Two Years WithoutMajor Hurricanes:

Implications for Insurersand Policyholders2008 National Hurricane Conference

Orlando, FLApril 4, 2008Download at:

www.iii.org/media/presentations/nhc2008

Robert P. Hartwig, Ph.D., CPCU, President & Chief EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

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

Presentation Outline• Catastrophic Loss

Two Years Without Storms, But Not Without Disasters• Acts of God and the Bottom (and Top) Line• Reinsurance Markets

It Takes a Global Village to Insurance Against Major Hurricanes

• Financial Strength During the Decade of Disaster• Hurricane Risk: Florida & Texas Cases Studies• Post-Katrina Pricing Environment• Claims-Paying Capacity• Katrina Litigation Update• Flood/Surge Risk: Complacency is a Already Setting In

CATASTROPHICLOSS

What Does theFuture Hold?

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

$6.5

$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 0720

??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 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

$ Billions

2006/07 were welcome respites. 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, $2005)

$3.5 $3.8 $4.8 $5.0 $6.6 $7.4 $7.7$10.3

$21.6

$41.1

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Georges(1998)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Andrew(1992)

Katrina(2005)

$ B

illio

ns

Sources: ISO/PCS; Insurance Information Institute.

Seven of the 10 most expensive hurricanes in US history

occurred in the 14 months from Aug. 2004 – Oct. 2005:

Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne

Insured Loss & Claim Count for Major Storms of 2005*

$1.1

$41.1

$10.3$5.0

104383

1,047

1,744

$0$5

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

Dennis Rita Wilma KatrinaSize of Industry Loss ($ Billions)

Insu

red

Loss

($ B

illio

ns)

02004006008001,0001,2001,4001,6001,8002,000

Cla

ims

(thou

sand

s)

Insured Loss Claims

*Property and business interruption losses only. Excludes offshore energy & marine losses.Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.

Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3

million claims

States With Largest Insured Catastrophe Losses in 2007

$ Millions

$1,230

$747 $677

$320$223 $202 $200 $200$262$270$272

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

CA MN TX GA IL OK KS MO NY CO ALSource: PCS/ISO; Insurance Information Institute.

2007 CAT STATS•1.18 million CAT claims across 41 states arising•23 catastrophic events

Distribution of 2007 US CAT Losses, by Type and Insured Loss

Personal, $4.4 , 68%

Commercial, $1.3 , 20%

Vehicle, $0.8 , 12%Personal (home, condo, rental, contents etc.)

accounted for 68% of all US insured

CAT losses paid in 2007. CAT claim

count was 1.18 million.

Source: PCS division of ISO.

$ Billions

Distribution of 2007 US CAT Losses, by Type and Claim Count

Personal, 721 , 61%

Commercial, 144 , 12% Vehicle, 315 , 27%

Personal (home, condo, rental, contents etc.) accounted for 61% of all US insured CAT

claims in 2007, but 68% of loss

dollars paid.Source: PCS division of ISO.

Thousands of Claims

$14.3$34.4$40.2$47.7$63.6$68.4$108.3$132.6$138.4$154.4$168.7

$420.7$502.5$538.4

$2,260.0$2,294.4

$2,589.3

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

Sep. 12-18, 1979 Hollywood Hills, CA

Oct. 9-10, 1982 Los Angeles, Ventura, Orange Cos., CA

Nov. 16-17, 1980 Bradbury, Pacific Palisades, Malibu, Sunland,Carbon Canyon, Lake Elsinore, CA

Oct. 23-25, 1978 Los Angeles, Ventura Cos., CA

May 17-20, 1985 Florida

Jul. 26-27, 1977 Santa Barbara, Montecito, CA

Nov. 24-30, 1980 Los Angeles, San Bernardino, Orange,Riverside, San Diego Cos., CA

