hartwig by 2jHQ6NB

VIEWS: 6 PAGES: 117

									  Trends & Challenges in
the P/C Insurance Industry
        Challenges Amid the
         Economic Storm
                        ISO PAAS Forum
                           Miami, FL

                             June 4, 2008
               Robert P. Hartwig, Ph.D., CPCU, President
Insurance 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
• Weakening Economy: Insurance Impacts & Implications
     Implications of Treasury ―Blueprint‖ for insurers
     Inflation Threat Looming for Insurers?
•   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 BubbleAsset 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.
                                    Real GDP Growth*
 6%
                                                                                          Economic growth has
                                                                                           slowed dramatically




                                                                         4.9%
 5%
                                                                                            in recent quarters,
                                                                                             though no official



                                                                 3.8%
                                                                                          recession has occured
        3.7%




                                    3.6%

 4%                                        3.1%
                                                  2.9%




                                                                                                                                                 2.9%
                                                                                                                                         2.7%
                             2.5%




                                                                                                                                 2.5%
 3%




                                                                                                                         1.9%
                                                                                                         1.7%
                      1.6%




                                                                                                                 1.5%
 2%




                                                                                         0.9%
               0.8%




                                                         0.6%




                                                                                 0.6%


                                                                                                 0.2%
 1%


 0%
                                                         07:1Q
                                                                 07:2Q
                                                                         07:3Q
                                                                                 07:4Q
                                                                                         08:1Q
                                                                                                 08:2Q
                                                                                                         08:3Q
                                                                                                                 08:4Q
                                                                                                                         09:1Q
                                                                                                                                 09:2Q
                                                                                                                                         09:3Q
                                                                                                                                                 09:4Q
       2000
               2001
                      2002
                             2003
                                    2004
                                           2005
                                                  2006




*Yellow bars are Estimates/Forecasts.
Source: US Department of Commerce, Blue Economic Indicators 5/08; Insurance Information Institute.
                                   Toward a New World
                                     Economic Order
 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 hand
 5. IOUs are Being Redeemed
       •     Stakes in hard assets/institutions demanded
 6. Good News: No Shortage of Available Capital
       •     Central banks are (generally) making right decisions; Dollar sinks
Source: Insurance Information Institute
                   What’s Being Done to Fix the
                  Economy?Impacts on Insurers
Economic Fix                                Impacts on Insurers
Fed Rate                          •Reduces bond yields (65% - 80% of portfolio)
Cuts                              •Potentially contributes to inflation longer run
Fed Debt                          •Fed will swap up to $200B in bank holdings of
                                  mortgage back securities for Treasuries up to
Swap                              28 days; Improves bank finances
Fed Bailout                       •Fed on 3/14 (via J.P. Morgan) provided Bear
                                  with cash after what is effectively a ―run on
of Bear                           the bank‖
Stearns                           •―Too Big to Fail‖ doctrine is activated
                                  •Fed acting to prevent broader loss of
                                  confidence
                                  •3/17: J.P. Morgan buys Bear for $236 million
                                  ($2/share); Price increased to $10 on 3/24
Source: Insurance Information Institute
                 What’s Being Done to Fix the
                Economy?Impacts on Insurers
                                                 (cont’d)
Economic Fix                                    Impacts on Insurers
Stimulus                    •Hope is that $168B plan boosts overall economic activity
                            and employment (by 500,000 jobs) and therefore p/c
Package                     personal and commercial exposures
                            •Contributes to already exploding budget deficits—
                            Washington may expand its search for tax revenue
Housing                     •If banks take 15% ―haircut‖ on appraised mortgage
                            value, can receive up to $300B in FHA loan guarantees
Bailout*                    •Could cost taxpayers $2.7B (GAO)
                            •States collectively could issue $10B in tax-exempt bonds
                            to subsidize home purchases, help subprime borrowers
Regulatory/                 •Treasury March 31 ―Blueprint‖ affects all financial firms
                            •For insurers, major recommendation is established of
Legislative                 Optional Federal Charter under Office of National
Action (?)                  Insurance within Treasury
Source: Insurance Information Institute. *FHA Housing and Homeowner Retention Act as of 5/12/08.
              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
                                                       Source: Insurance Information Institute
           Elements of Credit Market Reform
              Currently Being Considered
     Reform                                  Rationale
Increased             •Require issuers of mortgage-backed securities to disclose
                      more about the ―level and scope of due diligence‖
Disclosure/           •More details on actual underlying assets of the security
Transparency          •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              •Multi-national effort to require enhanced and tested risk




                                                                                       Source: Wall Street Journal, 3/15/07
                      management policies for large financial institutions
Awareness of Risk
Stronger Risk         •Require financial institutions to implement stronger risk
                      controls
Management
Increased Capital     •Revisit latest bank capital requirements (Basel II) to ensure
                      banks have sufficient capital/liquidity for risks assumed
Stronger              •Strengthen state and federal oversight of mortgage lenders
Regulatory Policies   •Nationwide licensing of mortgage brokers
Summary of Treasury
   ―Blueprint‖for
  Financial Services
   Modernization
  Impacts on Insurers
                      Treasury Regulatory
                Recommendations Affecting Insurers
•     Establishment of an Optional Federal Charter (OFC)
      Would provide system for federal chartering, licensing,
       regulation and supervision of insurers, reinsurer and
       producers (agents & brokers)
      OFC insurers would still be subject to state taxes,
       provisions for compulsory coverage, residual market and
       guarantee funds
      OFC would specify specific lines covered by charter;
       Separate charters needed for P/C and Life
•     OFC Would Incorporate Several Regulatory Concepts
      Ensure safety and soundness
      Enhance competition in national and international markets
      Increase efficiency through elimination of price controls,
       promote more rapid technological change, encourage
       product innovation, reduce regulatory costs and provide
       consumer protection
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
               Treasury Regulatory Recommendations
                     Affecting Insurers (cont’d)
•     Establishment of Office of National Insurance (ONI)
          Department within Treasury to regulate insurance pursuant to OFC
          Headed by Commissioner of National Insurance
          Commissioner has regulatory, supervisory, enforcement and
           rehabilitative powers to oversee organization, incorporation, operation,
           regulation of national insurers and national agencies
•     Establishment of Office of Insurance Oversight (OIO)
          Department within Treasury to handle issues needing immediate
           attention such ―reinsurance collateral‖; OIO could focus immediately
           on ―key areas of federal interest in the insurance sector‖
          OIO: lead regulatory voice on international regulatory policy
          Would have authority to ensure states achieved uniform
           implementation of declared US international insurance policy goals
          OIO would also serve as advisor to Treasury Secretary on major
           domestic and international policy issues
•     UPDATE: HR 5840 Introduced April 17 Would Establish
      Office of Insurance Information (OII)
          Very similar to OIO
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
 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)
Source: Insurance Information Institute.
                                Real GDP Growth vs. Real P/C
                             Premium Growth: Modest Association
                      25%                                                                                  8%
                                                  P/C insurance industry’s growth



                                        20.3%
                                     18.6%
                                                  is influenced modestly by growth
                      20%                               in the overall economy                             6%




                                                                                     13.7%
                      15%
                                                                                                           4%
    Real NWP Growth




                                                                                                                  Real GDP Growth
                                                                7.7%
                      10%
                                                             5.8%




                                                            5.6%
                                                            5.2%




                                                                                                           2%
                                                          4.3%




                                                        3.1%
                       5%
                                                      1.8%




                                                     1.6%



                                                    1.2%
                                                    1.1%
                                                    0.8%

                                                   0.6%
                                                   0.4%
                                                   0.3%




                                                                                                           0%
                       0%



                                             -0.3%
                                            -0.4%




                                            -0.5%
                                           -0.9%




                                           -1.0%

                                           -1.0%
                                          -1.5%




                                          -1.6%

                                         -1.8%




                                       -2.8%
                                       -2.9%
                      -5%                                                                                  -2%




                                    -4.7%
                              81 -6.5%




                                                Real NWP Growth           Real GDP
                              80-7.4%




                      -10%                                                                                 -4%




                             08F
                              78
                              79


                              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
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 5/08; Insurance Information Inst.
       Summary of Economic Risks and
        Implications for (Re) Insurers
 Economic Concern                 Risks to Insurers
                       •Some insurers have some asset risk
Subprime Meltdown/     •D&O/E&O exposure for some insurers
Credit Crunch          •Client asset management liability for some
                       •Bond insurer problems; Muni credit quality
                       •Reduced exposure growth
Housing Slump          •Deteriorating loss performance on neglected,
                       abandoned and foreclosed properties
                       •Lower investment income
Lower Interest Rates
                       •Decreased capital gains (which are usually
Stock Market Slump     relied upon more heavily as a source of
                       earnings as underwriting results deteriorate)
                       •Reduced commercial lines exposure growth
General Economic       •Surety slump
Slowdown/Recession     •Increased workers comp frequency
                            New Private Housing Starts,
                            1990-2014F (Millions of Units)
              Exposure growth forecast for HO                                                                                         New home starts plunged
                                                                                                                                        34% from 2005-2007;
                insurers is dim for 2008/09




