Why 2008 is Shaping Up to Be a Make or Break Year for the P/C Insurance Industry Focus on Georgia...

Why 2008 is Shaping Up to Be a Make or Break Year for the P/C

Insurance Industry

Focus on Georgia MarketsAtlanta I-DayAtlanta, GA

October 4, 2007

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

Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org

Presentation Outline

• P/C Profit Overview—2006, A Cyclical Peak• Subprime Lending Crisis: What Does it Mean for Insurers?• Underwriting Trends: Unsustainable?• Premium Growth: Approaching a Standstill• Pricing: Competitive Pressures Mounting• Capital & Capacity: UnderleveragedROE Pressure• Catastrophe Loss Management• Reinsurance Summary• Financial Strength & Ratings• Investments: Less Bang for the Buck• Tort System: Great News for a Change (Mostly)• Legislative & Regulatory Update• Q&A

P/C PROFIT:An Historical Perspective

Profits in 2006/7 ReachedTheir Cyclical Peak

P/C Net Income After Taxes1991-2007F ($ 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

$65,

192

-$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

07F

*ROE figures are GAAP; 1Return on avg. surplus. 2007F figure is annualized actual first half net income of $32.596B **Actual first half 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= 9.4%2006 ROAS1 = 14.0%2007F ROAS = 13.1%**

Insurer profits peaked in 2006/7. “Normal” CAT year,

average investment gain imply flattening

-5%

0%

5%

10%

15%

20%

US P/C Insurers All US Industries

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

*2007 is actual first half 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

RETURN ON EQUITY (Fortune):Stock & Mutual vs. All Companies*

*Fortune 1,000 group.

Source: Fortune Magazine, Insurance Information Institute.

13%

13.4%14.6%

10.0%

14.9%13.0%

11%

13%15%14%13%

7%6%

11%12%

8%

11%12%10%

9%

-2%

8%7%

2%

10%

10.4%

15.4%14.0%

13.9%12.6%

-4%-2%0%2%4%6%8%

10%12%14%16%18%

1998 2000 2001 2002 2003 2004 2005 2006E 2007F 2008F

StockMutualAll Cos.*

Mutual insurer ROEs are typically lower than for stock

companies, but gap has narrowed. All are cyclical.

-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

F08

F

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

1975: 2.4%

1977:19.0% 1987:17.3%

1997:11.6%

2006:14.0%

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

10 Years

10 Years 9 Years

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

-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 07E

ROE Cost of Capital

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2007E

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

+0.

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

-0.1

pts

+3.

5 p

ts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

+3.

1 p

ts

Insurance & Reinsurance Stocks: Slow Start in 2007 in P/C, Reins.

4.15%

-1.09%

1.82%

1.87%

1.71%

1.36%

-30.53%

8.60%

-40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0%

S&P 500

Mortgage*

Life/Health

Reinsurers

P/C

All Insurers

Multiline

Brokers

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

Total YTD Returns Through September 28, 2007

P/C insurance, reinsurance stocks lagging on soft market concerns, worries over 2007

hurricane season and subprime selloff

Top Industries by ROE: P/C Insurers Still Underperformed in 2006*

30.7%30.3%

26.4%24.6%

24.2%22.6%

21.8%21.5%

20.9%20.9%

20.5%19.6%19.4%19.1%

14.9%15.4%

31.8%

0% 5% 10% 15% 20% 25% 30% 35%

Oil & Gas Equip., ServicesPetroleum Refining

MetalsFood Services

Household & Pers. ProductsPharmaceuticals

Industrial & Farm EquipmentMining & Crude Oil Prod.

Aerospace & DefenseChemicalsSecurities

Food Consumer Prod.Medical Prod. & Equip.

Specialty RetailersHomebuilders

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

*Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors.Source: Fortune, April 30, 2007 edition; Insurance Information Institute

P/C insurer profitability in 2006 ranked 30th out of 50

industry groups despite renewed

profitabilityP/C insurers

underperformed the All Industry median for the 19th consecutive

year

Advertising Expenditures by P/C Insurance Industry, 1999-2006

$ Billions

$1.736 $1.737 $1.803 $1.708

$3.695

$2.975

$2.111$1.882

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

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

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

increased competition

GEORGIA:

A PROFIT COMPARISON

ALL LINES: 10yr Avg Return on Equity, GA & Nearby States

-12.8%

7.2%

7.7%

8.0%

1.9%

5.2%

5.8%

-15% -10% -5% 0% 5% 10%

South Carolina

Georgia

US

Tennessee

Florida

Alabama

Mississippi

Source: NAIC, Insurance Information Institute

1996-2005

PP AUTO: 10yr Avg Return on Equity, GA & Nearby States

2.8%

5.1%

7.2%

8.4%

8.0%

3.5%

9.0%

0% 2% 4% 6% 8% 10%

South Carolina

Georgia

US

Tennessee

Florida

Alabama

Mississippi


1996-2005

HOME: 10yr Avg Return on Equity, GA & Nearby States

-35.0%

0.5%

-4.5%

2.8%

3.1%

16.0%

-6.9%

-40% -30% -20% -10% 0% 10% 20%

South Carolina

Georgia

US

Tennessee

Florida

Alabama

Mississippi


1996-2005

Comm M-P: 10yr Avg Return on Equity, GA & Nearby States

-17.4%

2.8%

2.7%

5.3%

8.9%

5.4%

-2.5%

-20% -15% -10% -5% 0% 5% 10% 15%

South Carolina

Georgia

US

Tennessee

Florida

Alabama

Mississippi


1996-2005

WC: 10yr Avg Return on Equity, GA & Nearby States

8.6%

7.4%

8.4%

1.0%

9.9%

7.4%

9.8%

0% 2% 4% 6% 8% 10% 12%

South Carolina

Georgia

US

Tennessee

Florida

Alabama

Mississippi


1996-2005

Comm Auto: 10yr Avg Return on Equity, GA & Nearby States

-2.7%

2.3%

6.8%

6.2%

2.6%

5.0%

-1.2%

-4% -2% 0% 2% 4% 6% 8%

South Carolina

Georgia

US

Tennessee

Florida

Alabama

Mississippi


1996-2005

THE SUBPRIME CRISIS

What Does it Mean for the Insurance Industry

Insurer Exposure to Subprime Mortgage Backed Securities*

P/C, $20.10 , 22.0%

Life, $67.97 , 74.3%

Other, $3.41 , 3.7%

•As of June 30, 2007, p/c & life insurers had $91.48B in exposure to residential mortgage backed securities or about 15% of the $600 billion subprime market.

