Overview & Outlook for the P/C Insurance Industry An Industry at the Crossroads

Overview & Outlook for the P/C Insurance Industry

An Industry at the Crossroads

Insurance Information Institute

April 23, 2007

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

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

Presentation Outline

• P/C Profit Overview—2006, A Cyclical Peak• Underwriting Trends: Unsustainable?• Premium Growth: Approaching a Standstill• Pricing: Competitive Pressures Mounting• Expenses: Will Ratios Rise a Growth Slows?• Capital & Capacity: UnderleveragedROE Pressure• Catastrophe Loss Management

What is the Appropriate Role for Government?• Reinsurance Summary• Financial Strength & Ratings• Investments: Less Bang for the Buck• Tort System: Great News for a Change (Mostly)• Legislative & Regulatory Update• Q&A

P/C PROFIT:An Historical Perspective

Profits in 2006 ReachedTheir Cyclical Peak

Highlights: Property/Casualty,2006 vs. 2005

Item 2006 2005 Change

Net Written Prem. 443,778 425,500 +4.3%

Loss & LAE 283,700 311,624 -9.0%

Net UW Gain (Loss) 31,232 (5,612) N/A

Net Inv. Gain** 55,561 59,430 -6.4%

Net Income (a.t.) 63,695 44,155 +44.3%

Surplus* 487,123 425,760 +14.4%

Combined Ratio* 92.4 100.9 -8.5 pts.*Comparison is with year-end 2004 value. **Includes invest income and realized investment gains/losses.Source: ISO, Insurance Information Institute

Growth up due to coastal property premiums

Record underwriting profit: Unsustainable

P/C Net Income After Taxes1991-2006 ($ Millions)*

$14,178

$5,840

$19,316

$10,870

$20,598$24,404

$36,819

$30,773

$21,865

-$6,970

$3,046

$30,029

$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

*ROE figures are GAAP; 1Return on avg. Surplus.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= 10.5%2006 ROAS1 = 14.0%

Though up in 2006, insurer profits are highly volatile (2001 was the industry’s worst year ever). ROEs

generally fall below that of most other industries.

-5%

0%

5%

10%

15%

20%

US P/C Insurers All US Industries

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

*2007-08 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; Fortune

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

4 Hurricanes

Katrina, Rita, Wilma

P/C profitability is cyclical, volatile and vulnerable

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

*Fortune 1,000 group.

Source: Fortune Magazine, Insurance Information Institute.

13%

13.4%14.6%

10.0%

14.9%13.0%

11%

13%

15%14%

13%

7%6%

11%12%

8%

11%12%

10%9%

-2%

8%7%

2%

10%

10.4%15.0%

14.0%

13.9%12.6%

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

10%12%14%16%

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

StockMutualAll Cos.*

Mutual insurer ROEs are typically lower than for stock

companies, but gap has narrowed. All are cyclical.

-5%

0%

5%

10%

15%

20%

25%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 0607

F08

F

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

*2007-08 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; ISO, A.M. Best.

1975: 2.4%

1977:19.0% 1987:17.3%

1997:11.6%

2006E:14.0%

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

10 Years

10 Years 9 Years

-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 06E

ROE Cost of Capital

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2006

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 2003-06

+1.

0 p

ts

+5.

5 p

ts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

Insurance & Reinsurance Stocks:Strong Finish in 2006

0.61%

9.53%

10.33%

16.57%

19.95%

16.24%

13.62%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

S&P 500

Life/Health

Reinsurers

P/C

All Insurers

Multiine

Brokers

Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

Total Returns for 2006

P/C insurer & reinsurer stocks rallied in late 2006

as hurricane fears dissipated and insurers turned in strong resultsBroker stocks held back

by weak earnings

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

8.23%

0.97%

2.84%

0.08%

-1.44%

8.16%

4.66%

-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

S&P 500

Life/Health

Reinsurers

P/C

All Insurers

Multiline

Brokers

Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

Total YTD Returns Through April 20, 2007

P/C insurance, reinsurance stocks lagging on soft market

concerns and worries over 2007 hurricane season

Advertising Expenditures by P/C Insurance Industry, 1999-2005

$ Billions

$1.736 $1.737 $1.803$1.708

$2.975

$2.111

$1.882

$1.5

$1.7

$1.9

$2.1

$2.3

$2.5

$2.7

$2.9

$3.1

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

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

increased competition

UNDERWRITING

Extremely Strong 2006, Momentum for 2007

115.8

107.4

100.198.3

100.7

92.4

98.696.6

90

100

110

120

01 02 03 04 05 06 07F 08F

P/C Industry Combined Ratio

Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Early Bird survey.

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 92.493.1 93.1 93.3

93.0

85

86

87

88

89

90

91

92

93

94

1949 1948 1943 1937 1935 2006 1950 1939 1953 1936

Ten Lowest P/C Insurance Combined Ratios Since 1920

Sources: Insurance Information Institute research from A.M. Best data.

The 2006 combined ratio of 92.4 was the best since the 87.6 combined in 1949

The industry’s best underwriting years are associated with

periods of low interest rates

-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

Underwriting Gain (Loss)1975-2006

Source: A.M. Best, Insurance Information Institute

$ B

illi

ons

Insurers earned an underwriting profit of $31.2 billion in 2006, the largest ever but only

the second since 1978. Despite the 2006 underwriting profit, the cumulative

underwriting deficit since 1975 is $419 billion.

110.

3

110.

2

107.

6

103.

9

109.

7

112.

3

111.

1

122.

3

110.

2

102.

5

105.

