Catastrophes, the Credit Crisis & Insurance Cycle...Catastrophes, the Credit Crisis & Insurance...

Catastrophes, the Credit Crisis & Insurance CycleImpacts & Implications for the

P/C Insurance Industry

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

Ole Miss Insurance SymposiumUniversity of Mississippi

Oxford, MSMarch 26, 2008

Download: www.iii.org/media/presentations/MSoverview

Presentation Outline

• Credit Crisis & The Weakening EconomyInsurance Impacts & Implications

• Catastrophic RiskFocus on Mississippi

• Profitability & PerformanceOverview & Outlook

• Legal Liability & Tort EnvironmentWill the Pendulum Swing Against Insurer

• Regulatory and Legislative EnvironmentQ&A

A STORMY ECONOMIC FORECAST

What a Weakening Economy & Credit Crunch Mean for

the Insurance Industry

What’s Going On With the US and Global Economies Today?

Fundamental Factors Affecting Global Economy in 2008• Puncture of Two Bubbles: Credit and Housing in US

Burst Bubble Asset Price DeflationSubprime mortgage market was first part of credit bubble to burst

• Credit Crunch: Some credit markets have effectively seized• Global Contagion Effect: Securitization of asset back securities, derivatives

based on those securities amplified via leverage produced contagion effectMany financial institutions around the world found they are exposedMany hedge funds, banks caught holding CDOs, credit default swaps and other instruments against which they borrowed heavily (sometimes 10:1)Some face margin calls, distressed selling of every type of asset except Treasuries

• Global Economic Impacts: Global Economic SlowdownGDP growth in US down sharply, employment falling; Deceleration abroad too“Decoupling” theory was naïve Crashing dollar is symptom of irresponsible US fiscal policy, trade deficits. IOUs are being redeemed for hard assets or states in corporationsNew bubbles forming in commodities and currencies

Source: Insurance Information Institute.

3.7%

0.8%

1.6%

2.5%

3.6%

3.1%

2.9%

0.6%

3.8%

4.9%

0.1%

2.4%

2.2%

2.1%

2.7% 2.8% 2.9%

0.6%

0.5%

0%

1%

2%

3%

4%

5%

6%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

Real GDP Growth*

*Yellow bars are Estimates/Forecasts.Source: US Department of Commerce, Blue Economic Indicators 3/08; Insurance Information Institute.

Economic growth is expected to slow

dramatically in the year ahead

2.9%

2.6% 3.

0%

1.9%

3.0%

2.2%

2.0% 3.

0%

1.4% 2.

0%

10.1

%

1.8%

1.7%2.

6% 3.6%

1.9% 2.2%

9.3%

2.0% 2.

6%2.8%

4.8%

2.2% 2.

8% 2.8%

11.1

%

2.6%

11.3

%-1%

2%

4%

6%

8%

10%

12%

14%

Canada Mexico Japan U.K. China EuroZone U.S.

2006* 2007** 2008 2009

Percent Change in GDP By Country,2006-2009

* Best estimates available. **In most cases, actual data for 2007 GDP are not yet available. Where actual data not available, figures are consensus forecasts from Dec. 10., 2007 issue of Blue Chip Economic Indicators.Source: Blue Chip Economic Indicators, Feb. 10, 2008.

Economic growth is expected to slow globally in 2008, adversely impact global

exposure growth and slowing absorption of excess capital

US growth is among the

slowest in 2008

Toward a New WorldEconomic Order

Source: Insurance Information Institute

1. Credit Crunch (incl. Subprime) Issue Will Ultimately Cost Hundreds of Billions Globally (est. up to $600B)

• Problem exacerbated by leveraged bets taken by some financial institutions therefore its reach extends beyond simple defaults

2. Heavy Toll on Capital Base of Some Large Financial Institutions Worldwide (e.g., Bear Stearns)

• Cash infusions necessary; Sovereign Wealth Funds important source• Federal Reserve forced into playing a larger role; must improvise

3. Most Significant Economic Event in a Generation• US economy will recover, but will take 18-24 months

4. Shuffling of Global Economic Deck; Economic Pecking Order Shifting

• China, oil producing countries hold the upper hand5. IOUs are Being Redeemed

• Stakes in hard assets/institutions demanded6. Good News: No Shortage of Available Capital

• Central banks are (generally) making right decisions; Dollar sinks

What’s Being Done to Fix the Economy? Impacts on Insurers

•Fed on 3/14 (via J.P. Morgan) provided Bear with cash after what is effectively a “run on the bank”•“Too Big to Fail” doctrine is activated•Fed acting to prevent broader loss of confidence•3/17: J.P. Morgan buys Bear for $236 million ($2/share); Price increased to $10 on 3/24

Fed Bailout of Bear Stearns

•Fed will swap up to $200B in bank holdings of mortgage back securities for Treasuries up to 28 days; Improves bank finances

Fed Debt Swap

•Reduces bond yields (65% - 80% of portfolio)•Potentially contributes to inflation longer run

Fed Rate Cuts

Impacts on InsurersEconomic Fix


What’s Being Done to Fix the Economy? Impacts on Insurers

(cont’d)

•Outline of actions only now beginning to emerge. Nothing is solid, but action is both necessary & inevitable•Will actions be directed primarily toward banks or broadly affecting all financial institutions?

Regulatory/ Legislative Action (?)

•Keeps more people in their homes and hopefully paying HO insurance premiums•Abandoned and neglected homes have demonstrably worse loss performance

HousingBailout (?)

•Hope is that $168B plan boosts overall economic activity and employment (by 500,000 jobs) and therefore p/c personal and commercial exposures•Contributes to already exploding budget deficits—Washington may expand its search for people and industries to tax

Stimulus Package

Impacts on InsurersEconomic Fix


Post-Crunch: Fundamental Issues To Be Examined Globally


• Adequacy of Risk Management, Control & Supervision at Financial Institutions Worldwide

Colossal failure of risk management (and regulation)Implications for ERM?Includes review of incentives

• Effectiveness and Nature of RegulationWhat sort of oversite is optimal given recent experience?Credit problems arose under US and European (Basel II) regulatory regimesWill new regulations be globally consistent? Can overreactions be avoided?Capital adequacy & liquidity

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

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

Elements of Credit Market Reform Currently Being Considered

•Multi-national effort to require enhanced and tested risk management policies for large financial institutions

Enhanced Awareness of Risk

•Strengthen state and federal oversight of mortgage lenders•Nationwide licensing of mortgage brokers

Stronger Regulatory Policies

•Revisit latest bank capital requirements (Basel II) to ensure banks have sufficient capital/liquidity for risks assumed

Increased Capital

•Require financial institutions to implement stronger risk controls

Stronger Risk Management

•Require issuers of mortgage-backed securities to disclose more about the “level and scope of due diligence”•More details on actual underlying assets of the security•Disclose if “issuers had shopped for ratings” and why•Require ratings firms to differentiate between ratings on complex structured products and conventional products•Ratings firms must disclose conflicts of interest and provide greater scrutiny of firms that originate loans

Increased Disclosure/ Transparency

RationaleReform

Sour

ce: W

all S

treet

Jour

nal,

3/15

/07

Insurance &The Economy

Important But Somewhat Muted Impacts

A Few Facts About the Relationship Between Insurance & Economy

• Vast Majority of Insurance Business is Tied to RenewalsApproximately 98+% of P/C business (units) is linked to renewalsA very large share of p/c insurance premiums are statutorily or de facto compulsory (e.g., WC, auto liability, surety, usually HO…)P/C insurers have marginal exposure impact due to economyMost life revenues and units are renewals, but some products (e.g., variable annuities are sensitive to market volatility)Life insurers who manage 401(k) assets seeing more loans and hardship withdrawals;

• Insurers are Sensitive to Interest RatesAbout 2/3 of P/C invested assets and 75% if Life assets are fixed incomeHistorically, yield on industry portfolios has tracked 10-year note closelyAll else equal, lower total investment gain implies greater emphasis on underwritingHistorically, industry’s best underwriting performances are rooted in periods when interests rates were low and/or equity market performance poor (1930s – 1950s, early 2000s gave rise to strong 2006/07)


5.2%

-0.9

%-7

.4%

-6.5

%-1

.5%

1.8%

4.3%

18.6

% 20.3

%5.