•Most securities rate AA or higher (93% AA or high among life insurers

•Insurers & reinsurers maintain sufficient liquidity to weather subprime storm virtually unscathed

*Includes direct ownership of subprime loans, collateralized debt and loan obligations, bond fund and hedge fund exposures.Source: Standard & Poor’s Survey as reported in SNL Insurance Weekly, September 4, 2007.

$ Billions

Repackaged Mortgage-Backed Securities Contain Varying Degrees of Risk

34%

33%

33%

0%

25%

50%

75%

100%

Asset ClassSource: Mark Stancher and Kyongsoo Noh, “Subprime Not Quite Sublime? Recent Developments in the Subprime Mortgage Markets,” Insights 7/13/07, JPMorgan Asset Management, accessed at http://www.jpmorgan.com/pages/jpmorgan/am/ia/research_and_publications/insights

CLASS C

Riskiest class. Absorbs first 34% of losses in portfolio.

Typically purchased by hedge funds and other high-risk risk

investors.

CLASS B

Absorbs middle third of losses

CLASS A

Safest class. Typically

purchased by insurers, federal

agencies and institutional

money managers

CLASS A

Suffers losses only when more than

67% of underlying portfolio not repaid

Implications of Sub-Prime Mess & Credit Crunch on P/C Insurers

• P/C Insurers Not Heavily Exposed to Subprime Residential Mortgage Securities (RMBS) Subprime exposure equal to about 3% - 10% of policyholder surplus

• Asset Quality High Average security in P/C insurer portfolio carries AA rating Most P/C exposure to subprime market is in AAA tranches

• P/C Insurers Do Not Have Much Leverage in Business Model 0-10% of capital structure typically Insurers accept risk primarily through underwriting Some leverage gained via reinsurers, who likewise are not heavily

exposed to subprime RMBS• Rarely Necessarily for Insurers to Liquidate Securities

Major CAT could be exception, but even payouts occur gradually and can be paid primarily out of cash flow

Implies insurers unlikely to be forced into “fire sale” to pay losses while bond and stock prices are depressed

Source: Merrill Lynch, Insurance Information Institute;

Implications of Sub-Prime Mess & Credit Crunch on P/C Insurers (cont’d)

• Impact on ProfitsWidening credit spreads do not impact insurers business

model, which is not leverage-based, so earnings should not be affected

Rising interest rates could push up average yield on insurers’ bond portfolio (about 2/3 of invested assets)

Ability to realize capital gains will be hurt if swoon persistsFed cut fed funds rate 50 bps 9/18—huge stock rally

• Mark-to-Market (or Mark-to-Make Believe?) Insurers required to carry securities categorized as “available

for sale” at market value (most investments in this category)Rising rates/falling prices for corporate bonds and RMBS and

CDOs will have to be marked to a lower market value Impact will be to decrease paper value of policyholder surplus

(net worth) and depress book value of stock insurers

Source: Merrill Lynch, Insurance Information Institute;

D&O/E&O Implications ofSub-Prime Meltdown

• D&O/E&O Losses Pegged to Subprime Meltdown Variously Estimated at $1 Billion to $3 Billion, based on Experience in Past Financial Crises Pure play subprime lenders typically purchase low limits of cover Lender’s liability coverage (an E&O exposure) difficult to purchase last few years Usually regulatory fines and penalties not compensable under D&O, therefore

substantial share of costs may not be insured Defense cost shouldered by D&O insurers could be large Hedge funds sometimes carry D&O apart from parent entity

• Bond Ratings Agencies May be Object of Significant Litigation Likely to fail due First Amendment “free speech” opinions defense

• Class Actions Against Mortgage Brokers and Lenders Based on Allegations Non-Suitability and Deceptive Sales Practices Will Be Attempted. Most states don’t require brokers to carry E&O (maybe fidelity); If they do, limits

usually about $300-$500K; No D&O Defendants will argue cases should be heard in fed court (due to federal guarantees on

many loans) which are less receptive to class actions Defendants will argue lack of homogeneity and cite Class Action Fairness Act to get

cases heard individually

Source: Lehman Brothers; Insurance Information Institute;

Share of Home Purchase Loans in 2005 for Properties Not Occupied by Owner

29%

32%

14%

15%

17%

29%NV

AZ

FL

CA

All OtherStates

TOTAL US

Source: Mortgage Bankers Association, HMDA reports; Wall Street Journal, August 31, 2007.

14%

15%

7%

10%

10%

14%NV

AZ

FL

CA

All OtherStates

TOTAL US

Prime Subprime

Insurers in FL being asked to cover many non-owner occupied dwellings, many with poor credit in major

CAT zone.

Defaults on Loans for Properties Not Occupied by Owner as a % of All Defaults*

26%

25%

21%

13%

16%

32%NV

AZ

FL

CA

All OtherStates

TOTAL US

*Defaults defined as 90+ days past due or in foreclosure. As of June 30, 2007.Source: Mortgage Bankers Association, HMDA reports; Wall Street Journal, August 31, 2007.

18%

14%

15%

11%

12%

24%NV

AZ

FL

CA

All OtherStates

TOTAL US

Prime Subprime

UNDERWRITING

Extremely Strong 2006, Momentum for 2007/08?

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

*0

8F

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000s: 102.2**

Sources: A.M. Best; ISO, III *Actual figure of 92.7 through first half 2007. **Through 2007:H1.

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

115.8

107.4

100.198.3

100.7

92.5

97.0

93.592.7

90

100

110

120

01 02 03 04 05 06 07:H1 07F 08F

P/C Insurance Combined Ratio, 2001-2008F

Sources: A.M. Best; ISO, III. *III estimates for 2007/8.

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

2006 produced the best underwriting result

since the 87.6 combined ratio in 1949

As recently as 2001, insurers were paying out nearly $1.16 for

every dollar they earned in premiums

2007/8 deterioration due primarily to falling rates, but results still strong assuming

normal CAT activity

87.6

91.2

92.1 92.3 92.4 92.593.0 93.1 93.1 93.3

92.7

85

86

87

88

89

90

91

92

93

94

1949 1948 1943 1937 1935 2006 2007* 1950 1939 1953 1936

Ten Lowest P/C Insurance Combined Ratios Since 1920 (& 2007:H1)

Sources: Insurance Information Institute research from A.M. Best data. *2007 first half actual.