1

94

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 06F

Commercial Lines Combined Ratio, 1993-2006E*

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

Outside CAT-affected lines, commercial

insurance is doing fairly well. Caution is

required in underwriting long-

tail commercial lines.

2006 results will benefited from relatively disciplined underwriting

and low CAT losses

Commercial coverages have exhibited extreme variability. Are current

results anomalous?

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

91.0

85

90

95

100

105

110

115

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

Personal LinesCombined Ratio, 1993-2006E

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

A very strong 2006 resulted from favorable frequency & severity

trends and low CAT activity

$1

0.8

$2

2.7

$1

3.9

$9

.9

$8

.0

$5

.0

$2.0$0.4

2.41.9

1.1

0.4

6.5

3.63.5

0.1

$0

$5

$10

$15

$20

$25

2000 2001 2002 2003 2004 2005E 2006E 2007E

Re

se

rve

De

ve

lop

me

nt

($B

)

0

1

2

3

4

5

6

7

Co

mb

ine

d R

ati

o P

oin

ts

PY Reserve Development Combined Ratio Points

Impact of Reserve Changes on Combined Ratio

Source: A.M. Best, Lehman Brothers for years 2005E-2007F

Reserve adequacy has improved substantially

The Big Question: Is the Industry More Disciplined Today?

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

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

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

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

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

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

• Ratings Agencies More stringent capital requirements Quicker to downgrade

PREMIUM GROWTH

Deceleration in 2006, Even Slower in 2007

-10%

-5%

0%

5%

10%

15%

20%

25%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

F2

00

8F

20

09

F2

01

0F

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

Strength of Recent Hard Markets by NWP Growth*

1975-78 1984-87 2001-04

*2007-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006-2008 figures from III Groundhog Survey.

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

(post-Andrew)

2005: biggest real drop in premium since early 1980s

Growth in Net Written Premium, 2000-2008F

Source: A.M. Best; Forecasts from the Insurance Information Institute’s Groundhog survey: http://www.iii.org/media/industry/financials/groundhog2007/.

5.1%

8.1%

14.1%

9.8%

4.7%

0.3%

4.3%

1.8% 1.9%

2000 2001 2002 2003 2004 2005 2006 2007F 2008F

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

expected to remain healthy

PRICING

Under Pressure in 2007

$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

$787$835

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

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

Average Expenditures on Homeowners Insurance**

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

Countrywide home insurance expenditures rose an estimated 6% in 2006

Homeowners in non-CAT zones will see

smaller increases, but larger in CAT zones

Average Commercial Rate Change,All Lines, (1Q:2004 – 4Q:2006)

-0.1%

-3.2%

-7.0%

-9.4%-9.7%

-4.6%

-2.7%-3.0%

-5.3%

-9.6%

-5.9%

-8.2%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06

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

Magnitude of rate decreases has diminished greatly since

mid-2005 but is growing again

KRW Effect

Average Commercial Rate Change by Line: 4Q99 – 4Q06

Source: Council of Insurance Agents & Brokers

Commercial accounts trended downward from early 2004 to mid-2005

though that trend moderated post-Katrina

Average Commercial Rate Change by Account Size: 4Q99 – 4Q06

Source: Council of Insurance Agents & Brokers

Accounts of all sizes are renewing

downward and more quickly than in 06Q3

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

71%

48%

28%21%

63%

32%

21%

12% 10%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

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

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

25%

6% 6%

0%

8%6% 6%

3%

0%

11%

0%

5%

10%

15%

20%

25%

30%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

Largest increases for Commercial Property &

Business Interruption are in the Southeast, but

are diminishing; Smallest in Midwest

Commercial Accounts Rate Changes,2nd Qtr. 2006 vs. 4th Qtr. 2006

-4.5%-5.6%

-3.6%-2.3%

-9.3%-8.1%

-9.6%-7.7% -8.6%

-6.9%

9.3%

-8.1%

-15%

-10%

-5%

0%

5%

10%

CommercialAuto

WorkersComp

CommercialProperty

GeneralLiability

Umbrella Average

2Q06 4Q06

Source: Council of Insurance Agents and Brokers

Even commercial property is now

renewing down in 2006

EXPENSES

Will Expense Ratio Rise as Premium Growth Slows?

Personal vs. Commercial Lines Underwriting Expense Ratio*

23.4%24.3%

25.0%

30.8%

24.4%

24.5%24.8%25.6%

24.6%

25.6%24.7%

26.6%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

Personal Commercial

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

Expenses ratios will likely rise as premium

growth slows

CAPACITY/SURPLUS

The Industry in Underleveraged

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

7576777879808182838485868788899091929394959697989900010203040506

U.S. Policyholder Surplus: 1975-2006

Source: A.M. Best, ISO, Insurance Information Institute.

$ 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 12/31/06 was $487.1B (est.), 14.4% above year-

end 2005, 71% above its 2002 trough and 46% above its 1999

peak.Foreign reinsurance and residual market

mechanisms absorbed 45% of 2005 CAT

losses of $62.1B

Capital Raising by Class Within 15 Months of KRW

Existing Cos., $12.145 , 36%

New Cos., $8.898 , 26%

Sidecars, $6.359 , 19%Insurance Linked

Securities, $6.253 , 19%

Insurers & Reinsurers raised $33.7 billion in the wake of Katrina,

Rita, Wilma

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

$ Billions

Annual Catastrophe Bond Transactions Volume, 1997-2006

$966.9

$1,729.8

$4,693.4

$1,991.1

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

$1,139.0

$633.0

$0$500

$1,000$1,500

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

$3,500$4,000

$4,500$5,000

97 98 99 00 01 02 03 04 05 06

Ris

k C

apita

l Iss

ues

($ M

ill)

02

46

81012

1416

1820

Nu

mb

er o

f Iss

uan

ces

Risk Capital Issued Number of Issuances

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

Catastrophe bond issuance has soared in the wake of Hurricanes

Katrina and the hurricane seasons of 2004/2005

£8.9

£10.

