The Insurance Cycle and Credit Crunch: Impacts & Implications for the P/C Insurance Industry Robert...

The Insurance Cycle and Credit Crunch: Impacts &

Implications for theP/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

Casualty Actuarial Society Ratemaking SeminarBoston, MA

March 18, 2008

Presentation Outline

• Weakening Economy: Insurance Impacts & Implications• Profitability• Underwriting Trends• Premium Growth• Rising Expenses• Capacity• Investment Overview• Catastrophic Loss• Shifting Legal Liability & Tort Environment• Regulatory and Legislative Environment

Q&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 BubbleAsset Price Deflation Subprime 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 effect Many financial institutions around the world found they are exposed Many 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 Slowdown GDP 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 corporations New 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%

2

00

0

2

00

1

2

00

2

2

00

3

2

00

4

2

00

5

2

00

6

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

Real GDP Growth*

*Yellow bars are Estimates/Forecasts.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

Economic Fix Impacts on Insurers

Fed Rate Cuts

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

Fed Debt Swap

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

Fed Bailout of Bear Stearns

•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)



(cont’d)


Stimulus Package

•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

HousingBailout (?)

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

Regulatory/ Legislative Action (?)

•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?




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

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

Stimulus Package

•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

HousingBailout (?)

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

Regulatory/ Legislative Action (?)

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

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 Regulation What sort of oversite is optimal given recent experience? Credit problems arose under US and European (Basel II) regulatory

regimes Will new regulations be globally consistent? Can overreactions be avoided? Capital adequacy & liquidity

• Accounting Rules Problems arose under FAS, IAS Asset Valuation, including Mark-to-Market Structured Finance & Complex Derivatives

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

Elements of Credit Market Reform Currently Being Considered

Reform Rationale

Increased Disclosure/ Transparency

•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

Enhanced Awareness of Risk

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

Stronger Risk Management

•Require financial institutions to implement stronger risk controls

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

Stronger Regulatory Policies

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

ourc

e: W

all S

tree

t Jou

rnal

, 3/1

5/07

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 Renewals Approximately 98+% of P/C business (units) is linked to renewals A 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 economy Most 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 Rates

About 2/3 of P/C invested assets and 75% if Life assets are fixed income Historically, yield on industry portfolios has tracked 10-year note closely All else equal, lower total investment gain implies greater emphasis on

underwriting Historically, 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%7

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

8F

Rea

l N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Rea

l G

DP

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

Economic Concern Risks to Insurers

Subprime Meltdown/ Credit Crunch

•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

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

Lower Interest Rates •Lower investment income

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

General Economic Slowdown/Recession

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

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.

16.816.916.9

16.6

17.1

17.5

17.8

17.4

16.5

16.1

15.5

15.8

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

,08

2

$1

,14

4

$1

,22

6

$1

,30

7

$1

,37

0

$1

,39

6

$1

,43

8

$1

,49

5

$1

,56

3

$1

,64

1

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,8000

3

04

05

06

07

E

08

F

09

F

10

F

11

F

12

F

0%

1%

2%

3%

4%

5%

6%

7%

8%

% C

ha

ng

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

den

tial F

ixed

In

vest

men

t ($

Bill

)

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)

0

10,000

20,000

30,000

40,000

50,000

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 3.2

2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.2

4.0

3.4

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

Industry Rationale

Health Care •Economic NecessityRecession Resistant•Demographics: aging/immigrationGrowth

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

Agriculture & Food Processing & Manufacturing

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

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

Natural Resources & Commodities

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

Sources: Insurance Information Institute

D&O/E&O

Turbulent Markets, Bankruptcies Can Give

Rise to Suits

Shareholder Class Action Lawsuits*

*Securities fraud suits filed in U.S. federal courts; 2008 figure is current through February 29.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute

164202

163

231188

111

173

242210215

497

267226237

182

118

176

24

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 44 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.

PROFITABILITY

Profits in 2006/07 ReachedTheir 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%

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 1990s Many companies have been releasing redundant reserves, which allows them to boost

net income even as underwriting results deteriorate Reserve 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 fallContributes to discipline Realized capital gains are already rising as underwriting profits shrink, but like

redundant reserves, realized capital gains are a finite resource A 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 strategy Many 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 p

ts

+0.

2 p

ts

US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on

target or better 2003-07

-0.1

pts

+1.

7 p

ts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

+3.