                                                                                                                 2.07
2.1                                                                                                                                      Drop through 2008




                                                                                                          1.96
                                                                                                                                       trough is 54% (est.)—a
2.0           Impacts also for comml. insurers                                                                                          net annual decline of




                                                                                                   1.85
               with construction risk exposure                                                                                            1.11 million units




                                                                                                                        1.80
1.9




                                                                                            1.71
1.8


                                                                       1.64
                                                                1.62



                                                                                     1.60
1.7


                                                                              1.57




                                                                                                                                                                                1.56
                                                                                                                                                                         1.54
                                                                                                                                                                  1.51
1.6
                                                  1.48
                                                         1.47
                                   1.46




                                                                                                                                                           1.45
1.5




                                                                                                                                                    1.38
                                                                                                                               1.36
                                          1.35




1.4
                            1.29
                     1.20




1.3
       1.19




                                                  I.I.I. estimates that each incremental
1.2                                              100,000 decline in housing starts costs




                                                                                                                                             1.05
                                                   home insurers $87.5 million in new
              1.01




1.1                                                exposure (gross premium). The net




                                                                                                                                      0.96
1.0                                                  exposure loss in 2008 vs. 2005 is
                                                         estimated at $971 million.
0.9
       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
5/08 edition of BCEF; Insurance Info. Institute
                           Case-Schiller Home Price
                           Index— 20 City Composite
                                      January 2000 = 100
250
                  Peak in July 2006 at 206.52,
                   meaning home prices had
200               more than doubled between
                   Jan. 2000 and July 2006

150

100
                                                    February 2008 index value was
                  Home prices are                  175.94, meaning home prices were
50              approximately where                14.8% below their July 2006 peak
               they were in early 2005
  0
      Jan-00



                  Jan-01



                             Jan-02



                                       Jan-03



                                                  Jan-04



                                                            Jan-05



                                                                     Jan-06



                                                                               Jan-07



                                                                                        Jan-08
Source: Standardandpoors.com; Insurance Info. Institute
                     Change in Home Values from
                      Maximum Price, by City*
  0%




                                                                                                       -3.4%
 -5%




                                                  -5.1%
                                                -6.3%
                                               -6.9%
                                              -7.4%
                                             -7.8%
                                             -8.0%
-10%




                                           -9.1%
                                         -10.2%
                                     -13.5%
-15%




                                   -14.7%
                                   -14.8%
                                                                         Home prices are
                                -17.5%
-20%
                             -19.8%

                                                                        falling across the
                            -20.8%
                           -21.6%
                          -22.1%
                         -23.2%
                        -23.8%




-25%                                                                      country, down
                        -24.1%
        Sa eni -24.5%




-30%                                                                    14.8% on average




            D a
             ng i




             D r
          lev is
         po ton




            Bo d




         C land

                    te
                      a
                     x



                     it




            Se s
          Po ttle
                   rk
          C on

          ew o
           Ph a s




        as sco
                    es




        in -20
                   go



         sA m




                   la
                  ve
                  nt
        F r mp




                 an



        N cag
                 ro




        C pol




                 ot
                 el
               eg




      Lo Mia




              Yo
                st
                ie




                al
              tla

              en
      om g




                a
      M site
      W nci
              et




              el




              rl
              o




             rt
             D




    C hin
              a




              a
  sV




            hi
            D




           ha
    Sa T




            A
           ne
           a
           n
La




      n




*Calculated as of Feb. 2008 (latest available) by III from monthly Case-Schiller price index data. Date of
 maximum price varies by city (July 2006 for 20-city composite).
Source: Case-Schiller Home Price Index at Standardandpoors.com; Insurance Info. Institute
                         Auto/Light Truck Sales,
                       1999-2014F (Millions of Units)
                                      Weakening economy,                     New auto/light trick sales are
                                     credit crunch and high                  expected to experience a net
 18.0           17.8                                                           drop of 1.7 million units
                                     gas prices are hurting                  annually by 2008 compared
         17.4          17.5
 17.5                                       auto sales                       with 2005, a decline of 10.1%
                              17.1
                                            16.9 16.9                                                  16.9 16.8
 17.0
                                     16.6               16.5                               16.6 16.7
                                                                                    16.4
 16.5
                                                               16.1
 16.0
                                                                             15.5
 15.5                                                                 15.2
               Impacts of falling auto sales will
 15.0          have a less pronounced effect on
               auto insurance exposure growth
 14.5           than problems in the housing
                market will on home insurers
 14.0
 13.5
          99     00    01     02     03     04    05    06     07F    08F     09F   10F    11F   12F   13F   14F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from
5/08 edition of BCEF; Insurance Info. Institute
                    Favored Industry Groups for
                     Insurer Exposure Growth
       Industry                                              Rationale
  Health Care                              •Economic NecessityRecession Resistant
                                           •Demographics: aging/immigrationGrowth
  Energy (incl. Alt.)                      •Fossil, Solar, Wind, Bio-Fuels, Hydro & Other

  Agriculture &                            •Consumer StapleRecession Resistant
  Food Processing &                        •Grain and land prices high due to global demand,
                                           weak dollar (exports)
  Manufacturing                            •Acreage GrowingFarm Equipment, Transport
                                           •Benefits many other industries
  Export Driven                            •Weak dollar, globalization persist; Cuba angle?
  Natural Resources                        •Strong global demand,
  & Commodities                            •Supplies remain tight…but beware of bubbles
                                           •Significant investments in R&D, plant & equip
                                           required

Sources: Insurance Information Institute
                                                       Retail Gas Price* and Percent Change
                                                          In Miles Driven, 1970 – 2008:Q1
                                                             Inflation adjusted gas prices       There is a strong
                                                             % change in miles driven
                                                                                              association between gas
                                                     $3.50                                    prices and miles driven.    8%
   Retail Gas Price, Inflation adjusted ($/gallon)




                                                                                             Until 2007/8 miles driven
                                                                                             had not declined since the
                                                                                             energy crises of the 1970s   6%
                                                     $3.00




                                                                                                                               % Change Miles Driven
                                                                                                                          4%
                                                     $2.50
                                                                                                                          2%
                                                     $2.00
                                                                                                                          0%

                                                     $1.50
                                                                                                                          -2%


                                                     $1.00                                                                -4%
                                                             1970
                                                             1971
                                                             1972
                                                             1973
                                                             1974
                                                             1975
                                                             1976
                                                             1977
                                                             1978
                                                             1979
                                                             1980
                                                             1981
                                                             1982
                                                             1983
                                                             1984
                                                             1985
                                                             1986
                                                             1987
                                                             1988
                                                             1989
                                                             1990
                                                             1991
                                                             1992
                                                             1993
                                                             1994
                                                             1995
                                                             1996
                                                             1997
                                                             1998
                                                             1999
                                                             2000
                                                             2001
                                                             2002
                                                             2003
                                                             2004
                                                             2005
                                                             2006
                                                             2007
                                                             2008
*1970-1977 retail gas prices based on leaded only. 1970-2007 adjusted to 2007 dollars.
Sources: Energy Highway Administration, Federal Highway Administration.
                      Wage & Salary Disbursements
                     (Payroll Base) vs. Workers Comp
                          Net Written Premiums
                   Wage & Salary Disbursement (Private Employment) vs. WC NWP
 $ Billions                                                                                        $ Billions
                  7/90-3/91                                           3/01-11/01
   $7,000                                      Wage & Salary                                              $45
                                               Disbursements
                                               WC NPW                                                     $40
   $6,000
                                                                                                          $35
   $5,000
                                                                                                          $30
   $4,000                                                                                                 $25
                                                                                   Weakening wage
   $3,000                                                                             and salary          $20
                                                                                       growth is
                                                                                                          $15
   $2,000                                                                          expected to cause
                              Shaded areas indicate recessions                     a deceleration in      $10
   $1,000                                                                           workers comp
                                                                                                          $5
                                                                                   exposure growth
        $0                                                                                                $0
              89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
*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
                                                          Workplace Injury Incidence Rates
                                                        Declined in Last 4 Economic Downturns
                           15                                                                                                                                                                                                                  3750
Incidence Rates per 100 FTE Workers




                                                                                                                                                                                                                                                   Claims per 100,000 Workers
                           10                                                                                                                                                                                                                  2500




                                                                                                                                                                                                                                                             (NCCI)
               (BLS)




                                      5                                                                                                                                                                                                        1250


                                                                       Recessions
                                                                       Manufacturing Industry Injuries and Illnesses per 100 Full-Time Workers
                                                                       Private Industry Injuries and Illnesses per 100 Full-Time Workers
                                                                       NCCI Lost-Time Claims per 100,000 Workers
                                      0                                                                                                                                                                                                        0
                                          1980

                                                 1981
                                                        1982

                                                               1983

                                                                      1984

                                                                             1985
                                                                                    1986

                                                                                           1987

                                                                                                  1988

                                                                                                         1989
                                                                                                                1990