8%0.

3%-1

.6%

-1.0

%-1

.8%

-1.0

%3.

1%1.

1%0.

8%0.

4%0.

6%-0

.4%

-0.3

%1.

6%5.

6%13

.7%

7.7%

1.2%

-2.9

% -0.5

%-2

.9%

-2.7

%

-10%

-5%

0%

5%

10%

15%

20%

25%78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F

Rea

l NW

P G

row

th

-4%

-2%

0%

2%

4%

6%

8%

Real

GDP

Gro

wth

Real NWP Growth Real GDP

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

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

in the overall economy

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/08; Insurance Information Inst.

Summary of Economic Risks and Implications for (Re) Insurers

•Reduced commercial lines exposure growth•Surety slump•Increased workers comp frequency

General Economic Slowdown/Recession

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

Stock Market Slump

•Lower investment income Lower Interest Rates

•Reduced exposure growth•Deteriorating loss performance on neglected, abandoned and foreclosed properties

Housing Slump

•Some insurers have some asset risk•D&O/E&O exposure for some insurers•Client asset management liability for some•Bond insurer problems; Muni credit quality

Subprime Meltdown/ Credit Crunch

Risks to InsurersEconomic Concern

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

2.07

1.80

1.36

0.98

1.11

1.38 1.

45

1.54 1.56

1.51

1.48

1.35

1.46

1.29

1.20

1.01

1.19

1.47

1.62 1.64

1.57 1.

60

1.71

1.85

1.96

0.91.01.11.21.31.41.51.61.71.81.92.02.1

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

Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 3/08 edition of BCEF; Insurance Info. Institute

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

Impacts also for comml. insurers with construction risk exposure

New home starts plunged 34% from 2005-2007;

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

net annual decline of 1.09 million units

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

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

exposure loss in 2008 vs. 2005 is estimated at $954 million.

16.816.916.916.6

17.1

17.517.8

17.4

16.5

16.1

15.515.8

16.416.6 16.7

16.9

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

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

Weakening economy, credit crunch and high gas prices are hurting

auto sales

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

drop of 1.4 million units annually by 2008 compared with 2005, a decline of 8.3%

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

than problems in the housing market will on home insurers

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

Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 3/08 edition of BCEF; Insurance Info. Institute

$1,0

82

$1,1

44

$1,2

26

$1,3

07

$1,3

70

$1,3

96

$1,4

38

$1,4

95

$1,5

63

$1,6

41

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,80003 04 05 06 07E

08F

09F

10F

11F

12F

0%

1%

2%

3%

4%

5%

6%

7%

8%

% C

hang

e

Nonresidential Fixed Investment% Change Nonresidential Fixed Investment

Nonresidential Fixed Investment,* 2003 – 2012F

Sharp dip in business

investment growth in 2007/2008 will slow commercial exposure growth

*Nonresidential fixed investment consists of structures, equipment and software.Sources: US Bureau of Economic Analysis (Historical), Value Line (2/22/08) estimates/forecasts for 2008-2012.

Non

resi

dent

ial F

ixed

Inve

stm

ent (

$ B

ill)

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

1.1%

3.5% 3.6%

-1.0%

0.5% 0.3%

1.6%

2.4% 2.5% 2.6% 2.7% 2.9%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/08); Insurance Info. Inst.

Industrial production shrank during the final quarter of 2007 and is expected to grow only very slowly

during the first half of 2008

Industrial production affects exposure both directly and indirectly

Employment Change by Industry

(39,000)(52,000)

(34,000)(20,000)

30,00021,000

38,000

(60,000)(50,000)(40,000)(30,000)(20,000)(10,000)

010,00020,00030,00040,00050,000

Construction Manuf. Retail Trade Professional& Biz

Services

Education &Health

Leisure &Hospitality

Government

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

Employment fell by 63,000 in February, the biggest decline in 5

years. Manufacturing and Construction are always the hardest hit in an economic slowdown, with

each losing several hundred thousand jobs over the past 12 months.

Jan. 2008 to Feb. 2008p

US Unemployment Rate,(2007:Q1 to 2009:Q4F)

4.5% 4.5% 4.6%4.8%

5.0%5.2%

5.4% 5.5% 5.5% 5.5% 5.4% 5.4%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/08); Insurance Info. Inst.

Rising unemployment rate negative impacts workers comp exposure and could signal a temporary claim

frequency surge

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$5

$10

$15

$20

$25

$30

$35

$40

$45Wage & SalaryDisbursementsWC NPW

*As of 7/1/07 (latest available).Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books

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

Net Written Premiums

7/90-3/91

Shaded areas indicate recessions

3/01-11/01

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

Weakening wage and salary growth is

expected to cause a deceleration in workers comp

exposure growth

Inflation Rate (CPI-U, %),1990 – 2009F

4.9 5.1

3.0 3.22.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.2

4.03.4

2.42.82.9

2.4

0

1

2

3

4

5

6

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

*12-month change Feb. 2008 vs. Feb. 2007; Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Mar. 10, 2008; Ins. Info. Institute.

Inflation was just 2.2% in 2007 but is accelerating. Medical cost inflation, important in WC, auto liability

and other casualty covers is running far ahead of inflation. Rising inflation can also lead to rate inadequacy and adverse reserve development

Favored Industry Groups for Insurer Exposure Growth

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

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

Natural Resources & Commodities

•Weak dollar, globalization persist; Cuba angle?Export Driven

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

Agriculture & Food Processing & Manufacturing

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

Health CareRationaleIndustry

Sources: Insurance Information Institute

D&O/E&OTurbulent Markets,

Bankruptcies Can GiveRise to Suits

Shareholder Class Action Lawsuits*

*Securities fraud suits filed in U.S. federal courts; 2008 figure is current through March 25.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute

164202

163

231188

111173

242210215

497

267226237

182

118176

48

0

100

200

300

400

500

600

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

Pace of suits is up due in part to subprime issues,

housing collapse and market volatility.

Defendants include banks, investment banks,

builders, lenders, bond and mortgage insurers

Includes 56 suits related to subprime in 2007/08

A credit crunch creating a “contagion” effect resulting

in significant financial distress and bankruptcies in

other sectors could breed more securities litigation

Origin of D&O Claims for Public Companies, 2006

Customers & Clients, 4%Competitors,

6%

Employees, 25%

Government, 2%

Other 3rd Party, 22%

Shareholders, 40%

40% of D&O suits originate

with shareholders

Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.

CATASTROPHE LOSS REVIEW

A Decade of Disaster, With Mississippi in

the Crosshairs

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

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 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

HURRICANE KATRINA

A Review of Mississippi Insured Losses

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

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

Hurricane Katrina Claim Count Distribution by State*

Mississippi, 515,000 , 29.5%

Tennessee, 15,000 , 0.9%

Louisiana, 975,000 , 55.9%

Florida, 122,000 , 7.0%

Georgia, 7,800 , 0.4%

Alabama, 109,000 , 6.3%


Total # Claims = 1,743,800

MS accounted for 33.5% of the insured losses

paid and 29.5% of the claims filed

Hurricane Katrina Loss Distribution by Line ($ Millions)*

Homeowners, $17,564.0 , 43%

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

Vehicle, $2,168.0 , 5%

Total insured losses are

estimated at $40.579 billion

from 1.7438 million claims. Excludes $2-

$3B in offshore energy losses


Katrina had a disproportionate impact on businesses, decimating the economy

and making recovery more difficult

Mississippi: Katrina Loss Distribution by Line ($ Millions)*

Homeowners, $5,475.0 , 40%


Vehicle, $630.0 , 5%

Mississippi insured losses

are estimated at $13.6 billion from 515,000

claims. Excludes $2-



Mississippi: Katrina Claim Count Distribution by Line*

Homeowners, 355,000 , 69%

Commercial Property & BI, 55,000 , 11%

Vehicle, 105,000 , 20%


Commercial (business) claims

accounted for 11% of the claims filed but 55% of

the insured losses. Homeowners

claims accounted for 69% of claims and 40% of losses.