2007 is off to a great start

The industry’s best underwriting years are associated with

periods of low interest rates

The 2006 combined ratio of 92.5 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

F

Underwriting Gain (Loss)1975-2007F*

Source: A.M. Best, Insurance Information Institute *Actual 2007:H1 underwriting profit = $14.402B annualized to $28.8B.

$ B

illi

ons

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

second since 1978. Expect figure near $28 billion in 2007 assuming “normal” CAT losses. Cumulative

underwriting deficit since 1975 is $412 billion.

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

85

90

95

100

105

110

115

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

Personal LinesCombined Ratio, 1993-2006

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

A very strong 2006 resulted from favorable frequency & severity

trends and low CAT activity

101.7101.3101.3101.0

99.5

101.1

103.5

109.5

107.9

104.2

98.4

94.395.1 95.5

90

95

100

105

110

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

Private Passenger Auto (PPA) Combined Ratio

Average Combined Ratio for 1993 to 2005:

101.0

Sources: A.M. Best; III

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.

117.7

158.4

113.6118.4

112.7

121.7

101.0

108.2111.4

121.7

109.3

98.294.4

100.3

90.4

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 06F

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


110.

3

110.

2

107.

6

103.

9

109.

7

112.

3

111.

1

122.

3

110.

2

102.

5

105.

4

90.5

102.

0

112.

5

85

90

95

100

105

110

115

120

125

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

Commercial Lines Combined Ratio, 1993-2006

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

Outside CAT-affected lines, commercial

insurance is doing fairly well. Caution is

required in underwriting long-

tail commercial lines.

2006 results benefited from relatively disciplined underwriting, low CAT

losses and reserve releases

Commercial coverages have exhibited extreme variability. Are current

results anomalous?

$1

0.8 $

22

.8 $3

3.4

$3

6.9

$1

8.9

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

$0.4

($7.0)

8.9

-1.1-1.3-1.6

4.5

-1.20.1

3.5

8.6

6.5

($10)

($5)

$0

$5

$10

$15

$20

$25

$30

$35

$40

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

Re

se

rve

De

ve

lop

me

nt

($B

)

(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

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

Reserve adequacy has

improved substantially

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

-$1,

886 -$

1,17

4

-$1,

116

-$77

9

-$47

5

-$41

3

-$25

4

-$10

0

-$10

0

-$96

-$53

-$48

$366

$1,176$1,172

-$3,006-$3,500

-$3,000

-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

$500

$1,000

$1,500

PPA Liab

ility

PPA PD

Home

Med

Mal

Special

ty P

rop

Comm

. Auto

Prod. L

iabili

ty

Finl.

Guaran

ty

Inte

rnat

ional

Other

Special

ty L

iab.

Wor

ker's

Comp

Fideli

ty/S

urety

Comm

ercia

l Mul

ti

Other

Liab

ility

Reinsu

rance

$ B

illi

ons

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

Reserve redundancies in most lines have resulted

in releases in recent years

Release

Strengthening

The Big Question: Is the Industry More Disciplined Today?

• Signs suggest that the answer is yes• Current period of sustained underwriting profitability is the first

since the 1950s• While prices are falling, underlying lost cost trends (frequency and

severity trends) are generally favorable to benign Suggest impact of falling prices will be less pronounced than late 1990s

• Reserve situation appears much improved an under control• Management Information Systems: Much More Sophisticated

Insurers can monitor and make adjustments much more quickly Adjustments made quickly by line, geographic area, producer, etc.

• Investment Income Relative to late 1990s, interest rates and stock markets returns are lower Has effect of imposing (some) discipline

• Ratings Agencies More stringent capital requirements Quicker to downgrade

KEY LINES

Results Will Remain Fairly Robust in 2007, But What About 2008?

COMMERCIAL MULTI-PERIL & COMMERCIAL

AUTO

112.

1

112

113 11

5.9 12

0.5

120.

1

106.

6

99.4

96.6

93.4

94

96.7

102.

2 105.

6 108.

9 112.

1

105.

9

101.

6

93.8

84.5

82.8

88.3

87.7

122.5

80

85

90

95

100

105

110

115

120

125

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

Comm Auto Liab Comm Auto PD

Commercial Auto Liability& PD Combined Ratios

Average Combined: Liability = 108.8

PD = 97.5


Commercial Auto has improved dramatically

119.0

119.8

108.5

125.0

113.1

115.0

121.0

116.2

116.1

104.9

101.9 105.5

100.7

116.8

113.6

115.3

122.4

115.0

117.0

97.3

89.0

97.7

93.8

83.6

80

85

90

95

100

105

110

115

120

125

130

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

CMP-Liability

CMP-Non-Liability

Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion)

Liab. Combined 1995 to 2004 = 113.8

Non-Liab. Combined = 105.2


CMP- has improved recently

WORKERS COMPENSATION

OPERATING ENVIRONMENT

Workers Comp Calendar Year vs. Ultimate Accident Year – Private Carriers

101

97

111

110

107

103

95

101 10

6

119

131

140

135

123

88 87 87

100

101 10

7 115 11

8 122

97

104

96

80

90

100

110

120

130

140

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

Calendar Year Accident Year

Percent

p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2006 and developed to ultimateSource: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders

Workers Comp Combined Ratios, 1994-2006P

Lost-Time Claims

-4.2 -4.4

-6.9

-4.5 -4.1 -3.9

-6.8

-9.2

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5

-6.6

-10

-8

-6

-4

-2

0

2

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

Cumulative Change of –52.1%since 1991 means that lost work

time claims have been cut by more than half

Accident Year

Percent Change

Workers Comp Lost-TimeClaim Frequency (% Change)

2003p: Preliminary based on data valued as of 12/31/20061991-2005: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI

IndemnityClaim Cost (000s)

Lost-Time Claims

$9.9 $9.6 $9.4 $9.8 $10.0$10.6

$11.4$12.4

$13.6

$15.1$16.5$16.9

$17.7$18.0$18.6

$19.6

$5

$7

$9

$11

$13

$15

$17

$19

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

Annual Change 1991–1996: +1.2%Annual Change 1997–2005: +6.6%

2005p: Preliminary based on data valued as of 12/31/20061991-2005: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI

Accident Year

Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2006p

Cumulative Change = +108.5%(1993-2006p)

Med Costs Share of Total Costs is Increasing Steadily

Indemnity55%

Medical45%

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

Indemnity52%

Medical48%

Indemnity41%

Medical59%1986

1996

2006p

PREMIUM GROWTH

At a Virtual Standstillin 2007/08

-10%

-5%

0%

5%

10%

15%

20%

25%

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

F2

00

8F

20

09

F2

01

0F

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

*2007-10 figures are III forecasts/estimates.

