The Financial Crisis & the P/C Insurance Industry

Challenges Amid the Economic Storm

Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ bobh@iii.org ♦ www.iii.org

Casualty Actuaries of New EnglanfSouthbridge, MA

September 26, 2008Download at:

www.iii.org/media/presentations/CANE

Presentation Outline• Federal Government Economic Bailout: Plan Summary, Insurer Implications• AIG’s Loan from the Fed: Structure of Agreement• Regulatory Aftershock: The Coming Regulatory Tsunami in Financial Services• Weakening Economy: Insurance Impacts & Implications

Exposure Impacts: Commercial InsuranceInflation Threat Looming for Insurers?

• Treasury “Blueprint” for Insurance Regulatory Modernization• Profitability• Underwriting Trends• Excess & Surplus Market Trends• Premium Growth• Capacity/Capital• Investment Overview• Catastrophic Loss• Shifting Legal Liability, Tort & Political Environment

Q&A

Troubled AssetRelief Program

(a.k.a. “The Bailout”)

Plan Details &Insurer Implications

Federal Government FinancialServices Rescue Package

Source: Insurance Information Institute research.

THE SOLUTION: A 5-POINT PLAN1. Mortgage Debt Purchases: Up to $700 billion in

Mortgage Debt to Purchased by Feds$250B Available Immediately; Congress Approves Remainder in $100B Increments as Needed

Eliminates “blank check” criticism of Treasury PlanLimits on CEO Compensation in Participating FirmsPricing: Debt Sold to Feds via Reverse Auction

• Reverse auction is one in which sellers bid lowest price it willaccept from the government (i.e., rather a traditional auction in which the highest bid from buyer wins). Helps ensure that the Feds (taxpayer) does not overpay for questionable debt

• Will be sold in $10 billion increments• Amassed portfolios will be run by outside asset managers in

amounts ranging up to $50 billion2. Fannie/Freddie Will Increase Mortgage Buying

• Feds step-up buying MBS in open market

Federal Government FinancialServices Rescue Package (cont’d)

Source: Insurance Info. Inst. research.

3. Money Market Fund Stabilization: Commercial Paper Market Froze After Mass Redemptions and Lending Fears (“Breaking the Buck”)

Treasury will establish a 1-year temp. guaranty program for the money-fund industry for deposits held as of Sept. 19Will insure retail and institutional funds (but not those investing exclusively in municipal and government debt)Funds must pay a fee to participate in the programProgram financed with as much as $50 billion from the

Treasury's Exchange Stabilization Fund, which was created in 1934 for exchange rate stabilizationThe Federal Reserve will also essentially lend as much as $230 billion to the industry, via banks, to be used against their illiquid asset-backed holdings

4. 10-Day Ban on Short-Selling 829 Financial Stocks• Most major public insurers on list

Federal Government FinancialServices Rescue Package (cont’d)

Source: Insurance Info. Inst. research.

5. Conversion of Last 2 Remaining Investment Banks (Goldman Sachs and Morgan Stanley) to Bank Holding Companies

Recognition that Wall Street as we have known it for decades is deadHigh leverage investment bank model no longer viable in current market environmentNew entities will be subject to stringent federal regulation in exchange for more access to federal dollars/liquidity facilitiesCapital and liquidity requirements will be greatly enhancedReduced leverage means new entities will be less profitable

Leverage Ratios for InvestmentBanks and Traditional Banks*

33.0

24.3

23.3

21.5

15.4

13.3

12.4

10.8

10.5

44.0

0 10 20 30 40 50

Merrill Lynch

Morgan Stanley

Goldman Sachs

Lehman Brothers

Fannie Mae

Citibank

JP Morgan Chase

Wells Fargo

Wachovia

Bank of America

*Based on data for last quarter reported (May or June 2008).Source: “The Perils of Leverage,” North Coast Investment Research, Sept. 15, 2008

Investment bank leverage ratios were extremely high. Lehman filed for bankruptcy 9/15Merrill merged with JP Morgan

ChaseGoldman and Morgan converted to

bank holding companies

How Does Leverage Work?• Example of Non-Leverage Transaction

Buy 1 share of stock for $100Price of share rises to $110RETURN = $10 or 10%

• Leveraged TransactionInvest $10 and borrow $90Stock rises to $110RETURN = $10 or 100% (less borrowing costs)

• This Pleasant Arithmetic Works Equally Unpleasantly in the Opposite Direction

• Declining asset values, seizing of credit markets made such borrowing impossible and the operating model of investment banks nonviable

Source: Insurance Information Institute.

Investment banks and others juiced their returns

by making big, bad bets with (mostly) borrowed

money on mortgage securities

Top 10 Largest Bank Failures

$12.2 $13.0 $15.1 $18.5 $21.7 $30.2 $32.0 $32.5 $40.0

$307.0

$0

$50

$100

$150

$200

$250

$300

$350

Hom

efed

Ban

k(1

992,

San

Die

go)

Firs

t City

Ban

corp

orat

ion

(198

8, H

oust

on)

Gib

ralta

rSa

ving

s (19

89,

Sim

i Val

ley)

Mco

rp (1

989,

Dal

las)

Ban

k of

New

Eng

land

(199

1,B

osto

n)

Am

eric

anSa

ving

s & L

oan

(198

8,St

ockt

on, C

A)

Indy

Mac

(200

8,Pa

sade

na)

Firs

t Rep

ublic

(198

8, D

alla

s)

Con

tinen

tal

Illin

ois (

1984

,C

hica

go)

Was

hing

ton

Mut

ual (

2008

,Se

attle

)

$ B

illio

ns

Source: FDIC; Insurance Information Institute research.

Resurgent bank failures are

symptomatic of weakness in the financial system

Failure of IndyMacwas the 4th largest in

history

Sept. 25 failure of Washington

Mutual was bar far the largest in

US history. Sold to JP Morgan Chase by govt. for $1.9B

plus WaMu’s loans and deposits

Government Rescue Package of AIG

Motivation &Structural Details

AIG Rescue Package by the Fed• AIG suffered a liquidity crisis due to large positions, mostly

associated with Credit Default Swaps, related to mortgage debt through its AIG Financial Products division

• The losses at AIGFP brought AIG’s holding company to the brink of bankruptcy by Sept. 16 (AIG has 245 divisions, 71 are USdomiciled insurer)

Efforts to create large credit pool via private banks failed• AIG’s separately regulated insurance subsidiaries were solvent at

all times and met local capital requirements in all jurisdictions*• Federal Reserve Agreed to Lend AIG $85 Billion to Prevent

Bankruptcy, of Which about $30B has been borrowed (as of 9/22)2-year term @ 850 bps over LIBOR (about 11 to 11.5%); 8% unborrowedFed gets 79.9% stake in AIG (temporary nationalization)CEO Robert Willumstad replaced by former Allstate CEO Edward Liddy

• Proceeds from sale of non-core assets will be used to repay loan• New CEO says most insurance divisions are “core”Source: AIG press releases and regulator statements.

Rational for Federal Reserve’s Rescue Package of AIG

• “Too Big to Fail” Doctrine Applied to Insurance for First Time

• AIG is the Largest Insurer in the US and One of the Top 5 Globally: Internationally Disruptive

Disorderly unwinding of CDS positions (which guarantee large amounts of debt) would have had large negative consequences on already fragile credit markets

• Fear Was that Generally Healthy Insurance Operations Affecting Millions of People and Businesses Would Have to Be Sold at Fire Sale Prices

• Loan Allowed Time for an Orderly Sale of Assets and a Minimal Disruption on Credit Markets while also Protecting Policyholders

• New CEO says most insurance divisions are “core”Source: Insurance Information Institute research.

Leading U.S. Writers of P/C Insurance By DWP, 2007 ($ Billions)1

1Before reinsurance transactions, excluding state funds.

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

$49.4

$37.7

$29.1 $27.7$22.2 $20.2

$16.1 $15.4 $14.0 $11.5

$0

$10

$20

$30

$40

$50

State FarmIL Group

AIG ZurichInsurance

Group

AllstateInsurance

Group

TravelersGroup

LibertyMutual

InsuranceGroup

NationwideGroup

BerkshireHathawayIns. Group

ProgressiveGroup

HartfordFire &

CasualtyGroup

Direct Written Premiums (DWP) $ Billions

AIG is the second largest p/c insurer in the US and the

largest commercial insurer (11% markets share)

Leading U.S. Writers of Life Insurance By DWP, 2007 ($ Billions)1

1Premium and annuity totals, before reinsurance transactions, excluding state funds.

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

$53.0 $51.9

$42.3$38.0

$32.4$29.8 $29.7

$22.7 $21.9 $21.5

$0

$10

$20

$30

$40

$50

$60

AIG MetropolitanGroup

Prudential ofAmerica

ING AmericaInsuranceHoldingGroup

Hartford Fire& Casualty

Group

John HancockGroup

Aegon USAHoldingGroup

PrincipalFinancial

Group

New YorkLife Group

LincolnNational

Direct Written Premiums (DWP) $ Billions

AFTERSHOCK: Regulatory Response

Could Be HarshAll Financial Segments

Including InsurersWill Be Impacted

Incurred Liabilities of the Federal Government Due to Financial Crisis

$700

$200$85

$30$0

$100$200$300$400$500$600$700$800

MortgageSecurityBuyouts

Fannie/FreddieTakeover

AIG Loan Bear StearnsIlliquid AssetAssumption

$ B

illio

ns

*As of September 22, 2008. Amounts reflect maximum losses under terms at time of announcement.Source: Wall Street Journal, 9/22/08, p. A8; Insurance Information Institute research.