                                                                                                                       1991

                                                                                                                              1992

                                                                                                                                     1993
                                                                                                                                            1994

                                                                                                                                                   1995

                                                                                                                                                          1996

                                                                                                                                                                 1997
                                                                                                                                                                        1998

                                                                                                                                                                               1999

                                                                                                                                                                                      2000

                                                                                                                                                                                             2001
                                                                                                                                                                                                    2002

                                                                                                                                                                                                           2003

                                                                                                                                                                                                                  2004

                                                                                                                                                                                                                         2005
                                                                                                                                                                                                                                2006

                                                                                                                                                                                                                                       2007p
p Preliminary
Source: US Department of Labor, Bureau of Labor Statistics (BLS), National Bureau of Economic Research; NCCI Frequency and
Severity Analysis
                       Inflation Rate (CPI-U, %),
                              1990 – 2009F
                   Inflation was just 2.2% in 2007 but is accelerating.
6                 Medical cost inflation, important in WC, auto liability
                    and other casualty covers is running far ahead of
     4.9 5.1       inflation. Rising inflation can also lead to adverse
5                   reserve development and inadequate reinsurance
                                                                                        3.8         3.9 3.7
4
                                                        3.3 3.4
               3.0 3.2      2.9 2.8                                               3.0
3                        2.4        2.6                                 2.5 2.3                               2.5
                                                                                              2.2
                                                  1.9
2                                           1.5                   1.3
1

0
      90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F 09F
*12-month change Apr. 2008 vs. Apr. 2007;
Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, May 10, 2008; Ins. Info. Institute.
                        World Crude Oil Prices:
                           1997- May 2008
$140                                      Dollars per Barrel*
$120           Crude oil prices in May                               As of May 2008 oil
                                                                      prices averaged a
                2008 ($123.35) are up                                record $123.35 per
$100
                 711% since January                                         barrel
 $80           1998 ($15.21) and 137%
 $60
               from Feb. 2007 ($52.11)

 $40

           $15.21
 $20

   $0
      Jan-97   Jan-98   Jan-99   Jan-00   Jan-01   Jan-02   Jan-03   Jan-04   Jan-05   Jan-06   Jan-07   Jan-08
*All countries spot market price weighted by estimated export volume. May 2008 figure is NYMEX crude.
Source: Energy Information Administration; http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm
           Inflation: Important Economic
         Risks and Implications for Insurers
Effects of Inflation                 Risks to Insurers
                       •Accelerating inflation can contribute to rate
Rate Inadequacy        inadequacy because ratemaking is largely a
                       retrospective process
                       •Many types of loss trends are sensitive to the pace
                       of inflation: medical cost, tort, etc.
                       •Historical loss cost trends could be biased
                       predictors of future loss if inflation accelerates
                       •Reserves are established using certain assumptions
Reserve                about future development and discounting factors
Deficiency             •If inflation accelerates, development could be more
                       rapid and/or be more substantial (in dollar terms)
                       than assumed and discount factors may be too low
                       •Inflation can lead to a more rapid and unexpected
Inadequate             exhaustion of reinsurance because losses are higher
Reinsurance            than expected
              Consumer Price Index for Medical
                Care vs. All Items, 1960-2007
        All Items    Medical Care       (Base: 1982-84=100)
400
         Inflation for Medical Care                           351.1
         has been surging ahead of
300      general inflation (CPI) for
          25 years. Since 1982-84,
          the cost of medical care
200
           has more than tripled.                             207.3




100



  0
      60
      61
      62
      63
      64
      65
      66
      67
      68
      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
Source: Department of Labor (Bureau of Labor Statistics).
               Tort Cost Growth & Medical Cost Inflation
                vs. Overall Inflation (CPI-U), 1961-2008*

14%                  Tort costs move with                                           Tort System is an
                inflation but at twice the rate                                    Inflation Amplifier
                                                                                Avg. Ann. Change: 1961-2008*
12%
                                                                                Torts Costs: +8.4%
10%                                                                             Med Costs: +6.0%
 8%                                                                           Overall Inflation: +4.2%

 6%
 4%
 2%
                                       Tort Costs           Medical Costs              CPI
 0%
               1961-70               1971-80               1981-90             1991-2000             2001-08E
*Medical cost and CPI-U through April 2008 from BLS. Tort figure is for full-year 2008 from Tillinghast.
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.
  D&O/E&O
 Turbulent Markets,
Bankruptcies Can Give
    Rise to Suits
                                         Shareholder Class
                                         Action Lawsuits*
                                                                                    Pace of suits is up due in
 600            A credit crunch creating a                                          part to subprime issues,
               ―contagion‖ effect resulting                             497           housing collapse and
 500              in significant financial                                              market volatility.
                                                                                   Defendants include banks,
               distress and bankruptcies in                                            investment banks,
 400            other sectors could breed                                            builders, lenders, bond
                 more securities litigation                                          and mortgage insurers
 300                                                                           267
                             231                      242                            226237
        202                                                 210215
                                188             173                                              182     176
 200 164 163
                                          111                                                          118
 100                                                           Includes 74 suits related                       74
                                                                to subprime in 2007/08
     0
            91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
*Securities fraud suits filed in U.S. federal courts; 2008 figure is current through May 2.
Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute
PROFITABILITY
  Profits in 2006/07 Reached
     Their Cyclical Peak;
By No Reasonable Standard Can
 Profits Be Deemed Excessive
                         P/C Net Income After Taxes
                          1991-2008F ($ Millions)*
                   2001 ROE = -1.2%
                   2002 ROE = 2.2%
                                                                                              Insurer profits




                                                                                                                                                              $63,695
                                                                                              peaked in 2006




                                                                                                                                                                        $59,200
                   2003 ROE = 8.9%
 $70,000
                   2004 ROE = 9.4%




                                                                                                                                                                                  $46,300
 $60,000           2005 ROE= 9.6%




                                                                                                                                                    $44,155
                   2006 ROE = 12.2%



                                                                          $36,819




                                                                                                                                          $38,501
 $50,000
                   2007E ROAS1 = 13.1%**




                                                                                    $30,773




                                                                                                                                $30,029
 $40,000                                                        $24,404




                                                                                              $21,865
                                                      $20,598




                                                                                                        $20,559
                                  $19,316




 $30,000
               $14,178




                                            $10,870




 $20,000
                         $5,840




                                                                                                                       $3,046
 $10,000
        $0
 -$10,000                                                                                                  -$6,970
              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.
                         ROE: P/C vs. All Industries
                               1987–2008E
 20%
                         P/C profitability is cyclical, volatile and vulnerable
 15%


 10%
                                                                           Sept. 11
  5%


           Hugo                                      Lowest CAT                                           Katrina,
  0%                                                                                                     Rita, Wilma
                                                  losses in 15 years
               Andrew                   Northridge
 -5%
                                                                                               4 Hurricanes
     87
          88
               89
                    90
                         91
                              92
                                   93
                                        94
                                             95
                                                  96
                                                       97
                                                            98
                                                                 99
                                                                      00
                                                                           01
                                                                                02
                                                                                     03
                                                                                          04
                                                                                               05
                                                                                                    06

                                                                                                           F
                                                                                                           F
                                                                                                         07
                                                                                                         08
                              US P/C Insurers                    All US Industries
*2007 is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.
Source: Insurance Information Institute; Fortune
               Personal/Commercial Lines &
              Reinsurance ROEs, 2006-2008F*
                                                                 ROEs are declining
18%         2006     2007E       2008F
                                         16.8%                    as underwriting
16%                                                              results deteriorate
         14.0%                                    13.2%
14%                                                                 12.3%
12%                                                                      10.7%
                   9.4%                                    9.8%                  9.8%
10%
 8%                        6.3%
 6%
 4%
 2%
 0%
                Personal                     Commercial               Reinsurance
Sources: A.M. Best Review & Preview (historical and forecast).
              Profitability Peaks & Troughs in the
              P/C Insurance Industry,1975 – 2008F*
 25%
                     1977:19.0%                1987:17.3%                         2006:12.2%
 20%
                                                   1997:11.6%
 15%


 10%


  5%


  0%
          1975: 2.4%               1984: 1.8%          1992: 4.5%                   2001: -1.2%
 -5%




        07E
        08F
         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
*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
                  P/C, L/H Stocks: Lagging the
                     S&P 500 Index in 2008
                   Total YTD Returns Through May 30, 2008
                                                                 -4.63%            S&P 500
    P/C, Life insurance stocks
    underperforming S&P—                                                           All Insurers
   concerns about soft market,                     -16.00%
   credit/subprime exposure of                                   -4.25%            P/C
         some companies
                                                              -6.77%               Life/Health
 Mortgage & Financial
Guarantee insurers were              -27.90%                                       Multiline
  down 69% in 2008
                                            -22.27%
                                                                                   Reinsurance
   -60.55%
                                                                                   Mortgage*
                                                                   -3.04%
                                                                                   Brokers


-70.0% -60.0% -50.0% -40.0% -30.0% -20.0% -10.0%                            0.0%
*Includes Financial Guarantee.
Source: SNL Securities, Standard & Poor’s, Insurance Information Inst.
                                Factors that Will Influence the
                                Length 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 fallContributes 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
Source: Insurance Information Institute.
                       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
• M&A Activity: More consolidation implies greater discipline
      Liberty Mutual/Safeco deal creates 5th largest p/c insurer. More to come?


