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The Complexity of Natural Catastrophes

July, 2011

Thomas Clift, WSSLC 2011 Incline Village, NV

NSLA

1Guy Carpenter

Natural Disasters are Very Complex

Natural Catastrophes -

1. Increase in Frequency and Severity – fact or fiction?

2. Loss Potential – true loss potential understood?

3. Financially Prepared - sufficient resources?

4. “Total” Loss verses “Insured” Loss – impact?

5. 2011 YTD Highlights – any helpful signals?

Natural Catastrophes –1. Frequency / Severity

3Guy Carpenter

Worldwide Natural Catastrophes 1980 – 2011Frequency

The number of worldwide storms and severe weather events over the last 30

years suggest we are in an upward cycle

“Flood”

“Storm”

“Earthquake”

“Extreme

Temperature”

4Guy Carpenter

Worldwide Natural Catastrophes 1980 – 2011Severity

Both “insured” and “total” losses are increasing over the last 30 years

“Total”

Losses

“Insured”

Losses

5Guy Carpenter

U.S. Natural Catastrophes 1980 – 2010Frequency of Events

The number of U.S. hurricanes and severe weather events is increasing

A record 247 natural disasters in 2010

“Extreme

Temperature”

“Flood”

“Storm”

“Earthquake”

Source: MR NatCatSERVICE

6Guy Carpenter

U.S. Natural Catastrophes 1989 – 2010Severity of Events (in billions)

U.S. property catastrophe losses averaging $13.8 billion between 1980 and 2010

$8

.3

$7

.4

$2

.6

$1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9

$2

7.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$1

3.8

$1

4.0

$7

.5

$2

.7

$4

.7

$2

2.9

$5

.5

$1

6.9

$0

$10

$20

$30

$40

$50

$60

$70

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P

• Sources: Property Claims Service / ISO; Munich Re; Insurance Information Institute

Averaged $8.8 billion between

1989 and 1999Averaged $18.8 billion between

2000 and 2010

7Guy Carpenter

U.S. Natural Catastrophes 1960 – 2010Combined Ratio Points

Source: ISO; Insurance Information Institute estimate for 2010.

1.1% .85% 1.3% 3.4% 3.5%

8Guy Carpenter

U.S. Catastrophe Losses* from 1990 to 2011 by Peril* Inflation Adjusted – in Billions

Hurricane and tropical storm losses are the biggest component

Tornado share of catastrophe losses is sizeable and increasing

% 0.2

2.4%

3.4%

4.9%

6.6%

8.0%

31.8%

42.7%Hurricanes &

Tropical Storms, $160.5

Other,$0.6Fires, $9.0

Wind/Hail/Flood, $12.7

Geological Events, $18.5

Terrorism, $24.9

Winter Storms, $30.0

Tornadoes, $119.5

* Catastrophic events causing direct insured losses to property of $25 million or more in 2009 dollars.

Source: ISO’s Property Claim Services

9Guy Carpenter

1. Natural Catastrophe Trends – Conclusions / Comments

It is very important to understand the upward trend because…

– Global influence on risk, capital and reinsurance

– Industry’s evolution to be more “proactive” verses “reactive”

– Trend will have an increasing impact on individual Company’s financial

stability but ….

Does the industry have a “realistic” gauge on loss potential?

Worldwide U.S.

Frequency Increasing Increasing

Severity Increasing Increasing

Natural Catastrophes –2. Industry Loss Potential

11Guy Carpenter

7 5 0

0 7 1

5 7 0

8 7 5

0 6 84 1 2

Natural CatastrophesMother Nature is Patiently Raising the Threshold

1989

$15b

1992

$17b

1994

$18b1999

$9b

2004

$40b

2005

$85b

?

2011

$60+b

2011New Zealand Quakes $15b, Chile Quake $8b

Japan Quake $30b / Midwest Severe Weather $11b

12Guy Carpenter

U.S. Earthquake – Industry 250 Year Gross Loss Estimate

Occurrence

Commercial $34

Residential $14

All lines $47

EQECAT version 3.15 (2010)

EQECAT estimates a combined personal and commercial lines industry U.S.

earthquake loss indication of about $50 billion

13Guy Carpenter

U.S. Earthquake – Historical Events Using Current Industry Exposures

Losses are in billions / shake only

Select EQ Scenarios DescriptionEstimated Loss

(Industry)

1811-1812 Event Cluster, M8 $87

1811 NM Arkansas M7.7 rupture only $40

1812 NM Missouri M7.7 rupture $37

Cascadia Megathrust M9 $40

M7.05 Downtown LA $68

1906 SF M7.9 $40

1886 Charleston, SC $9

1994 Northridge $17

EQECAT does “not” generate “shake only” simulations reaching $150 billion in

industry loss

14Guy Carpenter

U.S. Hurricane – Industry 100 Year Gross Loss EstimateConsistent Message From Major Modelers