9

£10.

2

£10.

0

£10.

3

£10.

2

£10.

1 £11.

3 £12.

2

£14.

4

£15.

0

£13.

7 £14.

8

£16.

1

£9.9

£7.0

£8.0

£9.0

£10.0

£11.0

£12.0

£13.0

£14.0

£15.0

£16.0

£17.0

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

Lloyd’s Capacity (Global)

Lloyd’s capacity is up 1.3 GBP or 8.8% in 2007 and 63% since its 1999 trough

Sources: Lloyd’s

Billions of GBP

INVESTMENT IRONY

Markets & Interest Rates Up, Returns Flat

Property/Casualty Insurance Industry Investment Gain*

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7$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*Investment 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. Source: ISO; Insurance Information Institute.

Investment gains fell in 2006 and are now only

comparable to gains seen in the late 1990s

$0

$10

$20

$30

$40

$50

$60

7576777879808182 83848586878889909192939495969798 9900010203040506

Net Investment Income$

Bil

lion

s

Growth History

2002: -1.3%

2003: +3.9%

2004: +3.4%

2005: +24.4%**

2006: +5.2%

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

Investment income posted modest gains in 2006

-30%

-20%

-10%

0%

10%

20%

30%

40%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Source: Ibbotson Associates, Insurance Information Institute. *Through April 20, 2007.

Total Returns for Large Company Stocks: 1970-2007*

S&P 500 was up 13.62% in 2006, Up 4.66% YTD 2007*

Markets rose in 2006 for the 4th consecutive year

US P/C Net Realized Capital Gains,1990-2006 ($ Millions)

$2,880

$4,806

$9,893

$1,664

$5,997

$9,244$10,808

$18,019

$13,016

$16,205

$6,631

-$1,214

$6,610

$3,3

59

$9,701$9,125

$9,818

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06Sources: A.M. Best, ISO, Insurance Information Institute.

Realized capital gains rebounded strongly in

2004/5 but fell sharply in 2006 despite strong stock

market as insurers “bank” their gains

CATASTROPHICLOSS

Insurers Accused of Crying Wolf Over Cats

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

$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

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 was a welcome respite. 2005 was by far the worst

year ever for insured catastrophe losses in the US, but the worst has yet to come.

$100 Billion CAT year is coming soon

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

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

Source: ISO; Insurance Information Institute

$601$688

$873$878

$1,500

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Indiana Missouri Tennessee Texas Kansas

SURPRISE!! Indiana led the US with $1.5 billion in

insured CAT losses in 2006

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

total catastrophe losses for the year.

Number of Tornadoes,1985 – 2006p

1071 12

16

941

1376

1819

1254 13

33

1132

1133

856

702

65676

5

684

1297

1173

1082 12

34

1173

1148

1424

1345

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

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

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

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

accounted for about 25% of catastrophe losses since 1985

$9 $11 $11 $12 $16$25 $27

$38

$88

$108

$0

$20

$40

$60

$80

$100

$120

San Jo

se, C

A (7-1

-191

1; 6.

6)

Portla

nd, O

R (8-1

2-18

77; 6

.3)

San F

rancis

co (6

-1-1

838;

7.2)

Mar

ked T

ree,

AR (1-5

-184

3; 6.

5)

North

ridge

, CA (1

-17-

1994

; 6.7)

Haywar

d, CA (1

0-21

-186

8; 6.

8)

Ft. Tejo

n, CA (1

-9-1

857;

7.9)

Charle

ston, S

C (8-3

-188

6; 7.

3)*

New M

adrid

, MO (2

-7-1

812;

7.7)

*

San F

rancis

co (4

-18-

1906

; 7.9)

$ B

illi

ons

With development along major fault lines, the threat of

$25B+ quakes looms large

Source: AIR Worldwide

(Billions of 2005 Dollars)

3 of the Top 10 are not West Coast events

Insured Losses from Top 10 Earthquakes Adjusted to 2005 Exposure Levels

Percentage of California Homeowners with Earthquake

Insurance, 1994-2004*

32.9%33.2%

19.5%17.4%

14.6%13.3%13.8%12.0%

15.8%15.7%16.8%

0%

5%

10%

15%

20%

25%

30%

35%

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

*Includes CEA policies beginning in 1996. **2006 estimate from Insurance Information Network of CA.Source: California Department of Insurance; Insurance Information Institute.

The vast majority of California homeowners forego earthquake

coverage & play Russian Roulette with their most valuable asset.

$20.0$24.0 $26.0

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

$80.0

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

Homes

tead

Hurr

(194

5, FL)

Ft. Lau

derdale

Hurr

(194

7, FL)

Donna (

1960

, FL)

Okeech

obee

Hurr

(192

8, F

L)

Galve

ston (

1900

, TX)

Bestsy

(196

5, LA)

LI Exp

ress

(193

8, NY)

Katrin

a (20

05, L

A)*

Andre

w (199

2, FL)*

Mia

mi H

urr (1

926,

FL)

$ B

illi

ons

With rapid coastal development,

$40B+ storms will be more common

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

(Billions of 2005 Dollars) Plurality of worst-case

scenarios involve Florida

Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels

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

1986-2005¹

Utility Disruption0.1%

Terrorism7.7%

All Tropical

Cyclones3

47.5%

Tornadoes2

24.5%

Water Damage0.1%

Civil Disorders0.4%

Fire6

2.3%

Wind/Hail/Flood5

2.8%

Earthquakes4

6.7%

Winter Storms7.8%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.