 Source: Insurance Information Institute.
              ROE vs. Equity Cost of Capital:
              US P/C Insurance:1991-2007E
18%
                          The p/c insurance industry achieved its cost of
16%                      capital in 2005/6 for the first time in many years
14%




                                                                                                                        +1.7 pts

                                                                                                                                   +3.1 pts
12%
10%




                                                                                -9.0 pts




                                                                                                            -0.1 pts
8%




                                                                                                 +0.2 pts
                                                                   -13.2 pts
6%
4%
         US P/C insurers missed their                                                            The cost of capital
2%                                                                                              is the rate of return
0%
        cost of capital by an average 6.7                                                         insurers need to
                                                                                                 attract and retain
        points from 1991 to 2002, but on                                                            capital to the
-2%
            target or better 2003-07                                                                   business
-4%
       91    92   93    94   95    96   97    98   99    00   01               02          03   04          05         06 07E
Source: The Geneva Association, Ins. Information Inst.                 ROE                      Cost of Capital
  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
                         Impairment rates                            Combined Ratio after Div
                             are highly
                             correlated                              P/C Impairment Frequency
                   120      underwriting                                                        2
                          performance and                                                       1.8
                   115    could reach near-
                         record low in 2007                                                     1.6
                                                                                                1.4




                                                                                                      Impairment Rate
  Combined Ratio




                   110
                                                                                                1.2
                   105                                                                          1
                                                                                                0.8
                   100
                                                                                                0.6
                                                                                                0.4
                   95
                                               2006 impairment rate was 0.43%, or 1-in-233      0.2
                                              companies, half the 0.86% average since 1969;
                   90                           2007 will be lower; Record is 0.24% in 1972     0




                         07E
                          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
Source: A.M. Best; Insurance Information Institute
                        Reasons for US P/C Insurer
                         Impairments, 1969-2005
                      2003-2005                                               1969-2005
         Affiliate                                  Deficient                              Reinsurance         Deficient
                                                                              Sig. Change                        Loss
         Problems                                     Loss                                   Failure
                                                                               in Business                    Reserves/In-
           8.6%                                    Reserves/In-                               3.5%
                                                                                  4.6%                         adequate
                                                    adequate             Misc.
  Catastrophe                                                            9.2%                                   Pricing
                                                     Pricing
    Losses                                                                                                      38.2%
                                                     62.8%
     8.6%
                                                             Investment
     Alleged                                                 Problems*
     Fraud                                                      7.3%
     11.4%
                                                             Affiliate
                                       Deficient             Problems
       Rapid                           reserves,               5.6%
       Growth                         CAT losses             Catastrophe
        8.6%                           are more                Losses
                                      important                 6.5%          Alleged                       Rapid
                                       factors in                             Fraud                         Growth
                                                                               8.6%                         16.5%
                                     recent years
                                                                                        *Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
                Cumulative Average Impairment Rates by
                   Best Financial Strength Rating*
             Insurers with strong ratings are far
 60%         less likely to become impaired over
               long periods of time. Especially                                                       D
 50%            important in long-tailed lines.
                                                                                                      C/C-
 40%                                                                                                  C++/C+

 30%                                                                                                  B/B-

                                                                                                      B++/B+
 20%
                                                                                                      A/A-
 10%
                                                                                                      A++/A+
  0%
            1     2    3     4     5    6     7     8     9 10 11 12 13 14 15
                                 Average Years to Impairment                  *US P/C and L/H companies, 1977-2002
Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.
UNDERWRITING
     TRENDS
Extremely Strong 2006/07;
Relying on Momentum &
   Discipline for 2008
                  P/C Insurance Combined Ratio,
                          1970-2008F*
              Combined Ratios
  120
                1970s: 100.3
                1980s: 109.2
  115
                1990s: 107.8
                2000s: 102.0*
  110


  105


  100


    95


    90




         08F
          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
Sources: A.M. Best; ISO, III   *Full year 2008 estimates from III.
                P/C Insurance Combined Ratio,
                         2001-2008F
                            As recently as 2001,                            2007/8 deterioration due
120                                                                      primarily to falling rates, but
                           insurers were paying                           results still strong assuming
           115.8
                            out nearly $1.16 for                             normal CAT activity
                              every dollar they
                            earned in premiums                    2006 produced the best
110
                         107.4                                      underwriting result
                                                                  since the 87.6 combined
                                                                        ratio in 1949

                                       100.1                    100.7
100                                                      98.3                                 98.6
                                                                                   95.6
           2005 figure benefited from
            heavy use of reinsurance                                     92.4
            which lowered net losses
  90
              01            02            03              04     05       06         07        08F
Sources: A.M. Best; ISO, III. *III estimates for 2008.
                      Underwriting Gain (Loss)
                           1975-2008F*
              35     Insurers earned a record underwriting profit of
              30    $31.7 billion in 2006, the largest ever but only the
              25   second since 1978. Cumulative underwriting deficit
              20
              15         from 1975 through 2007 is $422 billion.
              10
               5
$ Billions




               0
              -5
             -10
             -15
             -20
             -25
             -30
             -35
             -40
             -45
             -50
             -55
                   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
                   08
Source: A.M. Best, Insurance Information Institute
                                           Impact of Reserve Changes on
                                                 Combined Ratio
                                                                                   PY Reserve Development
                           $40                             8.6 8.9                 Combined Ratio Points  10
                           $35                                                                            9
Reserve Development ($B)




                                                                                      Reserve             8




                                                                                                                Combined Ratio Points
                           $30                     6.5
                                                                                  adequacy has            7
                           $25                                                                            6
                                                                           4.5      improved
                                                                                                          5

                                                                   $36.9
                           $20          3.5                $33.4
                                                                                  substantially           4
                           $15
                                                   $22.8



                                                                                                          3


                                                                           $18.9
                           $10                                                                            2
                                           $10.8




                                   0.1                                                                    1
                            $5                                                   -1.2 -1.6 -1.3 -1.1
                                    $0.4                                                                  0
                             $0
                                                                                                          (1)
                            ($5)
                                                                               ($5.3) ($7.0)($6.0) ($5.0) (2)
                           ($10)                                                                          (3)
                                   00      01      02      03      04      05         06   07F   08F   09F
Source: A.M. Best, Lehman Brothers estimates for years 2007-2009
PERSONAL LINES
                              Personal Lines
                        Combined Ratio, 1993-2007E




                                                                       110.9
115




                                                               109.9


                                                                               105.3
110
                                104.9
                104.5




                                                       104.5
        103.9


                        103.5




105                                            102.7
                                        99.8




                                                                                                                          98.6
                                                                                       98.4


                                                                                                     96.4
100




                                                                                                                   95.6
                                                                                              94.3


                                                                                                            94.3
 95
                 Recent strong results
 90        attributable favorable frequency
             trends and low CAT activity
 85
        93      94      95      96      97     98      99      00      01      02      03     04     05     06 07E 08F
Source: A.M. Best; Insurance Information Institute.
                          Private Passenger Auto
                          (PPA) Combined Ratio
 110
               PPA is the profit                     109.5                         Auto insurers have
              juggernaut of the                            107.9
                                                                                    shown significant
                                                                                  improvement in PPA
                 p/c insurance                                                        underwriting
 105            industry today                                    104.2            performance since
                                              103.5                               mid-2002, but results
       101.7101.3 101.3                                                            are deteriorating.
                       101.0            101.1

 100                             99.5                                                                      99.5
                                                                          98.4
                                                                                                    97.5

               Average Combined                                                         95.1 95.5
  95                                                                             94.3
              Ratio for 1993 to 2006:
                       101.0
  90
         93     94   95     96    97     98     99    00     01    02     03     04     05   06     07E 08F
Sources: A.M. Best (historical and forecasts)
               Pure Premium Spread: Personal
               Auto PD Liability, 2000-2007:Q4
        Auto Insurance Component of CPI                  Personal Auto-PD Pure Premium
10%
              Margin necessary                                An inversion of pure
  8%          to maintain PPA                                premium spread began
                profitability                                     in late 2006
  6%

  4%

  2%

  0%

 -2%               2000 PPA
                 Combined=110                                     2006 PPA
 -4%                                                            Combined=95.5
         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
         07:Q4
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
                   Bodily Injury: Severity Trend
                   Running Ahead of Frequency
                                                  Frequency        Severity
         Medical
 8%      inflation
            is a                                                                         6.0%
 6%      powerful      4.7%                                                     4.8%
            cost                          3.6%     3.8%     3.4%
 4%        driver                3.0%                                  2.8%
 2%

