Liability Trends, Issues and Jury Verdicts Liability Excess by xiw67167

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									         Liability Trends, Issues
            and Jury Verdicts:
     Liability & Excess Casualty
   Markets in the Post-Katrina World


                Insurance Information Institute
                       October 20, 2006

 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist
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
•   P/C Financial Overview & Outlook: Post-Katrina Perspective
•   Profitability
•   Underwriting Performance
•   Mega-CATS: Post-Katrina Casualty Spillover?
•   TRIA Extension
•   Investments
•   Capacity/Capital: New & Old
•   Pricing Trends
•   Financial Strength & Ratings
•   Legal Liability & Tort System
       Overview of Tort System Costs & Jury Awards & Trends
       By-Line Issues
       The High Cost of Litigation & Class Actions
       Excess Casualty Capacity & Pricing
• Q&A
                             POP QUIZ
•   P/C insurer profits in 2006
     a)   $25-$35 billion
     b)   $35-$45 billion
     c)   $45-$55 billion
     d)   $55-$60+ billion


•   Insurers will generate their lowest combined
    ratio since:
     a)   Since the Woodrow Wilson was president
     b)   Since Dwight D. Eisenhower was president
     c)   Since Jimmy Carter was president
     d)   Since Ronald Reagan was president
 P/C PROFIT
 OVERVIEW
 Awash in Profits,
Starved for Growth
                     P/C Net Income After Taxes
                      1991-2006E ($ Millions)*
                2001 ROE = -1.2%
 $70,000        2002 ROE = 2.2%
                                                       2006 Net Income
                2003 ROE = 8.9%
                                                         may shatter
 $60,000        2004 ROE = 9.4%
                                                       previous records                          $56,668

                2005 ROE= 10.5%
 $50,000
                2006 ROAS1,2 = 13.0%                                                        $43,013
 $40,000                                      $36,819                                   $38,501
                                                   $30,773                        $30,029
 $30,000                                $24,404
                                   $20,598              $21,865
                       $19,316                                $20,559
 $20,000 $14,178
                              $10,870
 $10,000            $5,840
                                                                              $3,046
        $0

 -$10,000                                                              -$6,970
               91

                      92

                             93

                                  94

                                        95

                                             96

                                                  97

                                                       98

                                                             99

                                                                  00

                                                                         01

                                                                                 02

                                                                                       03

                                                                                            04

                                                                                                 05

                                                                                                       06F
*ROE figures are GAAP; 1Return on avg. surplus. 2005 ROAS = 9.8% after adj. for one-time special
dividend paid by the investment subsidiary of one company. 2Based on H1 results; Sources: A.M. Best,
ISO, Insurance Information Inst.
              ROE vs. Equity Cost of Capital:
              US P/C Insurance:1991-2006E
18%
                                   The p/c insurance industry
16%                             achieved its cost of capital in 2005
14%




                                                                                                                             +5.9 pts
12%
10%




                                                                                     -9.0 pts
8%




                                                                                                                +1.0 pts
                                                                                                     +0.2 pts
                                                                        -13.2 pts
6%
4%
                  US P/C insurers missed their
2%
                  cost of capital by an average
0%
                  6.7 points from 1991 to 2002,
-2%
                      but on target 2003-05
-4%
       91    92    93    94    95    96   97    98       99   00   01               02          03   04         05         06E
*Based on 2006:H1 ROAS of 13.0%                                    ROE                          Cost of Capital
Source: The Geneva Association, Ins. Information Inst.
                        ROE: P/C vs. All Industries
                             1987–2006:H1
 20%                                                                             Insurers will outperform only
                         2004/5 ROEs excl. hurricanes                             if CAT losses are “normal”

 15%


 10%
                                                                            Sept. 11
  5%

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

          US P/C Insurers                   All US Industries               P/C excl. Hurricanes
*2006 P/C insurer ROE based on annualized H1 results.
Source: Insurance Information Institute; Fortune
  WALL STREET:
   MAINTAINING THE
 CONFIDENCE OF WALL
STREET IS CRITICAL FOR
    MANY INSURERS
                     Change in YTD Stock Performance by
                    Sector Pre- & Post-Katrina/Rita/Wilma
                                                                        P/C & reinsurer stocks hurt but now fully
     P/C          Reinsurers                   Brokers                  recovered. Brokers rose on expectation of
                                                                        tighter conditions and demand for broker




                                                                                                                                                                          13.3%
15%                                                                         services; closure of Spitzer issues.
                                                           Katrina:




                                                                                                                                                                   9.3%
                                                                                                                                                            8.7%
                                                           Aug. 29
10%




                                                                                                                                                         7.0%
                                                                                                                                                5.0%
                                                                                                                                                4.9%
                                                                                                              4.8%
                                      4.5%
           4.2%

                        4.0%




                                                                                                            3.9%
                                                    3.8%




                                                                                                    3.6%




                                                                                                                      3.4%
                                                                                            3.3%




                                                                                                                                3.2%

                                                                                                                                       2.9%
                                                                                                                                       2.8%
                                                                                                   2.7%




                                                                                                                     2.6%
                                                                                 2.5%
                                                                 2.2%




                                                                                                                              2.2%
                                                                                          2.1%
 5%                                                                             1.9%


 0%
                                                                        -0.6%




                                                                                                                                                                     -0.5%
                                                                                           Rita comes                Wilma landfall




                                                                                                                                                          -1.3%
                                                                                         ashore Sept. 24                Oct. 24
                                            -2.7%
                              -3.5%
                -4.0%




-5%
                                                         -4.1%




                                                                                 -4.5%
                                        -4.8%



                                                                   -5.3%




                                                                                                                               -5.3%
             -5.5%




                                                      -5.5%




                                                                                                                                        -5.6%

                                                                                                                                                 -5.6%
                                                                                           -5.7%

                                                                                                    -5.8%

                                                                                                             -6.0%

                                                                                                                      -6.2%
                          -6.4%




-10%
            5- 12- 19- 26- 2-   9- 16- 23- 30- 7- 14- 21- 28- 04- 31-
           Aug Aug Aug Aug Sep Sep Sep Sep Sep Oct Oct Oct Oct Nov Dec
Source: SNL Securities; Insurance Information Institute
                P/C Insurance Stocks: Slow
                Start, Strong Finish in 2006
               Total YTD Returns Through September 30, 2006

P/C insurer stocks now                                               7.01%            S&P 500

 up in 2006. Investors                                                        8.91%   Life/Health
  less worried about
                                                                                9.09% Reinsurers
  potential hurricane
         losses.                                                    6.84%             P/C
                                                     2.69%
                                                                                      All Insurers
                                               1.15%       Broker stocks
                                                                                      Multiline
                                                           hurt by weak
              -4.73%
                                                             earnings                 Brokers


-10.0%             -5.0%              0.0%               5.0%                 10.0%


 Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
UNDERWRITING
Surprisingly Strong in
2005, Stage is Set for a
     Good 2006!
                P/C Industry Combined Ratio
                             2005 figure reflects heavy
120                          use of reinsurance which                                2006 is could
           115.8            lowered net losses, but still                          produce the best
                            a substantial deterioration                              underwriting
                                from first half 2005                                result since the
110                                                                                 94.9 combined
                         107.4
                                                                                     ratio in 1955

                                        100.1                                100.7
100                                                    98.3

                                                                                                94
                                                                     92.7             92.0

  90
              01             02            03            04          05H1     05      06H1    06F III
                                                                                             Forecast*
Sources: A.M. Best; ISO, III. *III forecasts/estimates for 2006 full year.
                        Commercial Lines Combined
                           Ratio, 1993-2006E*
                                                                                                           Outside CAT-
                                                                                                           affected lines,




                                                                                   122.3
                                                                                                            commercial
125                                                                                                     insurance is doing
                                                                                                      fairly well. Caution is
120                                                                                                         required in
                    112.5




                                                               112.3
                                                                                                       underwriting long-




                                                                           111.1
          110.3



                             110.2




                                                                                           110.2
                                                                                                      tail commercial lines.


                                                       109.7
115
                                      107.6




                                                                                                                   105.1
110
                                               103.9




                                                                                                           102.5
                                                                                                   102.0
105

100




                                                                                                                           96
                     2006 results will benefit from
 95
                  relatively disciplined underwriting
 90                       and low CAT losses
 85
          93       94       95        96       97      98      99          00      01      02      03      04      05      06F
Source: A.M. Best; Insurance Information Institute                     .
                          Underwriting Gain (Loss)
                               1975-2006F*
               $30    Insurers sustained a $5.9 billion underwriting loss in
               $25     2005. First half 2006 underwriting gain was $15.1B
               $20
                       implying a record gain of about $30B for full-year
               $15
               $10
                $5
                $0
 $ Billions




               ($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
Source: A.M. Best, Insurance Information Institute *2006F of $30.2B is annualized H1 gain of $15.1B
                          A 100 Combined Ratio Isn’t What it
                            Used to Be: 95 is Where It’s At
                    110                                                                           18%
                                                                 Combined Ratio         ROE*

                    105              15.9%                                 15.3%                  16%
                             14.3%
                                 100.6     100.1                                100.7




                                                                                                        Retrun on Equity*
                                                         98.3
   Combined Ratio




                    100                                                                           14%
                          97.5
                                                                                               13.0%
                     95                                                 92.7                      12%
                            Combined ratios                                              92.0
                          today must be below
                     90      95 to generate                                                       10%
                                                                9.4%                10.4%
                           Fortune 500 ROEs 9.4%
                     85                                                                           8%


                     80                                                                           6%
                          1978   1979       2003         2004          2005:H1   2005   2006:H1
* 2006 figure is return on average statutory surplus.
Source: Insurance Information Institute from A.M. Best and ISO data.
                                         Impact of Reserve Changes on
                                               Combined Ratio
                                         PY Reserve Development             Combined Ratio Points
                           $25                        6.5                                                7
                                                                        Reserve adequacy
Reserve Development ($B)




                                                                          is improving                   6




                                                                                                              Combined Ratio Points
                           $20
                                                                          substantially                  5
                           $15           3.5                    3.6                                      4
                                                       $22.7


                           $10                                          2.4                              3
                                                                                1.9
                                                                $13.9
                                                                                                         2
                                              $10.8




                                                                                        1.1
                           $5                                            $9.9


                                                                                 $8.0
                                                                                                0.4       1




                                                                                         $5.0
                                 0.1
                                       $0.4                                                           $2.0
                           $0                                                                             0
                                  2000     2001       2002     2003     2004    2005E   2006E   2007E

Source: A.M. Best, Lehman Brothers for years 2005E-2007F
                  2004 Prior Year Reserve
               Development by Line ($ Millions)
                $6,320                                                                                                                                              Longer-tail casualty
   $7,000                                                                                                                                                           coverages have been
   $6,000                                                                     Reserve                                                                                the source of most
                                                                                                                                                                    reserve problems in
                                     $3,513
   $5,000                                                                  Strengthening
   $4,000
                                                $2,118
                                                                                                                                                                        recent years
   $3,000                                                    $1,729

                                                                            $1,109




                                                                                                                                                                                                                           ($1,686)

                                                                                                                                                                                                                                      ($1,779)
                                                                                                                                                                                                              ($1,156)
                                                                                                                                                                     ($103)
                                                                                        $850




                                                                                                                                                                                     ($617)

                                                                                                                                                                                                ($799)
   $2,000



                                                                                                          $241

                                                                                                                        $148



                                                                                                                                                     ($27)
   $1,000




                                                                                                                                   $27
       $0
  ($1,000)
  ($2,000)                                                                                                                        Reserve Releases
  ($3,000)
                Other Liability




                                                                                        Fidelity/Surety



                                                                                                                        Med Mal

                                                                                                                                   International



                                                                                                                                                                    Special Liab.
                                                                                                                                                   Finl. Guaranty
                                                                            Comml. MP




                                                                                                                                                                                              Special Prop.
                                                                                                          Comml. Auto
                                                             Prod. Liab.
                                  Reinsurance




                                                                                                                                                                                    Other




                                                                                                                                                                                                                                      Auto PD
                                                                                                                                                                                                                           PP Auto
                                                Work. Comp




                                                                                                                                                                                                              Homeowners
Source: A.M. Best, Lehman Brothers.
 REINSURANCE
   MARKETS
 Higher Reinsurance Costs
Squeezing Insurers, Pushing
Property CAT Prices Upward
                               Global Number of
                        Catastrophic Events, 1970–2005
                       The number of natural                                          Record 248 man-
250
                          and man-made                                                 made CATs &
                       catastrophes has been                                         record 149 natural
                                                                                        CATs in 2005
200                    increasing on a global
                         scale for 20 years
150



100



  50

                                                            Natural catastrophes                 Man-made disasters
    0
         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
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.
                         Combined Ratio:
                    Reinsurance vs. P/C Industry
                                                                                                     Katrina,




                                                                                                                                     259.0
270                                                                                                 Rita, Wilma
               Reinsurance             All Lines Combined Ratio
250

230
                                                     Sept. 11                                             4 Florida
210
                                                                                                         Hurricanes
190




                                                                                         162.4
170
                                              Hurricane
150                                            Andrew
                  126.5




                                                                                                         125.8



                                                                                                                           123.3
                                    119.2
                115.8




                                                                                            115.8
                                                                        114.3
                                   113.6




