110 1949 (87.6) Releases

95.7

99.3

92.6

98.4

90

100

48

* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:H1=101.7 Sources: A.M. Best, ISO.

902001 2002 2003 2004 2005 2006 2007 2008 2009* 2010:H1

Number of Years with Underwriting Profits by Decade, 1920s–2010s

10

12Number of Years with Underwriting Profits For insurers to

survive the next 5-10 years, they will need to run underwriting

8

10

76

8

10to run underwriting

profits on a consistent basis

3

54

6

4

6

0 0 00

2

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**

Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –

But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

49

*2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.**Based on estimated combined ration of 101.7 for 2010.Note: Data for 1920–1934 based on stock companies only. Sources: Insurance Information Institute research from A.M. Best Data.

Recorded in the 25 Years from 1979 Through 2003

Average Expenditures on Auto Insurance

$950

$830 $842 $831$816 $816

$844

$878

$850

$900

$705$726

$786$816

$795$816

$703$750

$800

$651$668

$691$705

$690$685$703

$650

$700

$60094 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10*

Countrywide Auto Insurance Expenditures Increased

50

Countrywide Auto Insurance Expenditures Increased2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)

* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

Average Premium forHome Insurance Policies**

$950

$822 $835$854

$879

$804$764$800

$850

$900

$668

$764$729

$6 0

$700

$750

$

$508$536

$593

$550

$600

$650

$508$500

00 01 02 03 04 05 06 07 08* 09* 10*

51

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2010)

Q04

Q04

Q04

Q04

Q05

Q05

Q05

Q05

Q06

Q06

Q06

Q06

Q07

Q07

Q07

Q07

Q08

Q08

Q08

Q08

Q09

Q09

Q09

Q09

Q10

Q10

(Percent)-0

.1%

-2%

0%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

Magnitude of Price Declines Shrank

During Crisis,

-3.2

%% -4

.6%

-2.7

%-3

.0%

3% .1%

4.9% % 6% 3%-6%

-4%

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

-5.9

%-7

.0%

4% 7%-8

.2%

-

-5.

6%

-6.4

% -5 -4-5

.8%

-5.6 -5.

-6.4

%

-10%

-8%

gPerformance, Higher

Cat Losses and Costlier Reinsurance

-9.

-9.7

-9.6

-11.

3%-1

1.8%

.3% -12.

0%5% 2.

9% -11.

0%

-14%

-12%

KRW Eff t

Market Remains Soft as Capital

52

-13

-13. -1

2-16%

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effectp

Restored and Underwriting Losses

Remain Modest

Change in Commercial Rate Renewals, by Line: 2010:Q2Percentage Change (%)

n

All Com

mercial

Comml P

ropGL Umbre

llaCom

ml Auto

WV

Constr

uctio

nD&O

Bus. In

terrup

tion

EPL

Surety

-0.1%

-3 0%-2.0%-1.0%0.0%

-4.6%

-3.4% -3.3% -3.0%

6 0%-5.5% -5.4%-6.0%

-5.0%-4.0%3.0%

Most Major Commercial Lines Renewed Down in Q2:2010 at a

-6.4%-7.0%

-6.3% -6.0%

-8.0%-7.0%

53Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

jFaster Pace than a year Earlier

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q2Percentage Change (%)

Market has Been Soft for 6 years and Remains Soft

Peak = 2001:Q4 +28.5%

as Capital is Restored and Underwriting Losses

Remain Modest

Pricing Turned Negati e in Earl

28.5%

KRW

Negative in Early 2004 and Has Been Negative

Ever Since

KRW Effect

Trough = 2007:Q3 -13.6%

54Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q2

1999:Q4 = 100

Pricing today is where is was in

Q4:2000 (pre-9/11)

55Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

#2F lli B hi d iFalling Behind in

Underwriting Technology:Underwriting Technology: The Competitive Leading Edge

U d iti A WillUnderwriting Acumen Will Determine Long-Run Success

56

A Technological Arms Race?

Competition: Success Defined More by Underwriting Acumen than by Price

Consumers see competition mostly in terms of price and serviceWhile insurance is generally very price competitive, long-run success for insurers is not solely correlated with the lowest priceinsurers is not solely correlated with the lowest priceUnderwriting is the key to accurate risk assessment and pricingAn insurer that systematically prices business more accurately will turn in a better financial performance and lead competitors mispricea better financial performance and lead competitors misprice There are theoretically no boundaries when it comes to underwritingThe past 15 years launched a technological revolution in underwriting

Now we’re in the midst of a Technological Arms Race

From Credit, to Predictive Modeling to Telematics to….???Next Wave of Innovations Will Include Integration of Real-Time gInformation About the Vehicle and DriverInteractive Technologies

Allows drivers to “log on” to view how driving behaviors influence risk and price

57

Ability for Consumer to Adjust BehaviorsTremendous public policy, public safety implications

#3Th E i StThe Economic Storm

C ti d E i W k dContinued Economic Weakness and Financial Market Volatility Will Ch ll I d t ’ EChallenge Industry’s Exposure Base, Growth and Profitability

58

US Real GDP Growth*

0% %% %6%

Real GDP Growth (%) The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

2.7%

0.9%

3.2%

2.3% 2.