2006-2010 (post-Katrina) period could resemble 1993-97

(post-Andrew)

2005: biggest real drop in premium since early 1980s

Growth in Net Written Premium, 2000-2008F

*2007 figure base on 2007 actual first half result of 0.1%.Source: A.M. Best; Forecasts from the Insurance Information Institute.

5.0%

8.4%

15.3%

10.0%

3.9%

0.5%

2.7%

0.1% 0.3%

2000 2001 2002 2003 2004 2005 2006 2007F* 2008F

P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are

expected to remain healthy

Most Layers of Coverage are Being Challenged/Leaking

Retention$1 Million$2 Million

Primary

Excess

Reinsurance

Retro

$10 Million

$50 Million

$100 Million

Risks are comfortable taking larger retentions

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

Excess squeezed by higher primary

retentions, lower reins. attachments

Reinsurers losing to higher retentions,

securitization

Source: Insurance Information Institute from Aon schematic.

Risk Retention Group Premiums,1988 – 2006*

$1,7

37.7 $2

,197

.8

$2,4

49.1

$2,7

73.7

$585

.8

$527

.2

$493

.7

$493

.6

$419

.3

$358

.4

$250

.2 $575

.5

$707

.6

$751

.9

$790

.5

$875

.3

$775

.5

$944

.0 $1,2

65.1

0

500

1,000

1,500

2,000

2,500

3,000

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

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

Millions of Dollars

Risk retention (& self-insurance) group premiums have risen rapidly in recent years and represent a form

of competition to traditional insurers and captives

733

542

380

382

242

208

165

158

989

740

563

381

235

208

161

160

166*

*

987*

169*

*

383*

0

200

400

600

800

1,000

Berm

uda

Caym

ans

Verm

ont

BVI

Guer

nsey

Barbad

os

Luxem

bourg

Turks &

Cai

cos

Isle

of M

an

Haw

aii

2005 2006

Leading Captive Domiciles Worldwide, 2005 vs. 2006

Large and growing number of captive domiciles

worldwide bleeding away tradition commercial risks

*BI estimate. **Excludes credit life insurers.

Sources: Business Insurance, March 12, 2007, III

542

158

122

58 53 59

33 15 13 15 6

563

160

146

97

74 70

39 30 21 17 10

0

100

200

300

400

500

600

VT HI SC NV AZ DC NY UT MT GA KY

2005 2006

Leading US Captive Domiciles, 2005 vs. 2006

U.S. captive domiciles experienced dramatic

growth in 2006, hurting traditional commercial

insurers, especially in the middle market space

Sources: Business Insurance, March 12, 2007; III

PRICING

Under Intense Pressure in 2007/08

$651 $6

68 $691 $7

05

$703

$685

$690 $7

24

$780 $8

23 $851

$847

$838

$847

$600

$650

$700

$750

$800

$850

$900

$950

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

Average Expenditures on Auto Insurance

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

Countrywide auto insurance expenditures

are expected to fall 0.5% in 2007, the first drop

since 1999

Lower underlying frequency and modest

severity are keeping auto insurance costs in check

2005 State Average Expenditures for Personal Auto Insurance

$659

$678

$745

$753

$784

$829

$1,063

$0 $200 $400 $600 $800 $1,000 $1,200

Florida

U.S.

Georgia

South Carolina

Mississippi

Alabama

Tennessee

Source: NAIC

Georgia had the second highest auto insurance

expenditure among Southeastern states in 2005. The average cost

of auto insurance nationally declined by

1.3 percent in 2005.

$418$440 $455

$481 $488 $508$536

$593

$668

$729

$787$835

$400$450$500$550$600$650$700$750$800$850$900

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

Average Expenditures on Homeowners Insurance**

*Insurance Information Institute Estimates/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute

Countrywide home insurance expenditures rose an estimated 6% in 2006

Homeowners in non-CAT zones will see

smaller increases, but larger in CAT zones

Average Premiums For HO Insurance, By State (2004)*

$635

$681

$729

$768

$793

$907

$929

$0 $200 $400 $600 $800 $1,000

Florida

Mississippi

Alabama

South Carolina

U.S.

Tennessee

Georgia

*Latest available. Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings, broad named-peril coverage on personal property, and is the most common package written.Source: NAIC

In 2004, Georgia ranked as the least expensive state for

HO insurance among Southeastern states. It also ranked

32nd among all states.

Homeowners Insurance Expenditures as a % of Median Existing Home

Prices, 1995-2008F

$1

17

,00

0

$1

29

,00

0

$1

36

,00

0

$1

67

,60

0

$1

80

,20

0

$2

19

,00

0

$2

21

,90

0

$2

22

,70

0

$1

41

,20

0

$1

47

,30

0

$1

95

,20

0

$2

18

,80

0

$1

56

,60

0

$1

22

,60

0

0.3

57

%

0.3

59

%

0.3

53

%

0.3

46

%

0.3

73

%

0.3

59

%

0.3

98

%

0.3

97

%

0.3

54

%

0.3

45

%

0.3

76

%

0.3

71

%

0.3

42

%0.3

54

%

($25,000)

$25,000

$75,000

$125,000

$175,000

$225,000

$275,000

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

Med

ian

Exi

stin

g H

ome

Pri

ce

0.31%

0.32%

0.33%

0.34%

0.35%

0.36%

0.37%

0.38%

0.39%

0.40%

0.41%

HO

In

s. E

xpen

d. A

s %

Hom

e P

rice

Median Existing Home Price Homeowners Insurance Expenditure as % Home Price

Record catastrophe losses and declining home prices are pushing HO insurance expenditures as a

% of median home price up

Source: National Association of Realtors, NAIC; Insurance Info. Institute calculations and HO expenditure estimates/forecasts for years 2005-2008.