                                                                                                                   111.0
       110.5




                                                                                 110.1
       108.8




                                                                       108.0
130
                                  108.5




                                                                                                     107.4
                          106.9



                                  106.7




                                                                                106.5
                                             106.0



                                                               105.9
                          105.0




                                             104.8


                                                      101.9
                                                      100.8

                                                              100.5




                                                                                                                                        100.7
                                                                                                                 100.1

                                                                                                                              98.3
110

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

 Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
                   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.
                          Reinsurance Prices Surged in 2006
                           Following Record CATs in 2005
                         In hurricane-prone                                        US cat reinsurance price index:
                        areas, property CAT                                                   1994 = 100
    40%                   reinsurance prices                                                                      125
                         are up 100-300%+
    30%                                                                                                              25%   100
                                                                                             21%
    20%                                                                           16%
                                                                                                                           75
                                                                                                   11%
    10%
                                                                          2%                                               50
       0%
                                                                 -4%                                     -4%
                            -5%                                                                                -6%         25
  -10%                                        -9% -8%
                                    -11%

  -20%                                                                                                                     0
                    94       95       96       97       98       99       '00 '01 '02 '03 '04 05E 06F

                                    rate changes [left]                                      index level [right]
Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for 2006.
                    A Look Ahead to Reinsurance
                         Markets for 2007
• Despite lack of major hurricane in 2006, reinsurance
  pricing strong in US for 2007
       New capital entry not sufficient to fully meet demand
       Reinsurance prices flat at best outside peak CAT zones
• Retrocessional market still tight
• Softening in European p/c reinsurance markets
• Softening in US casualty reinsurance markets
       More pronounced if property cat reinsurers shift emphasis
• Capital market role expanding
       Hedge funds, private equity
       Securitization: Insurance Linked Securities
       Some concern over staying power, (lack of) regulation
       Complement or competitor to traditional reinsurance?
Sources: Insurance Information Institute.
                    Summary of Nonadmitted &
                 Reinsurance Reform Act (HR 5637)
 • NRRA Passed by House 9/28/06 by unanimous 417-0
   vote; Senate prospects uncertain.
 • Gives exclusive regulatory authority to insured’s home state for
   placement of nonadmitted insurance
 • Establish uniform system for collection/allocation of premium
   tax obligations related to nonadmitted insurance
 • Estabishes uniforms standards for surplus lines eligibility
 • Pre-empts state diligent search requirements for sophisticated
   commercial buyers
 • Makes ceding insurer’s state of domicile the single point of
   regulation with respect to credit for resinsurance
 • Prevents states from applying laws in extra-territorial manner
 • Creates uniformity in reinsurer solvency regulation based on
   NAIC accreditation requirements
Source: LeBoeuf, Lamb, Greene & MacRae LLP, Oct. 4, 2006.
  UNDERWRITING
AFFECTS FINANCIAL
    STRENGTH

   Is There Cause
    for Concern?
                        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;
                  Historical Ratings Distribution,
                               US P/C Insurers, 2000 vs. 2005
                                                                                                   A++/A+
                          2000                                                     2005           shrinkage
               C/C-           D
                            0.2%     E/F                                                               A++/A+
       C++/C+ 0.6%                           A++/A+
                                    2.3%                                                                9.2%
        1.9%                                 11.5%               Vulnerable*
          B/B-                                                     12.1%
          6.9%




                                                           B++/B+
B++/B+
                                                           26.4%           Ratings agencies increasing
28.3%
                                                                             emphasis on multiple
                                                                          eventsrequire more capital

                                                                                                              A/A-
                                                 A/A-
                                                                                                             52.3%
                                                48.4%
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,
November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings „B‟ and lower.
                 Ratings Agencies Tightening
                   Requirements for CATs
 2006 SRQ CAT Model Reqs.*                          ALSO “A.M. Best will
 •All Property Exposure                             perform additional
 •Auto Physical Damage                              “stress-tested” risk-
                                                    adjusted capital analysis
 •Reinsurance Assumed                               for a second event in
 •Pools & Assessments                               order to determine the
 •All Flood Exposure                                potential financial
 •WC Losses from Quake                              condition of an entity post
                                                    a severe event.”
 •Fire Following estimates PML for
                   Best currently
                                                    IMPLICATION: Some
 •Storm Surge 100-yr. quake& 250-
                     yr.
                         wind
                              to                    insurers may be required
 •Demand Surge determine capital
                      adequacy                      to carry more capital to
 •Secondary Uncertainty                             maintain the same rating.
*SRQ = Supplemental Rating Questionnaire
Source: A.M. Best Review & Preview, January 2006.
COMPETITIVE
 PRESSURE
Non-CAT Pricing
Momentum Slows
              Strength of Recent Hard Markets
                     by NWP Growth*
                     1975-78              1984-87                                    2001-04
 25%
                                                         2006-2010 (post-Katrina)
 20%                                                   period could resemble 1993-97
                                                               (post-Andrew)
 15%


 10%


  5%


  0%


  -5%                                       2005: biggest real drop in
                                            premium since early 1980s
-10%




        2006F
        2007F
        2008F
        2009F
        2010F
         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
                                                     *2006-10 figures are III forecasts/estimates. 2005 growth of
                                                     0.4% equates to 1.8% after adjustment for a special one-time
Note: Shaded areas denote hard market periods.       transaction between one company and its foreign parent. 2006
Source: A.M. Best, Insurance Information Institute   figure of 2.9% is based on 2006:H1 data.
               Property Catastrophe Price Index*
                                                        1994 - 2006
       120                          US CAT prices are
                                  continue to rise faster
                                  than anywhere else in
       100
                                        the world
         80


         60


         40
                               Worldwide
         20                    US
                               European Storm
                               Rest of the World
           0
                  94      95      96      97      98       99      00      01      02      03        04   05   06
*Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B
and insured CAT losses of $57.7B. Includes primary and reinsurance coverage.
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
            Average Commercial Rate Change,
              All Lines, (1Q:2004 – 3Q:2006)
  0%
         -0.1%             Magnitude of rate
 -2%                    decreases has diminished
                       greatly since mid-2005 but
                            is growing again                               -2.7%-3.0%
 -4%             -3.2%
                                                                   -4.6%
 -6%                                                                                -5.3%
                          -5.9%
 -8%                           -7.0%
                                                           -8.2%
-10%                                      -9.4%-9.7%

-12%
           1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
                   Average Commercial Rate
                       Change by Line
                                                  Commercial accounts
                                                trended downward from
                                                 early 2004 to mid-2005
                                                   though that trend
                                                moderated post-Katrina




Source: Council of Insurance Agents & Brokers
                   Average Commercial Rate
                    Change by Account Size

                                                Accounts of all sizes
                                                    are renewing
                                                downward and more
                                                quickly than in 06Q2




Source: Council of Insurance Agents & Brokers
    Percent of Commercial Accounts Renewing
      w/Positive Rate Changes, 2nd Qtr. 2006