1 p

ts

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

-14.82%

-50.52%

-17.70%

-26.44%

-14.04%

-10.54%

-19.72%

-12.27%

-60.0% -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 14, 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 &

RATINGS Industry 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

07

E

Co

mb

ine

d R

ati

o

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Imp

air

me

nt

Ra

te

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

*0

8F

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000s: 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

91.2

92.1 92.3 92.4 92.593.1 93.1 93.3

93.8

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

06

07

E0

8F

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

$ B

illi

ons

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*

$1

0.8 $

22

.8 $3

3.4

$3

6.9

$1

8.9

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

$0.4

($7.0)

8.9

-1.1-1.3-1.6

4.5

-1.20.1

3.5

8.6

6.5

($10)

($5)

$0

$5

$10

$15

$20

$25

$30

$35

$40

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

Re

se

rve

De

ve

lop

me

nt

($B

)

(3)(2)(1)012345678910

Co

mb

ine

d R

ati

o P

oin

ts

PY Reserve DevelopmentCombined Ratio Points

Impact of Reserve Changes on Combined Ratio

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

Reserve adequacy has

improved substantially

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

-$1,

886 -$

1,17

4

-$1,

116

-$77

9

-$47

5

-$41

3

-$25

4

-$10

0

-$10

0

-$96

-$53

-$48

$366

$1,176$1,172

-$3,006-$3,500

-$3,000

-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

$500

$1,000

$1,500

PPA Liab

ility

PPA PD

Home

Med

Mal

Special

ty P

rop

Comm

. Auto

Prod. L

iabili

ty

Finl.

Guaran

ty

Inte

rnat

ional

Other

Special

ty L

iab.

Wor

ker's

Comp

Fideli

ty/S

urety

Comm

ercia

l Mul

ti

Other

Liab

ility

Reinsu

rance

$ B

illi

ons

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

Reserve redundancies in most lines have resulted

in releases in recent years

Release

Strengthening

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

:Q1

00

:Q2

00

:Q3

00

:Q4

01

:Q1

01

:Q2

01

:Q3

01

:Q4

02

:Q1

02

:Q2

02

:Q3

02

:Q4

03

:Q1

03

:Q2

03

:Q3

03

:Q4

04

:Q1

04

:Q2

04

:Q3

04

:Q4

05

:Q1

05

:Q2

05

:Q3

05

:Q4

06

:Q1

06

:Q2

06

:Q3

06

:Q4

07

:Q1

07

:Q2

07

:Q3

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-Liability

CMP-Non-Liability

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

Liab. Combined 1995 to 2004 = 113.8

Non-Liab. Combined = 105.2

CMP- has improved recently

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

WORKERS COMPENSATION

OPERATING ENVIRONMENT

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

101

97

111

110

107

103

95

101 10

6

119

131

140

135

123

88 87 87

101.

5

98.5

100

101 10

7 115 11

8 122

97

104

96

80

90

100

110

120

130

140

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

Calendar Year Accident Year

Percent

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

Includes dividends to policyholders *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%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

F2

00

8F

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

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 2006

Homeowners 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

,00

0

$1

29

,00

0

$1

36

,00

0

$1

67

,60

0

$1

80

,20

0

$2

19

,00

0

$2

21

,90

0

$2

22

,70

0

$1

41

,20

0

$1

47

,30

0

$1

95

,20

0

$2

18

,80

0

$1

56

,60

0

$1

22

,60

0

0.3

57

%

0.3

59

%

0.3

53

%

0.3

46

%

0.3

73

%

0.3

59

%

0.3

98

%

0.3

97

%

0.3

54

%

0.3

45

%

0.3

76

%

0.3

71

%

0.3

42

%0.3

54

%

($25,000)

$25,000

$75,000

$125,000

$175,000

$225,000

$275,000

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

Med

ian

Exi

stin

g H

ome

Pri

ce

0.31%

0.32%

0.33%

0.34%

0.35%

0.36%

0.37%

0.38%

0.39%

0.40%

0.41%

HO

In

s. E

xpen

d. A

s %

Hom

e P

rice

Median Existing Home Price Homeowners Insurance Expenditure as % Home Price

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

% of median home price up

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

Average Commercial Rate Change,All Lines, (1Q:2004 – 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%

1Q04

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

illi

ons

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Capacity as of 9/30/07 was $521.8B, 5.3% above year-end

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

Premium-to-surplus ratio neared a record

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

excess capital

Capacity exceeded a half trillion dollars for the first time during

the 2nd quarter of 2007

Annual Catastrophe Bond Transactions Volume, 1997-2007

$1,729.8

$966.9

$7,329.6

$4,693.4

$1,991.1

$1,142.8$1,219.5$846.1$984.8$1,139.0

$633.0

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

97 98 99 00 01 02 03 04 05 06 07

Ris

k C

apita

l Iss

ues

($ M

ill)

0

5

10

15

20

25

30

35

Nu

mb

er o

f Iss

uan

ces

Risk Capital Issued Number of Issuances

Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.