The Fed (and hence taxpayer) are now exposed to as much as

$1.015 trillion in new debt tied to the current financial crisis*

$ Billions

Liquidity Enhancements Implemented by Fed Due to Crisis

• Lowered Interest Rates for Direct Loans to BanksFederal funds rate cut from 5.5% in mid-2007 to 2.0% now

• Injected Funds Into Money Markets• Coordinated Exchange Transactions w/Foreign Central

Banks• Created New Auction and Other Lending Programs for

Banks• Started Direct Lending to Investment Banks for the First

Time Ever• Authorized Short-Term Lending to Fannie/Freddie,

Backstopping a Treasury Credit LineSource: Wall Street Journal, 9/22/08, p. A8; Insurance Information Institute research.

From Hubris to the Humblingof American Capitalism?

“Government is not the solution to our problem, government is the problem.”

--Ronald Reagan, from his first inaugural address, January 20, 1981

From Hubris to the Humblingof American Capitalism?

--President George W. Bush, Sept. 19, 2008, on the $700 billion financial institution bailout

“Given the precarious state oftoday’s financial markets, andtheir vital importance to the dailylives of the American people,Government intervention is notOnly warranted, it is essential.”

Post-Crunch: Fundamental Issues To Be Examined Globally

Source: Ins. Info. Inst.

• Failure of Risk Management, Control & Supervision at Financial Institutions Worldwide: Global Impact

Colossal failure of risk management (and regulation)Implications for Enterprise Risk Management (ERM)?Misalignment of management financial incentives

• Focus Will Be on Risk Controls: Implies More Stringent Capital & Liquidity Requirements

Data reporting requirements also likely to be expandedNon-Depository Financial Institutions in for major regulationChanges likely under US and European regulatory regimesWill new regulations be globally consistent? Can overreactions be avoided?

• Accounting RulesProblems arose under FAS, IASAsset Valuation, including Mark-to-MarketStructured Finance & Complex Derivatives

• Ratings on Financial InstrumentsNew approaches to reflect type of asset, nature of risk

Post-Crunch: Fundamental Regulatory Issues & Insurance

Source: Insurance Information Institute

• Federal Encroachment on Regulation of Insurance $85 billion AIG loan makes increased federal involvement in insurance regulation a certaintyStates will lose some of their regulatory authorityWhat Feds get/what states lose is unclear

• Removing the “O” from “OFC”?Treasury in March proposed moving solvency and consumer protection authority to a federal “Office of National Insurance”Moving toward more universal approach for regulation of financial services, perhaps under Fed/TreasuryIs European (e.g., FSA) approach in store?Treasury proposed assuming solvency and consumer protection roles while also eliminating rate regulationExpect battle over federal regulatory role to continue to be a divisive issue within the industryStates will fight to maximize influence, arguing that segments of the financial services industry under their control had the least problems

Summary of Treasury “Blueprint”for

Financial Services Modernization

Impacts on Insurers

Treasury Regulatory Recommendations Affecting Insurers

Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.

• Establishment of an Optional Federal Charter (OFC)Would provide system for federal chartering, licensing, regulation and supervision of insurers, reinsurer and producers (agents & brokers)

• OFC Would Incorporate Several Regulatory ConceptsEnsure safety and soundnessEnhance competition in national and international marketsIncrease efficiency through elimination of price controls, promote more rapid technological change, encourage product innovation, reduceregulatory costs and provide consumer protection

• Establishment of Office of National Insurance (ONI)Department within Treasury to regulate insurance pursuant to OFCHeaded by Commissioner of National InsuranceCommissioner has regulatory, supervisory, enforcement and rehabilitative powers to oversee organization, incorporation, operation, regulation of national insurers and national agencies

• UPDATE: HR 5840 Introduced April 17 Would Establish Office of Insurance Information (OII)

Would create industry “voice” within Treasury

Government Takeover of Fannie Mae &

Freddie MacBeneficial for Insurers

Treasury’s Fannie/Freddie Rescue Package Should Help Residential Property Insurers

Source: Wall Street Journal Online, 9/7/08; Insurance Information Institute.

THE PROBLEM• Fannie Mae/ Freddie Mac borrow huge sums to buy

mortgages from mortgage lenders and do so with an implicit government guarantee that should these mortgage sour the government will come to the rescue

• Together the entities own or guarantee $5.4 trillion in mortgages (about 50% of US total)

• Collectively Fan/Fred have lost about $14 billion over the past 4 quarters and their capital is nearly depleted

• Loss of confidence in Fannie/Freddie is primary reason why Fed’s slashing of rates since has not lowered interest rates (esp. on mortgages)

Treasury’s Fannie/Freddie Rescue Package Should Help Residential Property Insurers

Source: Federal Housing Finance Agency; Wall Street Journal Online, 9/7/08; Insurance Information Institute.

THE SOLUTION: A 4-POINT PLAN1. Government seizes Fannie Mae/ Freddie Mac and places

them in “conservatorship” under their regulator the Federal Housing Finance Agency (FHFA)

Current CEOs ousted. Fannie will be run by Herb Allison (CEO TIAA-CREF) and Freddie by David Moffet (CEO US Bancorp)

2. Treasury purchases senior preferred stock; Govt. gains 79.9% ownership. Could buy up to $100 billion per firm.

3. Treasury will buy mortgage backed securities (MBS) in the open market issued by Fan/Fred in attempt to lower borrowing costs ($ unspecified)

4. Treasury establishing new lending facilities for Fan/FredTotal federal involvement could amount to $200 billion

0.0

1.02.0

3.0

4.05.0

6.0

7.08.0

9.0

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

January 2000 through August 2008

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

Fed slashes interest rates by 325 basis points (from 5.25% to 2.00

from July 2007 to mid-2008)

Credit Crisis: Fed Interest Rate Cuts Failed to Reduce Mortgage Rates

Mortgage FF spread increased to 4.5% from

about 1% pre-crisis

Interest rate on conventional mortgages remained high

despite Fed rate cuts

Aug

-08

Why Treasury’s Fannie/Freddie Rescue Package Should Help Residential Property Insurers

Source: Insurance Information Institute.

• Crash in housing market is already costing home insurers alone about $1 billion annually in lost premium growth based on 50%+ decline in new home construction (about 1 million fewer homes per year)

Plan should lower interest rates, accelerate clearing away existing inventory and stimulate new construction (don’t expect big gains until 2010 at earliest)Mortgage rates fell ½ point day after announcement

• Home in or headed for foreclosure are likely to suffer worse than average loss experience (neglect, abuse, abandonment, vandalism, theft…). Plan may bring interest rate relief to people who’s mortgages will reset over the next several years, averting some foreclosures.

• Insurers hold tens of billion in Fan/Fred MBS debt as well as shares in both companies. Both survive.

THE ECONOMIC STORM

What a Weakening Economy & The Threat of Inflation Mean

for the Insurance Industry

3.7%

0.8%

1.6%

2.5%

3.6%

3.1%2.9%

2.2%

1.6% 1.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Real Annual GDP Growth, 2000-2009F

March 2001-November

2001 recession Recession?

* Red bars are actual; Yellow bars are forecastsSources: US Department of Commerce (actual), Blue Economic Indicators 8/08 (forecasts).

3.7%

0.8%

1.6%

2.5%

3.6%

3.1%

2.9%

0.1%

4.8%

4.8%

0.9%

1.9%

1.2%

0.3%

1.1%

2.0% 2.

5% 2.7%

-0.2%-1%

0%

1%

2%

3%

4%

5%

6%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

Real GDP Growth*

*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/08; Insurance Information Institute.

Economic toll of credit crunch, labor market contraction and high

energy prices is growing, though no official recession declared

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

January 2000 through August 2008

Unemployment will likely continue to approach 6% during this cycle, impacting payroll sensitive p/c and non-life exposures

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

August 2008 unemployment jumped to 6.1%, its highest

level since Sept. 2003

Unemployment Rate:On the Rise

Average unemployment rate since 2000 is 5.0%

Previous Peak: 6.3% in June 2003

Trough: 4.4% in March 2007

Aug

-08

U.S. Unemployment Rate,(2007:Q1 to 2009:Q4F)*

4.7%4.6%

4.7%

4.5%4.5% 4.5%4.6%

4.8%4.9%

5.4%

5.7%

5.9%

6.1%6.1% 6.1% 6.1%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4

* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/08); Insurance Info. Inst.

Rising unemployment will erode payrolls and workers

comp’s exposure base

Total Private Employment* Grew by25½ Million Workers from 1991 to 2008

89.7

89.9 91

.7 94.9 97

.7 100.

1 103.

0 106.

0 108.

6

108.

8

108.

2

115.

4

115.

2

110.

9 114.

0

111.

8

111.

0

109.

8

80

90

100

110

120

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

*seasonally adjusted at mid-yearSource: U.S. Bureau of Labor Statistics, at http://data.bls.gov/cgi-bin/surveymost

Millions

The US economy added 25.5 million jobs between 1991 and

2008, but job growth has recently stagnated, impacted payrolls and the workers comp exposure base

Average Weekly Real Earnings in Private Employment Were Flat from 1999 to 2008$2

59.2

$257

.9

$258

.3

$260

.1

$258

.0

$260

.7 $264

.3

$271

.5 $276

.1 $279

.4

$279

.3

$281

.2

$276

.1

$275

.1

$277

.3

$276

.9

$275

.0

$276

.0

$250

$260

$270

$280

$290

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

Sources: U.S. Bureau of Labor Statistics; I.I.I.