80%                    Commercial Property           Business Interruption
          71%
70%              63%                        Largest increases for Commercial
60%                                       Property & Business Interruption are
                            48%           in the Southeast, smallest in Midwest
50%
40%                                          35%
                                  32%
30%                                                      28%
                                                   21%                21%
20%
                                                               12%           10%
10%
0%
          Southeast        Southwest Pacific NW Northeast             Midwest
Source: Council of Insurance Agents and Brokers
           Commercial Accounts Rate Changes,
              2nd Qtr. 2005 vs. 2nd Qtr. 2006
                  2Q05       2Q06           9.3%
10%                                                          Only commercial
                                                               property is
  5%
                                                           renewing up in 2006
  0%

                                                                            -2.3%
-5%                                                              -3.6%
             -4.5%
         -6.0%                                        -5.6%
                            -6.9%                             -6.6%
-10%                    -7.3%                                            -8.4%
                                                   -9.1%

-15%                                  -13.3%
        Commercial Workers Commercial General Umbrella Average
          Auto      Comp Property Liability
Source: Council of Insurance Agents and Brokers
           Commercial Accounts Rate Changes,
              2nd Qtr. 2006 vs. 3rd Qtr. 2006
                 2Q06       3Q06 9.3%
10%                                                      Even commercial
 8%                                                       property is now
 6%                                                   renewing down in 2006
 4%
 2%
 0%
-2%                                        -1.4%
-4%                                                                        -2.3%
                                                               -3.6%
-6%      -4.5%
                                                   -5.6%           -5.5%      -5.4%
-8%           -6.5%        -6.8%                       -6.9%
                       -6.9%
       Commercial Workers Commercial General Umbrella Average
         Auto      Comp Property Liability
Source: Council of Insurance Agents and Brokers
          Average Rate Increase/Decrease
                by Industry Class
                        September 2005         August 2006
 10%
               7%                                    Largest increases are
             5%                                      in the energy sector
   5%                                                          4%

                                         1%
                          0%           0%               0%
   0%
                                                   -1%
                                                               -2%
                               -3%
 -5%                                                                          -4%
                                                                                     -5%
                                                                                 -6%
                                                                                              -8%
-10%           Energy     Contracting Public Entity Transport. Habitational    Service Manufacturing
Source: MarketScout.com
  CATASTROPHE
      LOSS
  MANAGEMENT
Insurers Have Done a Fairly Good
   Job at Managing CAT Risk
                          U.S. Insured
                  Catastrophe Losses ($ Billions)*




                                                                                                                                                $100.0
$120                                                            $ Billions                          $100 Billion
                                                                                                    CAT year is
$100              2005 was by far the worst                                                         coming soon
                     year ever for insured




                                                                                                                                 $61.8
  $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
                                                       $8.3




                                                                                    $8.3
          $7.5




                                                              $7.4




                                                                                                                                         $6.2
                                                                                                          $5.9
                                        $5.5




  $20
                         $4.7




                                                                                           $4.6
                  $2.7




                                                                     $2.6

   $0
          89
                  90
                         91
                                92
                                        93
                                               94
                                                       95
                                                              96
                                                                     97
                                                                            98
                                                                                    99
                                                                                           00
                                                                                                  01
                                                                                                          02
                                                                                                                 03
                                                                                                                         04
                                                                                                                                   05
                                                                                                                                         06**
                                                                                                                                                20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. ** As of Sept. 30, 2006.
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
                                    Insured Loss & Claim Count for
                                        Major Storms of 2005*
                                                 Insured Loss       Claims

                              $45
                                      Hurricanes Katrina,                              1,744     2,000
                              $40                                                                1,800
                                     Rita, Wilma & Dennis
  Insured Loss ($ Billions)




                              $35                                                                1,600




                                                                                                         Claims (thousands)
                                     produced a record 3.3                              $40.6
                              $30                                                                1,400
                                         million claims    1,047                                 1,200
                              $25
                                                                                                 1,000
                              $20
                                                                                                 800
                              $15                383                                             600
                              $10                                                                400
                                    104                             $10.3
                               $5                                                                200
                                                 $5.0
                               $0   $1.1                                                         0
                                    Dennis       Rita              Wilma               Katrina
                                             Size of Industry Loss ($ Billions)

*Property and business interruption losses only. Excludes offshore energy & marine losses.
Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.
                 2005 Was a Busy, Destructive, Deadly
                    & Expensive Hurricane Season

                                                                   All 21 names
                                                                were used for the
                                                                first time ever, so
                                                                   Greek letters
                                                                were used for the
                                                                   final storms




                                                     2005 set a new record for the
                                                        number of hurricanes &
                                                    tropical storms at 28, breaking
                                                       the old record set in 1933.
Source: WeatherUnderground.com, January 18, 2006.
                          2006 Hurricane Season:
                       Much Less Active Than Expected
                                                    What a difference a
                                                    year makes! Just 9
                                                      named storms
                                                     through Oct. 20,
                                                     2006 vs. 22 as of
                                                    same date in 2005!




Source: WeatherUnderground.com, October 20, 2006.
    TRIA
  EXTENSION
The Burden Grows, and the
     Clock is Ticking
                        Terrorism Coverage Take-Up
                           Rate Continues to Rise
      Terrorism take-up rate for
      non-WC risk rose steadily                                                               64%
     through 2003, 2004 and 2005                                                        59%
                                                                              54%

                               44% 46% 44% 48% 47%

                     33%
            26%
  24%
                                           TAKE UP RATE FOR WC
                                              COMP TERROR
                                            COVERAGE IS 100%!!

   03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4
Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute
                     Insurance Industry Retention
                        Under TRIA ($ Billions)
                      •Individual company                      Extension
               $35   retentions rise to 17.5%
                      in 2006, 20% in 2007
               $30                                                   $27.5
                       •Above the retention,               $25.0
               $25   federal govt. pays 90% in
                        2006, 85% in 2007
  $ Billions




               $20
                                                  $15.0
               $15                        $12.5
                     $10.0                                    Congress &
               $10
                                                            Administration
               $5                                           want TRIA dead
               $0
                     Year 1           Year 2      Year 3   Year 4    Year 5
                     (2003)           (2004)      (2005)   (2006)    (2007)
Source: Insurance Information Institute
                   Insured Loss Estimates:
             Large CNBR Terrorist Attack ($ Bill)

                                                                       San            Des
Type of Coverage               New York         Washington          Francisco        Moines
Group Life                          $82.0               $22.5            $21.5            $3.4
General Liability                     14.4                  2.9              3.2            0.4
Workers Comp                        483.7               126.7              87.5           31.4
Residential Prop.                     38.7                12.7             22.6             2.6
Commercial Prop.                    158.3                 31.5             35.5             4.1
Auto                                    1.0                 0.6              0.8            0.4
TOTAL                             $778.1               $196.8          $171.2           $42.3

Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April
26, 2006.
                    Insured Loss Estimates:
               Truck Bomb Terrorist Attack ($ Bill)

                                                                       San            Des
Type of Coverage               New York         Washington          Francisco        Moines
Group Life                            $0.3                $0.2             $0.3           $0.1
General Liability                       1.2                 0.4              0.7            0.2
Workers Comp                            3.5                 2.8              3.9            1.5
Residential Prop.                       0.0                 0.0              0.0            0.0
Commercial Prop.                        6.8                 2.1              3.9            1.2
Auto                                    0.0                 0.0              0.0            0.0
TOTAL                               $11.8                 $5.5             $8.8           $3.0

Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April
26, 2006.
               Potential Insured Losses from Terrorist
                   Attack on Major Corporate HQ
                       in Houston* ($Billions)
  Liability,    Life, $0.5            Potential losses in
    $1.0
                                        TX are large


                                       Workers
                                      Comp, $4.6




Property,
  $3.9                          *Break down is based on $10 billion loss estimate.
                                 Range of estimates is $10 - $12 billion.
                                Source: RMS.
                           Surplus Under TRIA/TRIEA
                                 Covered Lines
                                                   (Billions of Dollars)
             $175
                                      $169
                                                                Shrinkage in 2006 (-11%)
             $170                                              surplus is due to elimination
             $165
                                                              of several lines covered under
                                                                  TRIA though 2005 but
                                                                 dropped under the Act’s
$ Billions




             $160
                                                                 extension effective 1/1/06
             $155
                                                                                              $151
             $150

             $145

             $140
                                       2004                                                  2006E
*2006 figure uses 2005 estimated year-end surplus and premiums by line as basis for calculations.
Source: Insurance Information Institute.
INVESTMENTS
 Does Investment
Performance Affect
    Discipline?
                               Net Investment Income
             $50


             $40
$ Billions




             $30                                                             Growth History
                                                                              2002: -1.3%
             $20                                                             2003: +3.9%
                                                                             2004: +3.4%
             $10                                                           2005: +23.7%**
                                                                         2006H1***: - 3.5%
             $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
       Source: A.M. Best, ISO, Insurance Information Institute;
       **Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. ***Annualized H1:06 figure.
                     Total Returns for Large
                   Company Stocks: 1970-2006*
                                       S&P 500 is up 9.51% so far in 2006*
  40%

  30%

  20%

  10%

   0%

 -10%                                         Markets are moving up
 -20%
                                              as energy prices and LT
                                                  interest rates fall
 -30%
           1970

                  1972

                         1974

                                1976

                                       1978

                                               1980

                                                      1982

                                                             1984

                                                                    1986

                                                                           1988

                                                                                  1990

                                                                                         1992

                                                                                                1994

                                                                                                         1996

                                                                                                                1998

                                                                                                                       2000

                                                                                                                              2002

                                                                                                                                     2004

                                                                                                                                            2006
Source: Ibbotson Associates, Insurance Information Institute.                                          *Through October 19, 2006.
                   Property/Casualty Insurance
                    Industry Investment Gain*
                                                         $ Billions
                                         $57.9                                                   $59.2
 $60                                                     $56.9
                                 $52.3           $51.9                                                   $50.8
                         $47.2                                                           $48.9
 $50                                                             $44.4           $45.3
                 $42.8
 $40     $35.4                                                           $36.0

 $30
                 Investment gains are up
 $20                 but are only now
                   comparable to gains
 $10
                  seen in the late 1990s
   $0
          94      95      96      97      98      99       00     01      02      03      04 05** 06E
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
2006 estimate based on actual annualized 2006:H1 result of $25.375B.
 **2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.
UNDERWRITING
  CAPACITY
   Can the Industry
 Efficiently Employ Its
  Increasing Capital?
                            U.S. Policyholder Surplus:
                                   1975-2006*
        $500
                                       Capacity TODAY is $445.5B,
        $450                         4.3% above year-end 2005, 56%
        $400
                                      above its 2002 trough and 33%
                                           above its 1999 peak.
        $350
                     Foreign reinsurance
$ Billions




        $300
                     and residual market
        $250
                     mechanisms absorbed
        $200
                      45% of 2005 CAT
        $150           losses of $62.8B                              “Surplus” is a measure of
                                                                     underwriting capacity. It is
        $100
                                                                     analogous to “Owners
             $50                                                     Equity” or “Net Worth” in
                                                                     non-insurance organizations
              $0
                   7576 77 7879 80 8182 8384 85 8687 88 8990 9192 93 9495 96 9798 9900 01 0203 04 0506

       Source: A.M. Best, ISO, Insurance Information Institute       *As of 6/30/06.
                          Announced Insurer Capital Raising*
                                       ($ Millions, as of December 1, 2005)
              $3,500                                                                                                                      $3,200
                                              As of Dec. 1, 19 insurers announced
              $3,000                           plans to raise $10.35 billion in new
                                                capital. Twelve start-ups plan to
              $2,500                          raise as much as $8.75 billion more
                                                for a total of $19.1 billion. Actual
 $ Millions




              $2,000                           total higher as Lloyd’s syndicates
                       $1,500                     have added capacity for 2006.
              $1,500

              $1,000                                        $710
                                                     $600                            $600                 $620
                                         $400 $450                                                                                      $490
               $500                                                $300                            $297                          $299
                                   $38                                    $100$140          $129                 $124$202 $150
                 $0
                                                            cie .




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*Existing (re) insurers. Announced amounts may differ from sums actually raised.
Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
                                           Announced Capital Raising by
                                               Insurance Start-Ups
                                                            ($ Millions, as of April 15, 2006)

                                                                               As of April 15, 14 start-
                 $1,600 $1,500
                                                                                 ups plan to raise as
                 $1,400                                                         much as $10 billion.
                 $1,200
                                     $1,000$1,000$1,000$1,000$1,000$1,000
                 $1,000
    $ Millions




                  $800

                  $600                                                                   $500 $500 $500 $500

                  $400
                                                                                                                                $220 $180
                  $200                                                                                                                             $100

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*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL
Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.
Sources: Investment Bank Reports; Insurance Information Institute.
Legal Liability &
Tort Environment
  Definitely Improving But
   Not Out of the Wood
                             Cost of U.S. Tort System
                                                ($ Billions)
                   Tort costs will consume an estimated 2.24% of GDP in 2005
   $350
                Per capita “tort tax” was $845                                                               $297
   $300                                                                                               $279
                in 2003, up from $680 in 2000                                              $246
                                                                                               $262
   $250                                                                             $233
                                                                             $205
   $200                                                   $167 $169
                                                                      $180
                                          $159 $156$156
                         $141 $144 $148
   $150      $129$130