Insured disaster losses totaled $289.1 billion from

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

from 27.1% from 1984-2003.

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

Florida & New York lead the way for insured coastal property at more than $1.9 trillion each.

Northeast state insured coastal exposure totals

$3.73 trillion.

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

After FL, many Northeast states have

among the highest coastal exposure as a share of all insured

exposure in the state.

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

New JerseyConnecticut

LouisianaS. Carolina

MaineVirginia

North CarolinaAlabamaGeorgia

DelawareRhode Island

NewMississippiMaryland

Source: AIR

Florida has nearly $1 trillion in insured residential exposure and

counting. Nearly 1,000 people move to the state per day!

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

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaGeorgia

AlabamaMississippi

New HampshireDelaware

Rhode IslandMaryland

Source: AIR

Commercial property exposure also implies significant business interruption losses.

Source: AIR Worldwide

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

$70

$30

$5 $4 $1$0

$20

$40

$60

$80

NY NJ PA CT Other

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

Total Insured Property Losses =

$110B, nearly 3 times that of

Hurricane Katrina

Distribution of Insured Property Losses,

by State, ($ Billions)

The 2007 Hurricane Season:

Preview to Disaster?

Outlook for 2007 Hurricane Season: 85% Worse Than Average

Average* 2005 2007F

Named Storms 9.6 28 17Named Storm Days 49.1 115.5 85

Hurricanes 5.9 14 9Hurricane Days 24.5 47.5 40Intense Hurricanes 2.3 7 5

Intense Hurricane Days 5 7 11

Accumulated Cyclone Energy 96.2 NA 170

Net Tropical Cyclone Activity 100% 275% 185%*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007

Average* 2007F

Entire US Coast 52% 74%

US East Coast Including Florida Peninsula

31% 50%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 49%

ALSO…Above-Average Major Hurricane

Landfall Risk in Caribbean for 2007

*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

REINSURANCE MARKETS

Big Risk, Big Reward orBig Government?

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

$19.93 $19.44$21.21

$24.85$26.69

$29.50$30.63

$28.76

$25.33

$10

$15

$20

$25

$30

$35

97 98 99 00 01 02 03 04 05

$ B

illi

ons

Pre

miu

ms

Wri

tten

US reinsurance premiums written grew 54% between 1997 and 2003, but fell 17%

from 2003 through 2005

Source: Reinsurance Association of America; Insurance Information Institute Fact Book 2007, p. 38.

($ Billions)

Reinsurers Net Written Premiums, US Business, 1997 - 2005

Premiums written are actually falling

despite higher prices

FINANCIAL STRENGTH &

RATINGS Industry Has Weathered

the Storms Well

Reasons for US P/C Insurer Impairments, 1969-2005

*Includes overstatement of assets.

Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;

Catastrophe Losses8.6%

Alleged Fraud11.4%

Deficient Loss

Reserves/In-adequate Pricing62.8%

Affiliate Problems

8.6%

Rapid Growth

8.6%

2003-2005 1969-2005

Deficient reserves,

CAT losses are more important factors in

recent years

Reinsurance Failure3.5%

Rapid Growth16.5%

Misc.9.2%

Affiliate Problems

5.6%

Sig. Change in Business

4.6%

Deficient Loss

Reserves/In-adequate Pricing38.2%

Investment Problems*

7.3%

Alleged Fraud8.6%

Catastrophe Losses6.5%

P/C Insurer Impairments,1969-2006

815

127

11 934

913 12

199

16 14 1336

4931

3449 49

5460

5841

2915

1231

18 1949 50

4735

1813 15

0

10

20

30

40

50

60

70

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

The number of impairments varies significantly over the p/c insurance cycle,

with peaks occurring well into hard markets

Source: A.M. Best; Insurance Information Institute

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006

90

95

100

105

110

115

120

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Co

mb

ined

Rat

io

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Imp

airm

ent R

ate

Combined Ratio after DivP/C Impairment Frequency

Impairment rates are highly

correlated underwriting performance

Source: A.M. Best; Insurance Information Institute

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

Debate Over Reinsurance Market Performance & Government

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

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

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

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

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

Sources: Insurance Information Institute

STATE RESIDUAL MARKETS

How Big is Too Big?

US FAIR Plans Exposure to Loss* (Billions of Dollars)

Source: PIPSO; Insurance Information Institute *Hurricane exposed states only.

$387.8$400.4

$345.9

$269.6

$140.7$113.3

$170.1

$96.5

$40.2

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

1990 1995 1999 2000 2001 2002 2003 2004 2005

In the 15-year period between 1990 and 2005, total exposure to loss in the FAIR plans has

surged by a massive 965 percent, from $40.2bn in 1990

to $387.8bn in 2005!

Total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $419.5 billion in 2005.

Florida Citizens Exposure to Loss (Billions of Dollars)

Source: PIPSO; Insurance Information Institute

408.8

$210.6$206.7$195.5

$154.6

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2002 2003 2004 2005 2006

Exposure to loss in Florida Citizens nearly doubled in 2006

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

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

-$516

-$1,425

-$1,770

-$954

-$595 *

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

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

$0

Florida HurricaneCatastrophe Fund

(FHCF) Florida Citizens Louisiana Citizens

Mississippi WindstormUnderwriting

Association (MWUA)

2004 2005

Hurricane Katrina pushed all of the residual market property plans in

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

What Role Should the Federal Government

Play in Insuring Against Natural Disaster Risks?