 0%
           -0.3%
-2%                                              -0.9%
       -2.2%                                              -2.6%
-4%                                     -3.3%
                               -4.0%                                          -3.8%
-6%              -5.3%                                              -5.4%              -5.0%
            99         00         01       02       03        04         05      06       07

Source: ISO Fast Track data.
 Auto Insurance
Claim Cost Drivers
                  Auto Claim Costs Rise Faster
                 than CPI or Health Care Costs
                         Claimed BI                          Inflation in auto
10%           9%
                          economic                         insurance claims is a
                         losses are 3                      significant and long-
 9%                       times the         8%
 8%                         overall                           term cost driver
 7%                        inflation
                             rate                          6%
 6%
 5%                          4%                                                           4%
 4%                                                                        3%
 3%
 2%
 1%
 0%
          Claimed BI       Total BI     Claimed PIP      Total PIP         CPI        CPI-Medical
          Economic         Payment       Economic        Payment
             Loss                           Loss
Sources: Insurance Research Council, Auto Insurance Claims: Countrywide Patterns in Treatment,
Cost and Compensation, 2008 Edition; Insurance Information Institute.
                   Percent of Claimants With No
                   Disability from Auto Injuries
80%                     Bodily Injury Claimants        PIP Claimants
                                                                                    76%
75%                                                               72%                      72%
                                               70%
70%                                                                      68%
                                                       66%
65%
                             59%
60%                                 56%
55%               52%
50%        48%                                   Fewer claimants
45%                                             reporting any type
40%                                            of disability helping
35%                                             to hold down costs
30%
              1987              1992              1997               2002              2007
Sources: Insurance Research Council, Auto Insurance Claims: Countrywide Patterns in Treatment,
Cost and Compensation, 2008 Edition; Insurance Information Institute.
                  Percent of Claimants Admitted
                    for 1+ Nights in Hospital
14%                           Bodily Injury Claimants        PIP Claimants
                12%
12%       11%                                         Fewer claimants are
                                   10%            spending time in the hospital
10%

 8%                          7%                        7%                7%
                                                                                           6%
 6%                                            5%                 5%
                                                                                    4%
 4%

 2%

 0%
            1987               1992              1997               2002              2007
Sources: Insurance Research Council, Auto Insurance Claims: Countrywide Patterns in Treatment,
Cost and Compensation, 2008 Edition; Insurance Information Institute.
                              Percent of Claimants
                                 Receiving MRI
25%                          Bodily Injury Claimants         PIP Claimants
                                                                                       22%
20%                                                     18%                18%
                         15%                15%
15%
             12%
10%
                             More claimants are getting
                              MRIs (and CT scans)
 5%

 0%
                  1997                           2002                           2007
Sources: Insurance Research Council, Auto Insurance Claims: Countrywide Patterns in Treatment,
Cost and Compensation, 2008 Edition; Insurance Information Institute.
                           Percent of Claimants
                          Represented by Attorney
60%                                    Bodily Injury Claimants        PIP Claimants
                            57%
          55%
55%                                           52%
                                                                                   49%
50%                                                              47%
45%                                Attorney representation
40%                                was falling until recently
35%             32%                32%                                                    31%
                                                      30%
30%                                                                     28%
25%
20%
            1987               1992              1997               2002              2007
Sources: Insurance Research Council, Auto Insurance Claims: Countrywide Patterns in Treatment,
Cost and Compensation, 2008 Edition; Insurance Information Institute.
Rising Gas Prices and
Auto Claim Frequency
                       Miles Driven vs. Gas Prices
                            in Recent Months
                                            Miles Driven        Gas Prices                            Gas Price/
Miles Driven                                                                                          Gallon
 280,000                                                                                                  $3.40

 270,000                                                                                                  $3.20

 260,000
                                                                                                          $3.00
 250,000
                                                                                                          $2.80
 240,000
                                                                                                          $2.60
 230,000
                                        Miles drive in
 220,000
                                       March 2008 fell                                                    $2.40
                                      below March 2007
 210,000                             as gas prices soared                                                 $2.20


 200,000                                                                                                  $2.00
           Jan   Feb   Mar   April   May   June   July   Aug   Sept   Oct   Nov   Dec   Jan   Feb March
            2007                                                                         2008
 Sources: Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm);
 Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08martvt/08martvt.pdf; .
Homeowners Insurance
                   Homeowners Insurance
                     Combined Ratio
165
          158.4
                                  Average 1990 to 2006= 111.8
155
                             Insurers have paid out an average of
145                          $1.12 in losses for every dollar earned
                              in premiums over the past 17 years
135

125                      121.7               121.7
       117.7       118.4
115 113.0
               113.6 112.7
                                          111.4
                                 109.4108.2       109.3
105                            101.0                            100.1
                                                      98.3                     99.5
                                                             94.2         95.5
 95                                                                  91.7

 85
        90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08F
Sources: A.M. Best (historical and forecasts)
 COMMERCIAL
    LINES

  Commercial Auto
Commercial Multi-Peril
   Workers Comp
                       Commercial Lines Combined
                          Ratio, 1993-2008F
                    Commercial coverages                                                            Outside CAT-affected lines,
                                                                                                      commercial insurance is
                   have exhibited significant




                                                                            122.3
                                                                                                    doing fairly well. Caution is
 125                 variability over time.                                                           required in underwriting
                                                                                                     long-tail commercial lines.
 120
                    112.5




                                                            112.3

                                                                    111.1
           110.3



                            110.2




                                                                                    110.2
                                                    109.7
 115
                                    107.6




                                                                                                              105.4
 110
                                            103.9




                                                                                                      102.5
                                                                                            102.0
 105




                                                                                                                                    97.5
 100




                                                                                                                             94.0
                               Recent results benefited from




                                                                                                                      91.2
   95
                            favorable loss cost trends, improved
   90
                             tort environment, low CAT losses,
                              WC reforms and reserve releases
   85
           93       94      95      96      97      98      99      00      01      02      03       04       05      06 07E 08F
Sources: A.M. Best (historical and forecasts)
                                Commercial Auto Liability
                                 & PD Combined Ratios
   Comm Auto Liab                         Comm Auto PD
                                                                                                        Average Combined:



                                                     120.5

                                                                120.1
 125                                                                    122.5
                                                                                                         Liability = 108.8
                                          115.9
 120
            112.1




                                                        112.1
                                113

                                                                                                                   PD = 97.5
                      112



 115                                         108.9




                                                                                   106.6
                                                                   105.9
                                  105.6


 110
                        102.2




                                                                           101.6
 105




                                                                                              99.4
               96.7




                                                                                                       96.6




                                                                                                                                             98
 100




                                                                                                                                     94.5
                                                                                      93.8




                                                                                                                93.4

                                                                                                                          94
   95




                                                                                                                   88.3

                                                                                                                            87.7
   90                     Commercial Auto has
                                                                                                84.5
                         improved dramatically

                                                                                                         82.8
   85
   80
             95       96        97         98         99         00        01       02        03        04       05       06 07E* 08F*
Sources: A.M. Best (historical and forecasts)                                                *Includes both liability and property damage.
                Commercial Multi-Peril Combined
                   (Liability vs. Non-Liability Portion)


                                          125.0
130                                                                                                              CMP-Liability




                                                        122.4
                                                                                                                 CMP-Non-Liability




                                                                           121.0
                     119.8

125
        119.0




                                                                        117.0
                   116.8




                                                                                   116.2

                                                                                             116.1
                                             115.3


                                                                115.0
                                                                115.0
120
                                  113.6


                                                     113.1
115
                             108.5




                                                                                                                           105.5
                                                                                                       104.9
110




                                                                                                                 101.9
           100.7




105
                                                     CMP- has




                                                                                                                                            98.0
                                                                                                          97.7
                                                                                      97.3
100                                               improved recently




                                                                                                                    93.8



                                                                                                                                     93.5
 95



                                                                                                89.0
 90             Liab. Combined 1995 to 2004 = 113.8




                                                                                                                              83.6
 85
                        Non-Liab. Combined = 105.2
 80
         95        96         97           98         99        00      01          02        03        04        05        06 07E* 08F*
Sources: A.M. Best (historical and forecasts)                                                 *Includes both liability and property damage.
  WORKERS
COMPENSATION
 OPERATING
ENVIRONMENT
                     Workers Comp Combined Ratios,
                              1994-2008F*
                      Workers Comp Calendar Year vs. Ultimate Accident Year –
                                        Private Carriers
Percent




                                                               142

                                                                           136
                                                   133
140




                                                                                  123
130




                                                                                 122
                                       119




                                                                     118
120
                                                         115




                                                                                          111

                                                                                          110
                                             107




                                                                                                                                                 101.5
                                                                                                     107
             106




                                                                                        105




                                                                                                                103
110
           101


          101


          101




                                                                                                                                     99.0
          100
         97
         97




                                                                                                96
100




                                                                                                                           93


                                                                                                                                            92
                                                                                                           88
 90