(at mid-year) Constant 1982 dollars

Virtually all of the real wage growth occurred between 1995 and 1999 and has now stagnated

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*$0

$5

$10

$15

$20

$25

$30

$35

$40

$45Wage & SalaryDisbursementsWC NPW

*Average of quarterly figures.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books

Wage & Salary Disbursements (Payroll Base) vs. Workers Comp

Net Written Premiums

7/90-3/91

Shaded areas indicate recessions

3/01-11/01

Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions

Weakening wage and salary growth is

expected to cause a deceleration in workers comp

exposure growth

p PreliminarySource: US Department of Labor, Bureau of Labor Statistics (BLS), National Bureau of Economic Research; NCCI Frequency and Severity Analysis

Workplace Injury Incidence RatesDeclined in Last 4 Economic Downturns

0

5

10

15

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007p

Inci

denc

e R

ates

per

100

FTE

Wor

ker

(BLS

)

0

1250

2500

3750

Claim

s per 100,000 Workers

(NC

CI)

RecessionsManufacturing Industry Injuries and Illnesses per 100 Full-Time WorkersPrivate Industry Injuries and Illnesses per 100 Full-Time WorkersNCCI Lost-Time Claims per 100,000 Workers

New Private Housing Starts,1990-2014F (Millions of Units)

2.07

1.80

1.36

0.97

0.97 1.

05

1.15

1.42

1.56

1.28

1.48

1.35

1.46

1.29

1.20

1.01

1.19

1.47

1.62 1.64

1.57 1.

60

1.71

1.85

1.96

0.91.01.11.21.31.41.51.61.71.81.92.02.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F 09F 10F11F 12F 13F 14F

Exposure growth forecast for HO insurers is dim for 2008/09

Impacts also for comml. insurers with construction risk exposure

New home starts plunged 34% from 2005-2007;

Drop through 2008 trough is 53% (est.)—a

net annual decline of 1.1 million units

I.I.I. estimates that each incremental 100,000 decline in housing starts costs

home insurers $87.5 million in new exposure (gross premium). The net

exposure loss in 2008 vs. 2005 is estimated at $963 million.

Source: US Department of Commerce; Blue Chip Economic Indicators for 2008/09, Aug. 2008.Insurance Information Institute for years 2010-2014.

16.916.916.916.6

17.117.5

17.817.4

16.516.1

14.114.4

14.8

15.4

16.0

16.7

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07F 08F 09F 10F 11F 12F 13F 14F

Weakening economy, credit crunch and high gas prices are hurting

auto sales

New auto/light trick sales are expected to experience a net

drop of 2.8 million units annually by 2008 compared

with 2005, a decline of 16.6%

Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth

than problems in the housing market will on home insurers

Auto/Light Truck Sales,1999-2014F (Millions of Units)

Source: US Department of Commerce; Blue Chip Economic Indicators for 2008/09, Aug. 2008.Insurance Information Institute for years 2010-2014.

$1,0

82

$1,1

44

$1,2

26

$1,3

07

$1,3

68

$1,4

06

$1,4

13

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

03 04 05 06 07 08F 09F0%

1%

2%

3%

4%

5%

6%

7%

8%

% C

hang

e

Nonresidential Fixed Investment% Change Nonresidential Fixed Investment

Nonresidential Fixed Investment,* 2003 – 2009F (Billions of 2000 $)

Sharp dip in business investment growth in 2007-2009 will slow

commercial exposure growth

*Nonresidential fixed investment consists of structures, equipment and software.Sources: US Bureau of Economic Analysis (Historical), Blue Chip Economic Indicators (7/08) for forecasts.

Non

resi

dent

ial F

ixed

Inve

stm

ent (

$ B

ill)

Total Industrial Production,(2007:Q1 to 2009:Q4F)

1.5%

3.2% 3.6%

0.3%

-0.3%

-2.7%

0.2%

1.1%1.7%

2.3%2.7%2.8%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/08); Insurance Info. Inst.

Industrial production shrank during Q1 2008 and is expected to shrink again in Q2, growing very

slowly thereafter

Industrial production affects exposure both directly and indirectly

0%

3%

6%

9%

12%

15%

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

Home Mortgage Consumer Credit Business Corporate

Percent Change in Debt Growth(Quarterly since 2004:Q1, at Annualized Rate)

Source: Federal Reserve Board, at http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf

Deflation of housing bubble is very evident

Corporate deleveraging

Consumer desperation?

5.2%

-0.9

%-7

.4%

-6.5

%-1

.5%

1.8%

4.3%

18.6

% 20.3

%5.

8%0.

3%-1

.6%

-1.0

%-1

.8%

-1.0

%3.

1%1.

1%0.

8%0.

4%0.

6%-0

.4%

-0.3

%1.

6%5.

6%13

.7%

7.7%

1.2%

-2.9

% -0.5

%-3

.4%

-4.9

%

-10%

-5%

0%

5%

10%

15%

20%

25%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 08F

Rea

l NW

P G

row

th

-4%

-2%

0%

2%

4%

6%

8%

Real

GDP

Gro

wth

Real NWP Growth Real GDP

Real GDP Growth vs. Real P/C Premium Growth: Modest Association

P/C insurance industry’s growth is influenced modestly by growth

in the overall economy

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 8/08; Insurance Information Inst.

Favored Industry Groups for Insurer Exposure Growth

•Fossil, Solar, Wind, Bio-Fuels, Hydro & OtherEnergy (incl. Alt.)

•Strong global demand, •Supplies remain tight…but beware of bubbles•Significant investments in R&D, plant & equip required

Natural Resources & Commodities

•Weak dollar, globalization persistExport Driven

•Consumer Staple Recession Resistant•Grain and land prices high due to global demand, weak dollar (exports)•Acreage Growing Farm Equipment, Transport•Benefits many other industries

Agriculture & Food Processing & Manufacturing

•Economic Necessity Recession Resistant•Demographics: aging/immigration Growth

Health CareRationaleIndustry

Sources: Insurance Information Institute

Summary of Economic Risks and Implications for (Re) Insurers

•Reduced commercial lines exposure growth•Surety slump•Decreased workers comp frequency due to drop in high hazard class employment

General Economic Slowdown/Recession

•Decreased capital gains (which are usually relied upon more heavily as a source of earnings as underwriting results deteriorate)

Stock Market Slump

•Lower investment income Lower Interest Rates

•Some insurers have some asset risk•D&O/E&O exposure for some insurers•Client asset management liability for some•Bond insurer problems; Muni credit quality•Mortgage insurers face losses; Also tightening standards and slowing real estate market•Banks less able to lend, slowing construction

Subprime Meltdown/ Credit Crunch

Risks to InsurersEconomic Concern

Inflation Overview

Pressures Claim Costs, Expands Probable & Possible Max Losses

Annual Inflation Rates(CPI-U, %), 1990-2009F

4.9 5.1

3.0 3.22.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

5.4

4.4

2.92.82.92.4

0

1

2

3

4

5

6

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

*12-month change August 2008 vs. August 2007 Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, September 10, 2008. (forecasts)

In July 2008, on a year-over-year basis inflation was 5.4% -- among the highest levels since 1991

Inflation: Important Economic Risks and Implications for Insurers

•Accelerating inflation historically contributed to rate inadequacy because ratemaking is largely a retrospective process•Many types of loss trends are sensitive to the pace of inflation: medical cost, tort, etc.•Historical loss cost trends could be biased predictors of future loss if inflation accelerates

Rate Inadequacy

•Claims (property and liability) costs may rise as the price of goods and services increase•PMLs could be (much) higher

Claim Severity Increase

Risks to Insurers & BuyersEffects of Inflation

Inflation: Important Economic Risks and Implications for Insurers (cont’d)

•Policyholders could find themselves inadequately insured as claims costs escalateInadequate

Insurance Limits•Inflation can lead to a more rapid and unexpected exhaustion of reinsurance because losses are higher than expected

Inadequate Reinsurance

•Reserves are established using certain assumptions about future development and discounting factors•If inflation accelerates, development could be more rapid and/or be more substantial (in dollar terms) than assumed and discount factors may be too low

Reserve Deficiency

Risks to InsurersEffects of Inflation

Comparative 2007 Inflation Statistics Important to Insurers ( %)

2.8

4.43.9

2.3

4.1

6.7

0

1

2

3

4

5

6

7

8

CPI-U Core CPI* TotalMedical

Care

PhysicianServices

HospitalServices

LegalServices

Infla

tion

Rat

e (%

)

*Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs.Source: US Bureau of Labor Statistics; Insurance Information Institute.

CPI and “Core” CPI are not representative of

many of the costs insurers face

Medical/Legal costs typically run well ahead of inflation

Medical & Tort Cost Inflation

Amplifiers of Inflation, Major Insurance Cost Driver

Consumer Price Index for Medical Care vs. All Items, 1960-2007

207.3

351.1

0

100

200

300

400

60 61 62 63 64 65 66 67 68 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

Inde

x V

alue

(198

2-84

=100

All Items Medical Care

Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.

(Base: 1982-84=100)

Inflation for Medical Care has been surging

ahead of general inflation (CPI) for 25

years. Since 1982-84, the cost of medical care has

more than tripled

Soaring medical inflation is among the most serious

long-term challenges facing

casualty, disability and LTC insurers

Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2008*

0%

2%

4%

6%

8%

10%

12%

14%

1961-70 1971-80 1981-90 1991-2000 2001-08E

Tort Costs Medical Costs CPI

*Medical cost and CPI-U through April 2008 from BLS. Tort figure is for full-year 2008 from Tillinghast.