Average Commercial Rate Change,All Lines, (1Q:2004 – 2Q:2007)

-0.1%

-3.2%

-7.0%

-9.4%

-4.6%

-2.7%

-5.3%

-9.6%

-11.8%

-3.0%

-9.7%-11.3%

-5.9%

-8.2%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q042Q043Q044Q041Q052Q053Q054Q051Q062Q063Q064Q061Q072Q07

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

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

KRW Effect

Cumulative Commercial Rate Change by Line: 4Q99 – 2Q07

Source: Council of Insurance Agents & Brokers

Commercial account pricing has been trending down for 3 years and is now on par with prices in late 2001, early 2002

Average Commercial Rate Change by Line: 4Q99 – 2Q07


Commercial accounts trended downward from early 2004 to mid-2005 though that trend moderated

post-Katrina

Average Commercial Rate Change by Account Size: 4Q99 – 2Q07


Accounts of all sizes are renewing

downward and more quickly than in 2006

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, 1st Qtr. 2007

11%

9%

0% 0%

8%

5%

9%

0% 0%

9%

0%

2%

4%

6%

8%

10%

12%




Commercial Property & Business Interruption

increases are disappearing in the

Southeast; Completely gone in the Midwest &

Northeast

“Soft” market seemed to hit Midwest about 1 year before the rest of the US

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2nd Qtr. 2007

11%

4%

0% 0%

4%

0% 0%

3%

0%

5%

0%

2%

4%

6%

8%

10%

12%




Commercial Property & Business Interruption increases are disappearing even in the Southeast; Completely gone

in the Midwest & Northeast“Soft” market seemed to hit Midwest about 1 year before the rest of the US

EXPENSES

Will Expense Ratio Rise as Premium Growth Slows?

Personal vs. Commercial Lines Underwriting Expense Ratio*

23.4%24.3%

25.0%

24.4%

24.5%24.8%25.6%

24.6%

25.6%24.7%

26.1%

30.8%

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

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

The Industry in Underleveraged

$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 June 30, 2007

$ 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 6/30/07 was $512.8B, 5.3% above year-end

2006, 80% above its 2002 trough and 54% above its 1999 peak.

Foreign reinsurance and residual market

mechanisms absorbed 45% of 2005 CAT

losses of $62.1B

Capacity exceeded a half trillion dollars for the first time during

the 2nd quarter of 2007

H1 = First HalfSource: 1985–2006, A.M. Best Aggregates & Averages;; 2007 ISO

0

100

200

300

400

500

600

0.0

0.5

1.0

1.5

2.0

2.5

NWP Surplus P:S Ratio

$ Billions P:S Ratio

Calendar Year

P/C Industry Premium-to-SurplusRatio, 1985-2007:H1

Private Carriers

$512.8B

$76 B

$145 B

$447 B

Low P:S Ratio 0.84:1 in 1998 0.87:1

1.92:1

At 0.87:1 as of 6/30/07, now approaching all-time record premium-to-surplus ratio of

0.84:1 in 1998

Capital Raising by Class Within 15 Months of KRW

Existing Cos., $12.145 , 36%

New Cos., $8.898 , 26%

Sidecars, $6.359 , 19%Insurance Linked

Securities, $6.253 , 19%Insurers &

Reinsurers raised $33.7 billion in the wake of Katrina, Rita, Wilma—

much of via offshore vehicles

Source: Lane Financial Trade Notes, January 31, 2007.

$ Billions

Annual Catastrophe Bond Transactions Volume, 1997-2006

$966.9

$1,729.8

$4,693.4

$1,991.1

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

$1,139.0

$633.0

$0$500

$1,000$1,500

$2,000$2,500$3,000

$3,500$4,000

$4,500$5,000

97 98 99 00 01 02 03 04 05 06

Ris

k C

apita

l Iss

ues

($ M

ill)

02

46

81012

1416

1820

Nu

mb

er o

f Iss

uan

ces

Risk Capital Issued Number of Issuances

Source: MMC Securities and Guy Carpenter; Insurance Information Institute.

Catastrophe bond issuance has soared in the wake of Hurricanes

Katrina and the hurricane seasons of 2004/2005

P/C Insurer Share Repurchases,1987- First Half 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

$6,1

73.0

$4,4

97.5

$1,5

39.9$2

,764

.2

$2,3

85.6

$4,2

97.3

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

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

07H

1

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

First half 2007 share buybacks are already 86%

of the 2006 record

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

MERGER & ACQUISITION

Few Catalysts for Major P/C Consolidation in ‘08

P/C Insurance-Related M&A Activity, 1988-2006

$2,4

35

$5,1

00

$19,

118

$40,

032

$1,2

49

$486

$20,

353

$425

$9,2

64

$35,

221

$55,825

$30,

873

$8,0

59

$11,

534

$1,8

82

$3,4

50

$2,7

80

$5,1

37

$5,6

38

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

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

Tran

sact

ion

Val

ue ($

Mill

)

0

20

40

60

80

100

120

140

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

.

Source: Conning Research & Consulting.

2006 surge due mostly to 2 deals. No

trend started.

Reinsurance, distribution are

exceptions

No model for successful

consolidation has emerged

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

Motivating Factors for Increased P/C Insurer Consolidation in 2007

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

NWP growth is forecast at 1.8% in 2007 and 1.9% in 2008 Prices are falling or flat in most non-coastal markets

• Accumulation of Capital: Excess capital depresses ROEs Policyholder Surplus up 14.4% in 2006 and up 71% 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.

INVESTMENT IRONY

More Pain, Little Gain

$0

$10

$20

$30

$40

$50

$60

757677787980818283848586878889909192939495969798990001020304050607*

Net Investment Income$

Bil

lion

s

Growth History

2002: -1.3%

2003: +3.9%

2004: +3.4%

2005: +24.4%*

2006: +5.2%

2007: 0.0%**

Source: A.M. Best, ISO, Insurance Information Institute;*Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. **Based on annualized H1 result of $26.128B.

Investment income posted modest gains

in 2006, but is running flat in 2007

-30%

-20%

-10%

0%

10%

20%

30%

40%

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Source: Ibbotson Associates, Insurance Information Institute. *Through September 21, 2007.