9%

0.6% 1.

6%5.

03.

7%1.

6% 1.8% 2.3% 2.5% 2.8% 3.0% 3.2%4.

1 %1.

1% 1.8% 2.

5% 3.6 %

3.1%

2%

4%

6%

-0.7

%

%

-0.7

%

-4%

-2%

0%

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump,

Economic growth up sharply in late 2009 with rebuilding of

inventories and stimulus. M d t th

-4.0

%-6

.8% -4

.9%

-8%

-6%

0

1

2

3

4

5

6

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

More moderate growth expected in 2010/11 but no

“double dip”

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

07:2

07:3

07:4

08:1

08:2

08:3

08:4

09:1

09:2

09:3

09:4

10:1

10:2

10:3

10:4

11:1

11:2

11:3

11:4

Demand Commercial Insurance Continues To Be Impacted by Sluggish Economic Conditions

59

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 7/10; Insurance Information Institute.

Economic Conditions

Real GDP Growth vs. Real P/CPremium Growth: Modest Association

% 3%25% 8%R l NWP G th R l GDP

Real GDP Growth vs. Real P/C (%)

18.6

%20

.3

13.7

%%

15%

20%

25%

owth

4%

6%

8%

Real

Real NWP Growth Real GDP

4.3% 5.

8%0.

3% 3.1%

1.1%

0.8%

0.4%

0.6% 1.6%

5.6% 7.

7%1.

2%

5.2%

1.8%

0%

5%

10%

eal N

WP

Gro

0%

2%

l GD

P Grow

-1.6

%-1

.0%

-1.8

%-1

.0%

-0.4

%-0

.3%

-2.9

% -0.5

%-3

.8%

-4.4

%-3

.3%

-1.6

%

-0.9

%.4

%6.

5%-1

.5%

-10%

-5%

0%Re

-4%

-2%

wth

-7 -6

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910

E

P/C I I d t ’ G th i I fl d M d tl

60Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 9/10; Insurance Information Institute

P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy

Soft Market Appears to Persist in 2010 but May Be Easing: Relief in 2011?

25%

(Percent)1975-78 1984-87 2000-03

20%

Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

10%

15%

5%

-5%

0%

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 F

NWP was flat with 0.0% growth in 10:H1 vs. -4.4% in 09:H1

61

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Auto/Light Truck Sales, 1999-2011F

9917.5

17.8

7.4

1819

(Millions of Units)New auto/light truck sales

fell to the lowest level since the late 1960s. Forecast for

2010-11 is still far below 1999-2007 average of 17

16.9

16.5

16.116

.9

16.617

.1 7117

15161718 1999-2007 average of 17

million units

13.1

1.5 12

.7

12131415

“Cash for Clunkers” generated about $300M in net new personal auto premiums

10.3

11

9101112

Sharply lower auto sales will have a smaller effect on auto insurance

exposure level than problems in the housing market will on home insurers

999 00 01 02 03 04 05 06 07 08 09 10F 11F

Car/Light Truck Sales Will Recover from the 2009 Low Point, but

62Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/10); Insurance Information Institute.

High Unemployment, Tight Credit Are Still Restraining Sales

New Private Housing Starts, 1990-2011F

(Millions of Units)

1 .85 1.96 2.

07

801 9

2.1

New home starts plunged 34% from 2005-2007; drop

through 2009 was

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1 1.8

1.36

1.351.

46

.29

09

1.5

1.7

1.9g

72% (est.); A net annual decline of 1.49 million units,

lowest since records began

0.90

.76

1

1.2

1.01

1.1

0.9

1.1

1.3 in 1959

I.I.I. estimates that each incremental 100,000

0.56 0.60 0

0 3

0.5

0.7

,decline in housing starts costs home insurers

$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is estimated

at about $1.3 billion0.3

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F

Little Exposure Growth Likely for Homeowners InsurersD t W k H C t ti F t f 2010 2011

63Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/10); Insurance Information Institute.