Tort System is an Inflation Amplifier

Avg. Ann. Change: 1961-2008*

Torts Costs: +8.4%Med Costs: +6.0%

Overall Inflation: +4.2%

Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.

Tort costs move with inflation but at twice the rate

4.5%3.5%

2.8% 3.2% 3.5%4.1% 4.6% 4.7%

4.0% 4.4% 4.2% 4.0% 4.4%

5.1%

7.4%

10.1%

8.3%

10.6%

7.3%

13.6%

7.6%6.2%

9.2%

7.2%8.6%

6.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007p

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Rising Far Faster than Medical CPI

Sources: NCCI; Med CPI from Economy.com; WC med severity from NCCI based on NCCI states.

1.6

pts

WC medical severity rose more than twice as fast as the medical CPI (8.3% vs. 4.0%)

from 1995 through 2007p

$8.4 $8.5 $8.3 $9.1 $9.5$10.3$11.3$12.2

$13.5$14.5

$16.5$17.7

$19.0$20.2

$22.1$24.0$25.4

$5

$10

$15

$20

$25

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

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002-2006: +7.8%

Accident Year

MedicalClaim Cost ($000s)

2007p: Preliminary based on data valued as of 12/31/20071991-2006: Based on data through 12/31/2006, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies

Workers Comp Medical Claims Costs Continue to Climb

Cumulative Change = +200%(1993-2007p)

Med Costs Share of Total Costs is Increasing Steadily

Indemnity54%

Medical46%

Source: NCCI (based on states where NCCI provides ratemaking services).

Indemnity53%

Medical47%

Indemnity41%

Medical59%1987

1997

2007pMed cost inflation is one factor to high WC severity.

Med cost are now nearly 60% of all lost time claim costs

WC Med Cost Will Equal 70% of Total by 2017 if Trends Hold

Source: Insurance Information Institute.

Indemnity30%

Medical70%

2017 Estimate

This trend will likely be supported

by the increased labor force

participation of workers age 55 and

older.

PROFITABILITYProfits in 2006/07 Reached

Their Cyclical Peak;

By No Reasonable Standard Can Profits Be Deemed Excessive

P/C Net Income After Taxes1991-2008 ($ Millions)*

$14,

178

$5,8

40

$19,

316

$10,

870

$20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$61,

940

$32,

936

-$6,970

$65,

777

$44,

155

$20,

559

$38,

501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*

*ROE figures are GAAP; 2008 figure is annualized Q1 net income of $8.234B; 1Return on avg. surplus.Sources: A.M. Best, ISO, Insurance Information Inst. ***9.5% excl. mortgage and finl. guarantee insurers.

2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.6%2006 ROE = 12.2%2007 ROAS1 = 12.3%**2008 ROAS = 6.4%***

Insurer profits peaked in 2006

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08Q1

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2008:Q1

2008 P/C insurer figure is annualized Q1 return on average surplus. Excluding mortgage and financial guarantee insurers = 9.5%. Source: ISO, Fortune; Insurance Information Institute.

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

4 Hurricanes

Katrina, Rita, Wilma

P/C profitability is cyclical and volatile

Mortgage & Financial Guarantee Impact

-5%

0%

5%

10%

15%

20%

25%

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

Profitability Peaks & Troughs in the P/C Insurance Industry,1975 – 2008:Q1

1975: 2.4%

1977:19.0% 1987:17.3%

1997:11.6%

2006:12.2%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years9 Years

*GAAP ROE for all years except 2007 which is ROAS of 12.3%. All figures include mortgage an d financial guarantee insurers. Excluding M&FG insurers 2008:Q1 ROAS is 9.5%..Source: Insurance Information Institute, ISO; Fortune

2008Q1: 6.4%(9.5% excl. M&FG)

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*

ROE Cost of Capital

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2008:Q1

*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.

The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years

-13.

2 pt

s

US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on

target or better 2003-07

-1.7

pts +2

.3 p

ts

-9.0

pts

The cost of capitalis the rate of return

insurers need to attract and retain

capital to the business

-1.3

pts

Factors that Will Influence theLength and Depth of the Cycle

• Capacity: Rapid surplus growth in recent years has left the industry with between $85 billion and $100 billion in excess capital, according to analysts, at end of 2007

All else equal, rising capital leads to greater price competition and a liberalization of terms and conditions

• Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which could extend the depth and length of the cycle

• Investment Gains: With sharp declines in stock prices and falling interest rates, portfolio yields are certain to fall Contributes to discipline and shallower cycle

• Sarbanes-Oxley: Presumably SOX will lead to better and more conservative management of company finances, including rapid recognition of deficient or redundant reserves

With more “eyes” on the industry, the theory is that cyclical swings should shrink• Ratings Agencies: Focus on Cycle Management; Quicker to downgrade• Information Systems: Management has more and better tools that allow faster

adjustments to price, underwriting and changing market conditions than it had during previous soft markets

• Analysts/Investors: Less fixated on growth, more on ROE through soft mkt.Management has backing of investors of Wall Street to remain disciplined

• M&A Activity: More consolidatio would imply greater discipline

Source: Insurance Information Institute.

P/C Stocks: Mirroring theS&P 500 Index in 2008

5.93%

-54.44%

-41.13%

-68.38%-6.91%

2.12%

-24.70%

-14.53%

-80.0% -60.0% -40.0% -20.0% 0.0% 20.0%

S&P 500

All Insurers

P/C

Life/Health

Multiline

Reinsurance

Mortgage*

Brokers

*Includes Financial Guarantee.Source: SNL Securities, Standard & Poor’s, Insurance Information Institute.

Total YTD Returns Through September 19 , 2008Insurance stocks caught in

financial services downdraft, but some p/c insurers upMortgage &

Financial Guarantee insurers were down

69% in 2007

Top Industries by ROE: P/C Insurers Still Underperformed in 2007*

26.3%26.1%

24.9%23.9%

23.0%22.0%21.8%

20.6%20.4%20.4%20.3%20.0%19.4%19.2%

14.0%15.2%

56.0%

0% 10% 20% 30% 40% 50% 60%

Household & Pers. ProductsPetroleum Refining

Hotels, Casinos, ResortsOil and Gas Equip., Services

Food ServicesMetals

Food Consumer Prod.Network & Other Comms.

Aerospace & DefenseMedical Prod. & Equip.

Electronics, Electrical Equip.Pharmaceuticals

Industrial & Farm Equip.Wholesalers: Diversified

Packaging, Containers

P/C Insurers (Stock)All Industries: 500 Median

Source: Fortune, May 5, 2008 edition; Insurance Information Institute

P/C insurer profitability in 2007 ranked 31st out of 51

industry groups despite renewed

profitability, underperforming the All Industry median

for the 20th

consecutive year

Advertising Expenditures by P/C Insurance Industry, 1999-2007E

$ Billions

$1.736 $1.737 $1.803 $1.708

$3.695

$4.323

$2.975

$2.111$1.882

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

99 00 01 02 03 04 05 06 07ESource: Insurance Information Institute from consolidated P/C Annual Statement data.

Ad spending by P/C insurers is at a record high, signaling

increased competition

FINANCIAL STRENGTH &

RATINGSIndustry Has Weathered

the Storms Well, But Cycle May Takes Its Toll

P/C Insurer Impairments,1969-2007

815

127

11 934

913 12

199

16 14 1336

4931

3449 49

5460 58

4129

1512

3118 19

49 5047

3518

13 154

0

10

20

30

40

50

60

70

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

The number of impairments varies significantly over the p/c insurance cycle,

with peaks occurring well into hard markets

Source: A.M. Best; Insurance Information Institute

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007E

90

95

100

105

110

115

120

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

Com

bine

d R

atio

00.20.40.60.811.21.41.61.82

Impa

irmen

t Rat

e

Combined Ratio after DivP/C Impairment Frequency

Impairment rates are highly correlated

underwriting performance and could reached a

record low in 2007

Source: A.M. Best; Insurance Information Institute

2007 impairment rate was a record low 0.12%, one-seventh the 0.8% average since 1969;

Previous record was 0.24% in 1972

Reasons for US P/C Insurer Impairments, 1969-2005

*Includes overstatement of assets.Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;

Catastrophe Losses8.6%

Alleged Fraud11.4%

Deficient Loss

Reserves/In-adequate Pricing62.8%

Affiliate Problems

8.6%

Rapid Growth

8.6%

2003-2005 1969-2005

Deficient reserves,

CAT losses are more important factors in

recent years

Reinsurance Failure3.5%

Rapid Growth16.5%

Misc.9.2%

Affiliate Problems

5.6%

Sig. Change in Business

4.6%

Deficient Loss

Reserves/In-adequate Pricing38.2%

Investment Problems*

7.3%

Alleged Fraud8.6%

Catastrophe Losses6.5%

Cumulative Average Impairment Rates by Best Financial Strength Rating*

0%

10%

20%

30%

40%

50%

60%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment

D

C/C-

C++/C+

B/B-

B++/B+

A/A-

A++/A+

Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.

Insurers with strong ratings are far less likely to become impaired over

long periods of time. Especially important in long-tailed lines.

*US P/C and L/H companies, 1977-2002

Top 10 P/C Insolvencies, Based Upon Guaranty Fund Payments*

$2,265.8

$1,272.7$1,049.7

$843.4$699.4

$566.5 $555.8 $543.1 $531.6 $516.8

$0

$500

$1,000

$1,500

$2,000

$2,500

Relian

ce Ins

uranc

e

Legion

Insur

ance

Califor

nia C

ompe

nsatio

n Ins.

Frem

ont I

ndem

nity I

ns.

PHIC

O Ins.

Transit

Casu

alty I

ns.