                                                                                                                      85

                                                                                                                                84
 80
          94       95       96       97        98          99         00          01     02   03       04        05        06p       07E 08F

p Preliminary AY figure.                                 Calendar Year                 Accident Year
Accident Year data is evaluated as of 12/31/2007 and developed to ultimate
Source: Calendar Years 1994-2006, A.M. Best Aggregates & Averages; Calendar Year 2007p and Accident Years 1994-2007pbased on NCCI
Annual Statement Analysis.
Includes dividends to policyholders        *2008 figure from A.M. Best.
               WC Medical Severity Rising Far
                 Faster than Medical CPI
 16%                                                           WC medical severity rose
                                                   13.6%      more than twice as fast as the
 14%                                                          medical CPI (8.3% vs. 4.0%)
                                                               from 1995 through 2007p
 12%                                10.6%
                     10.1%
 10%                                                                       9.2%
                             8.3%                                                   8.6%
              7.4%                          7.3%           7.6% 7.2%
  8%
                                                                    6.2%                   6.0%




                                                                                       1.6 pts
  6% 5.1%

  4%
       4.5%                                        4.6% 4.7%
                                            4.1%               4.0% 4.4% 4.2% 4.0% 4.4%
  2%
              3.5%        3.2% 3.5%
                     2.8%                     Change in Medical CPI
  0%
                                              Change Med Cost per Lost Time Claim
        1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007p
Sources: NCCI; Med CPI from Economy.com; WC med severity from NCCI based on NCCI states.
                    Med Costs Share of Total
                   Costs is Increasing Steadily
                                                                          2007p

                                        1997                    Indemnity
                                                                   41%
                                                                                  Medical
          1987                                                                     59%
                               Indemnity        Medical
                                  53%            47%

                   Medical
  Indemnity         46%
    54%




Source: NCCI (based on states where NCCI provides ratemaking services).
  PREMIUM
  GROWTH
At a Virtual Standstill
     in 2007/08
              Strength of Recent Hard Markets
                     by NWP Growth*
                     1975-78              1984-87                           2001-04
 25%

                                                     Post-Katrina period
 20%
                                                      resembles 1993-97
                                                        (post-Andrew)
 15%


 10%


  5%


  0%


 -5%                                     2007: -0.6% premium growth
                                         was the first decline since 1943
-10%




        2007F
        2008F
         1970
         1971
         1972
         1973
         1974
         1975
         1976
         1977
         1978
         1979
         1980
         1981
         1982
         1983
         1984
         1985
         1986
         1987
         1988
         1989
         1990
         1991
         1992
         1993
         1994
         1995
         1996
         1997
         1998
         1999
         2000
         2001
         2002
         2003
         2004
         2005
         2006
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
                 Personal/Commercial Lines &
             Reinsurance NPW Growth, 2006-2008F

30%                   Net written premium                        28.1%
25%
                    growth is expected to be
                     slower for commercial
20%                 insurers and reinsurers
15%
10%
  5%       2.0%-0.1%1.4%                   3.5%
  0%
 -5%                                              -1.5%-2.3%
-10%                                                                      -5.0%
              2006     2007E       2008F                             -8.5%
-15%
                 Personal                    Commercial           Reinsurance
Sources: A.M. Best Review & Preview (historical and forecast).
WEAK PRICING
  Under Pressure in
 2007/08, Especially
 Commercial Lines
                        Average Expenditures on
                            Auto Insurance

$950          Countrywide auto
           insurance expenditures
$900       are expected to fall 0.5%




                                                                                              $851
                                                                                       $847



                                                                                                     $847
                                                                                $838
                                                                         $823
$850        in 2007, the first drop




                                                                  $780
$800
                  since 1999



                                                           $724
                               $705

                                      $703

$750
                        $691




                                                    $690
                                             $685
                 $668




                                                                       Lower underlying
          $651




$700
                                                                     frequency and modest
$650                                                               severity are keeping auto
                                                                    insurance costs in check
$600
          94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute
                      Average Expenditures on
                      Homeowners Insurance**
                Countrywide home insurance
 $900          expenditures rose an estimated                  $868
 $850                    4% in 2006                       $835
 $800                                                  $787
               Homeowners in non-
 $750                                             $729
               CAT zones have seen
 $700                                        $668
              smaller increases than
 $650
 $600
                those in CAT zones      $593
                                    $536
 $550                          $508
                     $481 $488
 $500           $455
           $440
 $450 $418
 $400
       95 96 97 98 99 00 01 02                         03 04 05* 06* 07*
*Insurance Information Institute Estimates/Forecasts
**Excludes cost of flood and earthquake coverage.
Source: NAIC, Insurance Information Institute
            Average Commercial Rate Change,
              All Lines, (1Q:2004 – 4Q:2007)
  0%                        Magnitude of rate decreases diminished
           -0.1%


 -2%                       greatly after Katrina but have grown again




                                                                           -2.7%

                                                                                   -3.0%
                   -3.2%


 -4%




                                                                   -4.6%




                                                                                           -5.3%
 -6%
                           -5.9%

                                   -7.0%


 -8%
-10%                                                       -8.2%
                                           -9.4%




                                                                                                   -9.6%
                                                   -9.7%




                                                                                                           -11.3%
-12%




                                                                                                                    -11.8%



                                                                                                                                           -12.0%
                                                                                                                             3Q07 -13.3%
-14%
                                                                   KRW Effect
-16%
           1Q04

                   2Q04

                           3Q04

                                   4Q04

                                           1Q05

                                                   2Q05

                                                           3Q05

                                                                   4Q05

                                                                           1Q06

                                                                                   2Q06

                                                                                           3Q06

                                                                                                   4Q06

                                                                                                           1Q07

                                                                                                                    2Q07



                                                                                                                                           4Q07
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
               Cumulative Commercial Rate
               Change by Line: 4Q99 – 4Q07




                                     Commercial account pricing
                                    has been trending down for 3+
                                     years and is now on par with
                                    prices in late 2001, early 2002



Source: Council of Insurance Agents & Brokers
RISING EXPENSES
Expense Ratios Will Rise as
 Premium Growth Slows
               Personal vs. Commercial Lines
               Underwriting Expense Ratio*
32%                             31.1%                             Personal     Commercial


30%      29.4%           30.8%           30.0%
                29.9%
                                             29.1%
28%                                                                           27.0% 27.5%
                                                   26.6%      25.6% 26.4%
                                                                        26.3%
                                                                                    27.1%
26%                   25.0%                             25.0%                26.6%
              24.3%                         24.8% 24.5%                 26.1%
                              25.6% 25.6%
      23.4%                                                       24.7%
24%
                                                       24.4% 24.6%

22%           Expenses ratios will likely rise
                as premium growth slows
20%
       96      97      98      99   00      01    02    03   04     05    06   07E   08F

*Ratio of expenses incurred to net premiums written.
Source: A.M. Best; Insurance Information Institute
   CAPACITY/
    SURPLUS
Accumulation of Capital/
Surplus Depresses ROEs
                           U.S. Policyholder Surplus:
                                  1975-2007*
        $550              Capacity as of 12/31/07 was
                        $517.9B, 6.5% above year-end
        $500
                       2006, 81% above its 2002 trough
        $450             and 55% above its 1999 peak.
        $400

        $350
                     The premium-to-surplus
$ Billions




        $300
                      fell to $0.85:$1 at year-
        $250
                      end 2007, approaching
                          its record low of
        $200
                          $0.84:$1 in 1998                                      “Surplus” is a measure of
        $150                                                                    underwriting capacity. It is
                                                                                analogous to “Owners
        $100
                                                                                Equity” or “Net Worth” in
             $50                                                                non-insurance organizations
              $0
                   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


Source: A.M. Best, ISO, Insurance Information Institute.                           *As of December 31, 2007
                               P/C Insurer Share Repurchases,
                             1987- Through Q4 2007 ($ Millions)
                       Reasons Behind Capital Build-                                                 2007 share buybacks shattered
                         Up & Repurchase Surge                                                         the 2006 record, up 214%
$25,000                 •Strong underwriting results
                                                                                                                                                                                           $22,322.6
                       •Moderate catastrophe losses
$20,000                   •Reasonable investment                                                    2007 repurchases to
                               performance
                                                                                                  date equate to 3.9% of
                       •Lack of strategic alternatives
$15,000                (M&A, large-scale expansion)                                                industry surplus, the
                          Returning capital owners                                                   highest in 20 years
                         (shareholders) is one of the




                                                                                                                                                                                                     $7,094.1
$10,000                     few options available




                                                                                                                          $5,266.0




                                                                                                                                                                               $5,242.3
                                                                                                               $4,586.5
                                                                                                    $4,497.5




                                                                                                                                                                                          $4,370.0
                                                                                                                                     $4,297.3
                                                                                                                                                $2,764.2
                                                                                                $2,385.6




                                                                                                                                                           $1,539.9
 $5,000
                                          $952.4




                                                                                       $769.2




                                                                                                                                                                      $763.7
                        $646.9




                                                                              $658.8
              $564.0




                                                            $566.8
                                                   $418.1
                                 $311.0