Catastrophe bond issuance has soared in the wake of Hurricanes

Katrina and the hurricane seasons of 2004/2005, despite two

quiet CAT years

P/C Insurer Share Repurchases,1987- Through 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 $7,0

94.1

$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

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

$486

$20,

353

$425

$9,2

64

$35,

221

$55,825

$30,

873

$8,0

59

$11,

534

$1,8

82

$3,4

50

$2,7

80

$5,1

37

$5,6

38

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

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

Tran

sact

ion

Val

ue ($

Mill

)

0

20

40

60

80

100

120

140

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

Source: Conning Research & Consulting.

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

Val

ue ($

Mill

)

0

50

100

150

200

250

300

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

Source: Conning Research & Consulting.

No extraordinary trends evident

Distribution Sector M&A Activity, 2005 vs. 2006

Source: Conning Research & Consulting

Title9%Insurer

Buying Distributor

7%

Agency Buying Agency

51%

Other4%

Bank Buying Agency

29%

2005 2006

Title4%

Insurer Buying

Distributor7%

Agency Buying Agency

62%

Other2%

Bank Buying Agency

25%

Number of bank

acquisitions is falling

years

Motivating Factors for Increased P/C Insurer Consolidation

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

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

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

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

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


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

CATASTROPHICLOSS

What Will 2008 Bring?

Most of US Population & Property Has Major CAT Exposure

Is Anyplace

Safe?

U.S. Insured Catastrophe Losses*$7

.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$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 07

20??

*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,

1987-2006¹

Fire, $6.6 , 2.2%

Tornadoes, $77.3 , 26.0%

All Tropical Cyclones, $137.7 ,

46.3%

Civil Disorders, $1.1 , 0.4%

Utility Disruption, $0.2 , 0.1%

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

$9.3 , 3.1%

Earthquakes, $19.1 , 6.4%

Winter Storms, $23.1 , 7.8%

Terrorism, $22.3 , 7.5%

Source: Insurance Services Office (ISO)..

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

Insured disaster losses totaled $297.3 billion from

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

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

Global Insured Catastrophe Losses by Region, 2001-2007

0

10

20

30

40

50

60

70

80

90

2001 2002 2003 2004 2005 2006 2007

Seas/SpaceAfricaOceania/AustraliaSouth AmericaAsiaEuropeNorth America*

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

North America accounted for 70% of global

catastrophe losses 2001-2007

$ Billions

The 2008 Hurricane Season:

Preview to Disaster?

Outlook for 2008 Hurricane Season: 25% Worse Than Average

Average* 2005 2008F

Named Storms 9.6 28 13Named Storm Days 49.1 115.5 60

Hurricanes 5.9 14 7Hurricane Days 24.5 47.5 30Intense Hurricanes 2.3 7 3

Intense Hurricane Days 5 7 6

Accumulated Cyclone Energy 96.2 NA 115

Net Tropical Cyclone Activity 100% 275% 125%*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

Average* 2008F

Entire US East & Gulf Coasts 52% 60%US East Coast Including Florida Peninsula

31% 37%

Gulf Coast from Florida Panhandle to Brownsville

30% 36%

Caribbean NA Above Average

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

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

$4.5

3

$5.4

3

$1.4

7

$1.9

9

$1.3

1 $3.1

7

$3.4

1

$2.5

1

$9.6

8

$7.9

6

($2.98)

$0.1

2

$1.9

5

$1.3

8

$1.2

2

$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

Shifting Legal Liability & Tort

Environment

Is the Tort PendulumSwinging Against Insurers?

Bad Year for Tort Kingpins*

“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 and others indicted too.•Could get 5 years in prison, $250,000 fine

Sou

rce:

San

Die

go U

nion

Tri

bune

, 9/1

9/07

Sou

rce:

Wal

l Str

eet J

ourn

al, 3

/15/

07

$17.0$49.6 $58.7

$85.6$17.1

$51.0$70.9

$85.6

$5.2

$20.4

$30.0

$45.5

$0

$50

$100

$150

$200

$250

1980 1990 2000 2006

Commercial Lines Personal Lines Self (Un)Insured

Bil

lion

s

Total = $39.3 Billion

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




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

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

Source: Tillinghast-Towers Perrin.