Sep. 22-30, 1970 Oakland-Berkeley Hills, CA

Jun. 23-28, 2002 Rodeo-Chediski Complex, AZ

July 2007: Lake Tahoe, CA**

May 10-16, 2000 Cerro Grande, NM

Jun. 27-Jul. 2, 1990 Santa Barbara County, CA

Oct. 27-28, 1993 Orange Co., CA

Nov. 2-3, 1993 Los Angeles Co., CA

Oct. 2007: Southern CA Fires*

Oct. 2003: Southern CA Fires

Oct. 20-21, 1991: Oakland, Alameda Cos., CA

Insured Losses (Millions 2007 $)

Top Catastrophic Wildland Fires In The United States, 1970-2007

Fourteen of the top 17

catastrophic wildfires since

1970 occurred in California

*Estimate from CA Insurance Dept., Jan. 10, 2008. Source: ISO's Property Claim Services Unit; California Department of Insurance; Insurance Information Institute.

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

1987-2006¹Fire, $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.

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$4

3.1

$15.

0$4

1.8

$16.

7$2

1.6

$52.

8$1

13.9

$16.

9 $27.

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

Global Insured Catastrophe Losses by Region, 2001-2007

0

10

20

30

40

50

60

70

80

90

2001 2002 2003 2004 2005 2006 2007

Seas/SpaceAfricaOceania/AustraliaSouth AmericaAsiaEuropeNorth America*

Notes: 2001-03 figures for N. America include US only. 2001 figure includes only property losses from 9/11. Source: Insurance Information Institute compiled from Swiss Re sigma issues.

North America accounted for 70% of global

catastrophe losses 2001-2007

$ Billions

The 2008 Hurricane Season:

Preview to Disaster?

Outlook for 2008 Hurricane Season: 25% Worse Than Average

115NA96.2Accumulated Cyclone Energy675Intense Hurricane Days

125%275%100%Net Tropical Cyclone Activity

372.3Intense Hurricanes3047.524.5Hurricane Days7145.9Hurricanes

60115.549.1Named Storm Days13289.6Named Storms

2008F2005Average*

*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.

Landfall Probabilities for 2008 Hurricane Season: Above Average

Above Average

NACaribbean

36%30%Gulf Coast from Florida Panhandle to Brownsville

37%31%US East Coast Including Florida Peninsula

60%52%Entire US East & Gulf Coasts

2008FAverage*

*Average over the past century.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.

ACTS OF GOD & THE BOTTOM(& TOP) LINE

Catastrophic Loss & Insurer Financial Performance

-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 07F

08F

US P/C Insurers All US Industries

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

*2007 is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

4 Hurricanes

Katrina, Rita, Wilma

P/C profitability is cyclical, volatile and vulnerable

-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 0607

E08

F

Profitability Peaks & Troughs in the P/C Insurance Industry,1975 – 2008F*

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 Years 9 Years

*GAAP ROE for all years except 2007 which is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune

P/C Net Income After Taxes1991-2008F ($ Millions)*$1

4,17

8

$5,8

40

$19,

316

$10,

870

$20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$59,

200

$46,

300

-$6,970

$63,

695

$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

07E

08F

*ROE figures are GAAP; 1Return on avg. surplus. **Return on Average Surplus; Actual 9-month 2007 result.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= 9.6%2006 ROE = 12.2%2007E ROAS1 = 13.1%**

Insurer profits peaked in 2006

117.7

158.4

113.6118.4

112.7

121.7

101.0

108.2111.4

121.7

109.3

98.394.2

100.1

91.795.5

99.5

113.0109.4

85

95

105

115

125

135

145

155

165

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

Homeowners Insurance Combined Ratio

Average 1990 to 2006= 111.8

Insurers have paid out an average of $1.12 in losses for every dollar earned

in premiums over the past 17 years

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

-10%

-5%

0%

5%

10%

15%

20%

25%

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

F20

08F

Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute

Strength of Recent Hard Markets by NWP Growth*

1975-78 1984-87 2001-04

*2007 figure is actual 9-month figure.

