Dr L James Valverde, Jr

Vice President, Economics & Risk Management

Insurance Information Institute

110 William Street

New York, NY 10038

Tel: (212) 346-5520

Fax: (212) 732-1916

jamesv@iii.org www.iii.org

Property/Casualty Insurance Update

Insurance Information InstituteBoard of Directors Meeting

New York City

January 9, 2007

2006 — A Profitability Peak for the Industry?

Presentation Outline

• P/C Insurance Financial Overview

• Profitability

• Wall Street Perspective

• Underwriting Performance

• Investment Performance

• Catastrophe Review & Outlook

INSURANCE INFORMATION INSTITUTE

2006 P/C FINANCIAL OVERVIEW

Profitability: Peak Performance

P/C Net Income After Taxes: 1991-2006E ($ 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

$59,813

$43,013

$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

06F

*ROE figures are GAAP; 1Return on avg. surplus. 2005 ROAS = 9.8% after adj. for one-time special dividend paid by the investment subsidiary of one company. 2Based on 9-month results; 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 ROAS1,2 = 13.4%

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.

-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:1991-2006E

*Based on 2006:9M ROAS of 13.4%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, on target or better since 2004

+1.

0 p

ts

+3.

9 p

ts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

-5%

0%

5%

10%

15%

20%

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

06E

07F

08F

US P/C Insurers All US Industries

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

*2006-8 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 insurers have underperformed the Fortune 500 group every year since

1987…and may do so in 2006/7

-10%

-5%

0%

5%

10%

15%

20%

25%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006F

2007F

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

*2006-10 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 figure of 2.8% is based on III Early Bird Survey, Dec. 2006.

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

Andrew)

2005/6/7: slowest growth since late 1990s

Growth in Net Written Premiums

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

7576777879808182838485868788899091929394959697989900010203040506

U.S. Policyholder Surplus: 1975-2006E*

Source: A.M. Best, ISO, Insurance Information Institute *III Estimate.

$ 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 is $481.5B (est.), 13.1% above year-end 2005,

69% above its 2002 trough and 44% above its 1999 peak.

Foreign reinsurance and residual market

mechanisms absorbed 45% of 2005 CAT

losses of $62.1B

INSURANCE INFORMATION INSTITUTE

WALL STREET PERSPECTIVEMaintaining Investor Confidence is Critical

P/C Insurance 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 YTD Returns Through December 31, 2006

P/C insurer & reinsurer stocks rallied in late 2006

as hurricane fears dissipated and insurers turned strong results

INSURANCE INFORMATION INSTITUTE

UNDERWRITING PERFORMANCEBest Performance in a Generation (or Two)

115.8

107.4

100.198.3

100.7

91.5

97.6

94.3

90

100

110

120

01 02 03 04 05 06 9-Mos.Actual

06 IIIForecast*

07 IIIForecast

P/C Industry Combined Ratio

Sources: A.M. Best; ISO, III. *III forecast for 2006 full year.

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

2006 could produce the best underwriting

result since the 94.9 combined ratio in 1955, Actual 9-mos. Result of 91.5 is best since 1948.

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

every dollar they earned in premiums

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

normal CAT activity

87.6

91.291.5

92.1 92.3 92.493.1 93.1 93.3

93.0

85

86

87

88

89

90

91

92

93

94

1949 1948 2007* 1943 1937 1935 1950 1939 1953 1936

Ten Lowest P/C Insurance Combined Ratios Since 1920

Sources: A.M. Best; Insurance Information Institute. *ISO figure through September 30, 2006

The combined ratio through 2006Q3 is the third lowest on record

since 1920

INSURANCE INFORMATION INSTITUTE

INVESTMENT PERFORMANCEFlat Rates, Rising Stocks

Property/Casualty Insurance Industry Investment Gain*

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.2

$51.9$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** 06E*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 estimate based on actual annualized 2006:9mos result of $38.936B. **2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.

Investment gains are up but are only now comparable to gains seen in the late 1990s

INSURANCE INFORMATION INSTITUTE

CATASTROPHE REVIEWA Welcome Respite for the Industry

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.

