The Global AutoInsurance Industry in

Uncertain Times Challenges Amid the Global

Economic and Regulatory 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

Insurance Information Institute

October 2008

Presentation Outline

• Elements of Global Auto & Auto Insurance DemandDemographics and Economic Factors Impacts for Financial Services and Insurers

• The Weakening Economy: Insurance ImpactsGas Prices & Auto Claim FrequencyWhat Accelerating Inflation Means for Insurers

• Future of the Auto Insurance Industry• P/C Insurance Industry Overview & Outlook

Q & A

ELEMENTS OF GLOBAL AUTO

INSURANCE DEMAND

Where Will Vehicle Ownership Grow the Fastest?

Global Demand for Auto Insurance

• Overview of Global Demand for Vehicles and Demand for Auto InsuranceIncluding ability to finance vehicles

• Economic Growth & Performance• Energy Economics• Demographics• Social & Cultural Attitudes• Environmental & Climate Change Concerns• Legislative/Statutory Trends• Tort Environment• Pricing & Availability

Vehicle Demand Drives Insurance Demand

Short Term Outlook is Bleak as Global Economies Sink;

Long Run: Demand Accelerates

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 in US,1999-2014F (Millions of Units)

Source: US Department of Commerce; Blue Chip Economic Indicators(8/08) for 2008/09. Insurance Information Institute for years 2010-2014 based on adjusted Blue Chip data.

2.62.6

3.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2007 2008F 2009F

The weakening economy and high gas prices are taking their toll on fleet vehicles sales in the US affecting

exposure growth in commercial auto

Fleet vehicle sales in the US plunged by an

estimated 21% in 2008

US Fleet Vehicle Sales,2007-2009F (Millions of Vehicles)

Source: J.D. Power and Associates, July 2008.

-23.8%-23.2%

-18.7% -18.2%

-16.7%

-12.6% -12.4%-11.7%

-9.5%

-5.6%

-25%

-20%

-15%

-10%

-5%

0%

GM Toyota PSA Daimler BMW Ford Hyundai Fiat VW Renault

European New Vehicle Registrations, August 2008 vs. August 2007

Source: European Automobile Manufacturers Association.

Auto registrations are sharply lower in Western

Europe, down 17% overall in August and 4% through the first 8 months of 2008

Weaker economic growth, tight credit imply less

exposure growth for auto insurers in Europe

380,100

487,500

307,300

236,600

370,795

82,184

0

100,000

200,000

300,000

400,000

500,000

600,000

2000 2004 2005 2006 2007 2008:H1

Heavy truck sales have surged in recent years along with the

Chinese economy and big public sector work projects, but are likely

to slow in H2 2008 as gas prices remain high

Truck demand in China can be greatly affected

by government macroeconomic policy, as was the case in 2005

Heavy Truck Sales in China,2000-2008:H1

Source: ResearchInChina.com, 9/1/08

Global Car Ownership Trends for the Next 40 Years

Most new demand for automobiles will come from China and India and other

Asian nations.

By 2050 there will be approximately 1 billion cars

on the roads of the US, China and India alone.

This also implies that cars of the future will increasingly

use alternative fuels as global oil supplies cannot

keep pace with auto demand.

Can this many cars even be driven as a practical matter?

92

%

90

%

90

%

89

%

88

%

88

%

86

%

84

%

83

%

82

%

72

%

60

%

59

%

52

%

51

%

50

%

48

%

39

%

31

%

20

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

US

A

ITA

AU

S

NZ

SW

E

PO

R

FR

A

GE

R

BE

L

FIN

NE

TH

IND

KO

R

TH

PH

I

IND

TW

SN

G

CH

I

HK

Car Ownership Rates Among Online Survey Respondents, Highest vs. Lowest

Countries, 2005

Source: A.C. Nielsen.

Higher rate of car ownership in Western Europe, US

Stimulus check, export effects

Car Ownership Aspiration Index

High

China

India

Indonesia

Korea

Philippines

Thailand

Hong Kong

MediumMalaysiaTaiwanAustria

ItalyBelgium

New ZealandSingapore

SpainFrance

Portugal

LowUnites States

GermanyAustraliaFinlandJapan

SwedenNorway

NetherlandsDenmark

Source: A.C. Nielsen, 2005.

Asians have

greatest interest in

car purchase

Credit Market Impact

Ability to Secure CreditImpacts Vehicle Sales and

Insurer Exposure

Credit Market Conditions Will Affect Vehicle Demand

Source: Informa Research from USA Today, October 1, 2008, p. B1.

6.62%

6.99%6.96%

6.59%6.53% 6.56%

7.49%

7.12%7.07%

6.0%6.2%

6.4%6.6%6.8%

7.0%7.2%

7.4%7.6%

4-Year New Auto 5-Year New Auto 4-Year Used Auto

Sep-08 Mar-08 Sep-07

Average Auto Loan RatesWhile borrowing costs may be

down, credit standards are tighter, negatively impacting auto

insurance exposure growth

Public Transportation: Investment Could Slow Future Auto Insurance

Growth

Can Humans Really Coexist Will Billions of Motor

Vehicles?

2.12%

4.36%3.74%

6.68%5.35%

11.24%

4.40%

0%

2%

4%

6%

8%

10%

12%

Heavy Rail Light Rail CommuterRail

Trolleybus Bus US Overall Canada

Use of public transportation is increasing as energy prices rise. Weak economy, more investment

may increase interest.

Overall US ridership is up 4.36% in the first half of 2008—about

230,000 more riders per day

Change in Public Transportation Ridership

Source: American Public Transportation Association; Insurance Information Institute.