Supe

rior N

ation

al Ins

.

America

n Mutu

al Liab

ility I

ns.M

idlan

d Insu

rance

Southe

rn Fam

ily In

s.

* Disclaimer: This is not a complete picture. If anything the numbers are understated as some states have not reported in certain years.

Source: National Conference of Insurance Guaranty Funds, as of September 17, 2008.

$ MillionsThe 2001 bankruptcy of Reliance Insurance was the largest ever among p/c insurers

Top 10 Life Insolvencies, Based On GuarantyFund Payments and Net Estimated Costs*

$2,821.7

$173.6 $172.4 $131.6 $107.8 $106.9 $81.9 $61.6 $61.5 $57.2$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Executive LifeIns. Co. 1991

Corporate LifeIns. Co. 1994

NationalHeritage LifeIns. Co. 1995

LondonPacific Life &Annuity Co.

2004

Inter-American Ins.Co. of Illinois

1991

GuaranteeSecurity LifeIns. Co. 1992

New JerseyLife Ins. Co.

1993

AmericanChambers LifeIns. Co. 2000

AmericanIntegrity Ins.

Co. 1993

First NationalLife Ins. Co.of America

1999

*As of 2007.

Source: National Organization of Life and Health Guaranty Funds

$ Millions(Year Indicates Year of Liquidation)

The 1991 bankruptcy of Executive Life was by far the largest ever

among life insurers

UNDERWRITINGTRENDS

Extremely Strong 2006/07;Relying on Momentum &

Discipline for 2008

90

95

100

105

110

115

120

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 08F

Combined Ratios1970s: 100.31980s: 109.21990s: 107.82000s: 102.0*

Sources: A.M. Best; ISO, III *Full year 2008 estimates from III.

P/C Insurance Combined Ratio, 1970-2008F*

115.8

107.4

100.198.3

100.7

92.4

100.0102.0

95.6

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 08:H1 08:H1*

P/C Insurance Industry Combined Ratio, 2001-2008:H1

*Excluding Mortgage & Financial Guarantee insurers. Sources: A.M. Best, ISO; III.

2005 ratio benefited from heavy use of reinsurance which lowered net losses

Best combined ratio since 1949

(87.6)

As recently as 2001, insurers paid out nearly $1.16 for every

$1 in earned premiums

Relatively low CAT

losses, reserve releases

Including Mortgage

& Fin. Guarantee insurers

Excluding Mortgage

& Fin. Guarantee insurers

87.6

91.292.1 92.3 92.4 92.4

93.1 93.1 93.3

95.6

93.0

85

87

89

91

93

95

97

1949 1948 1943 1937 2006 1935 1950 1939 1953 1936 2007

Ten Lowest P/C Insurance Combined Ratios Since 1920 vs. 2007

Sources: Insurance Information Institute research from A.M. Best data. *2007: III Earlybird survey.

2007 was the 20th

best since 1920

The industry’s best underwriting years are associated with

periods of low interest rates

The 2006 combined ratio of 92.2 was the best since the 87.6 combined in 1949

-55-50-45-40-35-30-25-20-15-10-505

101520253035

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

Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage * finl. guarantee insurers

$ B

illio

ns

Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the

second since 1978. Cumulative underwriting deficit from 1975 through 2007 is $422 billion.

Underwriting Gain (Loss)1975-2008:H1*

$10B (est.) underwriting loss in 08:H1 incl. mort. & FG insurers

$10.

8 $22.

8 $33.

4

$36.

9

$18.

9

($5.0)($6.0)($5.3)

$0.4

($7.0)

8.9

-1.1-1.3-1.6

4.5

-1.20.1

3.5

8.6

6.5

($10)($5)$0$5

$10$15$20$25$30$35$40

00 01 02 03 04 05 06 07F 08F 09F

Res

erve

Dev

elop

men

t ($B

)

(3)(2)(1)012345678910

Com

bine

d R

atio

Poi

nts

PY Reserve DevelopmentCombined Ratio Points

Impact of Reserve Changes on Combined Ratio

Source: A.M. Best, Lehman Brothers estimates for years 2007-2009

Reserve adequacy has

improved substantially

Cumulative Prior Year Reserve Development by Line (As of 12/31/06)

-$1,

886 -$

1,17

4

-$1,

116 -$77

9

-$47

5

-$41

3

-$25

4

-$10

0

-$10

0

-$96

-$53

-$48

$366

$1,176$1,172

-$3,006-$3,500-$3,000-$2,500-$2,000-$1,500-$1,000

-$500$0

$500$1,000$1,500

PPA Liab

ility

PPA PD

Home

Med

Mal

Specialt

y Pro

pCom

m. Auto

Prod. L

iabilit

yFinl. G

uaran

tyIn

ternati

onal

Other

Specialt

y Liab

.W

orker'

s Com

pFideli

ty/Suret

y

Commerc

ial M

ulti

Other

Liabilit

yRein

sura

nce$

Bill

ions

Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2.

Reserve redundancies in most lines have

resulted in releases in recent years

Release

Strengthening

COMMERCIAL LINES

Commercial AutoCommercial Multi-Peril

Workers Comp

110.

3

110.

2

107.

6

103.

9 109.

7

112.

3

111.

1

122.

3

110.

2

102.

5 105.

4

91.2 94

.0 97.5

102.

0

112.

5

85

90

95

100

105

110

115

120

125

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08F

Recent results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases

Commercial coverages have exhibited significant

variability over time.

Commercial Lines Combined Ratio, 1993-2008F

Outside CAT-affected lines, commercial

insurance is doing fairly well. Caution is required in

underwriting long-tail commercial lines.

Sources: A.M. Best (historical and forecasts)

EMERGING RISKS

Common Mistake is to Assume all Emerging Risks

are About Underwriting

Emerging Risks Impacting the Global (Re)Insurance Industry

Source: Insurance Information Institute

DisintermediationLatent Occupational DiseaseUS Tax PolicySocialization of Insurance Markets

PharmaceuticalsEnvironmental LiabilityNanotechnologyAsset Valuation Risk (Mark-to-Market)TerrorismSecurities LitigationEconomic Shock/Contagion EffectsRegulatory RiskCurrency RiskProducts Liability (Imports, Food)Nursing Home/Asst. LivingClimate Change (liability>property)Energy SectorPost-Catastrophe LitigationEmployment Practices LiabilityBad Faith LitigationInflation RiskErosion of Tort Reform

IssueIssue

PREMIUM GROWTH

At a Virtual Standstillin 2007/08

-2%

0%2%

4%6%

8%10%

12%14%

16%18%

20%22%

24%

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2008 is Q1 actual (-0.7%), including Mortgage & Financial Guarantee insurersSources: A.M. Best, ISO, Insurance Information Institute

Strength of Recent Hard Markets by NWP Growth

1975-78 1984-87 2000-03

In 2007 net written premiums fell 0.6%, the first decline since 1943

Shaded areas denote “hard

market” periods

Excluding Mortgage &

Financial Guarantee

insurers, Q1 2008 NWP

dropped 0.9%

Year-to-Year Change in Net Written Premium, 2000-Q1:2008

Source: A.M. Best; ISO.

5.0%

8.4%

15.3%

10.0%

3.9%

0.5%

4.2%

-0.6% -0.7%2000 2001 2002 2003 2004 2005 2006 2007 Q1:2008

P/C insurers are experiencing their slowest growth rates

since 1943.

Excluding Mortgage &

Financial Guarantee

insurers, Q1 2008 NWP

dropped 0.9%

Personal/Commercial Lines & Reinsurance NPW Growth, 2006-2008F

2.0% 3.5%

28.1%

-0.1%

-1.5%

1.4%

-2.3%-8.5%

-5.0%-15%-10%

-5%0%5%

10%15%20%25%30%

Personal Commercial Reinsurance

2006 2007E 2008F

Sources: A.M. Best Review & Preview (historical and forecast).

Net written premium growth is expected to be slower for commercial insurers and reinsurers

PRICING TRENDS

Under Pressure

$651 $6

68 $691 $7

05

$703

$685

$690 $7

26

$781 $8

24 $859

$834

$837

$840

$829

$600

$650

$700

$750

$800

$850

$900

$950

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

Average Expenditures on Auto Insurance

*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2006-2008 based on CPI data.

Countrywide auto insurance expenditures are expected to increase about 2.5% in 2008,

highest since 2002/03

Lower underlying frequency and modest severity have kept auto insurance costs in check

$418$440$455

$481$488$508$536

$593

$668

$729$760$775$764$757

$400$450$500$550$600$650$700$750$800

95 96 97 98 99 00 01 02 03 04 05 06* 07* 08*

Average Expenditures on Homeowners Insurance**

*Insurance Information Institute Estimates/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute estimates 2006-2008 based on CPI data.

Countrywide home insurance

expenditures are expected to rise by an estimated 2% in 2008

Homeowners in non-CAT zones have seen smaller increases than

those in CAT zones

109.4110.2

118.8

109.5

112.5110.2

107.6

104.1

109.7 110.2

102.5

105.4

90.5 91.4

102.0

111.1112.3

122.3

$7.3

0

$6.4

9

$13.

91

$13.

15

$11.

94

$11.

55

$11.

95

$8.3

0

$13.