$6,000$15,422

$136,363

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

Vehicle Home Commercial

MS: Average Cost per Claim by Type of Claim*


Commercial (business) claims were 9-10 times more expensive

than homeowners claims on average for Hurricane Katrina,

but accounted for just 11% of the total number of claims

$2,879 $2,917 $2,889 $2,894$3,159 $3,046 $3,121

$3,702

$4,281

16.8%

1.3%0.2%

9.2%

-3.6%

2.5%

18.6%

15.6%

-1.0%

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

98 99 00 01 02 03 04 05 06

Valu

e of

Con

stru

ctio

n G

DP

-5%

0%

5%

10%

15%

20%

Gro

wth

in C

onst

ruct

ion

GDP

Value of Construction GDP% Growth in Construction GDP

Growth in Mississippi Construction Component of GDP Pre/Post-Katrina

Insurance dollars helped construction

spending surge in MS

Sources: US Bureau of Economic Analysis; Insurance Information Inst.

Mississippi Windstorm Plan:Exposure to Loss ($ Mill)

Source: PIPSO; Insurance Information Institute

$5,3

69.5

$1,8

73.0

$1,6

31.8

$1,3

44.3

$1,1

21.7

$848

.6

$864

.9

$917

.9

$637

.1

$352

.9

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006

Total exposure to loss in the Mississippi Windstorm Underwriting Association (MWUA) jumped to $5.4 billion in 2006 from $1.9 billion in 2005, an increase of 187%.The total number of policies in the Plan more than doubled between 2005 and 2006.

Louisiana: Katrina Loss Distribution by Line ($ Millions)*

Homeowners, $10,875.0 , 43%


Vehicle, $1,400.0 , 6%

Louisiana insured losses

are estimated at $25.275 billion from 975,000

claims. Excludes $2-



Hurricane Rita Claim Count Distribution by State*

Texas, 171,000 , 44.6%

Tennessee, 3,500 , 0.9%

Louisiana, 185,000 , 48.3%

Arkansas, 5,500 , 1.4%Florida, 6,000 , 1.6%

Alabama, 5,000 , 1.3%

Mississippi, 7,000 , 1.8%


Mississippi accounted for 1.8% of the

insured losses on 7,000 claims.

Excludes offshore energy losses of $2-3B

Total # Claims = 383,000

Hurricane Rita Loss Distribution, by Line ($ Millions)*

Homeowners, $2,974.2 , 59%


Vehicles, $211.0 , 4%Total insured

losses are estimated at $5.0

billion (excl. offshore energy of $2-$3B) from 383,000 claims.


Louisiana: Rita Loss Distribution, by Line ($ Millions)*

Homeowners, $1,795.0 , 62%


Vehicles, $117.5 , 4%Total insured

losses are estimated at

$2.9125 billion from 185,000

claims.


Katrina’s Path of Destruction Through the Offshore Energy Industry

Source: “Hurricane Katrina: Profile of a Super Cat,” RMS, October 2005.

Katrina (& Rita) tore through

offshore facilities

Insured Offshore Energy Losses for Recent Major Gulf Storms

$2.0$2.25

$3.0

$0.0

$1.0

$2.0

$3.0

$4.0

Katrina (2005) Ivan (2004)* Rita (2005)

$ B

illio

ns

Hurricanes Katrina, Rita and Ivan cost energy

insurers at least $7 billion

Sources: Insurance Information Institute research estimates. *Midpoint of estimated range for $2.0 to $2.5 billion)

HURRICANES: INSURED LOSS

POTENTIAL

Katrina:Just the Beginning?

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

Mississippi had $45 billion in insured coastal property

exposure in 2004 compared to $209 billion in Louisiana and nearly $2 trillion in Florida

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

NewMississippiMaryland

Source: AIR

Mississippi had $21 billion in insured residential

coastal property exposure in 2004 (47% of all MS

coastal exposure)

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

Mississippi had $24 billion in insured commercial

coastal property exposure in 2004 (53% of all MS

coastal exposure)

Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)

63.1%60.9%

57.9%54.2%

37.9%33.6%33.2%

28.0%25.6%25.6%

23.3%13.5%

12.0%11.4%

8.9%5.9%

1.4%

79.3%

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

FloridaConnecticut

New YorkMaine

MassachusettsLouisiana

New JerseyDelaware

Rhode IslandS. Carolina

TexasNH

MississippiAlabamaVirginia

NCGeorgia

Maryland

Source: AIR Worldwide

Mississippi coastal exposure accounts for 13.5% of all insured exposure statewide

Historical Hurricane Strikes in Hancock County, MS, 1900-2007

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

Population of Hancock County has soared (4-fold since 1950) as has its vulnerability

Historical Hurricane Strikes in Harrison County, MS, 1900-2007


Population of Harrison County has soared (4-fold since 1940) as has its vulnerability

Historical Hurricane Strikes in Jackson County, MS, 1900-2007


Population of Jackson County

has soared (4-fold since 1950) as has its vulnerability

The 2008 Hurricane Season:

Preview to Disaster?

2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season

Source: WeatherUnderground.com, January 18, 2006.

All 21 names were used for the first time ever, so

Greek letters were used for the

final storms

2005 set a new record for the number of hurricanes &

tropical storms at 28, breaking the old record set in 1933.

2007 Hurricane Season:No Big Hits Once Again

Source: www.wunderground.com, accessed 1/11/08; Insurance Information Institute

A Sigh of ReliefThe 2007 season saw 15 named

storms (same as devastating 2004 season) including

two rare Category 5 storms, but the US escaped this year

with very little loss

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.

Mississippi Insurance Market

Overview

Mississippi InsuranceMarket Facts

• MS P/C insurance premium volume in 2005 was $3.76 billion, or 0.8% of the US total of $478.5 billion

LA Homeowners insurance premium volume in 2005 was $580 million, or 1.0% of the US total of $57.5 bill.

• Insured Katrina & Rita homeowners losses of $5.5 billion in MS were more than 9 times the 2005 homeowners premiums of $580 million

• The 2005 hurricane losses in MS homeowners insurance wiped out 17 years of premium and every dollar of profit ever made in the history of the state in this line

Source: Insurance Information Inst. from National Underwriter Highline annual statement database; PCS.

Mississippi & Louisiana Market Shares, All Lines & Homeowners

Louisiana$7.70 1.6%

All Other States

$467.01 97.6%

Mississippi$3.76 0.8%

ALL LINES ($ Billions)

HOMEOWNERS ($ Millions)

Source: Insurance Information Institute from National Underwriter Highline annual statement database.

Louisiana$1,008.54

1.8%

All Other States

$55,899.48 97.2%

Mississippi$580.00 1.0%

MS accounts for less than 1% of the US insurance market but 34% of 2005 hurricane losses

$764

$455

$1,372

$855

$611

$1,083

$558

$939

$419

$847

$666

$1,144

$400$500$600$700$800$900

$1,000$1,100$1,200$1,300$1,400$1,500

2005 1997

US Texas Florida Mississippi Alabama Louisiana

Average Expenditures on Home Insurance, 2005 vs. 1997

Source: NAIC, Insurance Information Institute

+67.

9%

+60.

5%

+71.