Jan. – Jun. 2008 vs. Jan. – Jun. 2007

Auto Insurance Pricing

Modestly Rising Rates are Trailing Inflation Trends

$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

0.8

%

0.8

%

0.5

%

0.4

%

0.3

%

0.3

% 0.5

%

0.6

%

0.5

%

0.1

% 0.5

%

0.9

% 1.1

% 1.3

% 1.7

%

2.6

%

2.6

%

2.7

% 3.0

%

0.2

%

0%

1%

1%

2%

2%

3%

3%

4%

Ja

n-0

7

Fe

b-0

7

Ma

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7

Ap

r-0

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r-0

8

Ap

r-0

8

Ma

y-0

8

Ju

n-0

8

Ju

l-0

8

Au

g-0

8

Monthly Change in Auto Insurance Prices*

*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics; Insurance Information Institute.

Auto insurance prices have clearly

begun to rise in recent months

Insurance Expenditures as a Percentage of Total Household Spending

Source: Insurance Information Institute 2008 Fact Book; US Bureau of Labor Statistics.

Vehicle insurance expenditures account for

1.8% of household spending

Commoditization

Has Personal Auto Insurance Become a

Commodity?

Commoditization:Fact, Fiction or Fear?

• Notion that Personal Lines (esp. Auto) Have Become Commoditized is Overblown and Not Supported by the Facts Continuous product innovation by insurers Most coveted consumers can and do draw distinctions between insurers on factors

other than price (others can form a lucrative niche category) Quickening of product cycle (from rollout to maturation) does create the

appearance of more homogeneity among competitors Increased price transparency feeds illusion of commoditization; In a true

commodity the price elasticity of demand is infinite—not so for insurance Need to be like successful tech, fashion companies: All competitive edges are

temporary and fleeting It is impossible to be on the leading edge of all products and markets at all times;

Identify Bread & Butter plus Niche, Specialty, E&S markets If insurance were a commodity, it would be hard to lose competitive edge BUT—Web does make it easier to launch a brand today

• Product Differentiation: Invisible vs. Observable Differences may be invisible to consumer—insurers with superior underwriting

acumen are offering a fundamentally different product because margins are different even if the terms and conditions of the policy are identical. Underwriting advantages more difficult to replicate.

Design features (“bells and whistles”) are marketing driven & easily replicated but are attention getters

Rising Inflation

Acceleration in Inflation Affects Auto Claims Costs

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

4.9 5.1

3.0 3.2

2.6

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, August 10, 2008. (forecasts)

In July 2008, on a year-over-year basis inflation was 5.6% -- a level not seen since 1991.

Inflation: Important Economic Risks and Implications for Insurers

Effects of Inflation Risks to Insurers & Buyers

Claim Severity Increase

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

Rate Inadequacy •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

Medical & TortCost Inflation

Amplifiers of Inflation; Important 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

Ind

ex V

alu

e (1

982-

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

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

Effects of Inflation Risks to Insurers

Reserve Deficiency

•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

Inadequate Insurance Limits

•Policyholders could find themselves inadequately insured as claims costs escalate

Inadequate Reinsurance

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

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

Infl

atio

n R

ate

(%)

*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

Economic Growth

Expansion of Global Auto Insurance Market is

Fundamentally a Function of Local Economics

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

%

3.3

%

1.2

%

0.3

% 1.1

%

2.0

% 2.5

%

2.7

%

-0.2%-1%

0%

1%

2%

3%

4%

5%

6%

   2

00

0  

 

   2

00

1  

 

   2

00

2  

 

   2

00

3  

 

   2

00

4  

 

   2

00

5  

 

   2

00

6  

 

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

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

Stimulus check, export effects

Real GDP By Market 2002-2009F(% change from previous year)

0.9%

0.0% 0.

3%

1.6%

2.1%

0.8%

-0.2

%

1.4%

2.5%

1.8%

0.6%

3.6%

3.3%

2.9% 3.

1%

2.9%

2.9%

2.6%

2.1% 2.2%

3.0%

1.7% 1.

9%

1.7%

1.2%

1.8%

1.4%

1.1%

1.5%

1.1% 1.

4%

2.8%

2.7%

3.6%

1.6%

2.5%

3.1%

%

2.9%

%2.4%2.

6%

-1%

0%

1%

2%

3%

4%

5%

Euro Area Germany Japan US UK

2002 2003 2004 20052006 2007 2008E 2009F

Source: OECD Economic Outlook No. 83

Steep declines in GDP will negatively impact auto

insurer growth prospects

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Ja

n-0

0

Ja

n-0

1

Ja

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2

Ja

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3

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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

Au

g-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

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

The Housing CrashCollapse of Home Price Bubble

Influences Auto Purchases Through Wealth and Home

Equity Effects

Case-Schiller Home Price Index: 20 City Composite

0

50

100

150

200

250

Ja

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January 2000 = 100

Peak in July 2006 at 206.52, meaning home prices had

more than doubled between Jan. 2000 and July 2006

July 2008 index value was 166.23, meaning home prices were 19.5%

below their July 2006 peakHome prices are

approximately where they were in mid 2004

Source: Standardandpoors.com (SPCS20R Index); Insurance Info. Institute

Jul-

08

Loss of home equity is hurting car sales

Change in Home Values from July 2006 Housing Bubble Peak, by City*

-34.

4%

-34.

2%

-32.

9%

-30.

9%

-29.

7%

-27.

9%

-26.

5%

-24.

4%

-21.

8%

-19.

5%

-16.

0% -11.

5%

-10.

7%

-10.