NAIC’s Comprehensive National Catastrophe Plan

• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private

insurance & reinsurance industry Includes “All Perils” Residential Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves

• Layer 2: Establishes system of state catastrophe funds (like FHCF)

• Layer 3: Federal Catastrophe Reinsurance Mechanism

Source: Insurance Information Institute

Guiding Principles of NAIC’s National Catastrophe Plan

• National program should promote personal responsibility among policyholders

• National program should support reasonable building codes, development plans & mitigation tools

• National program should maximize risk-bearing capacity of private markets, and

• National plan should provide quantifiable risk management to the federal government

Source: Insurance Information Institute from NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005.

Comprehensive National Catastrophe Plan Schematic

Personal Disaster Account

Private Insurance

State Regional Catastrophe Fund

National Catastrophe Contract Program

Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

State Attachment

1:50 Event

1:500 Event

Legislation has been introduced and ideas

espoused by ProtectingAmerica.org will likely get a more

thorough airing in 2007/8

KEY LINES

Discipline Will Remain (Mostly) Intact in 2007

Private Passenger Auto

Private Passenger Auto is Enormous Part of P/C Industry

Total 2004 Direct Personal + Commercial Premiums Written = $467.0 Billion

All Commercial Lines

53.9%

PPA Coll/Comp14.2%

Homeowners11.4%

PPA Liability20.5%

Source: A.M. Best; Insurance Information Institute

Private passenger auto accounted for 34.7% or $162.2B in DPW in 2004

$251.6B $53.2B

$95.8B

$66.4B

101.7101.3101.3101.0

99.5

101.1

103.5

109.5

107.9

104.2

98.4

94.395.1

93.0

90

95

100

105

110

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

Private Passenger Auto Combined Ratio

Average Combined 1993 to 2005= 101.4

Most auto insurers have shown sig-nificant improvements in underwriting

performance since mid-2002

Sources: A.M. Best; III

PPA is the profit juggernaut of the p/c

insurance industry today

9%

17%

13%

15%

12%14%14%

11% 12%12%

10%

8%

2% 2%

4%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

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

RNW: Private Passenger Auto, United States, 1992-2006E

Source: NAIC; Insurance Information Institute

Private passenger auto profitability deteriorated throughout the 1990s but

has improved dramatically

Segmentation should help profitability

-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

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, 2000-2006:Q4

Margin necessary to maintain PPA

profitability

2000 PPA Combined=110

Inversion of pure premium spread is a warning sign but now in synch

2006 PPA Combined=92E

-2.2%

-5.3%

-4.0%-3.3%

-0.9%

-2.6%

-5.4%

-3.8%

3.0%3.6% 3.8%

3.4%2.8%

4.8%

-0.3%

4.7%

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06*

Frequency Severity

Bodily Injury: Severity Trend Running Ahead of Frequency

*Average of 4 quarters ending with 4th quarter 2006.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%

-3.3%

3.9%3.3%

2.8%

0.5%

2.2%

3.7%4.3%

6.2%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05 06*

Frequency Severity

PD Liability: Frequency Trend Roughly Offsets Severity

Fewer accidents, but more damage when they occur:

Higher Deductibles?

*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.

-1.6%

1.1%

-1.1%

0.0%

-0.6%

-7.2%-5.4% -5.1%

3.2%

6.5%

-4.0%

0.5%

4.8%2.4%

6.3%

16.1%

-10%

-5%

0%

5%

10%

15%

20%

99 00 01 02 03 04 05 06*

Frequency Severity

PIP: Frequency Trend Now Offsets Rising Claim Severity

Fraud caused problems from

1999-2001

Is No-Fault living on borrowed time?

*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.

2.6%

-0.4%

1.9%

-3.8%

-5.1%-4.4%

-1.8%

-3.5%

3.7% 3.7%

1.7%

3.8%3.2%3.0%

4.1%

6.8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05 06*

Frequency Severity

Collision: Frequency Trend Offsetting Rising Claim Severity

*Average of 4 quarters ending with 4th quarter 2006.Source: ISO Fast Track data.

-1.7% -2.6%

3.3%

-5.7%

-2.1%

-8.3%

-3.1%

-9.8%-6.9%

15.1%

-1.2%-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*

Frequency Severity

Comprehensive: Favorable Frequency and Severity Trends

*Average of 4 quarters ending with 3rd quarter 2006.Source: ISO Fast Track data.

Weather related claims from Hurricanes Katrina,

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

Private Passenger Auto: Future Shock

• Underwriting acumen is ultimate determinant of success• Innovations in technology, computing power, data retrieval/ storage

and new data/criteria will increase the number and quality of rating factors and lead to increasingly sophisticated underwriting models and a ever expanding number of price points; Integrate with new auto safety features

• Buzz Words: “Predictive Modeling” & “Segmentation”• Impact is to create a rating system that is more accurate and therefore

more fair, equitable to all• Risk is more accurately and reliably mapped to a price across a

broader range of circumstances• Life-cycle approach to underwriting

Can underwriting customer under almost any circumstance Recognizes fact that customer acquisition costs are high and new accounts

perform less well than seasoned accounts• Agents will need to be intimately familiar with new approaches in order

to communicate impact to customer

Homeowners Insurance

117.7

158.4

113.6118.4

112.7

121.7

101.0

108.2111.4

121.7

109.3

98.294.4

100.3

93

113.0109.4

90

100

110

120

130

140

150

160

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

Homeowners Insurance Combined Ratio

Average 1990 to 2005= 113.1

Insurers have paid out an average of $1.13 in losses for every dollar earned

in premiums over the past 16 years

Sources: A.M. Best; III

Rates of Return on Net Worth for Homeowners Ins: US

Source: NAIC; 2005/6 figures are Insurance Information Institute estimates.