Total Returns for Large Company Stocks: 1970-2007*

S&P 500 was up 13.62% in 2006, Up 7.58% YTD 2007*

Markets are up in 2007 for the 5th consecutive

year (so far)

US P/C Net Realized Capital Gains,1990-2007:H1 ($ Millions)

$2,8

80 $4,8

06

$9,8

93

$1,6

64

$5,9

97

$9,2

44

$10,

808

$13,

016 $1

6,20

5

$6,6

31

-$1,

214

$6,6

10

$4,1

73

$18,019

$3,3

59

$9,7

01

$9,1

25

$9,8

18

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

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

Sources: A.M. Best, ISO, Insurance Information Institute. *As of June 30, 2007.

Realized capital gains rebounded strongly in 2004/5

but fell sharply in 2006 despite strong stock market

as insurers “bank” their gains. Rising again in 2007.

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

$60.6$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**

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. **Annualized H1 result of $30.301B.Sources: ISO; Insurance Information Institute.

Investment gains fell in 2006 and even now are only marginally larger

than in the late 1990s

CATASTROPHICLOSS

What Will 2008 Bring?

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

$4.0

$100

.0

$61.

9

$9.2

$0

$20

$40

$60

$80

$100

$120

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

07**

20??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Estimated through 9/22/07. 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 was a welcome respite. 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

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

1986-2005¹

Utility Disruption0.1%

Terrorism7.7%

All Tropical

Cyclones3

47.5%

Tornadoes2

24.5%

Water Damage0.1%

Civil Disorders0.4%

Fire6

2.3%

Wind/Hail/Flood5

2.8%

Earthquakes4

6.7%

Winter Storms7.8%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 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 $289.1 billion from

1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up

from 27.1% from 1984-2003.

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

Texas, $25.6 , 10%

Florida, $57 , 22%

Rest of US, $176 , 68%

Florida accounted for 22% of all US insured CAT losses from 1980-2006: $57B out of

$249.3B

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

$ Billions of 2005 Dollars

Announced Katrina, Rita, Wilma Losses by Segment

U.S. Primary, $14.2 , 39%

U.S. Reinsurer, $3.4 , 9%

Other, $0.3 , 1%

Lloyd's, $3.5 , 9%

Bermuda, $10.9 , 29%

Europe, $4.9 , 13%

Catastrophes are global events. Only 39% of

KRW losses were borne by US

primary insurers

*As of 2/21/06Source: Dowling & Partners, RAA.

$ Billions

2007 Hurricane Season:No Big Hits…So Far

Source: www.wunderground.com, accessed 9/29/07; Insurance Information Institute

So Far, So Good

2007 season has seen 13 named

storms including two rare Category 5

storms, but both have missed the US

U.S. Catastrophe Losses 2006: States With Largest Losses ($ Millions)

*ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.

Source: ISO; Insurance Information Institute

$601$688

$873$878

$1,500

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Indiana Missouri Tennessee Texas Kansas

SURPISE!! Indiana ranked first highest, with $1.5 billion in insured catastrophe losses in 2006

Some 33 catastrophe events* in 34 states cost insurers an estimated $8.8bn in 2006, compared with $61.9bn in 2005. Cat losses in the following five states -- totaling $4.5bn -- represent half the

total catastrophe losses for the year.

U.S. Catastrophe Losses 2007:Q2 States With Largest Losses ($ Millions)

*ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.Source: PCS/ISO; Insurance Information Institute

$435

$322

$210$160

$130

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Texas Minnesota Kansas New Jersey New York

Six catastrophe events produced 504,000 claims* in 25 states and cost insurers $2.175bn

during the 2nd quarter of 2007. Catastrophe losses through the first half of 2007 total $3.4bn.

Number of Tornadoes,1985 – 2006p

1071 12

16

941

1376

1819

1254 13

33

1132

1133

856

702

65676

5

684

1297

1173

1082 12

34

1173

1148

1424

1345

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

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

Source: US Dept. of Commerce, Storm Prediction Center, National Weather Service; Ins. Info. Inst.

There are usually more than 1,000 confirmed tornadoes each year in the US. They

accounted for about 25% of catastrophe losses since 1985

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

$1,901.6$740.0

$662.4$505.8

$404.9$209.3

$148.8$129.7$117.2$105.3

$75.9$73.0

$46.4$45.6$44.7$43.8

$12.1

$1,937.3

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

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide

Georgia has at least $73 billion in insured coastal

property exposure—more than Mississippi, which suffer $13 billion

in Katrina losses

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

$512.1$306.6$302.2

$247.4$205.5

$88.0$65.1$64.5$60.0$60.0

$36.5$29.7$26.6$25.9$24.8$20.9

$5.4

$942.5

$0 $200 $400 $600 $800 $1,000

FloridaNew York

MassachusettsTexas



MaineVirginia

North CarolinaAlabamaGeorgia

DelawareRhode Island

New HampshireMississippiMaryland

Source: AIR

41% or all insured coastal exposure is

Georgia is residential, totaling some $29.7

billion in 2004

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

$994.8$437.8

$355.8$258.4

$199.4$121.3

$83.7$69.7

$52.6$45.3$43.3$39.4

$23.8$20.9$19.9$17.9$6.7

$1,389.6

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

New YorkFlorida

TexasMassachusetts



VirginiaMaine

North CarolinaGeorgia

AlabamaMississippi

New HampshireDelaware

Rhode IslandMaryland

Source: AIR

59% or all insured coastal exposure is

commercial, totaling some $43.3

million in 2004

$20.0$24.0 $26.0

$33.0 $33.0 $34.0 $35.0$41.0 $42.0

$80.0

$0$10$20$30$40$50$60$70$80$90

Homes

tead

Hurr

(194

5, FL)

Ft. Lau

derdale

Hurr

(194

7, FL)

Donna (

1960

, FL)

Okeech

obee

Hurr

(192

8, F

L)

Galve

ston (

1900

, TX)

Bestsy

(196

5, LA)

LI Exp

ress

(193

8, NY)

Katrin

a (20

05, L

A)*

Andre

w (199

2, FL)*

Mia

mi H

urr (1

926,

FL)

$ B

illi

ons

With rapid coastal development,

$40B+ storms will be more common

Source: AIR Worldwide **ISO/PCS estimate as of June 8, 2006

(Billions of 2005 Dollars) Majority of worst-case

scenarios involve Florida

Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels

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

$40.6

$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

illi

ons

Sources: ISO/PCS; Insurance Information Institute.