4%

-8.6

%

-7.2

%

-5.4

%

-3.0

%

-1.9

%

-1.8

%

4.1%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

Phoen

ix

Las V

egas

Mia

mi

San D

iego

Los A

ngeles

San F

rancis

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ork

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Dallas

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Home prices are falling across the country, down 19.5% on average in July 2008*

*Calculated as of July 2008 (latest available) by III from monthly Case-Schiller price index data. Date of maximum price varies by city (July 2006 for 20-city composite: SPCS20R Index).Source: Case-Schiller Home Price Index at Standardandpoors.com; Insurance Info. Institute

Home equity is a common source of wealth used to

fund car purchases

Home Price History:Anatomy of a Bubble

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Annual Change on a Monthly Basis: Jan. 1988 – Jul. 2008

Source: Standardandpoors.com (CSXR series); Insurance Info. Institute

Jan. 1988

Early stages of S&L fallout; Credit tightens

post-Oct. 1987 crash

April 1991

Max pace of decline.

S&L bank shakeout; Recession, Gulf War,

Energy price spike

Aug. 1990

Price decline begins.

Gulf War, Energy price spike, Recession

March 1996

House price recovery begins after 6 years of falling or flat prices.

Feb. 2002

Home price increases slow post 9/11 and tech bubble collapse; recession ends late 2001. Stock markets

down; Lowest interest rates in 40 years begin to fuel massive real estate

and credit bubble

Jul. 2004

Peak annual increase reached: 20.5%;

Credit standards deteriorate rapidly; Explosion in subprime loans, MBS, CDS

Jan. 2007

Home prices

begin to fall

Jul. 2008

Home prices plunge

17.5% vs. July 2007

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(8/08) for 2008/09. Insurance Information Institute for years 2010-2014.

Rising Energy Costs

Driving Patterns and Auto Claiming Behavior

Miles Driven vs. Gas Pricesin Recent Months

200,000

210,000

220,000

230,000

240,000

250,000

260,000

270,000

280,000

Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Miles Driven Gas Prices

Sources: Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm); Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08juntvt/index.cfm).

Miles DrivenGas Price/ Gallon

2007 2008

Miles driven in June were down 4.7% vs. June 2008; Between Nov. 2007 and June 2008 Americans drove 53.2B fewer miles

As gas prices fall, willing people drive more?

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

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

Re

tail G

as

Pri

ce

, In

fla

tio

n a

dju

ste

d (

$/g

allo

n)

-4%

-2%

0%

2%

4%

6%

8%

% C

ha

ng

e M

ile

s D

riv

en

Inflation adjusted gas prices

% change in miles driven

Retail Gas Price* and Percent Change In Miles Driven, 1970 – 2008:H1

*1970-1977 retail gas prices based on leaded only. 1970-2007 adjusted to 2007 dollars.

Sources: Energy Highway Administration, Federal Highway Administration.

There is a strong association between gas prices and miles driven.

Until 2007/8 miles driven had not declined since the energy crises of the 1970s

Do Increases in Gas Prices AffectAuto Collision Claim Frequency?

7.00

6.81

6.59

6.80 6.78

6.91

6.65

6.32

6.035.93

5.71

5.84 5.82$1.27 $1.24

$1.07$1.18

$1.52 $1.46 $1.39$1.60

$1.90

$2.31

$2.62$2.84

$3.48

5.5

6.0

6.5

7.0

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

Pa

id C

laim

Fre

q

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

Av

g G

as

Pri

ce

/Ga

l

Collision Claim Frequency Gas Prices

Sources: Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm); ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: First Half 2008, published October 1, 2008 and earlier reports. 2008 figure is for 4 quarters ending Q2 2008.

Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100

Through Q2 2008, there is a small reduction in

collision claim frequency due to high gas prices

Do Changes in Miles Driven AffectAuto Collision Claim Frequency?

7.00

6.81

6.59

6.80 6.78

6.91

6.65

6.32

6.035.93

5.71

5.84 5.82

5.5

6.0

6.5

7.0

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

Pa

id C

laim

Fre

q

2400

2500

2600

2700

2800

2900

3000

3100

Bil

lio

ns

of

Mil

es D

rive

n

Collision Claim FrequencyBillions of Vehicle Miles

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08juntvt/08juntvt.pdf; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: First Half 2008, published October 1, 2008 and earlier reports. 2008 figure is for 4 quarters ending Q2 2008.

Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100

Auto Insurance: Claim Frequency Impacts of Energy Crisis of 1973/4

Source: ISO, US DOT.

Oct. 17, 1973: Arab oil embargo

begins

Frequency Impacts

Collision: -7.7%

PD: -9.5%

BI: -13.3%

March 17, 1974: Arab

oil states announce

end to embargo

Driving Stats

Gas prices rose 35-40%

Miles driven fell 6.7% in

1974

Frequency began to rebound almost

immediately after the embargo

ended

Auto Insurance: Claim Severity Impacts of Energy Crisis of 1973/4

Source: ISO.

Severity Impacts

Collision: -7.5%

PD: +15.9%

BI: N/A*

Driving Stats

Gas prices rose 35-40%

Miles driven fell 6.7% in

1974

Oct. 17, 1973: Arab oil embargo

begins

March 17, 1974: Arab

oil states announce

end to embargo

Collision severity began

to rebound almost

immediately after the embargo

ended; PD accelerated as inflation rose; No discernable trend change

in BI.

Cost of PIP Claims byVehicle Size*

$5,554

$4,859

$4,500

$5,000

$5,500

$6,000

Light Vehicle (Less than 2,771 lbs) Heavy Vehicle (More than 3,726 lbs)

Substitution of more fuel efficient but lighter

vehicles is associated with high more severe and costly PIP (no-fault)

claim costs

*Claims with payment in 2007. Excludes death and permanent total disability claims.Source: Auto Injury Insurance Claims: Countrywide Patterns in Treatment, Costs and Compensation, August 2008; Insurance Information Institute.