8

$7.6

$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. **Through 9/30/06.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

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

INSURANCE INFORMATION INSTITUTE

2007 HURRICANE SEASONLet the Forecasts Begin…

Above Average Activity Expected

Outlook for 2007 Hurricane Season: 40% Worse Than Average

Average* 2005 2007F

Named Storms 9.6 28 14

Named Storm Days 49.1 115.5 70

Hurricanes 5.9 14 7

Hurricane Days 24.5 47.5 35

Intense Hurricanes 2.3 7 3

Intense Hurricane Days 5 7 8

Net Tropical Cyclone Activity 100% 275% 140%

*Average over the period 1950-2000.Source: Dr. William Gray, Colorado State University, December 8, 2006.

Presentation Summary

• Strong Profits• Record Profits in Dollar Terms in 2006

• Best ROE since 1988

• Significant Momentum into 2007

• Policyholder Surplus Will Likely Reach

$500B by 07Q2

• Top Line Growth Stagnating

• Underwriting Remains Strong, but Some

Deterioration Expected

Steven N. Weisbart, Ph.D., CLU

Economist

Insurance Information Institute www.iii.org

110 William Street, New York, NY 10038

Office Tel: (212) 346-5540 Cell phone: (917) 494-5945 email: stevenw@iii.org

A Brief Overview/Outlook for theLife, Health, and Longevity

Insurance Industry

January 9, 2007

L/H Industry Net Income, 1995-2007F

$13.6

$19.2$21.7

$18.0$20.9 $22.2

$9.8

$4.1

$26.6

$32.2

$36.0

$40.5

$45.0

$0

$10

$20

$30

$40

$50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* 2007*

Bill

ions

Source: NAIC, from Highline National Underwriter *I.I.I. forecast

L/H industry net income has risen in most years since 1995. The 1995-2005 compound average annual growth rate was 10.2%.

11% growth forecast

Elements of Net Income, L/H Industry, 2005

$36.0

-$120.3

$151.4

$4.9

-$160

-$80

$0

$80

$160

Bill

ion

s

L/H Net Income

Net Loss from Ins Opns

Net Gain from Inv Opns

Net Gain from Misc Opns

Source: NAIC, from Highline National Underwriter; I.I.I. calculations

Investment Income is a key element of annuity and whole life products, but it’s also key to industry profitability

Percent of Net Gain from Operations, by Business Line, 2005

Misc, 8.8%Other A&H, 7.3%

Group A&H, 16.7%

Group Life, 5.3%

Individual Life, 21.1%

Individual Annuities, 20.4%

Group Annuities, 17.3%

Other life, 3.1%

Source: NAIC data, from Highline National Underwriter.

“Net Gain from Operations” here includes net investment income but not capital gains allocated to each line—the traditional life/ health approach. It is net of dividends to policyowners and federal income taxes.

Direct Premium Trends, 1995-2007F

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006F2007F

Life Insurance Annuities A&H

Source: NAIC, from Highline National Underwriter, I.I.I. forecast based on LIMRA data for 2006

1995-2005 Average Annual Growth Rates:

Life Insurance: 3.1%

Annuities (1995 2000): 5.1%

Annuities (2001-2005): 2.2%

A&H: 2.7%

NAIC changed its definition of group annuity premiums

L/H Industry Productivity Trends, 1997-2005

$355

,700

$367

,000

$366

,000

$411

,000

$695

,000

$758

,000

$757

,000

$831

,000

$831

,000

$490

,000

$492

,000

$485

,000

$542

,000

$866

,000

$925

,000

$903

,000

$971

,000

$949

,000

$0

$250,000

$500,000

$750,000

$1,000,000

1997 1998 1999 2000 2001 2002 2003 2004 2005

Home Office Agents & Brokers

Source: NAIC, from Highline National Underwriter, I.I.I. calculations

Productivity is defined as total premium dollars (from all lines) per employee.

Productivity has been increasing fairly steadily for the last decade.

$1,300

$1,050

$960 $954

$695 $670 $690$740 $745 $725 $715

$660 $640 $615

$995

$830

$660$583

$515

$425$480

$420 $395 $375 $375 $375 $355 $341

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

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

Standard Preferred

Historical and Forecast Term Life Insurance Rates

Source: Accuquote; Insurance Information Institute Forecasts for 2007.