Post-Katrina period resembles

1993-97 (post-Andrew)

2008: Projected -0.3% premium growth would be the first decline since 1943

REINSURANCE MARKETS

It Takes a (Global) Village to Manage Large-Scale

Hurricane Losses

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

FINANCIAL STRENGTH &

RATINGSIndustry Has Weathered

the Storms Well, But Cycle May Takes Its Toll

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 07E

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 reach near-record low in 2007

Source: A.M. Best; Insurance Information Institute

2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969;

2007 will be lower; Record is 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

FLORIDA HURRICANES & INSURER

PROFITABILITY:

Selling Home Insurance in Florida is Challenging

Landfalling Hurricanes: 1900-2007FL Landfalls are Common

184

70

26

0

50

100

150

200

All Landfalling: 1900-2007

FL Landfalling FL CAT 3+Landfalling

Source: HURDAT database; Insurance Information Institute.

A hurricane strikes FL every other year on average—CAT 3+ every 4 years

38% of all hurricane landfalls occur in FL

37% of all FL landfalls are

CAT 3+

1.7 hurricanes make landfall each year on average

($9.30)

($3.77)

$2.96 $3.40

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

$6

2004 2005 2006 2007E

Underwriting Gain (Loss) in Florida Homeowners Insurance,

2004 - 2007E*

*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.

$ B

illio

ns

Over the past four years, underwriting losses

exceeded premiums in Florida by an estimated

$6.7 billion

Private Insurers**

($10.60)

($0.21)

$0.69 $0.43 $0.86 $1.08 $1.23 $1.28 $1.43 $1.15 $1.38 $1.76

($9.30)

($3.77)

$2.96 $3.40

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

$6

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

Underwriting Gain (Loss) in Florida Homeowners Insurance,

1992-2007E*

*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.

$ B

illio

ns

Florida’s homeowners insurance market produces small/modest

profits in most years and enormous losses in others

Private Insurers**

-$10.6-$10.8-$10.1-$9.7

-$8.8-$7.7

-$6.5-$5.2

-$3.8-$2.7

-$1.3

$0.5

-$8.8

-$12.6

-$9.6

-$6.2

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

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

Cumulative Underwriting Gain (Loss) in Florida Homeowners

Insurance, 1992-2007E*

$ B

illio

ns

It took insurers 11 years (1993-2003) to erase the UW loss

associated with Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits &

2005 deepened the hole.

Regulator under US law has duty to allow rates

that are “fair,” “not excessive” and “not

unduly discriminatory.”Reality is that regulators

in CAT-prone states suppress rates.

*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.

Private Insurers**

Florida Citizens Exposure to Loss (Billions of Dollars)

Source: PIPSO; FL Citizens; Insurance Information Institute. *As of March 31

$408.8$434.3

$210.6$206.7$195.5$154.6

$0$50

$100$150$200$250$300$350$400$450$500

2002 2003 2004 2005 2006 Q1 2007*

Exposure to loss in Florida Citizens

more than doubled by Q1 2007 relative

to year end 2005

Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)

* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.Source: Insurance Information Institute

-$516

-$1,425

-$1,770

-$954

-$595 *

-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000

-$800-$600-$400-$200

$0

Florida HurricaneCatastrophe Fund

(FHCF) Florida Citizens Louisiana Citizens

Mississippi WindstormUnderwriting

Association (MWUA)

2004 2005

Hurricane Katrina pushed all of the residual market property plans in

affected states into deficits for 2005, following an already record hurricane loss year in 2004

Cost of Borrowing for State Could Exceed Expectations

Source: Insurance Information Institute; Federal Reserve Board of Governors.