Proportion of Claimants Missing No Work Following a Claim*

38%

46%

30%

35%

40%

45%

50%

Light Vehicle (Less than 2,771 lbs) Heavy Vehicle (More than 3,726 lbs)

*Claims with payment in 2007. Excludes death and permanent total disability claims.Source: Auto Injury Insurance Claims: Countrywide Patterns in Treatment, Costs and Compensation, August 2008; Insurance Information Institute.

Substitution of more fuel efficient but lighter

vehicles is associated with a higher proportion of

claimants missing work following an accident

Claimants in lighter vehicles were also 12% more likely to

be hospitalized

Summary of Impacts of Energy Crises of 1970s on Auto Insurance

Measure Impact on Auto Insurers

Frequency •Falls initially•Rebounds almost shortly after shock passes•Rises to expected “no-crisis” levels with 2-3 years

Severity (Avg. Cost per Claim)

•Typically accelerates following surges in oil prices•Sensitive to inflationary pressures

Loss Cost (dollars of loss per insured vehicle)

•In general, initial slight decrease•Typically rebounds within 1 to 2 years

Source: ISO; Insurance Information Institute

Differences & Similarities Between Energy Crises of 1970s and Today

• Gas is Available In 1973/4 gas supplies were disrupted forcing a

reduction in driving, contributing to the declines in frequency

• Speed Limits Unlikely to be Reduced 55 MPH national speed limit imposed in 1974 Repealed in 1995, returning authority to states

• Ability to Migrate to More Fuel Efficient Fuels is Greater Today

Environmental Concerns

Fuel Economy, CO2 Emissions & the Auto

Insurance Industry

Corporate Average Fuel Economy (CAFE) Standards*

18

.0 19

.0 20

.02

2.0

24

.02

6.0 2

7.0 27

.5

26

.02

6.0

26

.0 26

.5 27

.5

27

.52

7.5

27

.52

7.5

27

.52

7.5

27

.52

7.5

27

.5

27

.52

7.5

27

.52

7.5

27

.52

7.5

27

.52

7.5

27

.5

15

17

19

21

23

25

27

29

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

CAFÉ standards originated with the “Energy Policy

Conservation Act” of 1975 in response to the Arab oil

embargo of 1973-74

*Passenger cars. Light trucks have separate standards.Source: National Highway Safety and Transportation Administration; Insurance Information Institute

Fuel economy standards have remained unchanged since 1990, exacerbating vulnerability to record gas prices

Light trucks need only get 22.5 mpg in 2008

Avg. Emissions for New Auto Fleets vs. EU Target* (Avg. CO2 grams/km)

142 144 147165

182 184

120

282

0

50

100

150

200

250

300

PSA PeugeotCitroen

Fiat SpA Renault SA VolkswagenAG

BMW AG Daimler AG PorscheAutomobil

Holding SE

EU Target

A proposed EU law would require auto makers to meet a target of an average of 120 grams of carbon dioxide per kilometer based

on new cars sold in Europe by 2012.

Source: The Wall Street Journal 9/24/08, European Commission, Citi Investment Research. *Based on Jan. 2008 figures

Av.

Co

2 g

ram

s/km

Most European brands falling short of EU CO2 emission targets and will need more

time to meet standards

CO2 REGULATION

Greenhouse Gases Can Be Reduced, But at What Cost?

CO2 Caps Set by S. 2191 Through 2050 (Billions of Metric Tons)

Source: Heritage Foundation; America’s Climate Security Act of 2007, S. 2191, 110th Congress, 1st Sess. (2007), Sec. 1201 (d).

5.2

4.43

3.47

2.51

1.56

0

1

2

3

4

5

6

2012 2020 2030 2040 2050

2005 emission level 15% below 2005

emission level

33% below 2005 emission level

52% below 2005 emission level

70% below 2005 emission level

Billions of Metric TonsLieberman-Warner (S.

2191) imposes ambitious CO2 reduction targets

Comparing Simulations of Carbon Dioxide Fees

*In 2006 dollars; *In 2005 Dollars.Source: Heritage Foundation, The Economic Costs of the Lieberman-Warner Climate Change Legislation, May 2008.

$68$68$83

$101

$58$50$49

$56

$83$65

$51$40

$0

$50

$100

$150

2015 2020 2025 2030

The Heritage Foundation* MIT** EPA**

Carbon Fees Per Ton, Adjusted for Inflation

Carbon fee estimates vary, but price grows sharply over time with

emission reduction mandates (108% under EPA scenario)