50

$8.4

2

$4.8

3

$5.2

0

$5.7

1

$5.2

5

$5.7

0

$7.7

0

$6.4

0

$6.1

0

90

95

100

105

110

115

120

125

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

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

$0

$2

$4

$6

$8

$10

$12

$14

Cos

t of R

isk/

$100

0 R

even

ue

CommercialCombined RatioCost of Risk

Source: RIMS Benchmark Survey, A.M. Best 2007 Aggregates & Averages; Insurance Information Institute

Cost of Risk vs. Commercial Lines Combined Ratio

How the Risk Dollar is Spent (2006)

Source: RIMS (2007); Insurance Information Institute

Firms w/Revenues < $1 Billion

Prof. Liability Costs, 7%

Other Costs, 4%

Property Premiums,

18%

Retained Property

Losses, 5%

LiabilityPremium

20%

Admin Costs, 14%

WC Premiums,

14%

Liability Retained

Losses, 5%

Total Mgmt. Liab., 5%Retained WC

Losses, 7%

Firms w/Revenues > $1 Billion

Retained WC, 21%

Other Costs, 4%

Property Premiums,

13%Retained Property

Losses, 11%

LiabilitPremium

11%

Total Mgmt. Liab., 7%

WC Premiums,

5%

Retained Liability

Losses, 13%

Admin Costs, 12%

Prof. Liability Costs, 2%

Total liability costs account for 35% - 40% of the risk dollar

Average Commercial Rate Change,All Lines, (1Q:2004 – 2Q:2008)

-3.2

%

-5.9

%

-7.0

%

-9.4

%

-9.7

% -8.2

%

-4.6

% -2.7

%

-3.0

%

-5.3

%

-9.6

%

-11.

3%

-11.

8%

-13.

3% -12.

0%

-13.

5%

-12.

9%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%1Q

04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

1Q08

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

KRW Effect

-0.1

% A flattening in the magnitude of price declines is evident

Cumulative Commercial Rate Change by Line: 4Q99 – 2Q08

Source: Council of Insurance Agents & Brokers

Commercial account pricing has been trending down for 4+ years and is now

on par with prices in late 2001

Average Commercial Rate Changeby Account Size: 4Q99 – 2Q08

Source: Council of Insurance Agents & Brokers

While pricing has moved in synch across account size,

large accounts have seen the most pronounced declines

Average Commercial Rate Changeby Line: 4Q99 – 2Q08

Source: Council of Insurance Agents & Brokers

Pricing has generally been negative since early 2004

Post-Katrina property insurance price impact

Most Layers of Coverage are Being Challenged/Leaking

Retention$1 Million$2 Million

Primary

Excess

Reinsurance

Retro

$10 Million

$50 Million

$100 Million

Risks are comfortable taking larger retentions

Lg. deductibles, self insurance, RRGs, captives erode primary

Excess squeezed by higher primary

retentions, lower reins. attachments

Reinsurers losing to higher retentions,

securitization

Source: Insurance Information Institute from Aon schematic.

U.S. Domiciled Captives- Net Premiums Written ($ Millions)

$8.4

$9.0

$9.3

$9.9

$10.2

$8.0

$8.5

$9.0

$9.5

$10.0

$10.5

2002 2003 2004 2005 2006

$ M

illio

ns

Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review

Following a five-year period of rapid growth, U.S. captive insurers saw net premiums written increase by just 2.7 percent in 2006, after 6.2 percent growth in 2005.

Risk Retention Group Premiums,1988 – 2006*

$1,7

37.7 $2

,197

.8

$2,4

49.1

$2,7

73.7

$585

.8$5

27.2

$493

.7$4

93.6

$419

.3

$358

.4

$250

.2 $575

.5$7

07.6

$751

.9

$790

.5

$875

.3

$775

.5

$944

.0 $1,2

65.1

0

500

1,000

1,500

2,000

2,500

3,000

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

*2006 ProjectedSource: Risk Retention Reporter, Insurance Info. Institute

Millions of Dollars

Risk retention (& self-insurance) group premiums have risen rapidly

in recent years and represent a form of competition to traditional

insurers and captives

Could be expanded to property risks

RISING EXPENSES

Expense Ratios Will Rise as Premium Growth Slows

Personal vs. Commercial Lines Underwriting Expense Ratio*

23.4%24.3%

25.0%27.1%

24.4%

24.5%24.8%25.6%

24.6%

25.6%24.7%

26.1%26.6%

27.5%

30.8%

27.0%26.3%26.4%25.6%

30.0%

31.1%

29.4%29.9%

29.1%

26.6%

25.0%

20%

22%

24%

26%

28%

30%

32%

96 97 98 99 00 01 02 03 04 05 06 07E 08F

Personal Commercial

*Ratio of expenses incurred to net premiums written.Source: A.M. Best; Insurance Information Institute

Expenses ratios will likely rise as premium growth slows

CAPACITY/SURPLUS

Accumulation of Capital/ Surplus Depresses ROEs

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

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

U.S. Policyholder Surplus: 1975-2008:Q1*

Source: A.M. Best, ISO, Insurance Information Institute. *As of March 31, 2008

$ B

illio

ns

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Capacity as of 6/30/08 was about $500B, down 4% from 12/31/07 was $517.9B, but 75% above its 2002 trough.

Recent peak was $521.8 as of 9/30/07

The premium-to-surplus fell to $0.85:$1 at year-end 2007, approaching

its record low of $0.84:$1 in 1998

Annual Catastrophe Bond Transactions Volume, 1997-2007

$1,729.8

$966.9

$7,329.6

$4,693.4

$1,991.1

$1,142.8$1,219.5$846.1$984.8$1,139.0

$633.0

$0

$1,000$2,000

$3,000$4,000

$5,000

$6,000$7,000

$8,000

97 98 99 00 01 02 03 04 05 06 07

Ris

k C

apita

l Iss

ues

($ M

ill)

0

5

10

15

20

25

30

35

Num

ber o

f Iss

uanc

es

Risk Capital Issued Number of Issuances

Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.

Catastrophe bond issuance has soared in the wake of

Hurricanes Katrina and the hurricane seasons of 2004/2005,

despite two quiet CAT years

P/C Insurer Share Repurchases,1987- Through Q4 2007 ($ Millions)

$564

.0

$646

.9

$311

.0

$952

.4

$418

.1

$566

.8

$310

.1

$658

.8

$769

.2

$4,5

86.5

$5,2

66.0

$763

.7

$5,2

42.3

$4,3

70.0

$7,0

94.1

$22,322.6

$4,4

97.5

$1,5

39.9

$2,7

64.2

$2,3

85.6

$4,2

97.3

$0

$5,000

$10,000

$15,000

$20,000

$25,000

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Sources: Credit Suisse, Company Reports; Insurance Information Inst.

2007 share buybacks shattered the 2006 record, up 214%

Reasons Behind Capital Build-Up & Repurchase Surge

•Strong underwriting results•Moderate catastrophe losses

•Reasonable investment performance

•Lack of strategic alternatives (M&A, large-scale expansion)

Returning capital owners (shareholders) is one of the

few options available

2007 repurchases to date equate to 3.9% of industry surplus, the highest in 20 years

MERGER & ACQUISITION

Are Catalysts for P/C Consolidation Growing

in 2008?

P/C Insurer M&A Activity,* 1997-2008**

$18,289

$6,750$599

$12,823

$800

$9,325

$36,407

$13,808

$3,318$8,683

7

15

10

2

0

2

01

9

21 2$0

$5,000$10,000

$15,000$20,000

$25,000

$30,000$35,000

$40,000

97 98 99 00 01 02 03 04 05 06 07 08**

Tran

sact

ion

Valu

e ($

Mill

)

0

24

68

10

1214

16

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

Source: Lehman Brothers. *Deals exceeding $500 million. *Through June 30, 2008.

M&A activity began to accelerated in 2007. The largest deals in 2008 are

Liberty Mutual’s acquisition of Safeco for $6.2B and Allied World’s

acquisition of Darwin for $550 million

Distribution of P/C Insurer Acquisitions, Jan. 2007 – June 2008

Personal, 23%, 23%

Commercial, 45%, 45%

Personal & Commercial, 32%,

32%SUMMARY STATS

•22 deals•$23 billion total transaction value•$475 million median deal value•Acquirers mostly p/c insurers and limited number of private equity deals

Source: SNL, Lehman Brothers.

Deals Exceeding $100 Million

Motivating Factors for Increased P/C Insurer Consolidation

Motivating Factors for P/C M&As• Slow Growth: Growth is at its lowest levels since the late 1990s

NWP growth was 0% in 2007; Appears similarly flat in 2008Prices are falling or flat in most non-coastal markets

• Accumulation of Capital: Excess capital depresses ROEsPolicyholder Surplus up 6-7%% in 2007 and up 80% since 2002Insurers hard pressed to maintain earnings momentum Options: Share Buybacks, Boost Dividends, Invest in Operation, AcquireOption B: Engage in destructive price war and destroy capital

• Reserve Adequacy: No longer a drag on earningsFavorable development in recent years offsets pre-2002 adverse develop.

• Favorable Fundamentals/Drop-Off in CAT ActivityUnderlying claims inflation (frequency and severity trends) are benign

Lower CAT activity took some pressure of capital baseSource: Insurance Information Institute.

Distribution Sector: Insurance-Related M&A Activity, 1988-2006

$542

$446

$1,9

34

$7$1,633

$2,7

20

$689

$60 $2

12

$944

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

96 97 99 00 01 02 03 04 05 06

Tran

sact

ion

Valu

e ($

Mill

)

0

50

100

150

200

250

300

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

Source: Conning Research & Consulting.