Near Term Single Occurrence

Residential – $85 to $103b

Commercial - $52 to $90b

Occurrence

Residential $91

Commercial $39

All lines $126

In billions / EQECAT version 3.15 (2010)

Near Term

A combined personal and commercial lines industry hurricane loss range of

$115 - $150 billion is realistic

15Guy Carpenter

U.S. Hurricane – Historical Events Using Current Industry Exposures

Historical U.S. hurricanes updated to current exposures fall well below $100 billion

Over 70 years since a SSI 3 made a Northeast landfall

Select Hurricane

ScenariosDescription

Estimated* Loss

(Industry)

1900-1 SSI 4, Houston $43

1992 Andrew SSI 5, Miami, Louisiana $34

1947-04 SSI 4, Miami, Louisiana $77

1926-06 SSI 4, Miami, Louisiana $74

1915-02 SSI 4, Houston $34

1938-04 SSI 3, Long Island Express $22

Ike SSI 4, U.S. Gulf $13

Katrina SSI 3, U.S. Gulf $45

* Losses are in billions

16Guy Carpenter

2. Industry Loss Potential - Conclusions

“Loss picks” based on reasonable benchmarks are

– U.S. Earthquake

$50 billion (excluding fire following) for 250 year return period

Probably within industry perception

– U.S. Hurricanes

$115 to 150 billion for 100 year return period

Generally higher than “perceived” by some segments

Is the insurance industry financially prepared to handle a $100 to

$150 billion natural catastrophe?

Natural Catastrophes –3. Is the Industry Financially Prepared

18Guy Carpenter

Natural CatastrophesReinsurers’ Participation in Prior Natural Catastrophes

History suggests that reinsurers generally participate 25 to 50% on U.S. natural

catastrophes

30%

25%

60%

20%

45%

33%

0%

10%

20%

30%

40%

50%

60%

70%

Hurricane

Hugo (1989)

Hurricane

Andrew (1992)

Sept. 11

Terrorist

Attack (2001)

2004

Hurricane

Season

2005

Hurricane

Season

2008 Texas

Hurricane

Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute.

Where does

the balance

end up?

30%

70%75%

40%

80%

55%

67%

100%

Reinsurers

19Guy Carpenter

Reinsurers – Capability to Respond

Reinsurers “total” surplus has grown 39% since 2008

Global reinsurance markets entered 2011 with record capital

0

100

200

300

400

500

600

2007 2008 2009 2010

$411b

$342b

$402b

$475b

20Guy Carpenter

Reinsurer “Peak Zone” Probable Maximum Loss Estimates

“Reinsurer Peak Zone Net PML to Shareholder Equity” as a percentage

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

A B C D E F G H I K L M N O P Q R S T U V

U.S. Earthquake

U.S. Hurricane

European Wind

Source: Public information gathered by Guy Carpenter Business Intelligence Unit

Perc

en

t o

f E

qu

ity

Reinsurer

21Guy Carpenter

U.S. Primary Insurers – Generally Strong Balance Sheets

December, 2010

– Net written premiums = $422b (up 1% over prior)

– Earned premiums $420.5b (down 5% over prior)

– 2011 net income after taxes = $34.7b (up 21% over prior)

– Rate of return on policyholders’ surplus = 6.5% (up 10%)

– Policyholders’ surplus = $556.9b (up 9% over prior – record high)

– Net losses on underwriting = $10.4b (up 247% over prior)

– Combined ratio = 102.4% (up 1% over prior)

– Net investment income = $47.2b ( Flat over prior year)

First Quarter, 2011

– Net income after taxes = $9.0b (down 29% over prior)

– Record policyholders’ surplus =$561.2b

– Combined ratio of 102.3% (up from 99.3% on prior)

22Guy Carpenter

U.S. Property & Casualty ROE Performance

Property / Casualty profitability is both cyclical and volatile

All U.S. Industries

…………………………………………………………

…………………………….…………………………

………..

U.S. P & C Industry

Break Even

23Guy Carpenter

Potential Concern – Residual Markets

Exposure growth in Residual Markets (FAIR, Coastal / Windstorm) has

increased from $54.7 billion in 1990 to about $700 billion as of 2008

$372.3$430.5 $419.5

$656.7

$771.9

$696.4

$54.7

$150.0

$281.8$221.3

$244.2$292.0

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

24Guy Carpenter

Florida Citizens Insurance Company

State-created, not for profit, tax-exempted government entity that provides

property insurance to those unable to find coverage in the voluntary admitted

market

Insures 1,237,289(1)

policyholders or about 15% of the Florida

residential and 53% of the commercial residential markets

Total Insured Values = $540.8 billion generating $2.6 billion in premium

Issues about 25,000 new policies each month

Surplus of $4.6 billion

1 in 100 year gross loss = $22.2 billion

Florida Hurricane Catastrophe Fund coverage of $6.35 billion

$11.0 billion in assessments (about $1,200 for “every household and

business)