$766.7$854.1

$932.6$1,044.0

$1,158.4

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

4.23% (Jan2007 Rate)

4.64% (Aug2007 Rate)

5.00% 5.50% 6.00%

If FL were to need to borrow money to fund state insurer deficits, the cost was 11.4% higher ($87.4 million) per billion

borrowed in August (midst of credit crunch & hurricane season) than in January when legislation was passed

Interest Charge to Borrow $1 Billion at State/Municipal Bond Rates, Amortized Over 30 Years

If state/muni bond rates rise to 6%, interest cost would be 51% higher than in January 2007, adding $392 million to the cost of each billion borrowed

Mill

ions

TEXAS EXPOSURE & VULNERABILITY

GROWS

Coastal Building Boom

ROE for Homeowners Insurance in Texas, 1992 - 2006

-38.8%

14.7%

-42.4%

10.2%

38.1%

13.1%

31.3%

-41.9%

11.9%

-10.9%

19.4%20.7%

-23.5%

6.2%

-6.0%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: NAIC

Average ROE in TX 1992 through 2006 was 0.14%

Texas will need to allow insurers to earn risk

appropriate rates of return that reflect huge losses in

some years

Low CATs in 2006/2007

boosted profitability, but focus must be

long term.

Historical Hurricane Strikes in Galveston County, TX, 1900-2007

Source: NOAA Coastal Services Center, http://maps.csc.noaa.gov/hurricanes/pop.jsp/; Insurance Info. Institute.

New Construction in Galveston: Will Dreams be Blown Away?

• More than $2.3 Billion Residential, Commercial and PublicConstruction is Under Way in 2007

• More than 6,500 Residential Units Under ConstructionMostly condos, including several towers up to 27 stories highOne development by Centex Homes will consist of 2,300 condos and houses on 1,000 acres

• The Average Home Price Rose 89% to $232,800 over the 4 Years Ending Jan. 2007• Typical Price Range for Newer Condos: $400,000 Up to $1.5 Million

An undeveloped waterview lot can go for as much as $300,000Most will be insured via TWIA Limits up to $1.6 million + contents

• Inconvenient Truth: Galveston is Site of the Deadliest Natural Disaster in US HistoryAt least 8,000 people were killed in a 1900 hurricane3,600 homes were destroyedThe current seawall is only 15.6 ft. high; Katrina’s storm surge was nearly 30 feet.

• Insured Losses Today from Repeat of 1900 Storm Would Exceed $21 BillionWould become the 3rd most expensive hurricane in US history (after Katrina and Andrew)

Source: Insurance Information Institute from “A Texas-Sized Hunger for Gulf Coast Homes,” New York Times, March 18, 2007 and www.1900storm.com and www.twia.org accessed July 9, 2007.

TX Windstorm Insurance Association: Growth In Exposure to Loss

(Building & Contents Only, $ Billions)

Source: TWIA; Insurance Information Institute; *As of 11/30/06; **As of 09/30/07.

$55.9

$35.9

$23.3$20.8$18.8$16.0

$13.2$12.1

$0

$10

$20

$30

$40

$50

$60

2000 2001 2002 2003 2004 2005 2006* 2007**

Exposure to Loss (Building & Contents Only)

TWIA’s liability in-force for building & contents has surged

by 362 percent in the last 7 years from $12.1bn in 2000 to

$55.9bn as of 09/30/07

PRICES

Flat or Down Almost Everywhere: Coastal Pricing Reflects Risk

-10%

-5%

0%

5%

10%

15%

20%

25%

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

F20

08F

Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute

Strength of Recent Hard Markets by NWP Growth*

1975-78 1984-87 2001-04

*2007 figure is actual 9-month figure.