No extraordinary trends evident

Distribution Sector M&A Activity, 2005 vs. 2006

Source: Conning Research & Consulting

Title9%Insurer

Buying Distributor

7%

Agency Buying Agency

51%

Other4%

Bank Buying Agency

29%

2005 2006

Title4%

Insurer Buying

Distributor7%

Agency Buying Agency

62%

Other2%

Bank Buying Agency

25%

Number of bank

acquisitions is falling

years

INVESTMENT OVERVIEW

More Pain, Little Gain

Property/Casualty Insurance Industry Investment Gain1

$ Billions

$35.4$42.8

$47.2$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$63.6

$12.2

$56.9$51.9

$57.9

$0

$10

$20

$30

$40

$50

$60

94 95 96 97 98 99 00 01 02 03 04 05* 06 07

08Q1

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B.

Sources: ISO; Insurance Information Institute.

Investment gains are off in 2008 due to lower yields and

poor equity market conditions.

P/C Insurer Net Realized Capital Gains, 1990-2008:Q1

$2.88

$4.81

$9.89

$1.66

$6.00

$9.24$10.81

$13.02

$16.21

$6.63

-$1.21

$6.61

$8.97

-$0.50

$18.02

$3.52

$9.70$9.13

$9.82

-$2

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

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

08:Q

1

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

Realized capital gains exceeded $9 billion in

2004/5 but fell sharply in 2006 despite a strong stock market. Nearly $9 billion

again in 2007, but $-0.5billion in 2008:Q1.

$ Billions

-30%

-20%

-10%

0%

10%

20%

30%

40%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

*

Source: Ibbotson Associates, Insurance Information Institute. *Through September 19, 2008.

Total Returns for Large Company Stocks: 1970-2008*

S&P 500 was up 3.53% in 2007, but down 14.5% so far in 2008*

Markets were up in 2007 for the 5th consecutive

year; 2008 off to a rough start

2%

3%

4%

5%

6%

7%

8%

9%

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

P-C Inv Income/Inv Assets 10-Year Treasury Note

P/C Investment Income as a % of Invested Assets Follows 10-Year US T-Note

*As of July 2008.Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.

Investment yield historically tracks 10-year Treasury note quite closely

CATASTROPHICLOSS

This is (One Reason) Why You Buy Reinsurance

Most of US Population & Property Has Major CAT Exposure

Is Anyplace

Safe?

U.S. Insured Catastrophe Losses*$7

.5$2

.7$4

.7$2

2.9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5$5

.9 $12.

9 $27.

5

$6.7 $2

2.0

$100

.0

$61.

9

$9.2

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0708

**20

??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.**Based on preliminary PCS data through June 30. PCS $1.8B loss of for Gustav. $9.8B for Ike of 9/22.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.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions2008 CAT losses already exceed 2006/07 combined. 2005 was by

far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come.

$100 Billion CAT year is coming soon

Top 12 Most Costly Hurricanes in US History, (Insured Losses, $2007)

$3.8 $4.0 $5.0 $6.0 $7.0 $7.8 $8.2 $9.8 $10.9

$22.9

$43.6

$0$5

$10$15$20$25$30$35$40$45$50

Georges(1998)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Ike (2008)

Wilma(2005)

Andrew(1992)

Katrina(2005)

$ B

illio

ns

*Based on average of midpoints of range estimates from risk modelers AIR, RMS and Eqecat as of 9/15/08.Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.

With Ike, 9 of the 11 most expensive hurricanes in

US history occurred since 2004 (Gustav insured losses totaled $1.8B)

2 3 3 4 3 4 3 5 3

Category of storm at landfall

3 2

Ike could become the 4th

most expensive

hurricane in US history*

Hurricane Ike Initial Insured Loss Estimates

$8 - $12B

$7 - $12B

$8 - $12B

$4 $6 $8 $10 $12

Eqecat

RMS

AIR

(Billions of $, as of September 19, 2008)

Sources: RMS, AIR Worldwide, Eqecat; Compiled by the Insurance Information Institute as of 9/19/08.

Ike came ashore in Galveston, Texas, as a

Cat 2 hurricane on September 13

Average of the midpoints of

the 3 ranges is $9.8 billion

Geophysical(earthquake, tsunami, volcanic activity)

Climatological(temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological(flood, mass movement)

Num

ber

Source: MR NatCatSERVICE

Number of events has more than

doubled since 1980

© 2008 Munich Re Group

109 events through June 30

is a record

Natural Disasters in the United States, 1980-2008 (Jan – June Totals)

Global Insured Catastrophe Losses 1970-2007 ($ 2007)

$2.4 $5.0

$5.8 $9.1

$5.0

$6.4

$5.6

$5.4 $1

1.3

$7.0

$4.2 $8

.9$1

0.3

$6.8 $1

1.6

$5.6 $1

5.4

$12.

4 $23.

7$2

7.9

$24.

4 $42.

5$1

8.4 $3

4.4

$25.

6$1

8.0

$11.

2 $24.

9 $43.

1$1

5.0

$41.

8$1

6.7

$21.

6$5

2.8

$113

.9$1

6.9 $2

7.6

$0

$20

$40

$60

$80

$100

$120

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

Source: Swiss Re Sigma No.1/08, Natural catastrophes and man-made disasters in 2007

$ Billions

Impact of Hurricane Katrina on 2005 losses was dramatic,

but losses are trending upward in general

Insured Offshore Energy Losses for Recent Major Gulf Storms

$2.0 $2.0 $2.25

$3.0

$0.0

$1.0

$2.0

$3.0

$4.0

Katrina(2005)

Gustav(2008)*

Ivan(2004)**

Rita (2005)

$ B

illio

ns

Hurricanes Katrina, Rita and Ivan cost energy insurers at least

$7 billion. Gustav estimates range from $1B - $3B.

*Midpoint of RMS estimated range of $1.0 to $3.0 billion as of 9/1/08; **Midpoint of range ofr $2.0 to $2.5 billion)Sources: Insurance Information Institute research estimates.

Total Value of Insured Coastal Exposure (2004, $ Billions)

$1,901.6$740.0

$662.4$505.8

$404.9$209.3

$148.8$129.7$117.2$105.3

$75.9$73.0

$46.4$45.6$44.7$43.8

$12.1

$1,937.3

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

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide

In 2004 Florida had more insured coastal exposure—at nearly $2 trillion dollars. Future “Mega-Losses” are

UNAVOIDABLE.

Total Value of Insured Coastal Exposure (2007, $ Billions)

$2,378.9$895.1

$772.8$635.5

$479.9$224.4

$191.9$158.8$146.9$132.8

$92.5$85.6

$60.6$55.7$51.8$54.1

$14.9

$2,458.6

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

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide

MA insured coastal exposure from $662B in 2004 to $773 in 2007, up

17% since 2004The insured value of all coastal

property was $8.9 trillion in 2007, up 24% from $7.2 trillion in 2004.

$110B increase since 2004, up 17%

The 2008 Hurricane Season:

Preview to Disaster?

Outlook for 2008 Hurricane Season: 90% Worse Than Average

175NA96.2Accumulated Cyclone Energy1175Intense Hurricane Days

190%275%100%Net Tropical Cyclone Activity

572.3Intense Hurricanes4547.524.5Hurricane Days9145.9Hurricanes

90115.549.1Named Storm Days17289.6Named Storms

2008F2005Average*

*Average over the period 1950-2000.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, August 5, 2008.

Landfall Probabilities for 2008 Hurricane Season: Above Average

Above Average

NACaribbean

42%30%Gulf Coast from Florida Panhandle to Brownsville

43%31%US East Coast Including Florida Peninsula

67%52%Entire US East & Gulf Coasts

2008FAverage*

*Average over the past century.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, August 5, 2008.

REINSURANCE MARKETS

Reinsurance Prices are Falling in Non-Coastal Zones, Casualty Lines

Share of Losses Paid by Reinsurers, by Disaster*

30%25%

60%

20%

45%

0%

10%

20%

30%

40%

50%

60%

70%

Hurricane Hugo(1989)

Hurricane Andrew(1992)

Sept. 11 TerrorAttack (2001)

2004 HurricaneLosses

2005 HurricaneLosses

*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.

Reinsurance is playing an increasingly

important role in the financing of mega-CATs; Reins. Costs

are skyrocketing

US Reinsurer Net Income& ROE, 1985-2007*

$1.9

4

$2.0

3

$1.9

5 $3.7

1$4

.53

$5.4

3$1

.47

$1.9

9

$1.3

1 $3.1

7$3

.41

$2.5

1$9

.68

$7.9

6

($2.98)

$0.1

2

$1.9

5

$1.3

8$1

.22

$1.8

7

$1.1

7 $2.5

2$1

.79

($4)

($2)

$0

$2

$4

$6

$8

$10

$12

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*

Net

Inco

me

($ B

ill)

-10%

-5%

0%

5%

10%

15%

20%

RO

E

Net Income ROE

Source: Reinsurance Association of America. *2007 ROE figure is III estimate based return on average 2007 surplus.

Reinsurer profitability rebounded post-Katrina

but is now falling

Regional Distribution of Reinsurers by NWP, 2006

Other11%

U.K.6%

Switzerland12%

Ireland2%

Japan6%

Germany25%

France3%

Bermuda10%

U.S.25%

Source: Standard & Poor’s, Global Reinsurance Highlights, 2007 Edition

International reinsurers from

Germany, Switzerland and

France account for 40 percent of global reinsurance volume.

Bermuda is a growing market, with a 10 percent

share. Lloyd’s and London-based

reinsurers account for 6 percent of the

world market.

Eight countries account for 89 percent of global reinsurance volume.

Reinsurer Market Share Comparison: 1990 vs. 2006

U.S. Reinsurer

64.7%

Offshore Reinsurer

35.3%

1990 2006

Sources: Reinsurance Association of America; Insurance Information Institute.