Source: Florida House Insurance & Banking Subcommittee Presentation, January, 2011

Statistics as of June, 2010

(1) Policy count as of June

,2011 increased to 1,392,000

25Guy Carpenter

Potential Concern – Residential Earthquake Take-Up Rates

Today 1 out of 8 California homeowners has EQ coverage compared to 1 out of 3 in 1996

Residential take-up rates in Missouri quake-prone areas also decreased in recent

26Guy Carpenter

3. Industry Financial Position – Conclusions

Reinsurers have a strong capital base and well positioned to handle 1Q 2011 losses

New sources of capital are emerging

U.S. Property & Casualty insurers financial position continues to improve

A number of “key” unknowns

– Company ratings

– Timing of next “big” event

– Trends in residual markets / earthquake coverage

– Marketplace pricing (primary and reinsurance)

– Fragile economic environment in terms of unemployment rate, inflation,

GNP growth rate, etc.

How does “Total loss compare to “Insured” loss?

Natural Catastrophes –4. Total Impact

28Guy Carpenter

Worldwide Natural Disasters 1980 – 2011Severity of Events

Worldwide “insured” losses represent about 25% of the “total economic” loss

As a general guide a “2 to 1” ratio appears more reasonable for the U.S.

U.S. Hurricane

Katrina was

reported at $81b

total and $40.6b

insured

29Guy Carpenter

Market Changer Event

In my opinion a single, independent occurrence

Show graphically

25

50

100

150

UnlikelyProbably

notPossible

Probably

yes

In $ billions

30Guy Carpenter

Natural Disasters – Total Loss PerspectiveThings to Consider

Primary

Insurers /

Reinsurers

Consumers

of Insurance

Products

In General

Earnings

Downgrades

Financial stability

Self Insured / Under-

insured

Product cost and

availability

Displacement

Inflation

Stock market

“Losers” vs. “Gainers”

“Supply” and

“demand”

31Guy Carpenter

Economic Outlook – Next 3 – 5 Years*

Area 2010 / 2011 Forecast

Considerations

from a $100b

U.S. Natural

Disaster

U.S. GDP Growth

Rate 3.3% by 4th Q 2012F = 3.2%

“Winners” and

“Losers”

Inflation Rate 2010 = 1.6% 2014F = 2.2% Supply and

demand

Unemployment

Rate

Countrywide = 9.0

with considerable

state variance

2012F = 8.3%Displacement vs.

new job creation

New Housing

StartsAbout 600,000

2013F = 1.2m

2016F = 1.5m“Spike”

Source : Overview & Outlook for P & C Industry, June 22, 2011, Robert Hartwig, CPCU, President, Insurance Information Institute

32Guy Carpenter

4. Economic Impact – Conclusions

Doubling “insured” loss is fair proxy for estimating “Total” loss

Recession officially ended November, 2011 but unusually slow recovery

Economic outlook and insurance industry performance closely linked to a

major catastrophic event

There is a significant number of “unknown” components that increases the

complexity surrounding a natural catastrophe

Has year-to-date 2011 increased or decreased the complexity

surrounding natural catastrophes?

Natural Catastrophes –5. 2011 Headlines

34Guy Carpenter

Natural Catastrophe Headlines for 2011

Significant worldwide losses in 1st & 2nd quarters, 2011

U.S. insured losses for first two quarters of 2011 are over 65% higher than

same period for prior year

Devastating U.S. tornadoes, Mississippi floods, wildfires

Above average prediction for U.S. hurricane landfall

47%30%Gulf Coast from Florida Panhandle to Texas

61%42%Caribbean

Geography

Average

(1950 to 2010)

2011

(Forecast)

U.S. Texas to Maine Coastline 52% 72%

U.S. East Coast including Florida 31% 48%

47%30%Gulf Coast from Florida Panhandle to Texas

61%42%Caribbean

Geography

Average

(1950 to 2010)

2011

(Forecast)

U.S. Texas to Maine Coastline 52% 72%

U.S. East Coast including Florida 31% 48%

Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, April 6, 2011.