Post-Katrina period resembles

1993-97 (post-Andrew)

2008: Projected -0.3% premium growth would be the first decline since 1943

$418$440 $455

$481 $488$508

$536

$593

$668 $693

$776

$711$739

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

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

Average Expenditures on Homeowners Insurance

*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute

Countrywide home insurance expenditures are expected to rise 4% in 2007, but much more

in hurricane zones

Hurricane zone residents can expect increases in the

20%-100% range, especially if insured by a state entity

Average Commercial Rate Change,All Lines, (1Q:2004 – 4Q:2007)

-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%

-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

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

Magnitude of rate decreases diminished greatly after Katrina but have grown again

KRW Effect

-0.1

%

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2nd Qtr. 2006

71%

48%

28%21%

63%

32%

21%12% 10%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 4th Qtr. 2006

25%

6% 6%

0%

8%6% 6%

3%0%

11%

0%

5%

10%

15%

20%

25%

30%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

Largest increases for Commercial Property &

Business Interruption are in the Southeast, but

are diminishing; Smallest in Midwest

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 4th Qtr. 2007

4%

0% 0% 0%0% 0% 0% 0% 0%0%0%1%1%2%2%3%3%4%4%5%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

Virtually no property or business interruption increases anywhere in late 2007, even in the Southeast. Two years

earlier 60%-70%+ accounts were renewing upward in the Southeast

CLAIMS PAYING CAPACITY

2006/2007 Respites:Rebuilding Years

$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 0607*

U.S. Policyholder Surplus: 1975-2007*

Source: A.M. Best, ISO, Insurance Information Institute. *As of September 30, 2007

$ 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 9/30/07 was $521.8B, 5.3% above year-end 2006, 80% above its 2002 trough and 54%

above its 1999 peak.

Premium-to-surplus ratio neared a record

low of $0.84:$1 at year end 2007, suggesting

excess capital

Capacity exceeded a half trillion dollars for the first time during

the 2nd quarter of 2007

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

Reinsurance & Capital Markets are Globally Linked

Global Reinsurance

Market

States like LA, MS paid little into the global

reinsurance pool but got a lot in return, shrinking

global claims paying resources and pushing up reinsurance costs for all

Premiums Ceded

Losses Paid

POST-KATRINA LITIGATION

Suits Add to Uncertainty, Expense

Hurricane Katrina Claim Status on Storm’s 1st Anniversary*

In Process, 3%

Mediation/ Litigation, 2%

Settled, 95%

95% of the 1.2 million

homeowners insurance claims in Louisiana & Mississippi are

settled, with just 2% in dispute

*Hurricane Katrina made its north Gulf coast landfall August 29, 2005.Source: Insurance Information Institute survey, August 2006.

Hurricane Katrina Claim Status on Storm’s 2nd Anniversary*

Unsettled**, 1%

Settled, 99%

99% of the 1.2 million homeowners insurance claims in

Louisiana & Mississippi were settled as of the storm’s second

anniversary in 2007

*Hurricane Katrina made its north Gulf coast landfall August 29, 2005.**Unsettled implies that the claim is in the process of settlement, involved in mediation or litigated.Source: Insurance Information Institute survey, August 2007.

Hurricane Katrina Insured Loss Distribution by State ($ Millions)*

Mississippi, $13,605 , 33.5%

Louisiana, $25,275 , 62.3%

Tennessee, $59.0 , 0.1%Florida, $572.0 , 1.4%

Georgia, $36.0 , 0.1%Alabama, $1,032 ,

2.5%

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

Mississippi accounted for 33.5% of the insured losses

paid and 29.5% of the claims filed

Total Insured Losses =

$40.579 Billion

Flood Insurance

Analysis of Flood Policy Purchase and Lapse Rates Since Katrina in Florida

NFIP Flood Policy Growth in Gulf States Since Katrina*

26.69%

14.15%

29.04%

80.24%

40.54%

21.62%

0%

10%

20%30%

40%

50%

60%70%

80%

90%

Alabama Florida Louisiana Mississippi Texas Total GulfStates*Change from July 2005 through August 2007.

Sources: NFIP ; Insurance Information Institute.