Due to Weak Home Construction Forecast for 2010-2011.Also Affects Commercial Insurers with Construction Risk Exposure, Surety

Recovery in Capacity Utilization is a Positive Sign for Insurance Exposure

82%

Percent of Capacity Utilized (Manufacturing, Mining, Utilities)

H i

“Full Capacity”

78%

80%Hurricane

Katrina Recession began December 2007

74%

76%Manufacturing

capacity stood at 74.8% in July 2010,

above the June 2009 low of 68 2% but well

70%

72%

M h 2001The closer the economy is

low of 68.2% but well below the pre-crisis

peak of 80%+

66%

68%

70% March 2001-November 2001

recession

yto operating at “full

capacity,” the greater the demand for insurance

66%

Mar

01

Jun

01

Sep

01

Dec

01

Mar

02

Jun

02

Sep

02

Dec

02

Mar

03

Jun

03

Sep

03

Dec

03

Mar

04

Jun

04

Sep

04

Dec

04

Mar

05

Jun

05

Sep

05

Dec

05

Mar

06

Jun

06

Sep

06

Dec

06

Mar

07

Jun

07

Sep

07

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

Jun

10

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 64

Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilizing in 2010?

18 Traditional Unemployment Rate U 3 U 6 went from

January 2000 through August 2010, Seasonally Adjusted (%)

14

16

18 Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

U-6 went from 8.0% in March

2007 to 17.5% in Oct 2009; Stood at 16.7% in July

2010Recession U l t R i

12

14

Unemployment rate was 9.6% in

J l

2010Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

8

10 JulyUnemployment peaked at 10.1%

in Oct. 2009, highest monthly

4

6

Aug10

g est o t yrate since 1983.Peak rate in the last 30 years: 10.8% in Nov -

Dec 1982

65

2Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10

10 Dec 1982

Source: US Bureau of Labor Statistics; Insurance Information Institute.

Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)y ( p p )

8.5%10% Recessions in the 1970s and 1980s saw smaller exposure impacts

because of continued wage

The Dec. 2007 to mid-2009 recession

caused the largest

(Percent Change)

(All Post WWII Recessions)

3.7%4.6%

3.5%4%

6%

8% because of continued wage inflation, a factor not present

during the 2007-2009 recession

caused the largest impact on WC

exposure in 60 years

1 1%

1.1%2.1%

-0.5%2%

0%

2%

-4.4%

-2.0%-1.1%

-3.6%-6%

-4%

-2%

1948-1949

1953-1954

1957-1958

1960-1961

1969-1970

1973-1975

1980 1981-1982

1990-1991

2001 2007-2009

Recession Dates (Beginning/Ending Years)

*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).

Deflation: An Old AdversaryWh t Hi t T h UWhat History Teaches Us

About Deflationand the P-C Industry

All Ins rers that Are 100+ Year Old TodaAll Insurers that Are 100+ Year Old Today Survived Bouts of Inflation in the Past, but

Not in the Most Recent 75 or So Years

67

Not in the Most Recent 75 or So Years

Primary Causesand Major Bouts of Deflation

Deflation is:A falling general price level

Note: this is different fromNote: this is different from A fall in the rate of increase of the general price level;

This is called disinflationA fall in the prices of some items or category of items

F l d i dFor a prolonged period That is expected to continue indefinitely

Deflation results from some or all of:A surge in productivity, generally from technological innovationA steep and prolonged drop in the money supplyA steep and prolonged recession

Note: this is different from a fall in the rate of increase of the price levelNote: this is different from a fall in the rate of increase of the price level

Major US Bouts of Deflation1920 22

68

1920-22 1930-33

Sources: http://www-personal.umich.edu/~alandear/glossary/d.html; http://en.wikipedia.org/wiki/Deflation; I.I.I.

Broad Impact of Deflation

Deflation causes…Consumers to delay buying things

Th t t b th thi l t t l iThey expect to buy those things later at lower pricesA drop in the level of aggregate demand, from the delay in consumptionA transfer of wealth

From borrowers and holders of illiquid assetsTo savers/lenders and holders of liquid assets and currency

A drop in the level of business investmentFollowing the drop in aggregate demandSlack in capacity if the economy is in recessionIncreased likelihood of lower profits or losses as selling prices drop below costs

69Sources: http://en.wikipedia.org/wiki/Deflation; I.I.I.