8%

+68.

3%

+102

.1%

+71.

8%

$455 $481

$487

$508 $536 $5

93 $668 $7

29

$1074$975

$840$758$721$714$692$666

$400$500$600$700$800$900

$1,000$1,100$1,200

97 98 99 00 01 02 03 04*

US Louisiana

Average Expenditures on HO Insurance, LA vs. U.S., 1997-2004*

*Latest available from NAIC.Source: NAIC, Insurance Information Institute

Change: 1997-2004*Louisiana: +61.3%

US: +60.2%

ACTS OF GOD & THE BOTTOM

(AND TOP) LINESCatastrophic 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

-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

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

Share of Losses Paid by Reinsurers, by Disaster*

30%25%

60%

20%

45%

0%

10%

20%

30%

40%

50%

60%

70%

Hurricane Hugo(1989)

Hurricane Andrew(1992)

Sept. 11 TerrorAttack (2001)

2004 HurricaneLosses

2005 HurricaneLosses

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

Reinsurance is playing an increasingly

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

are skyrocketing

US Reinsurer Net Income& ROE, 1985-2007*

$1.9

4

$2.0

3

$1.9

5 $3.7

1$4

.53

$5.4

3$1

.47

$1.9

9

$1.3

1 $3.1

7$3

.41

$2.5

1$9

.68

$7.9

6

($2.98)

$0.1

2

$1.9

5

$1.3

8$1

.22

$1.8

7

$1.1

7 $2.5

2$1

.79

($4)

($2)

$0

$2

$4

$6

$8

$10

$12

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

Net

Inco

me

($ B

ill)

-10%

-5%

0%

5%

10%

15%

20%

RO

E

Net Income ROE

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

Reinsurer profitability rebounded post-Katrina

but is now falling

Regional Distribution of Reinsurers by NWP, 2006

Other11%

U.K.6%

Switzerland12%

Ireland2%

Japan6%

Germany25%

France3%

Bermuda10%

U.S.25%

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

International reinsurers from

Germany, Switzerland and

France account for 40 percent of global reinsurance volume.

Bermuda is a growing market, with a 10 percent

share. Lloyd’s and London-based

reinsurers account for 6 percent of the

world market.

Eight countries account for 89 percent of global reinsurance volume.

Reinsurer Market Share Comparison: 1990 vs. 2006

U.S. Reinsurer

64.7%

Offshore Reinsurer

35.3%

1990 2006

Sources: Reinsurance Association of America; Insurance Information Institute.

U.S. Reinsurer

46.9%

Offshore Reinsurer

53.1%

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

The Flood Insurance Purchase

& Retention Decision

Flood Insurance is a Tough Sell

Hurricane Katrina NFIP Flood Claim Count and Closed Claim Losses Paid*

$272.9

$15,486.2

$2,362.9$128.2

5,723 8,956 18,897

177,036

$0$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000$18,000

Alabama Florida Mississippi LouisianaSize of Industry Loss ($ Billions)

Insu

red

Loss

($ B

illio

ns)

020,00040,00060,00080,000100,000120,000140,000160,000180,000200,000

Cla

ims

Rec

eive

d

NFIP Insured Flood Loss Claims Received

*As of 12/8/06, 98.7% of all Katrina claims had been closed. Paid amounts displayed are for closed claims only.Source: National Flood Insurance Program as of December 8, 2006; Insurance Information Institute.

85% of the $18.3 billion in NFIP flood losses

paid from Katrina were in Louisiana. MS

accounted for 13%.

Total Claim Payments by State (Top 11) Jan 1, 1978 - Feb. 2006

$ Millions

$3,2

28.8

$2,7

75.0

$2,5

54.6

$600

.0

$426

.0

$425

.5

$423

.2

$14,309.1

$655

.2

$721

.2

$851

.6

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

LA FL TX MS AL NC NJ PA NY SC CA

Source: FEMA, National Flood Insurance Program (NFIP)

Louisiana and Mississippi rank 1st and 4th respectively

in terms of total claims payments (up from 3rd and 11th pre-Katrina). Florida ranks 2nd and Texas 3rd.

Flood Insurance Penetration Rates:Top 25 Counties/Parishes in US*

81.5%80.0%

78.7%77.1%

74.1%69.6%

68.4%68.1%

66.7%65.9%65.5%

62.4%59.0%

56.2%51.6%

49.6%48.0%

46.3%44.4%

42.8%42.8%42.0%41.9%

40.1%

84.0%

0% 20% 40% 60% 80% 100%

JEFFERSON/LAWALTON/FL

BROWARD/FLCOLLIER/FL

LEE/FLGALVESTON/TX

GLYNN/GAST. BERNARD/LAMIAMI-DADE/FL

ORLEANS/LACARTERET/NC

ST. CHARLES/LAST. JOHNS/FL

CHARLOTTE/FLST. TAMMANY/LA

HORRY/SCINDIAN RIVER/FL

BAY/FLBRUNSWICK/NC

NASSAU/FLBERKELEY/SC

PINELLAS/FLBRAZORIA/TXCHATHAM/GA

TERREBONNE/LA

LA parishes have among the highest

flood coverage penetration rates

in the US (12 of the top 75)

*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.

Flood Insurance Penetration Rates:Counties/Parishes Ranked 26-50*

39.7%39.2%39.1%38.7%

37.2%36.5%36.2%

34.2%33.0%

32.1%30.6%

28.3%27.6%

27.0%26.8%26.4%26.1%

25.4%25.3%25.2%

23.4%23.3%

22.1%21.7%

39.8%

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

BALDWIN/ALSARASOTA/FL

PALM BEACH/FLCHARLESTON/SC

MANATEE/FLMARTIN/FL

ATLANTIC/NJLAFOURCHE/LA

OKALOOSA/FLGEORGETOWN/SC

FLAGLER/FLMAUI/HI

LIVINGSTON/LABREVARD/FL

SUSSEX/DEVOLUSIA/FL

ST. LUCIE/FLJEFFERSON/TX

HAMPTON CITY/VAOCEAN/NJ

HARRIS/TXPASCO/FL

BOSSIER/LANEW HANOVER/NC

BRONX/NY

Mid-Atlantic/Northeast Counties are

underrepresented

People along the eastern

seaboard have not gotten the

message


Flood Insurance Penetration Rates:Counties/Parishes Ranked 51-75*

20.9%20.1%

19.1%18.3%

17.8%17.7%17.5%

16.7%16.3%

15.8%15.6%15.4%

14.5%14.0%

13.3%12.9%

12.6%11.7%11.6%

11.3%10.2%

9.3%9.1%

8.5%

21.6%

0% 5% 10% 15% 20% 25%

CAMERON/TXFORT BEND/TX

SANTA ROSA/MSHARRISON/MSJACKSON/MS

NORFOLK CITY/VAHILLSBOROUGH/FL

LAFAYETTE/LAEAST BATON ROUGE/LA

VIRGINIA BEACHESCAMBIA/FLHONOLULU/HI

SACRAMENTO/CACALCASIEU/LA

MONTGOMERY/TXCITRUS/FL

MERCED/CACHESAPEAKE,

OSCEOLA/FLHUDSON/NJ

DUVAL/FLBARNSTABLE/MA

MARIN/CATULARE/CA

MONMOUTH/NJ


MS coastal counties

rank abysmally

low

Barnstable is only county in all of New England among Top 75

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


Insurance Information Institute On-Line

END PART IDownload at:

www.iii.org/media/presentations/MSoverview

Catastrophes, the Credit Crisis & Insurance CycleImpacts & Implications for the

P/C Insurance Industry

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

Ole Miss Insurance SymposiumUniversity of Mississippi

Oxford, MS

March 26, 2008

PROFITABILITYProfits in 2006/07 Reached

Their Cyclical Peak;