9.8%

11.9%

3.2%

13.8%

5.6% 5.7%

0.4%

-5.4%

2.4%

4.7%

11.6% 11.8%13.7%

-10%

-5%

0%

5%

10%

15%

1951-60

1961-70

1971-80

1981-90

1991-2000

2001 2002 2003 2004 2005 2006 2007E 2008E

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

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

2001-2005: 7.8%

2006-2009F: 1.6%

Cost of US Tort System ($ Billions)

$129

$130 $1

41

$144

$148 $1

59

$156

$156 $1

67

$169 $1

80 $205

$233 $2

46 $260

$261

$247

$253 $2

65 $277

$0

$50

$100

$150

$200

$250

$300

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

07E

08E

09E

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

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

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

economic stimulus of $31.1B

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

Tort System Costs, 1950-2009E

$1.8 $5.4 $7.9$13.9$20.0

$83.7

$130.2

$179.2

$246.0$265

$277

$158.5

$247.0

$42.7

$3.4

0.62%

0.82%

1.03%

1.34%1.22%

1.98%2.14%

1.82% 1.83%1.83%

1.87%

2.24%2.24%

1.53%

1.11%

$0

$50

$100

$150

$200

$250

$300

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

Tor

t S

yste

m C

osts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t C

osts

as

% o

f G

DP

Tort Sytem Costs Tort Costs as % of GDP

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

After a period of rapid escalation,

tort system costs as a % of GDP are

now falling

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

$179

$233$246

$265

$253

$260

$261

$277

$247

$205

1.82%2.03%

2.22% 2.23%

1.83%1.84%

2.10%

1.83%1.87%

2.24%

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

$300

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

Tor

t S

yste

m C

osts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t C

osts

as

% o

f G

DP

Tort Sytem Costs Tort Costs as % of GDP

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

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

The Nation’s Judicial Hellholes (2007)

Source: American Tort Reform Association; Insurance Information Institute

TEXAS

Rio Grande Valley and Gulf Coast

South Florida

ILLINOIS

Cook County West Virginia

Some improvement in “Judicial

Hellholes” in 2007

Watch ListMadison County, ILSt. Clair County, IL

Northern New Mexico

Hillsborough County, FLDelawareCalifornia

Dishonorable Mentions

District of ColumbiaMO Supreme Court

MI LegislatureGA Supreme Court

Oklahoma

NEVADA

Clark County (Las Vegas)

NEW JERSEY

Atlantic County (Atlantic City)

Business Leaders Ranking of Liability Systems for 2007

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

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

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

New in 2007

ME, NH, TN, UT, WI

Drop-Offs

ND, VA, SD, WY, ID

Newly Notorious

AK

Rising Above

FL

Midwest/West has mix of good and bad states

Sum of Top 10 Jury Awards, 2004-2007

$ Millions

$615.0$815.0

$2,953.7

$5,158.8

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2004 2005 2006 2007

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

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

Number of Top 10 Jury Awards, 1995 - 2007

22 2220

17

8 75 4 3 2 2 2 2 1 1 1

6

0

5

10

15

20

25

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

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

Total Top 10 Verdicts, 1995 through 2006

Source: Lawyers USA, 2007

2007 Top Ten Verdicts

Source: LawyersWeekly USA, January 22, 2008.

Value Issue State

$109 Million Medical Malpractice New York

$102.7 Million Premises Liability, Death Florida

$55.2 Million Product Liability, Death California

$54 Million Private Air Crash Florida

$54 Million Nursing Home, Death New Mexico

$50 Million DUI Crash Florida

$50 Million Product Liability, Death Alabama

$47.6 Million Prempro Nevada

$47.5 Million Vioxx New Jersey

$45 Million Auto Crash, Death Florida

2006 Top Ten Verdicts

Source: LawyersWeekly USA, 2007.

Value Issue State

$216.7 Million Medical Malpractice Florida

$160 Million Nursing Home Negligence Texas

$106 Million Wrongful Death California

$61 Million Workplace Harassment California

$51 Million Vioxx Louisiana

$47.5 Million Death of Prisoner Texas

$46 Million Auto Accident Missouri

$44.2 Million Business Dispute Florida

$44 Million Police Brutality Maryland

$38.5 Million Product Liability Texas

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

Bil

lio

ns

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 back Private reinsurance sector role may expand Citizens 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

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

Source: III

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

level (est. 13-14%) since 1988 Strong 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

If you would like a copy of this presentation, please give me your business card with e-mail address

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%

Carter

Reagan II

G.W. Bush II

Nixon

Clinton I

G.H.W. Bush

Clinton II

Reagan I

Nixon/Ford

Truman

Eisenhower I

Eisenhower II

G.W. Bush I

Johnson

Kennedy/Johnson

*ROE for 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

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