                                                                     $310.1




       $0
              87
                        88
                                 89
                                          90
                                                   91
                                                            92
                                                                     93
                                                                              94
                                                                                       95
                                                                                                96
                                                                                                       97
                                                                                                               98
                                                                                                                          99
                                                                                                                                     00
                                                                                                                                                01
                                                                                                                                                           02
                                                                                                                                                                      03
                                                                                                                                                                               04
                                                                                                                                                                                          05
                                                                                                                                                                                                     06
                                                                                                                                                                                                                07
Sources: Credit Suisse, Company Reports; Insurance Information Inst.
 MERGER &
ACQUISITION
  Catalysts for P/C
Consolidation Growing
        in 2008
                                                 P/C Insurance-Related M&A
                                                     Activity, 1988-2006
                                                                   Transaction Values                                                Number of Transactions

                              $60,000         M&A activity                                                                  $55,825                          No model for                                       140
                                            began to accelerate                                                                                                successful




                                                                                                                                                  $40,032
                                                                                                                                                                                                                120
 Transaction Value ($ Mill)




                              $50,000       during the second




                                                                                                                                                                                                                      Number of Transactions
                                                                                                                                                             consolidation




                                                                                                                                                                                                      $35,221
                                               half of 2007                                                                                                  has emerged




                                                                                                                           $30,873
                                                                                                                                                                                                                100
                              $40,000
                                                                                                                                                                                                                80




                                                                                                                                                                            $20,353
                                                                                                                                        $19,118
                              $30,000
                                                                                                                                                                                                                60
                                                                                                        $11,534




                                                                                                                                                                                             $9,264
                              $20,000
                                                                                                                  $8,059

                                                                                                                                                                                                                40
                                                                                               $5,100
                                                                    $5,137
                                        $5,638
                                                 $3,450
                                                          $2,780


                                                                             $2,435




                                                                                                                                                            $1,249
                                                                                      $1,882




                              $10,000                                                                                                                                                                           20



                                                                                                                                                                     $486


                                                                                                                                                                                      $425
                                  $0                                                                                                                                                                            0
                                        88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Conning Research & Consulting.
                       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
Source: Insurance Information Institute.
INVESTMENT
 OVERVIEW
 More Pain,
 Little Gain
                    Property/Casualty Insurance
                     Industry Investment Gain1
                                                      $ Billions
                                                                                                            $63.6
                                        $57.9                                               $59.4
  $60                                               $56.9                                           $55.7
                                $52.3       $51.9
                        $47.2                                                       $48.9
  $50                                                       $44.4           $45.3
                $42.8
  $40 $35.4                                                         $36.0

  $30
                   Investment rose in 2007 but are just
  $20
                    9.8% higher than what they were
  $10                nearly a decade earlier in 1998
    $0
       94

              95

                    96

                           97

                                   98

                                           99

                                                00

                                                       01

                                                               02

                                                                       03

                                                                               04



                                                                                               06
                                                                                        *



                                                                                                       **
                                                                                      05



                                                                                                     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.
           P/C Investment Income as a % of Invested
              Assets Follows 10-Year US T-Note
                         P-C Inv Income/Inv Assets             10-Year Treasury Note
9%
                                                                    Investment yield
8%                                                                 historically tracks
7%                                                                 10-year Treasury
                                                                   note quite closely
6%

5%

4%

3%

2%
     90
          91
               92

                    93
                          94
                               95
                                    96
                                         97

                                              98
                                                    99
                                                         00
                                                              01
                                                                    02
                                                                         03
                                                                              04
                                                                                   05
                                                                                        06
                                                                                             07
                                                                                                   08*
 *As of January 2008 month-end.
 Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.
CATASTROPHIC
    LOSS
What Will 2008 Bring?
   Most of US Population & Property
      Has Major CAT Exposure




   Is
Anyplace
 Safe?
              U.S. Insured Catastrophe Losses*
                                              $ Billions              $100 Billion




                                                                                                  $100.0
$120                                                                  CAT year is
               2006/07 were welcome                                   coming soon
$100        respites. 2005 was by far the
             worst year ever for insured




                                                                               $61.9
  $80
            catastrophe losses in the US,
  $60       but the worst has yet to come.




                 $27.5
                 $26.5
                $22.9




  $40
              $16.9




             $12.9
            $10.1




                                                                                        $9.2
            $8.3




            $8.3
           $7.5




           $7.4




                                                                                        $6.7
           $5.9
           $5.5
          $4.7




          $4.6
  $20




                                                                                       $3.4
          $2.7




          $2.6


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

           20??
          08:Q1
*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
                          Inflation-Adjusted U.S. Insured
                       Catastrophe Losses By Cause of Loss,
                                                           1987-2006¹
               Fire, $6.6 , 2.2%        Civil Disorders, $1.1
                                               , 0.4%           Water Damage, $0.4
          Wind/Hail/Flood,                                            , 0.1%
            $9.3 , 3.1%                                               Utility Disruption,
 Earthquakes, $19.1 ,                                                     $0.2 , 0.1%
        6.4%
                                                                               Tornadoes, $77.3 ,
        Winter Storms,                                                              26.0%
         $23.1 , 7.8%
                                                                                   Insured disaster losses
                                                                                 totaled $297.3 billion from
                                                                                1987-2006 (in 2006 dollars).
    Terrorism, $22.3 ,                                                             Wildfires accounted for
          7.5%                                                                  approximately $6.6 billion of
                                                   All Tropical                   these—2.2% of the total.
                                               Cyclones, $137.7 ,
                                                      46.3%
   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.
Source: Insurance Services Office (ISO)..
                Global Insured Catastrophe Losses
                        1970-2007 ($ 2007)
                                                   $ Billions

                                                   Impact of Hurricane




                                                                                                             $113.9
$120                                                  Katrina on 2005
$100
                                                    losses was dramatic
 $80




                          $52.8
 $60




                       $43.1
                       $42.5




                      $41.8
                    $34.4




                                                                                                                          $27.6
                  $27.9




                 $25.6
 $40




                $24.9
                $24.4
                $23.7




               $21.6
              $18.4


              $18.0




              $16.7



                                                                                                                      $16.9
             $15.4




             $15.0
            $12.4
            $11.6
            $11.3




            $11.2
           $10.3
           $9.1




           $8.9




 $20
          $7.0



          $6.8
          $6.4
         $5.8



         $5.6
         $5.4




         $5.6
         $5.0


         $5.0




         $4.2
        $2.4




  $0
        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



Source: Swiss Re Sigma No.1/08, Natural catastrophes and man-made disasters in 2007
The 2008 Hurricane
     Season:
 Preview to Disaster?
                    Outlook for 2008 Hurricane
                 Season: 25% Worse Than Average
                                                            Average*              2005        2008F
 Named Storms                                                   9.6               28           13
 Named Storm Days                                               49.1             115.5         60
 Hurricanes                                                     5.9               14            7
 Hurricane Days                                                 24.5             47.5          30
 Intense 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.
REINSURANCE
  MARKETS
Reinsurance Prices are
Falling in Non-Coastal
Zones, Casualty Lines
                   Share of Losses Paid by
                   Reinsurers, by Disaster*
70%       Reinsurance is playing
               an increasingly                    60%
60%
           important role in the
50%          financing of mega-                                                         45%
          CATs; Reins. Costs are
40%             skyrocketing
            30%
30%                      25%
                                                                     20%
20%

10%

0%
         Hurricane Hugo Hurricane Andrew          Sept. 11 Terror 2004 Hurricane      2005 Hurricane
               (1989)              (1992)          Attack (2001)      Losses               Losses
*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.
                                                       US Reinsurer Net Income
                                                        & ROE, 1985-2007*
                                                                  Reinsurer profitability
                        $12                                      rebounded post-Katrina                                                                                                           20%




                                                                                                                                                                                  $9.68
                                                                    but is now falling




                                                                                                                                                                                          $7.96
                        $10
                                                                                                                                                                                                  15%
                        $8




                                                                                                                     $5.43
  Net Income ($ Bill)




                                                                                                                                                                                                  10%




                                                                                                             $4.53
                        $6


                                                                                                     $3.71




                                                                                                                                                                  $3.41
                                                                                                                                                          $3.17
                                                         $1.95




                                                                                                                                                                          $2.51




                                                                                                                                                                                                        ROE
                                                                                   $1.79
                                                                  $2.03


                                                                                   $2.52




                                                                                                                                     $1.99
                                                        $1.94




                        $4                                                                   $1.95                                                                                                5%




                                                                                                                             $1.47
                                               $1.38




                                                                 $1.87




                                                                                                                                                  $1.31
                                       $1.22




                                                                           $1.17




                        $2
                               $0.12




                                                                                                                                                                                                  0%
                        $0
                                                            Net Income                   ROE                                                                                                      -5%
                        ($2)
                        ($4)                                                                                                           ($2.98)                                                    -10%