Seven of the 10 most expensive hurricanes in US history impacted

Florida:

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

Source: AIR Worldwide

Insured Losses: $110BEconomic Losses: $200B+

$70

$30

$5 $4 $1$0

$20

$40

$60

$80

NY NJ PA CT Other

Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm

Total Insured Property Losses =

$110B, nearly 3 times that of

Hurricane Katrina

Distribution of Insured Property Losses,

by State, ($ Billions)

THE FLORIDA APPROACH TO CATASTROPHE

RISK

Insurer, Policyholder & State Impacts

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

Florida Citizens Exposure to Loss (Billions of Dollars)

Source: PIPSO; Insurance Information Institute. *As of June 30.

$408.8

$600.0

$210.6$206.7$195.5$154.6

$0

$100

$200

$300

$400

$500

$600

$700

2002 2003 2004 2005 2006 2007E*

Exposure to loss in Florida Citizens nearly doubled in 2006

and was up another 50% during the first half of 2007

Pre- vs. Post-Event in FL for 2007 Hurricane Season

$12.

4

$15.

0

$17.

6

$25.

8

$9.9

$14.

6

$24.

1

$31.

4

$34.

5

$37.

4

$54.

2

$10.9$10.4$10.1$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250

Pre-Event Funding Post-Event Funding (Assessments & Bonds)

Bil

lion

s

Total = $20.0 Billion

Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not includefinancing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.”Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

$35.0B

$25.0B

$43.8B $49.5B

$55.0B

$80.0BThere is a very significant likelihood of major, multi-year assessments in 2007

Average Annual Assessment per Household, 1-in-100 Year Event in 2007

Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

The average Florida household will pay $8,699 over 30 years in assessments if a 1-in-100 year

event strikes in 2007. Assessments could rise if additional storms hit

in 2007 or beyond.

Savings vs. Costs by Region: Neither Equitable nor Proportionate

TALLAHASSEEAverage Savings: $20

Cost of 1-in-30 Storm: $2,000Cost is 100 times avg. savings

TAMPAAverage Savings: $100


ORLANDO

Average Savings: $30

Cost of 1-in-30 Storm: $2,075

Cost is 69 times avg. savings

MIAMI

Average Savings: $1,120

Cost of 1-in-30 Storm: $3,375

Cost is 3 times avg. savings

STATEWIDE AVERAGEAverage Savings: $265


Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

New Condo Construction inSouth Miami Beach, 2007-2009

• Number of New Developments: 15

• Number of Individual Units: 2,111

• Avg. Price of Cheapest Unit: $940,333

• Avg. Price of Most Expensive Unit: $6,460,000

• Range: $395,000 - $16,000,000

• Overall Average Price per Unit: $3,700,167*

• Aggregate Property Value: At least $6 Billion*Based on average of high/low value for each of the 15 developments

Source: Insurance Information Institute from www.miamicondolifestyle.com accessed April 5, 2007.

REINSURANCE MARKETS

Reinsurance Prices are Stabilizing; Falling in Some

Areas

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

Announced Katrina, Rita, Wilma Losses by Segment

U.S. Primary, $14.2 , 39%

U.S. Reinsurer, $3.4 , 9%

Other, $0.3 , 1%

Lloyd's, $3.5 , 9%

Bermuda, $10.9 , 29%

Europe, $4.9 , 13%

Catastrophes are global events. Only 39% of

KRW losses were borne by US

primary insurers

*As of 2/21/06Source: Dowling & Partners, RAA.

$ Billions

Ratio of Reinsurer Loss & Underwriting Expense to Premiums Written, 1985-2006

1.1

0

1.0

8

1.1

0

1.0

3

1.0

2 1.0

6 1.1

4

1.1

3 1.1

7

1.0

1 1.0

6

1.2

6

0.9

5

1.3

9

1.2

1

1.0

6

1.0

7

1.0

7

1.0

9

1.1

8

1.0

7 1.0

8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

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

Lo

ss &

LA

E R

atio

Source: Reinsurance Association of America.

Despite the respite in 2006, reinsurers paid an average of $1.11 in loss and expense

for every $1 in written premium since 1985

Hurricane Andrew

Sept. 11

Katrina, Rita, Wilma

Liability Crisis

Debate Over Reinsurance Market Performance & Government

• Reinsurance markets typically suffer large shocks, followed by a period of higher prices and transient capacity constraints

• A new equilibrium between Supply and Demand is typically found within 18 months, commensurate with changes in the risk landscape. This is Economics 101 and is a textbook illustration of how capitalism works.

• A competing hypothesis suggests that reinsurance markets “fail” because they do not provide a stable price or quantity of protection as is required in an economy with continuously exposed fixed assets, especially one that is growth oriented

• Public Policy Solution: Acting on this hypothesis generally results in displacement of private (re)insurance capital by government intermediaries

• Question Asked: Are policyholders and the economy better served through free markets, government or some hybrid?

Sources: Insurance Information Institute

Ideas & Proposals

Insurers & Policymakers Are Trying to Tackle this Difficult

Issue

Proposals & Ideas Abound

• Insurers and Policymakers Have Proposed and Support a Wide

Range of Ideas and Proposals

• Proposals Reflect Different Assessments of the Risk and About the

Appropriate Role of Government vis a vis Private Markets

• Approaches Range from Free Market, Pure Risk-Based Pricing to

Significant and Active Role by State/Federal Government

• Some Proposals Call for a Government “Back Stop” That Comes into

Play at Some Level of Loss (National CAT Fund)

• Some Believe that Level is When an Event Threatens Solvency

• Remaining Availability/Affordability Issues May Lend Themselves to

Government Role Under Any Plan

FINANCIAL STRENGTH &

RATINGS Industry Has Weathered

the Storms Well

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%

P/C Insurer Impairments,1969-2006

815

127

11 934

913 12

199

16 14 1336

4931

3449 49

5460

5841

2915

1231

18 1949 50

4735

1813 15

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

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, 1969-2006

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

Co

mb

ined

Rat

io

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Imp

airm

ent R

ate

Combined Ratio after DivP/C Impairment Frequency

Impairment rates are highly

correlated underwriting performance

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

Legal Liability & Tort Environment

Definitely Improving ButNot Out of the Woods

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

$17.0$49.6 $58.7

$95.2

$17.1

$51.0$70.9

$86.7

$5.2

$20.4

$30.0

$49.4

$0

$50

$100

$150

$200

$250

1980 1990 2000 2005

Commercial Lines Personal Lines Self (Un)Insured

Bil

lion

s


*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.