ME10.3

NH14MA 9.7

CT 8.3

PA26

WV114.5 VA

14.5

NC21.2

LA34.6TX

31.8

OK37.7

NE31.8

ND114.8

MN18.4

MI19.5

IL21.1

IA33.6

ID1.6

WA4.2

OR4.9

AZ24

HI20.9

NJ6.3

RI6.2

MD 14.6DE 18.4

AL

VT0

NY7.2

DC0.4

SC24.7

GA26.6

TN25.8

AL47.4

FL17.8

MS24

AR25.8

NM45.5

KY56.4

MO34.3

KS32.7

SD11.3

WI21.6

IN50.1

OH28.7

MT51.3

CA4.9

NV17.7 UT

44.8

WY218.1

CO22.7

Per-Household Carbon Dioxide Emissions

In Metric Tons for 2007AK

19.9

Source: Heritage Foundation

0 to 9.9

10 to 19.9

20 to 29.9

30 to 39.9

40 to 220

Carbon Dioxide Emissions, Metric Tons in 2007, State Rankings

1 Wyoming 218.1 18 Georgia 26.6 35 Nevada 17.7

2 North Dakota 114.8 19 Pennsylvania 26 36 Maryland 14.6

3 West Virgina 114.5 20 Arkansas 25.8 37 Virginia 14.5

4 Kentucky 56.4 21 Tennesse 25.8 38 New Hampshire 14

5 Montana 51.3 22 South Carolina 24.7 39 South Dakota 11.3

6 Indiana 50.1 23 Arizona 24 40 Maine 10.3

7 Alabama 47.4 24 Mississippi 24 41 Massachusetts 9.7

8 New Mexico 45.5 25 Colorado 22.7 42 Connecticut 8.3

9 Utah 44.8 26 Wisconsin 21.6 43 New York 7.2

10 Oklahoma 37.7 27 North Carolina 21.2 44 New Jersey 6.3

11 Louisiana 34.6 28 Illinois 21.1 45 Rhode Island 6.2

12 Missouri 34.3 29 Hawaii 20.9 46 California 4.9

13 Iowa 33.6 30 Alaska 19.9 47 Oregon 4.9

14 Kansas 32.7 31 Michigan 19.5 48 Washington 4.2

15 Nebraska 31.8 32 Delaware 18.4 49 Idaho 1.6

16 Texas 31.8 33 Minnesota 18.4 50 District of Columbia 0.4

17 Ohio 28.7 34 Florida 17.8 51 Vermont 0

Source: Heritage Foundation

P/C INSURANCE PROFITABILITY

In the Midstof a Cyclical Decline

P/C Net Income After Taxes1991-2009F ($ 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

$27,

866

$25,

000

-$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

08F

09F

*ROE figures are GAAP; 1Return on avg. surplus. 2008 numbers are based on H1 actual.Sources: A.M. Best, ISO, Insurance Information Inst.

2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.3%2008 ROAS = 5.4%*

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 08F09F10F

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2010F

2008 P/C insurer figure is annualized H1 return on average surplus. Excluding mortgage and financial guarantee insurers = 7.6%. 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*

08F

09F

10F

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 Years10 Years

9 Years

*GAAP ROE for all years except 2007 and 2008 which are ROAS (statutory Return on Average Surplus).2008 ROAS is annualized based on H1 2008. Excluding mortgage and financial guarantee insurers = 7.6%Sources: ISO; Insurance Information Institute.

2008: 5.4%(7.6% excl. M&FG)

P/C Insurance Industry ROEs,1975 – 2010F*

2010: 5.0%

Personal/Commercial Lines & Reinsurance ROEs, 2006-2008F*

14.0%

16.8%

12.3%

9.4%

13.2%

6.3%

9.8% 10.7%9.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Personal Commercial Reinsurance

2006 2007E 2008F

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

ROEs are declining as underwriting

results deteriorate

-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:H1

*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 p

ts

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 capital is 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 fallContributes 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 consolidation would imply greater discipline

Source: Insurance Information Institute.

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

4.98%

-71.84%

-36.70%

-50.47%

-10.56%

-5.24%

-24.07%

-15.39%

-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 5, 2008P/C, Life insurance stocks caught in financial services

downdraft

Mortgage & 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

PREMIUM GROWTH

At a Virtual Standstillin 2007, 2008 and

Possibly 2009

-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

F20

09F

2010

F

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

Strength of Recent Hard Marketsby NWP Growth

1975-78 1984-87 2000-03

Shaded areas denote “hard

market” periods

Negative growth so far in 2008

In 2007 net written premiums fell 0.6%, the first

decline since 1943

Year-to-Year Change in Net Written Premium, 2000-

2008:H1

Source: A.M. Best; ISO.

5.0%

8.4%

15.3%

10.0%

3.9%

0.5%

4.2%

-0.6% -0.6%2000 2001 2002 2003 2004 2005 2006 2007 2008H1

P/C insurers are experiencing their

slowest growth rates since 1943

Slow growth means retention is critical

Protracted period of

negative or zero growth is possible due to soft

markets and slow

economy

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

2.0% 3.5%

28.1%

-0.1%

-1.5%-2.3%

-8.5%

1.4%

-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

0%

10%

20%

30%

40%

50%

60%

70%

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

Direct Independent Agents

All P/C Lines Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained in recent

years. Direct channels include exclusive agency companies, direct marketers and

direct sales (e.g., internet)

0%

10%

20%

30%

40%

50%

60%

70%

80%

72 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Direct Independent Agents

Personal Lines Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

Independent agents have lost significant personal lines market

share since the early 1970s, but the trend has slowed or even ended.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

72 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Direct Independent Agents

Commercial P/C Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

Independent agents have seen only modest erosion in commercial lines

market share in recent decades

Channel ClutterDistribution Fusion

• Consumers Will Demonstrate Demand for Identical Product and Service via Multiple Distribution ChannelsCaptive/Exclusive Agent, IAs, Direct Marketing (incl.

Internet) will continue to co-exist for many years. More channels may be developed in the future.

Multi-channel distribution is already the normConsumers don’t necessarily think about channels

per se; In their minds distribution/service access are fused and should be seamless

Adds to expense, but produces more customer touch points, marketing opportunities and improves retention

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

08

F

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000s: 102.0*

Sources: A.M. Best; ISO, III *Actual H1 result.