   $100                               Reducing tort costs relative to GDP by
                                        just 0.25% (to about 2%) would
     $50
                                     produce an economic stimulus of $27.5B
       $0
              90    91    92    93   94    95   96   97    98   99     00     01     02     03 04E 05F 06F
Source: Tillinghast-Towers Perrin.
                     Personal, Commercial &
                   Self (Un) Insured Tort Costs*
            $250        Commercial Lines         Personal Lines        Self (Un)Insured
                                                                                 Total = $219.2 Billion

            $200                                                                        $45.3
                                                               Total = $157.7 Billion
 Billions




            $150                      Total = $120.2 Billion       $29.6
                                                                                        $82.5
                                            $20.1
            $100                                                   $70.9
                   Total = $39.5 Billion    $51.0
            $50                                                                         $91.4
                        $5.4
                       $17.1                $49.1                  $57.2
                       $17.0
             $0
                       1980                  1990                  2000                  2003
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin
                                            Tort System Costs,
                                               2000-2010F
                     $350                                                                       2.5%
                                            2.22% 2.23% 2.23% 2.24%2.27% 2.25% 2.21%2.20% 2.20%
                                    2.03%
                                                                                                   $295




                                                                                                                 Tort Costs as % of GDP
                     $300   1.83%                                                      $288               2.0%
                                                                        $279 $282 $283
                                                          $262 $269
 Tort System Costs




                                                   $245
                     $250                   $232                                                          1.5%

                                    $206
                     $200                                                                                 1.0%
                            $179
                                                        After a period of rapid
                     $150                          escalation, tort system costs as %                     0.5%
                                                    of GDP appear to be stabilizing
                     $100                                                                                 0.0%
                             00      01      02     03     04     05E   06F   07F   08F      09F   10F
                                               Tort Sytem Costs     Tort Costs as % of GDP

Source: Insurance Information Institute estimates from Tillinghast-Towers Perrin methodology.
COMMERCIAL
MULTI-PERIL &
COMMERCIAL
   AUTO
          Commercial Multi-Peril Combined
                 (Liability vs. Non-Liability Portion)



                                              125.0
 130                                                                                                CMP-Liability




                                                              122.4



                                                                                 121.0
                                                                                                    CMP-Non-Liability
                         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




                                                                                                               104.9
 110




                                                                                                                          101.9
             100.7




 105
                                                CMP- has




                                                                                                                   97.7
                                                                                             97.3
 100
                                             improved recently




                                                                                                                              93.8
  95




                                                                                                        89.0
  90
                     Liab. Combined 1995 to 2004 = 114.6
  85
                           Non-Liab. Combined = 107.1
  80
          95            96        97           98          99         00       01         02         03         04         05
Sources: A.M. Best; III
                              Commercial Auto Liability
                               & PD Combined Ratios
  Comm Auto Liab                   Comm Auto PD                                                 Average Combined:




                                                      120.5

                                                                 120.1
 125                                                                         122.5               Liability = 110.2


                                           115.9
 120
                                                                                                      PD = 97.1
           112.1




                                  113
                      112



 115




                                                                                        106.6
 110




                                                                     103.6


                                                                                102.3
                          102.2




 105
                                               99.7




                                                                                                   99.4
                                    99.0




                                                          99.0
               96.7




                                                                                                             96.6
                                                                                            95.9
 100




                                                                                                                         93.3
                                                                                                      92.1
   95




                                                                                                                       90.7
                       Commercial Auto has




                                                                                                                87.1
   90
   85                 improved dramatically
   80
            95        96          97        98         99         00           01        02        03         04       05
Sources: A.M. Best; III
  MEDICAL
MALPRACTICE
                                      Medical Malpractice
                                       Combined Ratios
 160                                                           154.7
             Average Med Mal




                                                                       142.5
 150         Combined Ratio




                                                                               137.6
                1995-2005




                                                       133.7
 140




                                               129.7
 130
                          121.3
                                       115.7
 120




                                                                                       111.0
                              107.9
                      106.6




 110
            99.8




                                                                                               95.5
 100                          Reforms/Award Caps and higher
                               rates have helped to improve
  90                               med mal dramatically
  80
           95        96
Sources: A.M. Best; III
                              97       98      99      00       01     02      03      04      05
PRODUCTS
LIABILITY
                                 Products Liability
                                 Combined Ratios
380
                                                                355.2
                      Average Combined Ratio
330                         1995-2005                                   Improvements
                                                                          in the tort
                                 176.7                                   environment,
280                                                                       rates have
                                                                        contributed to
230                                                     215.4            performance
        189.5
                  179.1
180                                                                     167.2
                                        156.4                                   153.1
                          131.9 138.8           133.3
130                                                                                     124.0


 80
          95        96     97    98      99      00      01      02      03      04      05
Sources: A.M. Best; III
  WORKERS
COMPENSATION
 OPERATING
ENVIRONMENT
                     Workers Comp Combined Ratios,
                              1994-2005P
             Workers Comp Calendar Year vs. Ultimate Accident Year –
Percent                          Private Carriers
140                                     138
                                               135
                                131
130
                         120                       122124
                                            118
120                                 115
                                                          111 110
110                 106      107                                     107
                                                             105
     101      101 100 101                                                  102
100      97 97                                                    96
                                                                        90    90
 90

 80
         1994       1995        1996       1997       1998       1999       2000       2001       2002       2003       2004 2005p

p Preliminary AY figure.                            Calendar Year            Accident Year
Accident Year data is evaluated as of 12/31/2005 and developed to ultimate
Source: Calendar Years 1994-2004, A.M. Best Aggregates & Averages; Calendar Year 2005p and Accident Years 1994-2005pbased on NCCI
Annual Statement Analysis.
Includes dividends to policyholders
OTHER LIABILITY
INCLUDING D&O
                                    Other Liability
                                   Combined Ratios*
 150
                      Average Combined Ratio
         138.6
 140                        1995-2005
 130                               116.1
                                                           122.6 124.4
 120               117.6
                                                                                       114.4
                                   112.3                                     111.8               112.1
                                                   110.5
 110                       108.5
                                           104.5

 100
                                            Improvements in tort and
  90
                                             D&O environment have
                                           contributed to performance
  80
           95        96     97      98      99      00      01       02        03        04        05
Sources: A.M. Best; III                                      *Includes Officers‟ & Directors‟ coverage.
                           D&O Premium Index
                              (1974 Average = 100)
1400                  Average D&O pricing is off
                                                                                      1,237
1200
                      18% since 2003, after rising                                        1,113
                        146% from 1999-2003                                                        1,010
1000                                                                            931

             746                 771 806 793
 800               704 720 720                  726                       720
       682
                                                      619
 600                                                        539 503 560

 400

 200

   0
       86    88    90 91    92   93 94     95   96 97       98   99 00    01    02 03         04    05