By No Reasonable Standard Can Profits Be Deemed Excessive

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

-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

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

14.0%16.8%

12.3%

9.4%

13.2%

6.3%

9.8% 10.7%9.8%

0%2%4%6%8%

10%12%14%16%18%

Personal Commercial Reinsurance

2006 2007E 2008F

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

ROEs are declining as underwriting

results deteriorate

-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

Factors that Will Influence theLength and Depth of the Cycle

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

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

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

Looming reserve deficiencies are not hanging over insurers they way they did during the last soft market in the late 1990sMany companies have been releasing redundant reserves, which allows them to boost net income even as underwriting results deteriorateReserve releases will diminish in 2008; Even more so in 2009

• Investment Gains: 2007 was the 5th consecutive up year on Wall Street. With sharp declines in stock prices and falling interest rates, portfolio yields are certain to fall Contributes to discipline

Realized capital gains are already rising as underwriting profits shrink, but like redundant reserves, realized capital gains are a finite resourceA sustained equity market decline (and potentially a drop in bond prices at some point) could reduce policyholder surplus


Factors that Will Influence the Length and Depth of the Cycle (cont’d)

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

With more “eyes” on the industry, the theory is that cyclical swings should shrink• Ratings Agencies: Focus on Cycle Management; Quicker to downgrade

Ratings agencies more concerned with successful cycle management strategyMany insurers have already had ratings “haircut” over the last several years they way they did during the last soft market in the late 1990s; Less of a margin today

• Finite Reinsurance: Had smoothing effect on earnings; Finite market is gone• Information Systems: Management has more and better tools that allow

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

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


-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 pt

s

+0.2

pts

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

+1.7

pts

-9.0

pts

The cost of capitalis the rate of return

insurers need to attract and retain

capital to the business

+3.1

pts

P/C, L/H Stocks: Ahead of the S&P 500 Index in 2008

-12.05%

-46.05%

-15.56%

-23.87%-7.27%

-8.24%

-17.18%

-9.46%

-50.0% -40.0% -30.0% -20.0% -10.0% 0.0%

S&P 500

All Insurers

P/C

Life/Health

Multiline

Reinsurance

Mortgage*

Brokers

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

Total YTD Returns Through March 21, 2008

P/C insurance stocks not affected as much as the

overall market by credit, subprime concerns

Mortgage & Financial Guarantee insurers were

down 69% in 2008

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, 1999-2007E

$ Billions

$1.736 $1.737 $1.803 $1.708

$3.695

$4.323

$2.975

$2.111$1.882

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

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

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

increased competition

FINANCIAL STRENGTH &

RATINGSIndustry Has Weathered

the Storms Well, But Cycle May Takes Its Toll

P/C Insurer 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

UNDERWRITINGTRENDS

Extremely Strong 2006/07;Relying on Momentum &

Discipline for 2008

90

95

100

105

110

115

120

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

08F

Combined Ratios1970s: 100.31980s: 109.21990s: 107.82000s: 101.8*

Sources: A.M. Best; ISO, III *Full year 2007/08 estimates from III 2008 Earlybird Survey.

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

115.8

107.4

100.198.3

100.7

92.5

97.3

93.8

90

100

110

120

01 02 03 04 05 06 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

91.292.1 92.3 92.4 92.5

93.1 93.1 93.393.8

93.0

85

86

87

88

89

90

91

92

93

94

95

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

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

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

2007 was one of the Top 12

best since 1920

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 0607

E08

F

Source: A.M. Best, Insurance Information Institute *Actual 2007:9M underwriting profit = $18.146B

$ B

illio

ns

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

second since 1978. Expected gain for 2007 is approximately $20 billion. Cumulative underwriting

deficit since 1975 is $421 billion.

Underwriting Gain (Loss)1975-2008F*

$10.

8 $22.

8 $33.

4

$36.

9

$18.

9

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

$0.4

($7.0)

8.9

-1.1-1.3-1.6

4.5

-1.20.1

3.5

8.6

6.5

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

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

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

Res

erve

Dev

elop

men

t ($B

)

(3)(2)(1)012345678910

Com

bine

d R

atio

Poi

nts

PY Reserve DevelopmentCombined Ratio Points

Impact of Reserve Changes on Combined Ratio

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

Reserve adequacy has

improved substantially

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

-$1,

886 -$

1,17

4

-$1,

116 -$77

9

-$47

5

-$41

3

-$25

4

-$10

0

-$10

0

-$96

-$53

-$48

$366

$1,176$1,172

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

-$500$0

$500$1,000$1,500

PPA Liab

ility

PPA PD

Home

Med

Mal

Specialt

y Pro

pCom

m. Auto

Prod. L

iabilit

yFinl. G

uaran

tyIn

ternati

onal

Other

Specialt

y Liab

.W

orker'

s Com

pFideli

ty/Suret

y

Commerc

ial M

ulti

Other

Liabilit

yRein

sura

nce$

Bill

ions

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

Reserve redundancies in most lines have

resulted in releases in recent years

Release

Strengthening

PERSONAL LINES

103.

9

104.

5

103.

5

104.

9

99.8 10

2.7

104.

5

109.

9

110.

9

105.

3

98.4

94.3 96

.4

94.3 95

.6 98.6

85

90

95

100

105

110

115

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

Recent strong results attributable favorable frequency

trends and low CAT activity

Personal LinesCombined Ratio, 1993-2007E

101.7101.3 101.0

99.5

101.1

103.5

109.5

107.9

104.2

98.4

94.395.1 95.5

97.5

99.5

101.3

90

95

100

105

110

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

Private Passenger Auto (PPA) Combined Ratio

Average Combined Ratio for 1993 to 2006:

101.0

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

PPA is the profit juggernaut of the

p/c insurance industry today

Auto insurers have shown significant

improvement in PPA underwriting

performance since mid-2002, but results

are deteriorating.

-4%

-2%

0%

2%

4%

6%

8%

10%

00:Q

100

:Q2

00:Q

300

:Q4

01:Q

101

:Q2

01:Q

301

:Q4

02:Q

102

:Q2

02:Q

302

:Q4

03:Q

103

:Q2

03:Q

303

:Q4

04:Q

104

:Q2

04:Q

304

:Q4

05:Q

105

:Q2

05:Q

305

:Q4

06:Q

106

:Q2

06:Q

306

:Q4

07:Q

107

:Q2

07:Q

3

Auto Insurance Component of CPI Personal Auto-PD Pure Premium

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

Pure Premium Spread: Personal Auto PD Liability, 2000-2007:Q3

Margin necessary to maintain PPA

profitability

2000 PPA Combined=110

Inversion of pure premium spread is a

warning sign that price and costs are out of sync

2006 PPA Combined=95.5

-2.2%

-5.3%-4.0%

-3.3%

-0.9%

-2.6%

-5.4%

-3.3% -3.0%

3.0%3.6% 3.8% 3.4%

2.8%3.7%

6.0%

-0.3%

4.7%

-6%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05 06 07*

Frequency Severity

Bodily Injury: Severity Trend Running Ahead of Frequency

*Average of 4 quarters ending with 3rd quarter 2007.Source: ISO Fast Track data.

Medical inflation

is a powerful

cost driver

0.8%

-1.5%

0.3%

-2.0% -2.3% -2.4%-1.6%

-3.8%

0.6%

3.9%3.3% 2.8%

0.5%

2.2%

4.8%

2.5%

4.3%

6.2%

-6%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05 06 07*

Frequency Severity

PD Liability: Frequency Trend No Longer Offsets Severity

Fewer accidents, but more damage when they occur:

Higher Deductibles?


-1.6%

1.1%

-1.1%

0.0%

-0.6%

-7.2%-5.4% -5.1% -5.9%

3.2%

6.5%

-4.0%

0.5%

4.8%6.9%

2.3%6.3%

16.1%

-10%

-5%

0%

5%

10%

15%

20%

99 00 01 02 03 04 05 06 07*

Frequency Severity

PIP: Frequency Trend Now Offsets Rising Claim Severity

Fraud caused problems from

1999-2001

Is No-Fault living on borrowed time?