On average in 2007, premium rates for term life insurance are expected to

fall 4% from rates in 2006

$500,000 20-year level term issued to 40-year-old male nonsmoker

Individual Life Insurance Sales, 1990-2005

14

.1

13

.5

13

.4

13

.2

12

.8

12

.3

12

.0

11

.6

11

.5

11

.0

10

.6

10

.3

10

.6

10

.5

10

.6

10

.1

0

5

10

15

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*

Mill

ion

s o

f Po

licie

s

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Millions of Policies Trillions of Face Amount

Source: LIMRA International and I.I.I. calculations *Preliminary estimates

First year and single premiums for individual life insurance grew at a 4% average annual rate from 1995-2005.

2007 Investment Outlook

• Interest rates for 2007 are forecast to remain about where they are now (4.7% for 10-Year U.S. Treasury Notes)

• The “spread” between short- and longer-term rates will remain small or negative

• Corporate profits are forecast to rise modestly (median Blue Chip forecast is 5.0%)

Source: Blue Chip Economic Indicators, Vol 31, No. 12 (December 10, 2006), p. 3; I.I.I. forecast

2007 Outlook for the Life/Health Industry

• If the stock market also rises modestly or is flat vs. inflation, net premiums for variable products might also struggle

• Fixed annuity premiums will post a modest increase, driven partly by• Transfers from variable accounts• New premiums from new 401(k) participation rules

• Life insurance premiums will continue their 3% annual growth

Source: Blue Chip Economic Indicators, Vol 31, No. 12 (December 10, 2006), p. 3; I.I.I. forecast

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

Steven N. Weisbart, Ph.D., CLUEconomistInsurance Information Institute110 William StreetNew York, NY 10038Office Tel: (212) 346-5540Cell phone: (917) 494-5945stevenw@iii.org www.iii.org

INSURANCE INFORMATION INSTITUTE ON-LINE

Invested Asset Distribution, US L/H Insurers, 1995 vs. 2005

Stocks3.4%

Othr Inv assets3.3%

Cash2.2%

Bonds61.8%

Policy Loans3.8%

Mortgages25.0%

Real Estate0.5%

Source: NAIC, via National Underwriter Highline data; I.I.I. calculations. Multi-class mortgage-backed securities included in mortgages

Stocks3.8%

Othr inv assets1.5%

Cash2.9%

Bonds56.6%

Policy Loans5.9%

Mortgages27.3%

Real Estate2.2%

1995 2005

Bonds up 5.2 percentage points; shift toward shorter

maturities

Changes in Life Insurance Distribution

• Decline in full-time affiliated agents (LIMRA estimates) • In 1989: about 262,000 • In 2001: about 178,000• In 2004: about 160,000

• More than ¾ of independent agents began their careers as affiliated agents

• In 2004 stockbrokers and banks wrote about 40% of new individual annuity premium but less than 10% of new individual life premium

Source: Marianne Purushotham, “The Impact of Distribution on the Individual Life and Annuity Industry,” The Actuary newsletter, June 2006.

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

Q1

-19

99

Q3

-19

99

Q1

-20

00

Q3

-20

00

Q1

-20

01

Q3

-20

01

Q1

-20

02

Q3

-20

02

Q1

-20

03

Q3

-20

03

Q1

-20

04

Q3

-20

04

Q1

-20

05

Q3

-20

05

Q1

-20

06

Q3

-20

06

% C

ha

ng

e v

s P

rior

Yr

Quarterly Change (vs. same quarter in prior year) in Individual U.S. Life Insurance Applications, 1999-2006

Source: MIB Life Index, Annual Reports for 2001, 2002, and 2003, plus monthly releases

9/11 effect

Effect of anticipated rate rise from increased reserve requirement for some

term policies (“XXX” regulation)

Challenges for 2007 and beyond

• Productivity: When will “straight-through processing” and other technology investments pay off?

• Distribution: How will increasing dependence on brokers and independent agents change market conduct management?

• Enterprise Risk Management: How will new reserve and compliance regulations and new perspectives on business risks change insurer behavior?

• Consolidation and Re-alignment: Will the need for scale and profits continue to fuel mergers and sales of business lines that “don’t fit”?