9.7%

3.6%

16.0%

-7.0%

-1.7%-4.2%

3.6%

12.4%

5.4%2.5%

5.4% 3.8%

1.4%

-7.2%-10%

-5%

0%

5%

10%

15%

20%

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

Averages: 1993 to 2005E

US HO Insurance = +2.1%

(+3.2% through 2006E)

COMMERCIAL MULTI-PERIL & COMMERCIAL

AUTO

119.0

119.8

108.5

125.0

113.1

115.0

121.0

116.2

116.1

104.9

101.9

100.7

116.8

113.6

115.3

122.4

115.0

117.0

97.3

89.0

97.7

93.8

80

85

90

95

100

105

110

115

120

125

130

95 96 97 98 99 00 01 02 03 04 05

CMP-Liability

CMP-Non-Liability

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

Liab. Combined 1995 to 2004 = 114.6

Non-Liab. Combined = 107.1

Sources: A.M. Best; III

CMP- has improved recently

112.

1

112

113 11

5.9 12

0.5

120.

1

106.

6

99.4

96.6

93.396

.7

102.

2

99.0

99.7

99.0

103.

6

102.

3

95.9

92.1

87.1 90

.7

122.5

80

85

90

95

100

105

110

115

120

125

95 96 97 98 99 00 01 02 03 04 05

Comm Auto Liab Comm Auto PD

Commercial Auto Liability& PD Combined Ratios

Average Combined: Liability = 110.2

PD = 97.1

Sources: A.M. Best; III

Commercial Auto has improved dramatically

MEDICAL MALPRACTICE

99.8

106.

6

107.

9 115.

7

129.

7

133.

7 142.

5

137.

6

111.

0

95.5

154.7

80

90

100

110

120

130

140

150

160

95 96 97 98 99 00 01 02 03 04 05

Medical MalpracticeCombined Ratios

Average Med Mal Combined Ratio

1995-2005

121.3

Sources: A.M. Best; III

Reforms/Award Caps and higher rates have helped to improve

med mal dramatically

WORKERS COMPENSATION

OPERATING ENVIRONMENT

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

10197

111 110107

102101106

120

131

138135

124

90 90

100 101

107

115118

122

97

105

96

80

90

100

110

120

130

140

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

Calendar Year Accident Year

Percent

p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2005 and developed to ultimateSource: Calendar Years 1994-2004, A.M. Best Aggregates & Averages; Calendar Year 2005p and Accident Years 1994-2005pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders

Workers Comp Combined Ratios, 1994-2005P

Lost-Time Claims

-4.2 -4.4

-9.2

-6.9-5.7

-4.3 -3.9

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5 -4.5

-10

-8

-6

-4

-2

0

2

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

Cumulative Change of –45.8%(1991-2004)

Accident Year

Percent Change

Workers Comp Lost-TimeClaim Frequency (% Change)

2003p: Preliminary based on data valued as of 12/31/20051991-2003: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI

IndemnityClaim Cost (000s)

Lost-Time Claims

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

$11.4$12.4

$13.6

$15.1$16.5 $16.9

$17.7$18.6 $19.1

$5

$7

$9

$11

$13

$15

$17

$19

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

Annual Change 1992–1996: +1.3%Annual Change 1997–2004: +7.4%

2005p: Preliminary based on data valued as of 12/31/20051991-2004: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI

Accident Year

Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2005p

Cumulative Change = +103.2%(1993-2005p)

2.8%

4.0%4.7%

4.2%4.9%

4.2%

2.2% 2.0% 2.2% 2.5%

5.9%

7.7%

9.0%9.4%

4.7%

6.0%

2.0%2.8% 2.2%

9.6%10.9%

1.7%

0%

2%

4%

6%

8%

10%

12%

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

Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim

WC Indemnity Severity vs. Wage Inflation

4.3

pts

WC indemnity severity is no longer outpacing

wage inflation

2005p: Preliminary based on data valued as of 12/31/2005; 1991-2004: Based on data through 12/31/2004, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI

$8.3 $8.4 $8.2$8.9 $9.4

$10.1$11.1

$12.0$13.2

$14.2

$16.0$17.4

$19.0

$20.9

$22.7

$5

$7

$9

$11

$13

$15

$17

$19

$21

$23

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

Annual Change 1992–1996: +4.1%Annual Change 1997–2005: +9.5%

Accident Year

MedicalClaim Cost ($000s)

2005p: Preliminary based on data valued as of 12/31/20051991-2004: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies

Workers Comp Medical Claims Continue to Climb

Cumulative Change = +176.8%(1993-2005p)

4.5%3.6%

2.8% 3.2% 3.5%4.1%

4.6% 4.7%4.0% 4.4% 4.2%

5.1%

7.4%

10.1%

8.3%

9.5%

8.1%

12.3%

8.7% 9.1%

10.3%

8.5%

0%

2%

4%

6%

8%

10%

12%

14%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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.

4.3

pts

WC medical severity is rising twice as fast as the

medical CPI

Med Costs Share of Total Costs is Increasing Steadily

Indemnity56%

Medical44%

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

Indemnity52%

Medical48%

Indemnity42%

Medical58%1985

1995

2005p

OTHER LIABILITY

138.6

117.6

108.5112.3

104.5

110.5

122.6 124.4

111.8114.4

112.1

80

90

100

110

120

130

140

150

95 96 97 98 99 00 01 02 03 04 05

Other LiabilityCombined Ratios*

Average Combined Ratio 1995-2005

116.1

Sources: A.M. Best; III *Includes Officers’ & Directors’ coverage.