Tort System Costs,2000-2008F

$179

$233$246

$270

$295

$260

$261

$261

$205

1.82%2.03%

2.22% 2.22%

2.04%2.09% 2.03%2.05%

2.24%

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

$300

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

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, 2006 Update on US Tort Cost Trends;2006 is III estimate.

Business Leaders Ranking of Liability Systems for 2007

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

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

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

New in 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

The Nation’s Judicial Hellholes(2006)

Source: American Tort Reform Association; Insurance Information Institute

TEXAS

Rio Grande Valley and Gulf

Coast

South Florida

ILLINOIS

Cook County

Madison County

St. Clair County

West Virginia

Some improvement in “Judicial

Hellholes” in 2006

Watch ListMiller County, AR

Los Angeles County, CASan Francisco, CAPhiladelphia, PA

Orleans Parish, LADelaware

Dishonorable Mentions

Providence, RIMA Supreme CourtLA Supreme Court

New JerseyNE Supreme Court

California

Preventing/Limiting Erosionof Recent Tort Reform

• Tort Pendulum Likely to Swing Against Insurers as Political Environment Changes

• Insurers Must Remain Active Members of Tort Reform Coalitions at State and Federal Level

May have more success at the state level• Pursuing Good Cases Can Set Precedent & Bring About Quantum

Shifts in Judicial Philosophy Campbell v. State Farm (limited punitives) Safeco v. Burr, Geico v. Edo (FCRA reporting violations) Asbestos: Class actions limited; no pre-pack bankruptcies Products Liability: Merck’s successful Vioxx defense

• Educate Policyholders About Link Between Tort Environment and Cost/Availability of Insurance

Businesses understand; Need facts to support local efforts Personal lines customers understand relationship, agents do

• Tighten Contract Language From 9/11 to Katrina, alleged “ambiguities” cost big bucks

REGULATORY UPDATE

Busy Year for Insurersin Washington

Federal Legislative UpdateFederal Terrorism Reinsurance (TRIA)• TRIA expires 12/31/07. The current federal program offers $100 billion of coverage

subject to a $27.5B industry aggregate retention.

• Under H.R. 2761: “Terrorism Risk Insurance Revision and Extension Act” 15-Yr. Extension, expiring 12/31/22 Certification now required of Treasury Secretary and DHS Secretary and Atty. General Congress must then enact a joint resolution to fund backstop Expansion of Act to include NBCR risks (as of 1/1/09) and Group Life NBCR insurer deductible is 3.5% of direct earned premium, rising 0.5 pts. each year thereafter Eliminates distinction between foreign and domestic act of terrorism Reduces trigger to $50 million from $100 million

• New Democratic Congress (with Committee chairs from urban Northeast states) predisposed to extend.

• Administration has issued veto threat• Senate will likely water down bill• Looking at late 2007 before legislation becomes law.

Sources: Insurance Information Institute

Federal Legislative Update

Natural Disaster Coverage• Some insurers are pushing for federal catastrophic risk fund coverage in the

wake of billions of dollars of losses suffered by insurers from the 2004-2005 hurricane seasons.

• Legislative relief addressing property/casualty insurers’ exposure to natural catastrophes, such as the creation of state and federal catastrophe funds, has been advocated by insurers include Allstate and State Farm recently. However, there is active opposition many other insurers and all reinsurers.

• There are supporters in Congress, mostly from CAT-prone states. Skeptics in Congress believe such a plan would be a burden on taxpayers like the NFIP and that the private sector can do a better job. Unlike TRIA, the industry is not unified on this issue.

• Allowing insurers to establish tax free reserves for future catastrophe losses has also been proposed, but Congress has not yet indicated much support.

Sources: Lehman Brothers, Insurance Information Institute

Federal Legislative UpdateOptional Federal Charter (OFC)• Large P&C and life insurers are the major supporters of OFC. Supporters

argue that the current patchwork of 50 state regulators reduces competition, redundant, slows new product introductions and adds cost to the system.

• In general, global P/C insurers , reinsurers and large brokers mostly support the concept, while regulators (state insurance commissioners), small single-state and regional insurers, and independent agency groups largely oppose the idea. An optional federal charter is more favorable for global P&C insurers, because an insurer that operates in multiple states could opt to be regulated under federal rules rather than multiple state regulations. As a result, this could increase innovation in the industry.

• Currently appears to be more momentum for OFC for life than for P&C insurers based on the homogeneous nature of many life products. The debate should intensify and although passage may not occur in the current session of Congress, it may lay the groundwork for passage in the 2009-2010 session.

Sources: Lehman Brothers, Insurance Information Institute

Federal Legislative UpdateMcCarran-Ferguson Insurance Antitrust Exemption• Under McCarran-Ferguson Act of 1945, insurers have limited immunity under

federal anti-trust laws allowing insurers to pool past claims information to develop accurate (actuarially credible) rates.

• Very low level of understanding of M-F in Washington

• Certain legislators threaten to revoke McCarran-Ferguson because of alleged collusion in the wake of Hurricane Katrina. However, the view among some Washington insiders is that such a move would hurt small insurers with less resources rather than the large insurers perhaps being targeted. The current bills designed to revoke McCarran-Ferguson are S.618 and H.R. 1081.

• The government appointed Antitrust Modernization Commission in an April 2007 report strongly encouraged Congress to re-examine the McCarran-Ferguson Act. Notably, 4 of the commissions 12 members called for a full repeal of the law.

Sources: Lehman Brothers, Insurance Info. Institute

Summary• Results were unsustainably good 2006; Overall profitability reached its highest level

(est. 14%) since 1988 Strong first half in 2007 but ROEs slipping

• Underwriting results were aided by lack of CATs & favorable underlying loss trends, including tort system improvements

• Property cat reinsurance markets past peak & more competitive• Premium growth rates are slowing to their levels since the late 1990s; Commercial

leads decreases• Rising investment returns insufficient to support deep soft market in terms of price,

terms & conditions• Clear need to remain underwriting focused• How/where to deploy/redeploy capital??• Major Challenges:

Slow Growth Environment AheadMaintaining price/underwriting disciplineManaging variability/volatility of results

Insurance Information Institute On-Line

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