1920-1950: Inflation, Deflation andthe P-C Industry’s Combined Ratio*y

110 26

Combined Ratio Price IndexCombined Ratio Price Index (1982-84 = 100)

105

22

24Declining CR Almost Completely a Result of Sharply

Lower Loss/LAE Ratio

95

100

18

20

9014

16

From 1930 to 1933 the Price Level Dropped 24%

85

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

12

pp

From Year-end 1929 Through 1932, the Industry’s Combined Ratio Rose from 96.3 t 104 9 th CPI D d B t f 1933 i t th 1950 th C bi d R ti

70

*From 1920-1934, stock companies onlySources: Best’s Aggregates & Averages; http://www.rateinflation.com/consumer-price-index/usa-historical-cpi.php?form=usacpi

to 104.9 as the CPI Dropped. But from 1933 into the 1950s, the Combined Ratio Remained Below 100 Even as Prices Slowly Rose, Then Shot Up after WWII.

1920-1950: Inflation, Deflation andP-C Industry Profitability*y y

15% 26

ROAS Price Index

From 1930 to 1933 From 1930-32 ROAS was below 1 2% b 1% i 1933 d

Combined Ratio Price Index (1982-84 = 100)

10%22

24

From 1930 to 1933 the Price Level Dropped 24%

1.2%, but was 5.1% in 1933 and 10% or higher in 1935-36

5%

18

20

0%

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

14

16

‐5% 12

The Significant Deflation from 1930-32 Punished the Industry’s ROAS, But an Improving Economy (and Slight Inflation) Helped Achieve

71

*stock companies onlySources: Best’s Aggregates & Averages; I.I.I.; ; http://www.rateinflation.com/consumer-price-index/usa-historical-cpi.php?form=usacpi

Improving Economy (and Slight Inflation) Helped AchieveROAS in Double Digits in 1935-36.

Deflation’s Effectson the P-C Insurance Industry

Lower Claim SeveritiesParticularly for property claims, severity drops for many items that insurers pay forthat insurers pay for

Rate contingency margins increaseAt least until rate construction reflects persistently declining claims se erit margins ill be higher than other ise d e toclaims severity, margins will be higher than otherwise due to high trend assumptions arising from use of historical data

Reserve Releases?Reserves may develop beneficially to become “redundant”

Lower Claim Frequency as Fewer Claims Reach Deductible, Retention Levelsete t o e e sLess Use of Reinsurance

Lower costs risks burn through their retentions less quickly reaching policy limits less quickly

72

quickly, reaching policy limits less quickly

#4Investment Performance WillInvestment Performance Will

Remain a Drag on Results

Investments Are a PrincipleS f S b P fi bili dSource of Subpar Profitability and

Will Force Insurers’ Hand on G ti U d iti P fit

73

Generating Underwriting Profits

Property/Casualty Insurance Industry Investment Gain: 1994–2010:H11

$64.0$70

($ Billions) 2009:H1 gain was $12.5B

$42.8$47.2

$52.3

$44.4 $45.3$48.9

$59.4$55.7

$39 0

$58.0$51.9

$56.9

$50

$60

$35.4 $36.0$31.7

$39.0

$25.8

$20

$30

$40

Investment gains in

$0

$10

$20 Investment gains in 2010 are on track to be their best since 2007

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:H1In 2008, Investment Gains Fell by 50% Due to Lower Yields and

Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income p g

Investment Gains Are Recovering So Far in 20101 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

P/C Insurer Net Realized Capital Gains, 1990-2010:H1

9 2 81 $18.

023.

02 16.2

1

3 04$20

($ Billions) Capital losses have turned to capital gains,

aiding earnings

$2.8

8$4

.81 $9

.89

$9.8

2

$10. $

$13 $

$6.6

3

$6.6

1$9

.13

$9.7

0$3

.52 $8

.92

$2.2

3$9.2

4$6

.00

$1.6

6$5

$10$15$20

-$1.

21

7.98

-$15-$10

-$5$0

-$7

$19.

81-$25-$20-$15

-$

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910:Q1

Realized Capital Losses Were the Primary Cause

75Sources: A.M. Best, ISO, Insurance Information Institute.

Realized Capital Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE

Treasury Yield Curves: Pre-Crisis (July 2007) vs. August 2010

4 82% 4.96% 5.04% 4.96% 4 82% 4 82% 4 88% 5.00% 4 93% 5.00% 5.19%6%

4.82% 4.96% 4.96% 4.82% 4.82% 4.88% 4.93%

3.80%3.52%4%

5%

Treasury yield curve is near its most depressed level in at

2.10%

2.70%

%2%

3%

most depressed level in at least 45 years. Investment

income is falling as a result

0.15% 0.16% 0.19% 0.26%0.52%

1.47%

0.78%1%

2%

August 2010 Yield Curve*Pre-Crisis (July 2007)

0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Pre Crisis (July 2007)

Stock Dividend Cuts Have Further Pressured Investment Income

76

Stock Dividend Cuts Have Further Pressured Investment Income

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

l Lines

s Autop cia

lAuto

PropCas Suret

yy Lin

esl ance

**

y

Persona

l L

Pvt Pas

s A

Pers Prop

Commerc

i

Comml A

u

Credit

Comm Pro

Comm C

a

Fidelity

/Su

Warranty

Surplus L

i

Med M

al

WC Reinsu

ran

.8%

.8%

.0% .9%

.1%

%

-3%-2%-1%0%

-1 -1 -2.