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

115.8

107.4

100.198.3

100.7

92.4

105107

103.2101.2

95.6

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2008* 2009F 2010F

P/C Insurance Industry Combined Ratio, 2001-2010F

*Includes 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

Cyclical Deterioration

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

illi

ons

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*

$5.635 Bill underwriting loss in 08:H1 incl. mort. & FG insurers

$2

3.1

$3

3.4

$3

3.9

$1

7.2

($2

.0)

$1

.3

($8.0)

($1

9.9

)

($6.6) ($6.0)($5.0)

8.2

-0.5

6.6

8.6

0.4

-6.8

-1.5

4.1

-1.8 -1.4 -1.1

($30)

($20)

($10)

$0

$10

$20

$30

$40

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

Re

se

rve

De

ve

lop

me

nt

($B

)

(8)(7)(6)(5)(4)(3)(2)(1)012345678910

Co

mb

ine

d R

ati

o P

oin

ts

PY Reserve DevelopmentCombined Ratio Points

Impact of Reserve Changes on Combined Ratio, 2000-2010F

Source: A.M. Best, Barclays Caoital estimates for years 2008-2010

Reserve adequacy has

improved substantially

$1.3

Cumulative Prior Year Reserve Development by Line (As of 12/31/07)

-$1,

859

-$1,

654

-$1,

023

-$92

5

-$78

5

-$55

0

-$30

5

-$26

7

-$24

0

-$77

$380

$575 $1

,11

5

$6,931

$2,650

-$2,285

-$4,000

-$2,000

$0

$2,000

$4,000

$6,000

$8,000

Pvt P

ass.

Auto L

iab

Auto P

hys.

Dam.

Special

Pro

perty

Reinsu

rance

Homeo

wner's

Comm

l. M

ulti-P

eril

Special

ty L

iab.

Inte

rnat

ional

Comm

l. Auto

Finan

cial G

uaran

ty

Other

Med

Mal

Fideli

ty/S

urety

Products

Liab

ility

Wor

ker's

Comp

Other

Liab

ility

$ B

illi

ons

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

Reserve redundancies in most lines have resulted in

releases in recent years but that is ending

Release

Strengthening

$147

.0

$156

.3

$168

.9

$177

.5

$180

.0 $198

.9

$187

.2

$198

.1

$200

.4

$209

.2

$201

.6

$214

.2

$224

.7

$242

.2

$280

.8

$292

.6

$299

.7

$308

.8

$320

.6

$288

.1

$298

.6

$314

.4

$0

$50

$100

$150

$200

$250

$300

$350

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

$ B

illi

ons

Total losses paid by insurers increased by $152 billion or more than 100%

from 1987 through 2007

Sources: A.M. Best; 2007 figure is from ISO. *2008 is annualized Q1 ISO result; Insurance Information Institute.

Dip in 2006/07 was associated with drop in catastrophe losses, which is unlikely to

persist. Losses and loss ratios in 2007 rose and are rising in 2008. During 2006/07, the price of many types of insurance fell.

Losses Paid by Property/Casualty Insurers Have Steadily Increased for Decades

AUTO INSURANCE

Recent Underwriting Trends by Coverage Type

103.

9

104.

5

103.

5

104.

9

99.8 10

2.7

104.

5

109.

9

110.

9

105.

3

98.4

94.3 96

.4

94.3 95

.6

102.

5

85

90

95

100

105

110

115

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08FSource: A.M. Best; Insurance Information Institute.

Recent strong results attributable favorable frequency

trends and low CAT activity

Personal LinesCombined Ratio, 1993-2008E

101.7101.3 101.0

99.5

101.1

103.5

109.5

107.9

104.2

98.4

94.395.1 95.5

97.5

99.5

101.3

90

95

100

105

110

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

Private Passenger Auto (PPA) Combined Ratio

Average Combined Ratio for 1993 to 2006:

101.0

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

PPA is the profit juggernaut of the

p/c insurance industry today

Auto insurers have shown significant

improvement in PPA underwriting

performance since mid-2002, but results

are deteriorating.

-4%

-2%

0%

2%

4%

6%

8%

10%

00

:Q1

00

:Q2

00

:Q3

00

:Q4

01

:Q1

01

:Q2

01

:Q3

01

:Q4

02

:Q1

02

:Q2

02

:Q3

02

:Q4

03

:Q1

03

:Q2

03

:Q3

03

:Q4

04

:Q1

04

:Q2

04

:Q3

04

:Q4

05

:Q1

05

:Q2

05

:Q3

05

:Q4

06

:Q1

06

:Q2

06

:Q3

06

:Q4

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

Auto Insurance Component of CPI Personal Auto-PD Pure Premium

Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.

Pure Premium Spread: Personal Auto PD Liability, 2000-2008:Q2

Margin necessary to maintain PPA

profitability

2000 PPA Combined=110

A favorable inversion of the pure premium spread

began in mid-2008

2006 PPA Combined=95.5

-2.2%

-5.3%

-4.0%-3.3%

-0.9%

-2.6%

-5.4%

-3.8%

-5.0% -5.1%

3.0%3.6% 3.8% 3.4%

2.8%

4.8%

6.0% 5.6%

-0.3%

4.7%

-6%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05 06 07 08*

Frequency Severity

Bodily Injury: Severity Trend Running Ahead of Frequency

Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008.

Medical inflation is a powerful cost driver

0.8%

-1.5%

0.3%

-2.0% -2.3% -2.1% -1.9%

-3.8%

0.6%0.0%

3.9%3.3%

2.8%

0.5%

2.8%3.7%

2.1% 2.0%

4.3%

6.2%

-6%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05 06 07 08*

Frequency Severity

PD Liability: Frequency Trend No Longer Offsets Severity

Fewer accidents, but more damage when they occur

Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008.