The number of flood insurance policies sold in the Gulf

states in the 2 years following Katrina

increased by 21.6%

Percentage of NFIP Flood Policies Issued Since Katrina That Are Not Renewed*

23%

32%

17%19%

25%

8.6%

0%

5%

10%

15%

20%

25%

30%

35%

Alabama Florida Louisiana Mississippi Texas US***Policies issued since July 2005 as of August 2007. **US figure is nonrenewal rate for all policies in force, average over 12 month period ending August 2007.Sources: NFIP ; Insurance Information Institute.

Flood policy nonrenewal rates in Gulf states are surprisingly high

28%

61%

22%

60%

49%

1%1%3%

0.6% 0.4%0%

10%

20%

30%

40%

50%

60%

70%

Northeast South Midwest West Overall US

In SFHA*Out of SFHA

NFIP Flood PolicyPenetration Rates, by Region

*Special Flood Hazard Areas.Source: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.

Flood is more commonly

purchased in the South, but

many still forego coverage

16%

56%

66%

0%

10%

20%

30%

40%

50%

60%

70%

Under 500 501 - 5,000 More Than 5000

Proportion of Homes Buying Flood Insurance by No. of Homes in SFHA*

Communities with few SFHAs are the most likely to not

buy flood insurance

*Special Flood Hazard Areas.Source: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.

Factors Influencing NFIP Flood Penetration Rates

• Price• Change in Price• Number of Homes in a Community’s Special Flood

Hazard Area (SFHA)Mandatory purchase requirements less vigorously enforced in communities with fewer structures in SFHAsQuestions about enthusiasm in selling or knowledge of agents regarding program

• Coastal Flooding PotentialPenetration rate much higher for coastal communities subject to flooding versus those that are not (63% vs. 35%)

• Mandatory Purchase RequirementSource: The National Flood Insurance Program’s Market Penetration Rate:Estimates and Policy Implications, RAND, 2006.

Reasons Why People BuyFlood Insurance

Mortgage Lender Requirement, 27%

Not Near Water, But Don't Want to Take

Chances, 29%

Agent/Broker Recommendation,

20%

House Near Body of Water, 24%

Source: Poll of 700 conducted by Opinion Research Corporation by Chubb Group of Insurance Companies, summarized in March 2006 press release “Katrina Doesn’t Motivate Many Homeowners to Protect Their Investment.”

Risk aversion and compulsion are the two most important

direct factors influencing the

purchase decision. Educational

attainment & income are also factors.

Additional Factors Influencing NFIP Flood Penetration Rates

• Education/Income of Homeowner• Tendency to Decline Most Optional Coverages

Only 13% of CA homeowners buy earthquake insurance• Lack of Understanding of Actual Risk

Most people do not understand the meaning or implications of 1-in-100 year flood riskMost people have never looked at a flood map

• Coverage Limits (e.g., $250K cap)• Expectation of Post-Event Aid

Potentially a more important factor for future events• Litigation Suggesting that Flood is Covered Under

Standard Homeowners Insurance Policies

Source: Insurance Information Institute

Summary• Insured catastrophe losses are on the rise, in the US and globally• Hurricanes are the #1 source of US catastrophe losses, by far• Rapid coastal development (driven by strong demographics) &

rising property values are the primary reasons for the upward trend in insured catastrophe losses in the US

Government subsidies to coastal dwellers exacerbate problem• Financial impacts on property/casualty insurance industry have

been severe ($81 billion in hurricane losses in 2004/2005) but were manageable due to global spread of losses

• Expectations for more frequent & more severe storms is driving risk-based, actuarially sound rates upward

• Insurers remain deeply committed to helping policyholders reduce vulnerability by supporting stronger building codes and mitigation

But insurers have no control over local land use decisions• Ultimately, insurance prices must reflect true risk• Market signals on risk provide incentives to fortify structures• Litigation creates unmanageable level of uncertainty

Insurance Information Institute On-Line

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