2.6%

-0.4%

1.9%

-3.8%-5.1%

-4.4%

-1.8%

-3.7%

1.4%

3.7% 3.7%

1.7%

3.8%3.1%

0.5%

3.0%4.1%

6.8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05 06 07*

Frequency Severity

Collision: Frequency and Severity Claim Trend Adverse


-1.7

%

-2.6

%

3.3%

-5.7

% -2.1

%

-8.3

%

-3.1

%

-9.8

%

-10.

3%-6.9

%

15.1

%

-1.4

%

-9.3

%

-4.1

%

-2.4

%

3.3%

-4.7

%

8.9%

-15%

-10%

-5%

0%

5%

10%

15%

20%

99 00 01 02 03 04 05 06 07*

Frequency Severity

Comprehensive: Favorable Frequency and Severity Trends

Weather related claims from Hurricanes Katrina,

Rita & Wilma: 681,900 claims valued $3.29 billion


Homeowners Insurance

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


COMMERCIAL LINES

Commercial AutoCommercial Multi-Peril

Workers Comp

110.

3

110.

2

107.

6

103.

9 109.

7

112.

3

111.

1

122.

3

110.

2

102.

5 105.

4

91.2 94

.0 97.5

102.

0

112.

5

85

90

95

100

105

110

115

120

125

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

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

Commercial coverages have exhibited significant

variability over time.

Commercial Lines Combined Ratio, 1993-2008F

Outside CAT-affected lines, commercial

insurance is doing fairly well. Caution is required in

underwriting long-tail commercial lines.


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

94.5 98

122.5

80

85

90

95

100

105

110

115

120

125

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

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

Sources: A.M. Best (historical and forecasts) *Includes both liability and property damage.

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

93.5

98.0

80

85

90

95

100

105

110

115

120

125

130

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

CMP-LiabilityCMP-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

Sources: A.M. Best (historical and forecasts) *Includes both liability and property damage.

WORKERS COMPENSATION

OPERATING ENVIRONMENT

Workers Comp Calendar Year – Private Carriers

101

97

111

110

107

103

95

101.

5

98.5

100

101 10

7 115 11

8 122

80

90

100

110

120

130

140

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

Calendar 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 *2007/2008 figures are A.M. Best estimates/forecasts.

Workers Comp Combined Ratios, 1994-2008F*

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

4.5%3.6%

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

4.0% 4.4% 4.2% 4.0%

5.1%

7.4%

10.1%

8.3%

10.6%

8.2%

14.0%

7.4%

9.0%

6.8%

11.7%

7.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Rising Far Faster than Medical CPI

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

3.5

pts

WC medical severity rose more than twice as fast as the medical CPI (8.8% vs. 4.0%)

from 1995 through 2006

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%

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

Growth in Net Written Premium, 2000-2007E

*2007 figure based on actual 9-month results.Source: A.M. Best; Forecasts from the Insurance Information Institute.

5.0%

8.4%

15.3%

10.0%

3.9%

0.5%

2.7%

0.0%

2000 2001 2002 2003 2004 2005 2006 2007*

P/C insurers are experiencing their slowest

growth rates since 1943…but underwriting results are expected to

remain relatively healthy

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

2.0% 3.5%

28.1%

-0.1%

-1.5%

1.4%

-2.3%-8.5%

-5.0%-15%-10%

-5%0%5%

10%15%20%25%30%

Personal Commercial Reinsurance

2006 2007E 2008F

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

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

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.

109.4110.2

118.8

109.5

112.5110.2

107.6

104.1

109.7 110.2

102.5

105.4

90.5

102.0

111.1112.3

122.3

$7.3

0

$6.4

9

$13.

91

$13.

15

$11.

94

$11.

95

$8.3

0

$13.

50

$8.4

2

$4.8

3

$5.2

0

$5.7

1

$5.2

5

$5.7

0

$7.7

0

$6.4

0

$6.1

0

90

95

100

105

110

115

120

125

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

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

($1)

$1

$3

$5

$7

$9

$11

$13

$15

Cos

t of R

isk/

$100

0 R

even

ue

CommercialCombined RatioCost of Risk

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

Cost of Risk vs. Commercial Lines Combined Ratio

0%

10%

20%

30%

40%

50%

60%

70%

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

Direct Independent Agents

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

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

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

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

direct sales (e.g., internet)

0%

10%

20%

30%

40%

50%

60%

70%

80%

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


Personal Lines Distribution Channels, Direct vs. Independent Agents


Independent agents have lost significant personal lines market

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

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


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


Independent agents have seen only modest erosion in commercial lines

market share in recent decades

WEAK PRICING

Under Pressure in 2007/08, Especially Commercial Lines

$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

$418$440 $455$481$488 $508

$536$593

$668$729

$868

$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* 07*

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

4% in 2006Homeowners in non-CAT zones have seen smaller increases than

those in CAT zones

Homeowners Insurance Expenditures as a % of Median Existing Home

Prices, 1995-2008F$1

17,0

00

$129

,000

$136

,000

$167

,600

$180

,200 $219

,000

$221

,900

$222

,700

$141

,200

$147

,300 $1

95,2

00

$218

,800

$156

,600

$122

,600

0.35

7%

0.35

9%

0.35

3%

0.34

6%

0.37

3%

0.35

9%

0.39

8%

0.39

7%

0.35

4%

0.34

5%

0.37

6%

0.37

1%

0.34

2%0.35

4%

($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

Pric

e

0.31%

0.32%

0.33%

0.34%

0.35%

0.36%

0.37%

0.38%

0.39%

0.40%

0.41%

HO

Ins.

Exp

end.

As %

Hom

e Pr

ice

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 – 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

%

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

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 Changes by Line: 4Q99 – 4Q07

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

Post-Katrina bump was short-lived

Rate Changes by Line,4th Qtr. 2005

-1.0% -0.9%

-4.6% -4.7%

-2.0%

-2.7%

-0.4%

-4.6%

0.2%

-4.2%

-3.0%

-5%

-4%

-3%

-2%

-1%

0%

1%

Comm Prop BizInterruption

Comm Auto WC GL Umbrella EPL D&O Surety Const. ALL Lines


Strong tightening in 05Q4—the Katrina effect

Rate Changes by Line,4th Qtr. 2007

-13.0%

-8.9%

-11.9%-13.0%

-11.9%

-7.6%

-9.3%

-12.2%

-1.7%

-11.0%

-6.1%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Comm Prop BizInterruption

Comm Auto WC GL Umbrella EPL D&O Surety Const. ALL Lines


All lines but Surety are strongly negative

RISING EXPENSES

Expense Ratios Will Rise as Premium Growth Slows

Personal vs. Commercial Lines Underwriting Expense Ratio*

23.4%24.3%

25.0%27.1%

24.4%

24.5%24.8%25.6%

24.6%

25.6%24.7%

26.1%26.6%

27.5%

30.8%

27.0%26.3%26.4%25.6%

30.0%

31.1%

29.4%29.9%

29.1%

26.6%

25.0%

20%

22%

24%

26%

28%

30%

32%

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

Personal Commercial

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

Expenses ratios will likely rise as premium growth slows

CAPACITY/SURPLUS

Accumulation of Capital/ Surplus Depresses ROEs

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 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

P/C Insurer Share Repurchases,1987- Through Q3 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

,094

.1

$17,412.7

$4,4

97.5

$1,5

39.9

$2,7

64.2

$2,3

85.6

$4,2

97.3

$0$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000$18,000$20,000

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

07Q

3

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

First 9-months 2007 share buybacks are already

133% 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

2007 repurchases to date equate to 4.4% of industry surplus, the highest in 20 years

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

Lloyd’s Insurance Market Capacity, 1998-2008 (£ billions)*

*Beginning of the year.Source: Lloyd’s Members’ Services Unit.