Source: Tillinghast Towers-Perrin, 2005 Directors and Officers Liability Survey.
                          % of Jury Awards with
                    Punitive Damages, by Jurisdiction*
   25%
                                                  1998-2004
            20%




   20%
                                                                            Alabama, by far, has
   15%
                                                                                 the highest
                                                                            percentage of awards
                  11%
                        11%




                                                                                with punitive
                                                                              damage awards
                               9%
                               9%




   10%
                              8%
                                     8%
                                    7%
                                                 6%
                                                 6%
                                                 6%
                                                 6%
                                                5%
                                                5%
                                              4%
                                              4%
                                              4%




                                              4%
     5%

                                             3%
                                             3%
                                             3%
                                             3%
                                           2%
                                           2%
                                           2%
                                           2%
                                           2%
                                           2%
                                           2%
                                           2%
                                           2%
                                           2%
                                          1%
                                          1%
     0%
                 if ia




                Ill ida
          A r ol a




           C Ut a




                  us a
        s a d ia
                   an a




                         rk

       C nne ania
                 eo o




           U es o t
                ar wa




                   w o
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                          n
         C irg a
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        Te ylv on
        S. ri n




                  an s
                  Id ky
          . C Io o




                           .
         K Tex as




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                ah ri




         N chi as
                   or .




              .S ta
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                  tu s




          D O s




                       vg
                n u
        M nec ee
               Fl .C
                         n




                       in




            ch ian
             rk in




              K noi
             G rad



             V om
             N am




                       ar
             ela hi




             ew ga
                      ah
              A nsi




             en a




             al in



                        t
             is c ad




      as In orn
            kl u
           M rg




            in tic
      Pe O Y o
            Ca zo




                      et
                       s




           M s



             s g
                      c




                      s
                    ol




                  .A
        nn r e

         on s
                    i
                   b




                  o
               la




               i
    A

         W




       N




     M




*Data for AK, HI, LA, ME, MD, MS, MT, NE, NH, NJ, NM, ND, SD, VT, WA, WV and WY were listed as “N/A” by
JVR. Several of these states had above-average punitive award rates in previous issues of the JVR publication.
Source: Jury Verdict Research, Current Award Trends in Personal Injury (2006 edition)
                    % of Jury Awards of $1 Million or
                    More, by Jurisdiction (1997-2003)*
  30%                            Top Five                                     Bottom 10
             26%              25%       25%               24%
  25%
                                                                          20%
  20%
  15%                                                                                                            13%

  10%
                                                                                          4%            3%
   5%
   0%




                                                                                                        N
                                                                                          ia
                                                          na




                                                                                         K




                                                                                                                   .
            rk




                                              ey
                               tts




                                                                                                                 vg
                                                                                                     /T
                                                                                        O
                                                                                       an
                                                       sia
         Yo




                                            rs




                                                                                                               .A
                             se




                                                                                     E/




                                                                                                    R
                                                                                    lv
                                         Je
                          us




                                                     ui




                                                                                                /O




                                                                                                             .S
                                                                                  /N
                                                                                  sy
       ew




                                                   Lo
                       ch



                                     ew




                                                                                                             U
                                                                                               IA
                                                                               nn




                                                                                D
     N



                    sa




                                                                              M
                                     N




                                                                             Pe
                 as




                                                                            E/
              M




                                                                          M
                                                                        S/
                                                                      K
                                                                    T/
                                                                 /C
                                                               R
                                                                A




*Compensatory awards only. Data for AK, AZ, DE, HI, ID, MS, NV, NM, ND, SD, VT, WV and WY were listed
as “N/A” by JVR. Source: Jury Verdict Research, Current Award Trends in Personal Injury (2005 edition)
   THE U.S. LEGAL SYSTEM:
BETTER BUT PROBLEMS PERSIST

    TRENDS, CONDITIONS & OUTLOOK
                 Business Leaders Ranking of
                  Liability Systems for 2005
Best States      New in 2005                           Worst States
1. Delaware                                            41. Hawaii
                                                                                    Newly
                ND, IN, SD, WY                                                     Notorious
2. Nebraska                                            42. Florida
3. North Dakota   Drop-Offs                            43. Arkansas                   HI, FL
4. Virginia     ID, UT, NH, KS                         44. Texas                      Rising
5. Iowa                                                45. California                 Above
6. Indiana                                             46. Illinois
                                                                                     MO, MT
7. Minnesota                                           47.Louisiana
8. South Dakota
9. Wyoming                                             48.Alabama
10. Idaho       LA, AL and MS’s                        49. West Virginia
                           liability systems are
                        ranked among the worst         50.Mississippi
                        in the country by the US
                         Chamber of Commerce
Source: US Chamber of Commerce 2005 State Liability Systems Ranking Study; Insurance Info. Institute.
                The Nation’s Judicial Hellholes
                            (2005)
   Dishonorable                                      There were notably
      Mention                                         fewer “Judicial
  WI Supreme Ct.                                     Hellholes” in 2005
     Watch List                                     ILLINOIS                West Virginia
     California                                  Cook County
 Eastern Kentucky                               Madison County
                                                St. Clair County
  Eastern Alabama
    Philadelphia
    New Mexico
                                       TEXAS
     Delaware
                                    Rio Grande                                   South Florida
     Oklahoma                      Valley and Gulf
                                        Coast
 Orleans Parish, LA
  Washington, DC

Source: American Tort Reform Association; Insurance Information Institute
                         Average Jury Awards
                   1998 vs. 2001, 2002, 2003 & 2004
          $8,000




                                                                                                               6,657
                    1998         2001             2002            2003                 2004




                                                                 6,173
          $7,000




                                                                                                          5,772
                         The average jury




                                                                                                         5,550
                                                                                          5,185




                                                                                                      5,021
          $6,000        award remains in




                                                                                        4,811
                                                                                     4,161
          $5,000      excess of $1 million for
 ($000)




                      the fourth consecutive




                                                                             3,399
          $4,000




                                                                          2,887




                                                                                                  2,854
                                                                         2,743
                                                                         2,731
                         year and is rising



                               2,406
                               2,338
          $3,000
                          1,390




                          1,366
                         1,151
                        1,079
                        1,031




          $2,000
                      675
                      691
                     602




                     614
                     564




          $1,000
                    286
                   272
                   245
                   251
                   170




             $0
                     Overall     Vehicular      Premises    Wrongful Death     Medical                Products
                                 Liability      Liability                     Malpractice             Liability

Source: Jury Verdict Research, Current Award Trends (2006 edition) ; Insurance Information Institute.
                Average Jury Award, 1998-2004
                              The average award increased by
             $2,000          29% from 2003 to 2004, after being
                               relatively flat for three years
             $1,500                                                                     $1,390

                                                                      $1,151
                                                                               $1,079
   ($ 000)