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

5.7%

-1 -2.

-3.1

%

-7%-6%-5%-4%

-5 -7.3%-8%

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

77

Underwriting and Pricing Discipline*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.

#5Shifting Legal Liability &Shifting Legal Liability &

Tort Environment

Is the Tort PendulumSSwinging Against Insurers?

78

Important Issues & Threats Facing Insurers: 2010–2015

Emerging Tort Threat

No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration

Erosion of recent reforms is a certaint (alread happening)Erosion of recent reforms is a certainty (already happening)

Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability

T t t i th ll t f i fl tiTorts twice the overall rate of inflation

Influence personal and commercial lines, esp. auto liability

Historically extremely costly to p/c insurance industry

Bottom Line: Tort “crisis” is on the horizon and will be

Leads to reserve deficiency, rate pressure

79Source: Insurance Information Institute

Bottom Line: Tort crisis is on the horizon and will be recognized as such by 2012–2014

Trial Bar Priorities

Reverse U.S. S p eme Supreme Court decisions on pleadingspleadings

Eliminate pre-dispute

Pass Foreign Manufactures L l

Confirm pro-trial lawyer j d pre dispute

arbitration

Erode federal

Legal Accountability Act

judges –“Federalize Madison County”preemption

Expand iti

Grant enforcement authorities to

County

Roll back existing securities

litigationauthorities to state AGs

existing legal reforms

Source: Institute for Legal Reform.

Trial Lawyer Poll: Which Areas Offer the Greatest Potential Benefit?

Top Categories Percentage

Environmental 14%

Insurance coverage 13%Insurance coverage 13%

Mortgage fraud 12%

Nursing home/seniors issues 11%

Bad-faith against insurance companies 10%Bad-faith against insurance companies 10%

41 different practice areas were included as categories41 different practice areas were included as categories

Source: Institute for Legal Reform poll, December 2009.

Cost of US Tort System ($ Billions)

Tort costs consumed 1.79% of GDP in 2008, down from 2.24% in 2003

3 46 $260

$261

247

252

255

$263 $273 $2

89.5

$300

$3501 44 48 15

956 56 $1

67$1

69 $180 $2

05 $23 $2 $ $ $2 $2 $2 $

$200

$250

$129

$130 $1

4$1

4$1

4 $1 $1 $1 $ $

$100

$150

Per capita “tort tax” was $? in

$0

$50

Per capita tort tax was $? in 2009, up from $838 in 2008

and $636 in 2000

$0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809

E10

E11

E

Source: Tillinghast-Towers Perrin, 2009 Update on US Tort Cost Trends.

Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical

$300 2.50%Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

$250

2.25%

To

y

$150

$200

stem

Cos

ts

2.00%

ort Costs as

$100Tort

Sys

1.75%

% of G

DP

2009–2010 Growth in Tort

$0

$50

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E1.50%

2009 2010 Growth in Tort Costs as % of GDP is Due in

Part to Shrinking GDP

83

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E

* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010

Business Leaders Ranking of Liability Systems in 2009*

Best States1 Delaware

Worst States41 New Mexico

New in 2009N l N t i1. Delaware

2. North Dakota

3 Nebraska

41. New Mexico

42. Florida

43. Montana

North DakotaMassachusettsSouth Dakota

Newly Notorious

New MexicoMontana3. Nebraska

4. Indiana

5. Iowa

43. Montana

44. Arkansas

45. IllinoisDrop-offs

Arkansas

Rising Above

6. Virginia

7. Utah

46. California

47. Alabama

MaineVermontKansas

TexasSouth CarolinaHawaii

8. Colorado

9. Massachusetts

48. Mississippi

49. LouisianaMidwest/West has mix of

10. South Dakota 50. West Virginia

Source: US Chamber of Commerce 2009 State Liability Systems Ranking Study; Insurance Info. Institute.

good and bad states.