                                                                                                                                                                                          07*
                               85
                                       86
                                               87
                                                       88
                                                            89
                                                                 90
                                                                      91
                                                                           92
                                                                                   93
                                                                                        94
                                                                                             95
                                                                                                     96




                                                                                                                                     00
                                                                                                                                             01
                                                                                                                                                  02
                                                                                                                                                          03
                                                                                                                                                                  04
                                                                                                                                                                          05
                                                                                                                                                                                  06
                                                                                                             97
                                                                                                                     98
                                                                                                                             99




Source: Reinsurance Association of America. *2007 ROE figure is III estimate based return on average 2007 surplus.
 Shifting Legal
Liability & Tort
 Environment
  Is the Tort Pendulum
Swinging Against Insurers?
Bad Year for Tort Kingpins*
       (Continued)




                                                     Source: San Diego Union Tribune, 9/19/07
        ―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




                                                                           Source: Wall Street Journal, 3/15/07
  •Won billions in tobacco, asbestos and Katrina
  litigation
  •Pleaded guilty for attempting to offer a judge
  $40,000 bribe to resolve attorney fee allocation
  from Katrina litigation in his firm’s favor. His
  son/othersguilty on related charges
  •Could get 5 years in prison, $250,000 fine
                      Personal, Commercial &
                    Self (Un) Insured Tort Costs*
            $250   Commercial Lines           Personal Lines             Self (Un)Insured
                                                                                         Total = $216.7 Billion


            $200                                                                             $45.5
                                                                Total = $159.6 Billion
 Billions




            $150                       Total = $121.0 Billion             $30.0
                                                                                             $85.6
                                               $20.4
            $100                                                          $70.9
                   Total = $39.3 Billion
                                               $51.0
            $50                                                                              $85.6
                        $5.2                                              $58.7
                       $17.1                   $49.6
                       $17.0
             $0
                       1980                    1990                       2000                2006
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.
                              Tort System Costs, 1950-2009E
                                   After a period of
                     $300          rapid escalation,                                                     2.5%
                                                               2.24%                    $277
                                  tort system costs as            2.14%   2.24%     $265
                                    a % of GDP are       1.98%             $246.0
                                                                               $247.0
                     $250




                                                                                                                Tort Costs as % of GDP
                                                                       1.82%            1.83%
                                                                                    1.83%                2.0%
                                      now falling
 Tort System Costs




                                                     1.53%
                                                                               1.87%
                     $200                                             $179.2
                                            1.34%                                                        1.5%
                                                1.22%            $158.5
                     $150               1.11%                $130.2
                                    1.03%
                                0.82%                                                                    1.0%
                     $100   0.62%                       $83.7

                                                       $42.7                                             0.5%
                      $50
                                                   $20.0
                            $1.8 $3.4 $5.4 $7.9$13.9
                       $0                                                                                0.0%
                             50    55   60   65   70   75   80   85     90   95   00   03   06 08E 09E
                                              Tort Sytem Costs        Tort Costs as % of GDP
Source: Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs as % of GDP
                         The Nation’s Judicial
                           Hellholes (2007)
   Watch List                                     Some improvement
Madison County, IL
                                                     in ―Judicial
St. Clair County, IL
                                                  Hellholes‖ in 2007                        NEW JERSEY
                                                                                            Atlantic County
   Northern New                                                                              (Atlantic City)
       Mexico                   NEVADA             ILLINOIS
    Hillsborough              Clark County        Cook County               West Virginia
     County, FL               (Las Vegas)

      Delaware
     California
 Dishonorable
  Mentions
                                      TEXAS
District of Columbia                Rio Grande                                              South Florida
MO Supreme Court                    Valley and
                                    Gulf Coast
  MI Legislature
GA Supreme Court
     Oklahoma
Source: American Tort Reform Association; Insurance Information Institute
                 Business Leaders Ranking of
                  Liability Systems for 2007
Best States      New in 2007                           Worst States       Newly
1. Delaware      ME, NH, TN,                           41. Arkansas      Notorious
2. Minnesota       UT, WI                              42. Hawaii
                                                                            AK
3. Nebraska       Drop-Offs                            43. Alaska
4. Iowa                                                44. Texas          Rising
               ND, VA, SD, WY,                                            Above
5. Maine              ID                               45. California
6. New Hampshire                                       46. Illinois         FL
7. Tennessee                                           47. Alabama
8. Indiana                                             48. Louisiana
9. Utah       Midwest/West has                         49. Mississippi
10. Wisconsin  mix of good and                         50. West Virginia
                  bad states

Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.
                       Sum of Top 10 Jury Awards,
                               2004-2007
                                                      $ Millions
   $6,000                                                                   Total of Top 10
                     $5,158.8
   $5,000                                                                   awards in 2007
                                                                            was 25% lower
   $4,000
                                                                            than in 2006
                                             $2,953.7
   $3,000
   $2,000
                                                                    $815.0                 $615.0
   $1,000
          $0
                         2004                    2005                   2006                   2007
Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007 and 2008.
REGULATORY &
 LEGISLATIVE
ENVIRONMENT
 Isolated Improvements,
   Mounting Zealoutry
                     Rating of Auto/Home Insurance
                  Regulatory & Operating Environment*
                                             Most states (25) get a ―B‖, but 7 got A’s, 10 got
                                             C’s (including DC), 5 earned D’s and 4 got F’s
             AK
             AL

                            WA                                                                                                                                     ME

                                               MT          ND                                                                                            VT

                                                                                MN                                                                             NH

                       OR                                                                                                                                      MA
                                                                                                                                                    NY
                                                                                                WI                                                            CT
                                                            SD
        =A                        ID                                                                                MI                                              RI
        =B                                      WY                                                                                        PA             NJ

        =C                                                                           IA
                                                                                                                              OH                DC
                                                                NE                                                                                            DE
        =D                   NV                                                                      IL        IN                                             MD
                                                                                                                                    WV
        =F                              UT                                                                                                     VA
                                                      CO
                                                                 KS                       MO                             KY
                       CA                                                                                                                      NC
                                                                                                                    TN

                                                                          OK                                                             SC
                                   AZ            NM                                       AR

                  HI
                                                                            2008.
                                  Source: James Madison Institute, FebruaryAL
                                                                                                          MS                       GA


                                                                                           LA
                                                                     TX

                                                                                                                                          FL



*Criteria considered were auto/home residual mkts.,
auto/home mkt. concentration, loss ratio stability,
reg. env.,form regulation, credit scores, territorial
restrictions                                                                   Source: James Madison Institute, Feb. 2008
                              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
      But state taking punitive steps (SB 2860)
•   Credit: Perennially under attack, but states shift each year
•   Massachusetts Auto: Reforms have led to more competition, lower rates
•   Optional Federal Chartering: Recommended in Treasury plan; Still divisive issue
•   Tax Issue: Treatment of locales like Bermuda; Effort to ―level the playing field‖
•   National CAT Plan: Hearings in February and in 2007, but no current catalyst
•   Flood Reform: Likely to happen; MS Rep. Gene Taylor still wants wind cover
•   McCarran-Ferguson: Trent Lott’s gone, some may still push for scaling back
    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)
• Excess Profits Laws: Laws seek to cap industry profits
                                                                                Source: III
PRESIDENTIAL
POLITICS & P/C
PROFITABILITY
                  Political Quiz
• Does the P/C insurance industry perform
  better (as measured by ROE) under
  Republican or Democratic administrations?

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

• Under which President did the industry realize
  its lowest ROE (average over 4 years)?
                   P/C Insurance Industry ROE by
                Presidential Administration,1950-2008*
          Carter                                                                      16.43%
      Reagan II                                                                  15.10%
   G.W. Bush II                                            10.45%
          Nixon                                       8.93%
       Clinton I                                     8.65%
                                                               OVERALL RECORD:
   G.H.W. Bush                                      8.35%           1950-2008*
       Clinton II                                 7.98%       Republicans 8.92%
       Reagan I                                  7.68%
     Nixon/Ford                               6.98%           Democrats 8.00%
        Truman                                6.97%
   Eisenhower I                          5.43%             Party of President has
   Eisenhower II                       5.03%                marginal bearing on
    G.W. Bush I                       4.83%                  profitability of P/C
        Johnson                     4.43%                    insurance industry
Kennedy/Johnson                  3.55%

                0%     2%       4%      6%       8%      10%     12%      14%     16%     18%
 *ROE for 2007/8 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52.
 Source: Insurance Information Institute
                         P/C Insurance Industry ROE by
                          Presidential Party Affiliation,
                                  1950–2008E
                     BLUE = Democratic President            RED = Republican President
25%
       Truman




                Eisenhower   Kennedy/   Nixon/Ford Carter   Reagan/Bush    Clinton       Bush
                              Johnson
20%


15%


10%


5%


0%


-5%




      08E
       50
       52
       54
       56
       58
       60
       62
       64
       66
       68
       70
       72
       74
       76
       78
       80
       82
       84
       86
       88
       90
       92
       94
       96
       98
       00
       02
       04
       06
Source: Insurance Information Institute
      Insurance Information
         Institute On-Line




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