-1.6%

1.1%

-1.1%

0.0%

-0.6%

-7.2%-5.4% -5.1%

-4.0% -4.8%

3.2%

6.5%

-4.0%

0.5%

4.8%6.1% 6.7%

2.3%

6.3%

16.1%

-10%

-5%

0%

5%

10%

15%

20%

99 00 01 02 03 04 05 06 07 08*

Frequency Severity

PIP: Severity Trend Now Offsets Smaller Claim Frequency Decline

Fraud caused problems from

1999-2001

Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008.

2.6%

-0.4%

1.9%

-3.8%

-5.1%-4.6%

-1.7%

-3.7%

2.3%

3.7% 3.7%

1.5%

3.8%3.1%

0.5%

0.7%

0.1%

3.0%4.1%

6.8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05 06 07 08*

Frequency Severity

Collision: Frequency and Severity Claim Trend Adverse

Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008.

-1.7

%

-2.6

%

3.3%

-5.7

% -2.1

%

-8.0

%

-3.1

%

-9.8

% -6.5

%

0.7%

-6.9

%

14.9

%

-1.3

%

-1.4

%

6.9%

-4.1

%

-2.4

%

3.3%

-4.7

%

8.9%

-15%

-10%

-5%

0%

5%

10%

15%

20%

99 00 01 02 03 04 05 06 07 08*

Frequency Severity

Comprehensive: Weather Hurts Frequency and Severity Trends

Weather related claims from

Hurricanes Katrina, Rita & Wilma:

681,900 claims valued $3.29 billion

Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008.

Severe first half weather (floods, hail, tornadoes)

5 Levels of Underwriting Innovation

• LEVEL I: Traditional Underwriting Relies on traditional underwriting tools to determine limited number of risk cells

• Level II: Predictive Modeling, Data Mining Has led to quantum leap in matching of risk with price Explosion in price points/identifiable and priceable market segments Enabled by reduction in computing and data storage costs—trends that will continue

• Level III: Revealed Risk (Telematics) Let the customer reveal to the insurer over time his/her individual risk profile Requires continuous monitoring or periodic sampling of individual risk (policyholder)

via “Black Box”• Level IV: Pavlov Policies

Provide continuous positive (or negative) reinforcement (feedback) Continuously changing and observable insurance premium Examples: ING Direct bank accounts; Continuous credit score monitoring; Zillow, etc.

—Idea is to provide continuous feedback in dollar terms WhatsMyPremiumToday.com;

• Level V: Experimentation and Behavioral Economics Conduct large-scale behavioral experiments to ascertain risk seeking/avoidance

behavior in wide variety of circumstances across wide cross section of customers relevant to insurance

Could be based on observation of actual behavior as well

Interactive Insurance Policies• Emulate Financial/Retirement Planning Engines

Allow people to “build” and modify policies at any time (goes well beyond Your Choice Auto)

Create “What If” scenario capacity with impact on premium; Examples: What if I had an at-fault accident?Product reports surcharge and new premium What if I bought a new Porshe vs. a used one? What if I increased my liability limits? What kinds of car would lower my premium by 10%? When I move to Mayberry what will my new premium be?

Can do something similar for home insurance• The Talking Insurance Policy (Interactive Policy Documentation)

Most people do not understand and never read their policy—not because they’re lazy or dumb but because it is often written in impenetrable legalese

Policy is online in customer’s account. Mouse-overs allow audio/visual pop-ups that explain policy in plain English and offer tips (e.g., Flood is excluded…call your Allstate agent to day to arrange flood coverage from the NFIP …)

• Gaming Game initializes with insureds parameters (vehicle, location, etc.) Policyholder “drives” in game and makes choices that influence premium, which

comtinuously changes based on those choices (e.g., speed, DUI, observe traffic signals, trade in vehicle for sports car…)

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

Capital/ Surplus Falling

from 2007 Peak

$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:H1*

Source: A.M. Best, ISO, Insurance Information Institute. *As of June 30, 2008

$ B

illi

ons

“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 $505.0, down 2.5% from 12/31/07 was $517.9B, but 80% above its 2002 trough.

Peak was $521.8 as of 9/30/07 (down 3.2% as of 6/30/08)

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

Nu

mb

er o

f Iss

uan

ces

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

$11,450

$599

$12,823

$800

$9,325

$36,407

$13,808

$3,318$8,683

7

15

10

2

0

2

01

9

3

1 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

Val

ue ($

Mill

)

0

2

4

6

8

10

12

14

16

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

Source: Lehman Brothers. *Deals exceeding $500 million. *Through July 24, 2008.

M&A activity began to accelerated in 2007. The largest deals in 2008 are Liberty Mutual’s/Safeco for $6.2B;

Tokio Marine/Philadelphia Consolidated for $4.7 B; Allied World/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 2008 Prices are falling or flat in most non-coastal markets

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

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

• Favorable Fundamentals/Drop-Off in CAT Activity Underlying claims inflation (frequency and severity trends) are benign Lower CAT activity took some pressure of capital base

Source: 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

Val

ue ($

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

$24.8

$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

08H1

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:H1

$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

-$1.07

$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:H

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 $-1.1

billion in 2008:H1.

$ Billions

-30%

-20%

-10%

0%

10%

20%

30%

40%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

200

8*

Source: Ibbotson Associates, Insurance Information Institute. *Through September 26, 2008.

Total Returns for Large Company Stocks: 1970-2008*

S&P 500 was up 3.53% in 2007, but down 20.6% 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

FINANCIAL STRENGTH &

RATINGS Industry Has Weathered

the Storms Well

P/C Insurer Impairments,1969-2007

815

12

711

934

913

12

19

916

14

13

36

49

31 3

449

49

54

60

58

41

29

15

12

31

18 19

49 50

47

35

18

13 15

4

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, 1969-2007

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

Co

mb

ined

Ratio

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Imp

air

men

t R

ate

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%

CATASTROPHICLOSS

2008 & Beyond

Most of US Population & Property Has Major CAT Exposure

Is Anyplace

Safe?