The Nation’s Judicial Hellholes: 2010

West VirginiaIllinoisCook County

Watch List

California

New York City

AlabamaMadison County, ILJefferson County, MSTexas Gulf CoastTexas Gulf CoastRio Grande Valley, TX

Dishonorable Mention

AR Supreme CourtMN Supreme Court

S C

New JerseyAtlantic County (Atlantic City)

New MexicoAppellate

ND Supreme CourtPA GovernorMA Supreme Judicial Court

85Source: American Tort Reform Association; Insurance Information Institute

South Florida

Appellate CourtsSacramento County

#6Regulatory and Fiscal Threats

Bad Regulation is Still the Norm in Some States

New Taxes Can Help/Hurt

86

New Taxes Can Help/Hurt P-C Insurers

Financial Services Reform:What does it mean for insurers?

Systemic Risk and Resolution Authority

The Dodd Frank Wall Street Reform and Consumer Protection Act

Creates the Financial Stability Oversight Council and the Office of Financial Research

Imposes heightened federal regulation on large bank holding companies and “systemically risky” nonbank financial companies, including insurersy y y p g

Federal Insurance Office (FIO)Establishes the FIO (while maintaining state regulation of insurance) within the Department of Treasury headed by a Director appointed by the Secretary of TreasuryDepartment of Treasury, headed by a Director appointed by the Secretary of Treasury

FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis

CONCERN: FIO morphs into quasi/shadow or actual regulatorCONCERN: FIO morphs into quasi/shadow or actual regulator

Surplus Lines/ReinsuranceTitle V of the Dodd-Frank bill includes, as a separate subtitle, the Nonadmitted and

87

Reinsurance Reform Act (NRRA), which eliminates regulatory inefficiencies associated with surplus lines insurance and reinsurance

Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

2010 Property and Casualty InsuranceReport Card

ME

NH

ND

MN

WA

AL

VTMT

AK

B-B-

B

C -

AB

F NH

MA

CT

PA

NE

MN

MI

IL

IA

IDOR

NJRI C

DE

NY

MD

SD WI

INOH

NV

WY

= A= B= C= D

A-

B-

B

B-B-

B-

B- C-A

B+B+

BB

C+

C+

C

D+F

WVVA

NC

OK

IL

AZSC

TN

ARNM

KYMOKS

IN

CA

NV

UTCO

 D= F= NG

A- A-

B-B-

B

B-

B-

B-C-

C-

D-D-

AB

B

C+

D+D+D

Source: James Madison Institute, February 2008.

LATX

HI GAAL

FL

MS

NM

B- B-B-C-

C-A B+ BNG

NGN t G d d Di t i t f C l bi

Source: Heartland Institute,  May 2010

D FNot Graded: District of ColumbiaMississippiLouisiana

Potential Impacts of Current Federal Tax Proposals on P/C Insurance Industry

Proposal Potential P/C Insurance Industry Impact P/C Lines that Benefit

100% Expensing of N I t t i

Could produce a 5-10% surge in i t t i h i l l t d

•Commercial PropertyNew Investment in Plant & Equipment in 2011 and Continuation of Bonus Depreciation

investment in physical plant and equipment in 2011 which will need to be insured immediately. Although the proposal only “steals” investment from the future this provides a permanent

•Construction•Commercial Liability•Commercial AutoSpecialty LinesBonus Depreciation the future, this provides a permanent

benefit to commercial insurers since insurance coverage must be purchased sooner and be maintained. New construction activity boosts WC and

•Specialty Lines•Excess & Surplus•Workers Comp•Suretyconstruction activity boosts WC and

surety.Surety

•ReinsuranceReinstate 36% and 39.6% Rates for High Income Taxpayers

Potential damage to new/small business formation and growth. Weakness in these areas has hurt p/c insurance

•None

Income Taxpayers >$250K

these areas has hurt p/c insurance exposure and tax hikes could depress insurance exposure in this segment

Continue 2001 and 2003 T C t f All

Should produce an environment that b fi i l t i ll

•Small Business

Sources: Proposals from Tax Policy Center; P/C discussion is Insurance Information Institute research.

2003 Tax Cuts for All Taxpayers

more beneficial to recovery in small business segment & associate insurance exposures

Commercial Lines•Personal Lines

Potential Impacts of Current Federal Tax Proposals on P/C Insurance Industry (cont’d)

Proposal Potential P/C Insurance Industry Impact P/C Lines that Benefit

Impose 20% Tax The increase in dividends and capital gains •NoneRate for Capital Gains and Dividends for High Income

taxes makes private investment less attractive. Under current law the rate is 15%. Additional taxes on investment would presumably result in a marginal but

Taxpayers negative impact on p/c insurance exposure.Payroll Tax Holiday

Reducing the cost of hiring workers would theoretically reduce the cost of employment and should spark hiring,

•Workers comp

e p oy e t a d s ou d spa g,increasing overall employment and payrolls

Limit Value of Itemized Deductions to

Will have an unambiguously negative impact on charitable giving. Nonprofit sector will be negatively impacted

•None (Commercial lines products Designed for NPOsDeductions to

28% for High Income Taxpayers

sector will be negatively impacted. Designed for NPOs would be negatively impacted; This is a large p/c market.)