U.S. Reinsurer

46.9%

Offshore Reinsurer

53.1%

U.S. Reinsurer market share fell precipitously between 1990 and 2006

Shifting Legal Liability & Tort

EnvironmentIs the Tort Pendulum

Swinging Against Insurers?

Bad Year for Tort Kingpins*

“King of Class Actions” Bill Lerach•Former partner in class action firm Milberg Weiss•Admitted felon. Guilty of paying 3 plaintiffs $11.4 million in 150+ cases over 25 years & lying about it repeatedly to courts•Will serves 1-2 years in prison and forfeit $7.75 million; $250,000 fine

“King of Torts” Dickie Scruggs•Won billions in tobacco, asbestos and Katrina litigation•Pleaded guilty for attempting to offer a judge $40,000 bribe to resolve attorney fee allocation from Katrina litigation in his firm’s favor. His son/others guilty on related charges•Could get 5 years in prison, $250,000 fine

Sour

ce: S

an D

iego

Uni

on T

ribun

e, 9

/19/

07So

urce

: Wal

l Stre

et Jo

urna

l, 3/

15/0

7

Bad Year for Tort Kingpins*(Continued)

“King of Class Actions” Melvyn Weiss•Former partner in class action firm Milberg Weiss; Earned $251 million in legal fees•Pled guilty to federal charges of racketeering and conspiracy for paying kickbacks to professional plaintiffs•Sentenced to 30 months in prison, pay $9.75 million in restitution; $250,000 fine

Sour

ce: W

all S

treet

Jour

nal,

vario

us is

sues

.

$17.0$49.6 $58.7

$85.6$17.1

$51.0$70.9

$85.6

$5.2

$20.4

$30.0

$45.5

$0

$50

$100

$150

$200

$250

1980 1990 2000 2006

Commercial Lines Personal Lines Self (Un)Insured

Bill

ions

Total = $39.3 Billion

*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

Total = $121.0 Billion

Total = $159.6 Billion

Total = $216.7 Billion

Personal, Commercial & Self (Un) Insured Tort Costs*

Growth in Cost of U.S. Tort System,1951-2009F

Source: Tillinghast-Towers Perrin.

9.8%11.9%

3.2%

13.8%

5.6% 5.7%

0.4%

-5.4%

2.4%4.7%

11.6% 11.8%13.7%

-10%

-5%

0%

5%

10%

15%

1951-60

1961-70

1971-80

1981-90

1991-2000

2001 2002 2003 2004 2005 2006 2007E 2008E

Tort costs moderated beginning in 2003 as many improvements in the tort system began to bear fruit

Asbestos-related and other costs drove tort growth sharply upward in 2001 and 2002

2001-2005: 7.8%

2006-2009F: 1.6%

Cost of US Tort System ($ Billions)

$129

$130 $1

41

$144

$148 $1

59

$156

$156 $1

67

$169 $1

80 $205 $2

33 $246 $2

60

$261

$247

$253 $2

65 $277

$0

$50

$100

$150

$200

$250

$300

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

07E

08E

09E

Tort costs consumed 1.87% of GDP in 2006, down from 2.24% in 2003

Per capita “tort tax” was $825 in 2006, up from $680 in 2000

Reducing tort costs relative to GDP by just 0.25% (to 1.84%) would produce an

economic stimulus of $31.1B

Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

Tort System Costs, 1950-2009E

$1.8 $5.4 $7.9$13.9$20.0

$83.7

$130.2

$179.2

$246.0$265

$277

$158.5

$247.0

$42.7

$3.4

0.62%0.82%

1.03%

1.34%1.22%

1.98%2.14%

1.82% 1.83%1.83%1.87%

2.24%2.24%

1.53%

1.11%

$0

$50

$100

$150

$200

$250

$300

50 55 60 65 70 75 80 85 90 95 00 03 06 08E 09E

Tor

t Sys

tem

Cos

ts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t Cos

ts a

s % o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

Source: Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs as % of GDP

After a period of rapid escalation,

tort system costs as a % of GDP are

now falling

Tort System Costs and Tort Costs as a Share of GDP, 2000-2009F

$179

$233$246

$265

$253

$260

$261

$277

$247

$205

1.82%2.03%

2.22% 2.23%

1.83%1.84%

2.10%1.83%1.87%

2.24%

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

$300

00 01 02 03 04 05 06 07E 08E 09E

Tor

t Sys

tem

Cos

ts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t Cos

ts a

s % o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

After a period of rapid escalation, tort system costs as % of GDP are now falling

Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

Liability: Average Cost per $1,000 of Revenue* United States, 2001 to 2007

$1.2

5

$0.6

5

$0.6

7

$0.3

3

$0.1

7

$0.1

1

$0.2

3

$3.2

1

$1.5

6

$1.2

7

$0.8

6

$0.3

6

$0.1

8 $0.4

8

$2.4

9

$1.0

7

$1.0

6

$0.6

3

$0.2

3

$0.1

4

$0.3

2

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$0 - $200M $201M-$500M

$501M-$1B $1B-$5B $5B-$10B $10B+ All

2001 2004 2007

*Across entire liability program (full population)Source: Marsh, 2007 Limits of Liability Report

Liability insurance costs relative to the client’s revenues are down by 25% - 35% since 2004

The Nation’s Judicial Hellholes (2007)

Source: American Tort Reform Association; Insurance Information Institute

TEXASRio Grande Valley and Gulf Coast

South Florida

ILLINOISCook County West Virginia

Some improvement in “Judicial

Hellholes” in 2007

Watch ListMadison County, ILSt. Clair County, IL

Northern New Mexico

Hillsborough County, FLDelawareCalifornia

Dishonorable MentionsDistrict of Columbia

MO Supreme CourtMI Legislature

GA Supreme CourtOklahoma

NEVADAClark County (Las Vegas)

NEW JERSEYAtlantic County (Atlantic City)

Business Leaders Ranking of Liability Systems for 2007

Best States1. Delaware2. Minnesota3. Nebraska4. Iowa5. Maine6. New Hampshire7. Tennessee8. Indiana9. Utah10. Wisconsin

Worst States41. Arkansas42. Hawaii43. Alaska44. Texas45. California46. Illinois47. Alabama48. Louisiana49. Mississippi50. West Virginia

Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2007ME, NH, TN,

UT, WI

Drop-OffsND, VA, SD,

WY, ID

NewlyNotorious

AK

RisingAbove

FL

Midwest/West has mix of good and bad states

Sum of Top 10 Jury Awards, 2004-2007

$ Millions

$615.0$815.0

$2,953.7

$5,158.8

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2004 2005 2006 2007Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007 and 2008.

Total of Top 10 awards in 2007 was 25% lower than in 2006

Number of Top 10 Jury Awards, 1995 - 2007

22 2220

17

8 75 4 3 2 2 2 2 1 1 1

6

0

5

10

15

20

25

TX NY CA FL

MO

DC* AL GA IL TN LA MD OR SC NM NV NJ

TX, NY and CA lead the U.S. in jumbo-size jury awards

Source: LawyersWeekly USA,, January 22, 2008. *All against Iran for terrorist activity

Total Top 10 Verdicts, 1995 through 2006

Source: Lawyers USA, 2007

2007 Top Ten Verdicts

Source: LawyersWeekly USA, January 22, 2008.

FloridaAuto Crash, Death$45 Million

New JerseyVioxx$47.5 Million

NevadaPrempro$47.6 Million

AlabamaProduct Liability, Death$50 Million

FloridaDUI Crash$50 Million

New MexicoNursing Home, Death$54 Million

FloridaPrivate Air Crash$54 Million

CaliforniaProduct Liability, Death$55.2 Million

FloridaPremises Liability, Death$102.7 Million

New YorkMedical Malpractice$109 Million

StateIssueValue

REGULATORY & LEGISLATIVE

ENVIRONMENT

Isolated Improvements, Mounting Zealoutry

Rating of Auto/Home Insurance Regulatory & Operating Environment*

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WVVA

NC

LATX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI

MDDE

AL

VT

NY

DC

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SD WI

INOH

MT

CA

NVUT

WY

CO

AK

Most states (25) get a “B”, but 7 got A’s, 10 got C’s (including DC), 5 earned D’s and 4 got F’s

*Criteria considered were auto/home residual mkts., auto/home mkt. concentration, loss ratio stability, reg. env.,form regulation, credit scores, territorial restrictions

= A= B= C= D= F

Source: James Madison Institute, Feb. 2008

PRESIDENTIAL POLITICS & P/C PROFITABILITY

15.10%10.13%

8.93%8.65%

8.35%7.98%

7.68%6.98%6.97%

5.43%5.03%

4.83%4.43%

3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

CarterReagan II

G.W. Bush IINixon

Clinton IG.H.W. Bush

Clinton IIReagan I

Nixon/FordTruman

Eisenhower IEisenhower II

G.W. Bush IJohnson

Kennedy/Johnson

*ROE for 2008 based on Q1 data. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute

OVERALL RECORD: 1950-2008*

Republicans 8.05%Democrats 7.14%

Party of President has marginal bearing on profitability of P/C insurance industry

ELECTION IMPACT

P/C Insurance Industry ROE byPresidential Administration,1950-2008*

-5%

0%

5%

10%

15%

20%

25%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08*

BLUE = Democratic President RED = Republican President

Source: Insurance Information Institute. *2008 based Q1 data.

Tru

man

Nixon/FordKennedy/ Johnson

Eisenhower Carter Reagan/Bush Clinton Bush

P/C Insurance Industry ROE by Presidential Party Affiliation,

1950–2008*

Insurance Information Institute On-Line

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