The capacity of the Lloyd’s market rose significantly during the period 2001 to 2004. In 2005, capacity reduced but increased again in 2006 and 2007 due to the impact of the U.S. hurricane season. Capacity reduced to £15.95 billion ($32 billion) in 2008.

£15.95 £16.1 £14.8

£13.7 £14.9 £14.4

£12.2 £11.3

£10.1 £9.9 £10.2

0

2

4

6

8

10

12

14

16

18

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

£bi

llion

s

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

$8.4

$9.0

$9.3

$9.9

$10.2

$8.0

$8.5

$9.0

$9.5

$10.0

$10.5

2002 2003 2004 2005 2006

$ M

illio

ns

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

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

Largest Sovereign Wealth Funds($ Billions, as of September 2007)

$341

$330

$300

$250

$200

$159

$50

$43

$40

$38

$875

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

United Arab Emirates

Norway

Singapore (GIC)

Saudi Arabia

Kuwait

China

Singapore (Tamasek)

Libya

Algeria

Qatar

US (Alaska)

Source: Morgan Stanley; Council of Foreign Relations http://www.cfr.org/publication/15251/#2;Insurance Information Institute

Abu Dhabi Investment Authority

controls some $875 billion in assets

Though not major investors in the insurance industry, SWFs held

nearly $3 trillion in assets, double the $1.5 trillion of hedge funds but a

fraction of the $53 trillion held by institutional investors like hedge

funds and endowments

MERGER & ACQUISITION

Catalysts for P/C Consolidation Growing

in 2008

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

$2,4

35

$5,1

00

$19,

118

$40,

032

$1,2

49$4

86$2

0,35

3$4

25$9

,264

$35,

221

$55,825

$30,

873

$8,0

59$1

1,53

4

$1,8

82

$3,4

50$2

,780

$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

Valu

e ($

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.

M&A activity began to accelerate during the second

half of 2007

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

Valu

e ($

Mill

)

0

50

100

150

200

250

300

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

Source: Conning Research & Consulting.

No extraordinary trends evident

Distribution Sector M&A Activity, 2005 vs. 2006

Source: Conning Research & Consulting

Title9%Insurer

Buying Distributor

7%

Agency Buying Agency

51%

Other4%

Bank Buying Agency

29%

2005 2006

Title4%

Insurer Buying

Distributor7%

Agency Buying Agency

62%

Other2%

Bank Buying Agency

25%

Number of bank

acquisitions is falling

years

Motivating Factors for Increased P/C Insurer Consolidation

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

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

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

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

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

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

INVESTMENT OVERVIEW

More Pain, Little Gain

Property/Casualty Insurance Industry Investment Gain1

$ Billions

$35.4$42.8

$47.2$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$63.6$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 9-month result of $47.718B.

Sources: ISO; Insurance Information Institute.

Investment rose in 2007 but are just 9.8% higher than what they were

nearly a decade earlier in 1998

2%

3%

4%

5%

6%

7%

8%

9%

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

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

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

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

Investment yield historically tracks 10-year Treasury note quite closely

Shifting Legal Liability & Tort

EnvironmentIs the Tort Pendulum

Swinging Against Insurers?

Bad Year for Tort Kingpins*(Continued)

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

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

Sour

ce: S

an D

iego

Uni

on T

ribun

e, 9

/19/

07So

urce

: Wal

l Stre

et Jo

urna

l, 3/

15/0

7

Bad Year for Tort Kingpins*(Continued)

“King of Class Actions” Melvyn Weiss•Former partner in class action firm Milberg Weiss; Earned $251 million in legal fees•Pled guilty to federal charges of racketeering and conspiracy for paying kickbacks to professional plaintiffs•Will serve 18-33 months in prison, pay $9.75 million in restitution; $250,000 fine

Sour

ce: W

all S

treet

Jour

nal,

3/24

/07

Abuse of the tort system is a primary determinant of the price

and availability of insurance

$17.0$49.6 $58.7

$85.6$17.1

$51.0$70.9

$85.6

$5.2

$20.4

$30.0

$45.5

$0

$50

$100

$150

$200

$250

1980 1990 2000 2006

Commercial Lines Personal Lines Self (Un)Insured

Bill

ions

Total = $39.3 Billion

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




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

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

Source: Tillinghast-Towers Perrin.

9.8%11.9%

3.2%

13.8%

5.6% 5.7%

0.4%

-5.4%

2.4%4.7%

11.6% 11.8%13.7%

-10%

-5%

0%

5%

10%

15%

1951-60

1961-70

1971-80

1981-90

1991-2000

2001 2002 2003 2004 2005 2006 2007E 2008E

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

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

2001-2005: 7.8%

2006-2009F: 1.6%

Cost of US Tort System ($ Billions)

$129

$130 $1

41

$144

$148 $1

59

$156

$156 $1

67

$169 $1

80 $205 $2

33 $246 $2

60

$261

$247

$253 $2

65 $277

$0

$50

$100

$150

$200

$250

$300

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

07E

08E

09E

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

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

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

economic stimulus of $31.1B

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

Tort System Costs, 1950-2009E

$1.8 $5.4 $7.9$13.9$20.0

$83.7

$130.2

$179.2

$246.0$265

$277

$158.5

$247.0

$42.7

$3.4

0.62%0.82%

1.03%

1.34%1.22%

1.98%2.14%

1.82% 1.83%1.83%1.87%

2.24%2.24%

1.53%

1.11%

$0

$50

$100

$150

$200

$250

$300

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

Tor

t Sys

tem

Cos

ts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t Cos

ts a

s % o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

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

After a period of rapid escalation,

tort system costs as a % of GDP are

now falling

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

$179

$233$246

$265

$253

$260

$261

$277

$247

$205

1.82%2.03%

2.22% 2.23%

1.83%1.84%

2.10%1.83%1.87%

2.24%

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

$300

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

Tor

t Sys

tem

Cos

ts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t Cos

ts a

s % o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

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

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

The Nation’s Judicial Hellholes (2007)

Source: American Tort Reform Association; Insurance Information Institute

TEXASRio Grande Valley and Gulf Coast

South Florida

ILLINOISCook County West Virginia

Some improvement in “Judicial

Hellholes” in 2007

Watch ListMadison County, ILSt. Clair County, IL

Northern New Mexico

Hillsborough County, FLDelawareCalifornia

Dishonorable MentionsDistrict of Columbia

MO Supreme CourtMI Legislature

GA Supreme CourtOklahoma

NEVADAClark County (Las Vegas)

NEW JERSEYAtlantic County (Atlantic City)

Business Leaders Ranking of Liability Systems for 2007

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

Worst States41. Arkansas42. Hawaii43. Alaska44. Texas45. California46. Illinois47. Alabama48. Louisiana

49. Mississippi50. West Virginia

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

New in 2007ME, NH, TN,

UT, WI

Drop-OffsND, VA, SD,

WY, ID

NewlyNotorious

AK

RisingAbove

FL

Midwest/West has mix of good and bad states

Sum of Top 10 Jury Awards, 2004-2007

$ Millions

$615.0$815.0

$2,953.7

$5,158.8

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

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

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

Number of Top 10 Jury Awards, 1995 - 2007

22 2220

17

8 75 4 3 2 2 2 2 1 1 1

6

0

5

10

15

20

25

TX NY CA FL

MO

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

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

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

Total Top 10 Verdicts, 1995 through 2006

Source: Lawyers USA, 2007

2007 Top Ten Verdicts

Source: LawyersWeekly USA, January 22, 2008.