Sources: Proposals (except Payroll Tax Holiday) from Tax Policy Center; P/C discussion is Insurance Information Institute research.

#7

Catastrophic Loss –An Omnipresent ChallengeAn Omnipresent Challenge

Whil R M j CAT C KillWhile Rare, Major CATs Can Kill Insurance Companies

91

US Insured Catastrophe Losses

$100

.0$120$100 Billion CAT Year is

Coming Eventually

First Half 2010

($ Billions)

$61.

9

$

$60

$80

$100 First Half 2010 CAT Losses

Were Up $1.9B or 32% compared to

avg. H1 losses over the past 10

2000s: A Decade of Disaster2000s: $193B (up 117%)

1990s: $89B

3 4 0.1

3

$26.

5

9 12.9 $2

7.5

2 7

$27.

1

0.6

95 $22.

9

5 $16.

9

$20

$40

$60 over the past 10 years

$8.3

$7.4

$2.6 $1

0

$8.3

$4.6

$5. 9 $1 $9.

$6.7 $10

$7.9

$7.5

$2.7

$4.7

$5.5 $

$0

$20

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*20??

2010 CAT Losses Are Running Below 2009, So FarFigures Do Not Include an Estimate of Deepwater Horizon Loss

92

*Through June 30, 2010.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2009

810 Avg. CAT Loss Component of the

Combined Ratio Points

8.8

.9

8.1

789

Component of theCombined Ratio

by Decade

1960s: 1.04

3.0

35

3.3

2.8 3.

62.

9

5.4

3.3

3.3

.7

5.0

.6

3.6

3456 1970s: 0.85

1980s: 1.31 1990s: 3.39 2000s: 3.52

0.4 1.

20.

4 0.8 1.

30.

3 0.4 0.

7 1.5

1.0

0.4

0.4 0.

71.

81.

10.

6 1.4 2.

01.

3 2.0

0.5

0.5 0.7 1.

22.

1 2.3 2

1.0

21.

6

1.6

21.

62 .

0.9

0.1

1.1

1.1

0.8

0123

0

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

The Catastrophe Loss Component of Private Insurer Losses Has I d Sh l i R t D d

93

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.

Increased Sharply in Recent Decades

Global Natural Catastrophes: January – June 2010

6

2

3

6

8 911 10

12

1The 12 Jan. Haiti

quake killed 225,500 people, caused $8B+ in economic damage, but little in the way of

insured losses

4

5

7Severe winter weather in the

Eastern US produced insured l f d d t l t

insured losses

Chilean earthquake (mag. 8.8) on 27 Feb. produced at least $4 billion in insured losses, $20

Winter Storm Xynthia produced

at least $2B in insured losses

and $4B in

Geophysical events(earthquake, tsunami, volcanic activity)

Hydrological events(flood, mass movement)

Global natural catastrophes

losses of produced at least $1B in insured losses and $2B

in economic losses

,billion in economic losses. Most

costly insurance event in 2010economic losses

( q , , y)Meteorological events (storm)

( , )Climatological events(extreme temperature, drought, wildfire)

Selection of significant natural catastrophes (see table)

© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 16 June 2010

Largest International Oil Well Blowouts by Volume, as of July 12, 2010*

Date Well Location Bbl Spilled

April 20 2010-July 12 2010

Deepwater Horizon Gulf of Mexico, USA est. 4,900,000July 12, 2010June 1979-April 1980

Ixtoc I Bahia del Campeche, Mexico 3,300,000

October 1986 Abkatun 91 Bahia del Campeche, Mexico 247,000

April 1977 Ekofisk Bravo North Sea, Norway 202,381

January 1980 Funiwa 5 Forcados, Nigeria 200,000

October 1980 Hasbah 6 Gulf Saudi Arabia 105 000October 1980 Hasbah 6 Gulf, Saudi Arabia 105,000

December 1971 Iran Marine International Gulf, Iran 100,000

January 1969 Alpha Well 21 Platform A Pacific, CA, USA 100,000

March 1970 Main Pass Block 41 Platform C

Gulf of Mexico 65,000

October 1987 Yum II/Zapoteca Bahia del Campeche, Mexico 58,643

December 1970 South Timbalier B-26 Gulf of Mexico USA 53 095December 1970 South Timbalier B 26 Gulf of Mexico, USA 53,095

*Date well was capped. Federal government estimate as of August 2, 2010. Does not include offset for any amounts recovered.Source: American Petroleum Institute (API), 09/18/2009; http://www.api.org/ehs/water/spills/upload/356-Final.pdf and updates from the Insurance Information Institute.

Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)

250

Fi t H lf 2010

Number of events in first half of 2010 is close to the annual totals from five of past ten years.

u be o e ts ( ua ota s 980 009 s st a 0 0)

200

First Half 201095 Events

100

150

Num

ber

50

100

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Geophysical ClimatologicalMeteorological (storm)Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Source: MR NatCatSERVICE 96© 2010 Munich Re

U.S. Thunderstorm Loss TrendsAnnual Totals 1980 – 2009 vs. First Half 2010

Thunderstorm losses have quadrupled since 1980.

First Half 2010 $3.0 Bn

Source: Property Claims Service, MR NatCatSERVICE 97© 2010 Munich Re

U.S. Winter Storm Loss TrendsAnnual totals 1980 – 2009 vs. First Half 2010

Average annual winter storm losses have increased over 50% since 1980.

Severe winter storms in

First Half 2010

early 2010 caused major damage to energy

infrastructure

$2.4 Bn

Source: Property Claims Service, MR NatCatSERVICE 98© 2010 Munich Re

U.S. Significant Natural Catastrophes, 1950 – 2009Number of Events ($1+ Bill economic loss and/or 50+ fatalities)

There were 7 Significant Natural Catastrophes in

Sthe United States in 2009

Sources: MR NatCatSERVICE

Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*($ Billions)

$

Texas

$31.20 , 10%

$33.60 , 11%

Louisiana

$176 , 60% $57 10

Rest of US60% $57.10 ,

19%Florida

Florida Accounted for 19% of All US Insured CAT Losses

100

* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

from 1980-2008: $57.1B out of $297.9B

Top 12 Most Costly Disastersin US History(Insured Losses, 2009, $ Billions)

$45 3$50 Hurricane Katrina Remains, By Far, the

$23 8

$45.3

$30$35$40$45$50 Hurricane Katrina Remains, By Far, the

Most Expensive Insurance Event in US and World History

$11.3 $12.5$18.2

$22.8 $23.8

$8.5$8.1$7.3$6.2$5.2$4 2$10$15$20$25$

$5.2$4.2

$0$5

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

(2001)

8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;

8 f th T 12 Di t Aff t d FL

101Sources: PCS; Insurance Information Institute inflation adjustments.

8 of the Top 12 Disasters Affected FL

Share of Losses Paid by Reinsurers for Major Catastrophic Events

70%

Reinsurance plays a very large role in claims payouts

associated with major60%

45%50%

60%

associated with major catastrophes

30%25%

45%

33%30%

40%

25%20%

10%

20%

30%

0%

10%

HurricaneHugo (1989)

HurricaneAndrew (1992)

Sept. 11Terrorist

2004Hurricane

2005Hurricane

2008 TexasHurricaneHugo (1989) Andrew (1992) Terrorist

Attack (2001)Hurricane

SeasonHurricane

SeasonHurricane

Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute.

Total Value of Insured Coastal Exposure

(2007, $ Billions)

$2,458.6Florida

$635.5$772.8

$895.1$2,378.9

$ ,New York

TexasMassachusetts

New Jersey $159B Insured C t l

$224.4$191.9

$158.8$146 9

$479.9ConnecticutLouisiana

S. CarolinaVirginia

Maine

Coastal Exposure in

Virginia in 2007

I 2007 Fl id Still R k d th #1 M t$146.9$132.8

$92.5$85.6$60.6

MaineNorth Carolina

AlabamaGeorgia

Delaware

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B

in insured coastal exposure$60.6$55.7$51.8$54.1

$14.9

DelawareNew Hampshire

MississippiRhode Island

Maryland

in insured coastal exposure

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

103Source: AIR Worldwide

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

US Residual Market Exposure to Loss

$900

Katrina, Rita, and Wilma

($ Billions)

$656.7

$771.9$696.4

$600

$700

$800

$900

4 Florida Hurricanes

$372.3$430.5 $419.5

$292.0$281 8$400

$500

$600Hurricane Andrew

$292.0$244.2$221.3

$281.8

$150.0

$54.7$100

$200

$300

$01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in the Resid al Market (FAIR & Beach/Windstorm) Plans Has S rged from

104Source: PIPSO; Insurance Information Institute

the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B in 1990 to $696.4B in 2008

Insurance Information Institute Online:

www iii orgwww.iii.org

Thank you for your timed tt ti !and your attention!

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