Improvements in tort and D&O environment have

contributed to performance

D&O Premium Index(1974 Average = 100)

682746 704 720 720

771 806 793726

619539 503

560

720

931

1,237

1,113

1,010

0

200

400

600

800

1000

1200

1400

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

Source: Tillinghast Towers-Perrin, 2005 Directors and Officers Liability Survey.

Average D&O pricing is off 18% since 2003, after rising

146% from 1999-2003

PRODUCTS LIABILITY

189.5179.1

131.9 138.8156.4

133.3

215.4

355.2

167.2153.1

124.0

80

130

180

230

280

330

380

95 96 97 98 99 00 01 02 03 04 05

Products LiabilityCombined Ratios

Average Combined Ratio 1995-2005

176.7

Sources: A.M. Best; III

Improvements in the tort

environment, rates have

contributed to performance

Legal Liability & Tort Environment

Definitely Improving ButNot Out of the Woods

Legal Liability & Tort Environment

Definitely Improving ButNot Out of the Woods

Cost of U.S. 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 $270 $2

82 $295

$0

$50

$100

$150

$200

$250

$300

$350

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

06E

07E

08E

Tort costs consumed 2.09% of GDP in 2005, down from 2.24% in 2003

Per capita “tort tax” was $880 in 2005, 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, 2006 Update on US Tort Cost Trends.

Inflation Adjusted Tort CostsPer Capita, 1950-2005

$96

$199

$340

$444

$780$722

$878 $897 $914 $880

$0$100$200$300$400$500

$600$700$800$900

$1,000

50 60 70 80 90 00 02 03 04 05

Tort costs per capita have

increased 817% since 1950 even

after adjusting for inflation

Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.

Tort Costs Relative to GDP,1950-2005

0.62%

1.03%

1.34%1.53%

2.24%

1.82%2.03%

2.22%2.24%2.22%2.09%

$0

$0

$0

$0

$0

$0

50 60 70 80 90 00 01 02 03 04 05

Tort costs relative to GDP have increased more than

3 fold since 1950

Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.

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

$17.0$49.6 $58.7

$95.2

$17.1

$51.0$70.9

$86.7

$5.2

$20.4

$30.0

$49.4

$0

$50

$100

$150

$200

$250

1980 1990 2000 2005

Commercial Lines Personal Lines Self (Un)Insured

Bil

lion

s

Total = $39.3 Billion

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

Total = $121.0 Billion

Total = $159.6 Billion

Total = $231.3 Billion

Tort System Costs,2000-2008F

$179

$233$246

$270

$295

$260

$261

$261

$205

1.82%2.03%

2.22% 2.22%

2.04%2.09% 2.03%2.05%

2.24%

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

$300

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

Tor

t S

yste

m C

osts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t C

osts

as

% o

f G

DP

Tort Sytem Costs Tort Costs as % of GDP

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

Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.

KATRINA TORT UPDATE

Suits Add to Uncertainty, Expense

Likely Market Impacts of Post-Katrina Litigation

• Litigation Creates an Additional Layer of Uncertainty in What is Already a Very Difficulty Market

Ultimate Thrust of Litigation is to Compel Insurers to Pay Water Damage (Flood/Surge) Losses for Which They Have Never Received A Penny in Premium

• Some Courts’ Apparent Willingness to Retroactively Rewrite Long-Standing, Regulator Approved Terms & Conditions of Insurance Contracts Creates an Unpriceable Risk

Compounded by juries willing to award millions in punitives• People Discouraged from Buying Flood Coverage• BOTTOM LINE: Weather, Courts, Juries Together

Create Nearly Impossible Operating Environment• Coverage Under These Circumstances Will Necessarily

Become More Expensive, Less Available

REGULATORY UPDATE

Busy Year for Insurersin Washington

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

coverage subject to a $27.5B industry aggregate retention.

• New Democratic Congress (with Committee chairs from urban Northeast states) predisposed to extend. Despite resistance/lackluster Administration support TRIA will likely extended for a multi-year period, perhaps 6-8 but potentially as long as 15 years (last extension in 2005 was for 2 years)

• Potential changes include extensions of coverage for domestic terrorism losses

(not included currently), and a lower industry retention for nuclear, biological, chemical, or radiological (NBCR) attacks.  There could possibly be a modestly higher industry retention for non-NBCR losses, and it needs to be resolved whether liability and group life losses will be covered.

• Original hope for first-half 2007 extension have faded. Now looking at fall or even 11th-hour extension as in 2005.

Sources: Lehman Brothers, Insurance Information Institute

Federal Legislative Update

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

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

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

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

• Allowing insurers to establish tax free reserves for future catastrophe losses has also been proposed, but Congress has yet to indicate broad support.

Sources: Lehman Brothers, Insurance Information Institute

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

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

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

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

Sources: Lehman Brothers, Insurance Information Institute

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

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

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

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

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

Sources: Lehman Brothers, Insurance Info. Institute

TRIA EXTENSION

The Burden Grows, and the Clock is Ticking

Terrorism Coverage Take-Up Rate Continues to Rise

Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute

24% 26%33%

44% 46% 44%48% 47%

54%59%

64%

03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4

Terrorism take-up rate for non-WC risk rose steadily

through 2003, 2004 and 2005

TAKE UP RATE FOR WC COMP TERROR

COVERAGE IS 100%!!