FloridaAuto Crash, Death$45 Million

New JerseyVioxx$47.5 Million

NevadaPrempro$47.6 Million

AlabamaProduct Liability, Death$50 Million

FloridaDUI Crash$50 Million

New MexicoNursing Home, Death$54 Million

FloridaPrivate Air Crash$54 Million

CaliforniaProduct Liability, Death$55.2 Million

FloridaPremises Liability, Death$102.7 Million

New YorkMedical Malpractice$109 Million

StateIssueValue

2006 Top Ten Verdicts

Source: LawyersWeekly USA, 2007.

TexasProduct Liability$38.5 Million

MarylandPolice Brutality$44 Million

FloridaBusiness Dispute$44.2 Million

MissouriAuto Accident$46 Million

TexasDeath of Prisoner$47.5 Million

LouisianaVioxx$51 Million

CaliforniaWorkplace Harassment$61 Million

CaliforniaWrongful Death$106 Million

TexasNursing Home Negligence$160 Million

FloridaMedical Malpractice$216.7 Million

StateIssueValue

INFLUENCE OF TORT ENVIRONMENT AND LEGAL

LIABILITY TRENDS ON PRICING AND AVAILABILITY

Excess Liability Market Capacity –North America

Source: Marsh, 2007 Limits of Liability Report

$1.660$1.645

$1.570$1.535$1.425

$1.575$1.710

$2.045$1.941

$2.011

$1.721

$1.405$1.334

$1.432

$1.0

$1.2

$1.4

$1.6

$1.8

$2.0

$2.2

$2.4

$2.6

$2.8

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

Bill

ions

Capacity is up 16.5% since its 2003 trough

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

$1.2

5

$0.6

5

$0.6

7

$0.3

3

$0.1

7

$0.1

1

$0.2

3

$3.2

1

$1.5

6

$1.2

7

$0.8

6

$0.3

6

$0.1

8 $0.4

8

$2.4

9

$1.0

7

$1.0

6

$0.6

3

$0.2

3

$0.1

4

$0.3

2

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

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

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

2001 2004 2007

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

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

31.3

%

22.0

% 37.5

%

20.8

%

46.7

%

40.8

%

37.5

%

24.9

%

11.2

%

10.1

%

39.7

% 53.8

%

40.5

%

22.6

%

11.3

%

10.0

%

42.2

%

70.0

%

48.0

%

28.3

%

10.0

%

11.1

%

36.7

% 56.6

%

27.1

%

10.1

%

11.0

%31.7

% 51.6

%

29.2

%

19.0

%

5.5%10

.4%

8.4%9.

9%

134.5%

0%

20%

40%

60%

80%

100%

120%

140%

160%

CommercialMultiperil**

ProductsLiability

MedicalMalpractice

GeneralLiability

Comm. Auto Liability

WorkersComp

2001 2002 2003 2004 2005 2006

Defense Costs and Cost Containment Expenses as % of Incurred Losses*

* Net of reinsurance; excludes state funds. **Liability portion onlySource: Insurance Information Institute 2008 Fact Book from NAIC Statement Database.

Defense costs as a percentage of incurred

losses are flat or tracking upward

Average Total Liability Limits Purchased by All U.S. Firms*

*Includes underlying primary limits

Source: Limits of Liability 2007, Marsh, Inc.

$77.9

$85.8$83.2

$85.9$88.7

$99.1

$105.0$101.8

$95.7

$87

$77 $75

$66 $66

$50

$60

$70

$80

$90

$100

$110

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

Limits purchased fell by 37.1% between 2000 and 2007.

Price/capacity are issues.

$ Millions

Average Underlying Limits – U.S. (Attachment Points)

*Source: Marsh, 2007 and 2006 Limits of Liability Report

$ Millions$2.2

$2.1

$1.8 $1.8$2.0

$1.9$1.9$1.8

$1.0$1.2$1.4$1.6$1.8$2.0$2.2$2.4

2000 2001 2002 2003 2004 2005 2006 2007

Average Jury Awards1994 vs. 2001 and 2005

419

187

333 1,

185

1,14

0

1,74

4

948

245 63

6

2,50

1 3,28

9

1,39

4

407

541

6,27

3

3,83

0

8,11

86,

358

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

$10,000

Overall VehicularLiability

PremisesLiability

WrongfulDeath*

MedicalMalpractice

ProductsLiability

($00

0)

1994 2001 2005

*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.

The average jury award continued to rise through 2005

Trends in Million Dollar Verdicts*4%

10%

8%

23%

22%

36%

48%

4%

8%

12%

31% 37

%

49%

59%

13%

14%

29%

51%

62%

5%

17%

13%

32%

41%

55%

64%

4%

39%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

VehicularLiability

PersonalNegligence

PremisesLiability

BusinessNegligence

GovernmentNegligence

MedicalMalpractice

ProductsLiability

1996-1998 1999-2001 2002-2003 2004-2005

*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.

Across all liability types, million dollar-plus awards rose from 10% of all awards from 1996-98 to 17% in 2004-05.

REGULATORY & LEGISLATIVE

ENVIRONMENT

Isolated Improvements, Mounting Zealoutry

Legal, Legislative &Regulatory Issues

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

Size of FL Hurricane Catastrophe Fund may be scaled backPrivate reinsurance sector role may expandCitizens actuary: extending rate freeze through 2010 unwise; 44% increase not excessive

• Massachusetts Auto: Reforms have led to more competition, lower rates• Optional Federal Chartering: Still division of opinion on issue• Tax Issue: Treatment of locales like Bermuda; Effort to “level the playing field”• National CAT Plan: Hearing in February and in 2007, but no current catalyst• Flood Reform: Likely to happen, but MS Rep. Gene Taylor still pushing for NFIP

to cover wind. Sen. Clinton supports idea.• McCarran-Ferguson: Even though Trent Lott is gone, some may still push for

scaling back of M-F• Profusion of Quasi-Regulators: AGs, Governors, Congressional representatives

AGs hiring private attorneys on contingency fee basis is dangerous policy• Bad Faith Legislation: Attempts by trial lawyers and legislative allies to

open new tort channels (WA referendum, Florida SB 2862)Source: III

PRESIDENTIAL POLITICS & P/C PROFITABILITY

Political Quiz

• Does the P/C insurance industry perform better (as measured by ROE) under Republican or Democratic administrations?

• Under which President did the P/C insurance industry realize its highest ROE (average over 4 years)?

• Under which President did the P/C insurance industry realize its lowest ROE (average over 4 years)?

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

15.10%10.45%

8.93%8.65%

8.35%7.98%

7.68%6.98%6.97%

5.43%5.03%

4.83%4.43%

3.55%

16.43%

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

CarterReagan II

G.W. Bush IINixon

Clinton IG.H.W. Bush

Clinton IIReagan I

Nixon/FordTruman

Eisenhower IEisenhower II

G.W. Bush IJohnson

Kennedy/Johnson

*ROE for 2007/8 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute

OVERALL RECORD: 1950-2008*

Republicans 8.92%

Democrats 8.00%

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

-5%

0%

5%

10%

15%

20%

25%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 0608

E

P/C Insurance Industry ROE by Presidential Party Affiliation,

1950–2008EBLUE = Democratic President RED = Republican President


Tru

man

Nixon/FordKennedy/ Johnson

Eisenhower Carter Reagan/Bush Clinton Bush

Summary• Results were excellent in 2006/07; Overall profitability reached

its highest level (est. 13-14%) since 1988Strong 2007 but ROEs slipping; Momentum for 2008

• 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 WW II;

Commercial leads decreases. Firming in personal lines?• Rising investment returns insufficient to support deep soft

market in terms of price, terms & conditions as in 1990s• How/where to deploy/redeploy capital??• Major Challenges:

Slow Growth Environment Ahead; Cyclical & EconomicMaintaining price/underwriting disciplineManaging variability/volatility of resultsManaging regulatory/legislative activism

Insurance Information Institute On-Line

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