U.S. Insured Catastrophe Losses*$7

.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$6.7

$22.

0$1

00.0

$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 07

08**

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

$3.8 $4.0 $4.4 $5.0 $6.0 $7.0 $7.8 $8.2$10.9

$22.9

$43.6

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Georges(1998)

Jeanne(2004)

Gustav(2008)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Andrew(1992)

Katrina(2005)

$ B

illi

ons

*Based on average of midpoints from Sept. 1/2 range estimates from AIR, RMS and Eqecat.Sources: ISO/PCS; Insurance Information Institute.

With Gustav, 8 of the 10 most expensive hurricanes in US history occurred since 2004

2 3 2 3 4 3 4 3 5 3

Category of storm at landfall

2

Gustav would become the 9th most expensive hurricane in US history based

on an average of current estimates*

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Nu

mb

er

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$4

2.5

$18.

4 $34.

4$2

5.6

$18.

0$1

1.2 $2

4.9

$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

Distribution of US Insured CAT Losses: TX, FL vs US, 1980-2006*

Texas, $25.6 , 10%

Florida, $57 , 22%

Rest of US, $176 , 68%

Just 2 states, Texas and Florida

accounted for nearly 1/3 of all US

insured CAT losses from 1980-2006: $72.6B out

of $249.3B*All figures (except 2006 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

$ Billions of 2005 Dollars

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1987-2006¹

Fire, $6.6 , 2.2%

Tornadoes, $77.3 , 26.0%

All Tropical Cyclones, $137.7 ,

46.3%

Civil Disorders, $1.1 , 0.4%

Utility Disruption, $0.2 , 0.1%

Water Damage, $0.4 , 0.1%Wind/Hail/Flood,

$9.3 , 3.1%

Earthquakes, $19.1 , 6.4%

Winter Storms, $23.1 , 7.8%

Terrorism, $22.3 , 7.5%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.

Insured disaster losses totaled $297.3 billion from

1987-2006 (in 2006 dollars). Wildfires accounted for

approximately $6.6 billion of these—2.2% of the total.

Hurricane Katrina: Largest Auto CAT Loss in History ($

Billions)*

Homeowners, $17,564.0 , 43%

Commercial Property & BI, $20,847.0 , 52%

Vehicle, $2,168.0 , 5%Total insured

losses are estimated at

$40.579 billion from 1.7 million claims, including $2.2 billion from 300,000+ vehicle

claims

*As of June 8, 2006Source: PCS division of ISO; I.I.I.

5% of the $40.6 billion Katrina losses were

vehicle claims

Shifting Legal Liability & Tort

Environment

Is the Tort PendulumSwinging Against Insurers?

$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

Bil

lion

s

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

$233 $2

46 $260

$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 S

yste

m C

osts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t C

osts

as

% o

f G

DP

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 S

yste

m C

osts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t C

osts

as

% o

f G

DP

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.

The Nation’s Judicial Hellholes (2007)

Source: American Tort Reform Association; Insurance Information Institute

TEXAS

Rio Grande Valley and Gulf Coast

South Florida

ILLINOIS

Cook County West Virginia

Some improvement in “Judicial

Hellholes” in 2007

Watch ListMadison County, ILSt. Clair County, IL

Northern New Mexico

Hillsborough County, FLDelawareCalifornia

Dishonorable Mentions

District of ColumbiaMO Supreme Court

MI LegislatureGA Supreme Court

Oklahoma

NEVADA

Clark County (Las Vegas)

NEW JERSEY

Atlantic 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. Alaska

44.Texas45. California46. Illinois47. Alabama48. Louisiana49. Mississippi50. West Virginia

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

New in 2007

ME, NH, TN, UT, WI

Drop-Offs

ND, VA, SD, WY, ID

Newly Notorious

AK

Rising Above

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 2007

Source: 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 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

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

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJ

RI

MDDE

AL

VT

NY

DC

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

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

Legal, Legislative &Regulatory Issues

• Florida “Seeing the Light”?: State finally recognizing that it is overexposed with its 2007 legislation having failed to deliver on political promises made

• Credit: Perennially under attack, but states shift each year

• Massachusetts Auto: Reforms have led to more competition, lower rates

• Optional Federal Chartering: Recommended in Treasury plan; Still divisive issue

• Tax Issue: Treatment of locales like Bermuda; Effort to “level the playing field”

• National CAT Plan: Hearings in February and in 2007, but no current catalyst

• Flood Reform: Likely to happen; MS Rep. Gene Taylor still wants wind cover

• McCarran-Ferguson: Trent Lott’s gone, some may still push for scaling back

• Profusion of Quasi-Regulators: AGs, Governors, Congressional representatives

• Bad Faith Legislation: Attempts by trial lawyers and legislative allies to open new tort channels (WA referendum, Florida SB 2862)

• Excess Profits Laws: Laws seek to cap industry profits

• Loss of Binding Arbitration: Congress threatening to enact legislation that could impair the use of binding arbitration in contracts

Source: III

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%

Carter

Reagan II

G.W. Bush II

Nixon

Clinton I

G.H.W. Bush

Clinton II

Reagan I

Nixon/Ford

Truman

Eisenhower I

Eisenhower II

G.W. Bush I

Johnson

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

THANK YOU FOR YOUR TIME AND

YOUR ATTENTION!