Insurance Industry Retention Under TRIA ($ Billions)

$10.0$12.5

$15.0

$25.0$27.5

$0

$5

$10

$15

$20

$25

$30

$35

Year 1(2003)

Year 2(2004)

Year 3(2005)

Year 4(2006)

Year 5(2007)

$ B

illi

ons

Source: Insurance Information Institute

•Individual company retentions rise to 17.5%

in 2006, 20% in 2007

•Above the retention, federal govt. pays 90% in

2006, 85% in 2007

Extension

Insured Loss Estimates: Large CNBR Terrorist Attack ($ Bill)

Type of Coverage New York WashingtonSan

FranciscoDes

Moines

Group Life $82.0 $22.5 $21.5 $3.4

General Liability 14.4 2.9 3.2 0.4

Workers Comp 483.7 126.7 87.5 31.4

Residential Prop. 38.7 12.7 22.6 2.6

Commercial Prop. 158.3 31.5 35.5 4.1

Auto 1.0 0.6 0.8 0.4

TOTAL $778.1 $196.8 $171.2 $42.3

Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.

FLORIDA SPECIAL SESSION

LEGISLATIVE CHANGES

Insurer, Policyholder & State Impacts

Summary: Florida Legislature Special Session (January 2007)

1. Exponential Expansion of the Role of the State in Insuring Homes & In Reinsurance Markets

More than doubles exposure of Florida Hurricane Catastrophe Fund to $35 billion from $16 billion (FHCF only has $1B cash), greatly displacing private reinsurers

Allows Florida Citizens to compete with private insurers by lowering rates and lowering eligibility standards

Allows Florida Citizens to displace private insurers by expanding into non-wind coastal business

Disbands disciplined, small and adequately priced Commercial JUA and transfers business to poorly run, underpriced, Citizens Commercial Account

Sources: Zurich Insurance Technical Center; Insurance Information Institute.

Summary: Florida Legislature Special Session (January 2007)

2. Dramatically Increases Exposure of Florida Policyholders to Post-Catastrophe Taxes

Expands the Citizens assessment base more than 4 fold

Increases maximum annual assessment facing Florida policyholders from $9.2 billion to $25 billion

Increases maximum general liability and commercial auto assessment exposure from 14% to 74% (These are 2 types of insurance that having nothing to do with hurricane risk)

Accelerates growth of Citizens, already the largest home insurers in the state and which doubled in size in 2006, by lowering rates and making access easier

Sources: Zurich Insurance Technical Center; Insurance Information Institute.

Summary: Florida Legislature Special Session (January 2007)

3. Disincentives for Insurers to Offer Policies in Florida Introduces “excess profits law” (a virtual oxymoron in FL) Requires Executive Officer review on routine rate filings

Threatens perjury charges and administrative penalties

Increases cost of processing and maintaining policies Requires “premium discounts” even if not actuarially justified

4. Threatens State of Florida’s Credit Rating Major event could result in simultaneous issuance of $40+

billion in debt from Cat Fund, Citizens and Guarantee Fund Governor’s promise to cut property taxes could compound

state’s fiscal problems after an event

Sources: Zurich Insurance Technical Center; Insurance Information Institute.

$8.3

$1.3

$35.0 $35.0 $35.0

$11.2

$35.0

$8.3 $8.3

$35.0

$11.2

$0

$5

$10

$15

$20

$25

$30

$35

$40

FL CitizensPersonal

Lines Acct.

FL CitizensCommercialLines Acct.

FL High RiskAcct.

FLHurricaneCat Fund

FL PCJUA FLGuarantee

Assoc.

2006 2007

Florida Hurricane Assessment Base, 2006 vs. 2007* ($ Bill)

The FL legislature

quadrupled the assessment

base for Citizens

Sources: Zurich Insurance Technical Center; Ins. Info. Inst. *Per special legislative session, Jan. 2007.

$1

.66

0

$0

.26

0

$7

.0

$7

.0

$7

.0

$0

.44

8

$3

.50

0

$1

.66

0

$1

.66

0 $3

.5

$0

.44

8

$0

$1

$2

$3

$4

$5

$6

$7

$8

FL CitizensPersonal

Lines Acct.

FL CitizensCommercialLines Acct.

FL High RiskAcct.

FLHurricaneCat Fund

FL PCJUA FLGuarantee

Assoc.

2006 2007

Florida Hurricane Max. Policyholder Annual Burden, 2006 vs. 2007* ($ Bill)

The FL legislature nearly tripled state

insurers’ assessment base from $9.2B to

$25B, an increase of $15.8B or 174%

Sources: Zurich Insurance Technical Center; Ins. Info. Inst. *Per special legislative session, Jan. 2007.

Why There is Concern Over the Florida Legislature’s & Governor’s Changes

• Risk is Now Almost Entirely Borne Within State• Virtually Nothing Done to Reduce Actual Vulnerability• Creates Likelihood of Very Large Future Assessments• Potentially Crushing Debt Load• State May be Forced to Raise/Levy Taxes to Avoid Credit

Downgrades• Many Policyholder Will See Minimal Price Drop

“Savings” came from canceling recent/planned rate hikes• Residents in Lower-Risk Areas, Drivers, Business

Liability Policyholders Will Come to Resent Subsidies to Coastal Dwellers

• Governor’s Emergency Order for Rate Freezes & Rollbacks Viewed as Unfair & Capricious

Sources: Insurance Information Institute.

Summary• Personal & Commercial lines results were unsustainably good 2006; Overall

profitability reached its highest level (est. 14%) since 1988• Underwriting results were aided by lack of CATs & favorable underlying loss

trends, including tort system improvements• Property cat reinsurance market remains tight• Premium growth rates are slowing to their levels since the late 1990s;

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

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

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

Insurance Information Institute On-Line

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