Probability for SSI 3 – 5 U.S. Hurricane in 2011

35Guy Carpenter

Catastrophe Loss Activity - 1st Quarter, 2011

Reinsurer

1Q Cat

Losses

Incurred

(000,000's)

Munich 3,702

Swiss Re 2,405

PartnerRe 1,071

Hannover Re 758

AXIS 577

QBE 550

TRC 545

SCOR 486

Ren Re 427

Amlin 425

XL 387

Catlin 375

Validus 294

Aspen 285

Hiscox 266

Flagstone 257

Platinum 248

Montpelier 200

Endurance 185

Beazley 154

R+V 133

Lancashire 117

Novae 80

Ariel 50

Hardy 40

Amlin

Ariel

Aspen

AXISBeazley

Catlin

Endurance

Flagstone

Hannover Re

Hardy

Hiscox

Lancashire

Montpelier

Munich

Novae

PartnerRe

Platinum

QBE

R+VRen Re

SCOR

Swiss Re

TRC

Validus

XL

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Dis

clo

sed

1Q

201

1 C

at L

oss

es a

s P

erce

nt

of Y

ear

End

201

0 N

et In

com

e

Disclosed 1Q 2011 Cat Losses as Percent of Year End 2010 Equity

Source: Guy Carpenter & Company, LLC

• 2011 ROE forecast reduced for a number of reinsurers

Percent of 2010 Equity

Pe

rce

nt

of

20

10

Net

Inc

om

e

36Guy Carpenter

Current Market Dynamics – Highlights

Model Version Impact (RMS v11)

– Significant individual company variation ( - 30% to +180%)

– RMS change not yet fully integrated into pricing or capacity assessment

Quoting Behavior

– Increasing variability as reinsurers address pricing mechanics and capital

assessment

Capacity Dynamics

– Some increase in demand

– Reinsurers more carefully allocating capacity

– No expectation for a capacity shortage

37Guy Carpenter

U.S. Reinsurance Renewal Pricing

Property

U.S. property catastrophe rates have experienced a directional shift

since January, 2011 expectation of “flat to single digit “ decrease

Increases primarily due to global losses and new catastrophe model

versions

Rate Change Summary

January, 2011 ………….…………………………...…. - 6% to - 10%

April 1, 2011 ………….. ……………………….………. flat to +5%

June / July, 2011.……………………………………… + 5% to + 10%

Source: Guy Carpenter & Company, LLC

38Guy Carpenter

U.S. Property CatastropheCapacity Utilization

95% of authorized

capacity used to fill

out second quarter,

2011 renewals

compared to 89% for

similar period in 2010

While utilization has

increased the

marketplace is not

experiencing a

capacity shortage

39Guy Carpenter

U.S. Property CatastropheReinsurance Cycle

Over time profits

generate capital (supply)

Capital competes for

premium (demand)

Demand creates

downward pressure on

pricing

Trend usually continues

until a “shock” loss

occurs that reduces

excess capital (When ?)

Reaction is higher rates

to strengthen balance

sheets and higher profits

Reset cycle

January,

2011

renewals

40Guy Carpenter

Wrap up

Frequency and severity of natural catastrophes are on an upward

slope – inconclusive if cyclical or long term trend

$115 to 150 billion U.S. hurricane is a realistic benchmark which we

have not experienced to date

Insurance industry is financially sound but individual companies need

to manage for frequency and severity potential

Insurance and reinsurance “partially” finance economic recovery but

there is the potential for an equally large segment that is uninsured

Our understanding of natural catastrophes has increased significantly

because of research, better information and technology advancements

This more in-depth understanding of natural catastrophes has

“highlighted” the many facets and complexity

41Guy Carpenter

Disclaimer

The data and analysis provided by Guy Carpenter herein or in connection herewith are provided “as is”, without

warranty of any kind, whether express or implied. The analysis is based upon data provided by, or obtained

from, external sources, the accuracy of which has not been independently verified by Guy Carpenter.

Neither Guy Carpenter, its affiliates nor their officers, directors, agents, modelers, or subcontractors

(collectively, “Providers”) guarantee or warrant the correctness, completeness, currentness, merchantability,

or fitness for a particular purpose of such data and analysis. The data and analysis is intended to be used

solely for the purpose of internal evaluation and the recipient shall not disclose the analysis to any third

party, except its reinsurers, auditors, rating agencies, and regulators, without Guy Carpenter’s prior written

consent. In the event that the recipient discloses the data and analysis, or any portion thereof, to any

permissible third party, the recipient shall adopt the data and analysis as its own. In no event will any

Provider be liable for loss of profits or any other indirect, special, incidental and/or consequential damage of

any kind howsoever incurred or designated, arising from any use of the data and analysis provided herein or

in connection herewith. This presentation is not intended to be a complete actuarial communication. Upon

request, we can prepare one. We are available to respond to questions regarding our analysis. There are

many limitations on actuarial analyses, including uncertainty in the estimates and reliance on data. We will

provide additional information regarding these limitations upon request. As with any actuarial analysis, the

results presented herein are subject to significant variability. While these estimates represent our best

professional judgment, it is probable that the actual results will differ from those projected. The degree of

such variability could be substantial and could be in either direction from our estimates.