                                                   $987      $1,031
             $1,000
                                      $725
                         $602
              $500


                $0
                         1998         1999         2000      2001     2002      2003     2004

Source: 2006 Current Award Trends, Jury Verdicts Research.
                Median Jury Award, 1998-2004

  $45,000                                    $41,220 $40,000
  $40,000         $36,313                                                     $37,086
                                                                    $34,699             $35,000
  $35,000
                                $28,707
  $30,000
  $25,000
  $20,000
  $15,000                   The median award fell by 5% from 2003
  $10,000                   to 2004, and is generally flat since 2000.
    $5,000
          $0
                    1998          1999         2000          2001    2002      2003      2004


Source: 2006 Current Award Trends, Jury Verdicts Research.
            Trends in Million Dollar Verdicts*
100%
                      1998-2000                  2001-2002                  2003-2004
90%
80%




                                                                                           65%
                                                                                          63%
70%




                                                                                         60%
                                                                                57%
60%




                                                                             50%
                                                                    47%

                                                                            47%
                                                                  41%
50%



                                                       35%
                                                       34%

                                                               33%
40%
30%                                              30%
                          16%



                                      16%
                                     15%
                        12%


                                    12%




20%
                       8%
          5%
         5%
         4%




10%
 0%
          Vehicular     Personal     Premises     Business    Government    Medical      Products
          Liability    Negligence    Liability   Negligence   Negligence   Malpractice   Liability
 *Verdicts of $1 million or more.
 Source: Jury Verdict Research (2006 edition); Insurance Information Institute.
                   2005 Top Ten Verdicts
Value                 Issue                                        State
$1.45 Billion         Investment Fraud                             Texas
$606 Million          Medical Malpractice (Chemo overdose)         Florida
$253 Million          Pharmaceutical Liability (Vioxx)             Texas
$164 Million          Negligence/Products Liability Traffic Death Florida
$135 Million          Vicarious Liquor Liability                   New Jersey
$90 Million           Unfair Business Practice                     Illinois
$65.5 Million         Conflict of Interest, Estate Planning        Texas
$65 Million           Products Liability, Electrocution            Florida
$64 Million           Age Discrimination                           California
$61.2 Million         Products Liability (Ford Explorer)           Florida
Source: LawyersWeekly USA, January 2006.
                    Sum of Top 10 Jury Awards
                                                     $ Millions             Total of Top 10
   $6,000                                                                   awards in 2005
                                 $5,158.8
   $5,000                                                                   was 43% lower
                                                                            than in 2004
   $4,000
                                                                               $2,953.7
   $3,000
   $2,000
   $1,000
          $0
                                     2004                                          2005
Source: Insurance Information Institute from LawyersWeekly USA, January 2005 and 2006.
             States With the Most Top 10 Jury Awards
                                               1995-2005
                                      •77% (85/110) of Top 10 awards came
 25                                   from just 7 states between 1995-2005
           21                         •23 States have had no award in the top 10
 20                     19
                                     17
 15
                                                  11
 10
                                                               7
                                                                     5         5
   5


   0
           NY           TX           CA           FL           MO   GA         AL
Source: Lawyers Weekly USA; Insurance Information Institute.
HOW THE RISK DOLLAR IS SPENT
                     How the Risk Dollar is Spent (2004)
                       Total liability costs account for about 40% of the risk dollar
    Firms w/Revenues < $1 Billion Firms w/Revenues > $1 Billion
                                              Property
                        Admin Costs           Premiums                                  Retained
              Retained     9%                                                           Liability
                                                22%                                                                Admin Costs
              Liability                                                                  14%                          7%
                3%                                                         Liability
                                                                          Premiums
                                                                            14%                                                  Property
                                                               Retained                                                          Premiums
  Liability                                                    Property                                                            19%
 Premiums                                                        4%
   27%




                                                           WC Premiums                                                           Retained
                                                              16%                                                                Property
                                                                                                                                   6%
                                                    Total Prof. Liab
                                      Total Mgmt.                         Retained WC                                         WC Premiums
          Retained WC                                     4%
                              Other      Liab.                                24%
                                                                                                    Total Mgmt.   Total Prof. Liab 6%
               6%                                                                         Other
                               1%         8%                                                           Liab.           5%
                                                                                           1%
                                                                                                        6%


Source: RIMS (2004); Insurance Information Institute
                       Who Buys Umbrella/Excess?
                                          (2005)
   Professional Services                                          100%
Consumer Discretionary                                         91%
      Consumer Staples                                       86%
                 Energy                                      85%
                 Utilities                                   85%
     Telecomm Services                                      84%
             Industrials                                   83%    Professional
    Nonbank Financials                                     83%
                                                                     Services
                                                                  concerns are
Information Technology                                    80%      more likely
                  Banks                                   80%     than average
     ALL INDUSTRIES                                      79%          to buy
              Materials                                  78%        umbrella/
            Health Care                            68%
                                                                     excess
                                                                    coverage
  Government & NPOs                              64%
             Education                         60%

                         0%    20%      40%   60%    80%       100%      120%
 Source: RIMS Benchmark Survey (2005)
    INFLUENCE OF TORT
  ENVIRONMENT AND LEGAL
LIABILITY TRENDS ON PRICING
      AND AVAILABILITY
      Liability: Average Cost per $1,000
          of Revenue,* 2003 to 2005
                     $3.21
$3.50                $3.09
                                     2003         2004           2005
$3.00
                                                                                          Liability insurance
             $2.31




$2.50
                                                                                            costs relative to
$2.00                                                                                     revenue are falling
                                       $1.56
                                     $1.37


                                                         $1.27                            for firms of all size
                             $1.30




$1.50                                                  $1.08
                                               $1.03




                                                                          $0.86
                                                                         $0.77
$1.00                                                            $0.67




                                                                                                                             $0.48
                                                                                           $0.44




                                                                                                                            $0.39
                                                                                  $0.42
                                                                                          $0.36




                                                                                                                    $0.40
                                                                                                            $0.18
                                                                                                           $0.13
                                                                                                   $0.17
$0.50

$0.00
             $0 - $200M        $201M-          $501M-$1B          $1B-$5B         $5B-$10B             $10B+                All
                               $500M
*Across entire liability program
Source: Marsh, 2005 Limits of Liability Report
              Average Price per Million Dollars
                   of Liability Coverage
                  Healthcare                                                    $52,004
                Construction                                        $29,895
            Chem, Pharma.                                 $22,852
                Government                               $21,724
             Trans. Services                         $18,166
               Trans. Equip.                        $17,187
             Mining/Energy                       $14,804
                  Misc. Mfg.                    $13,676
       Utility: Non-Nuclear
             Rubber/Plastic
                                               $13,512
                                               $13,149             There is a 9-fold
Lumber, Furn, Pack., Paper                  $11,278
  Primary Metals, Leather,                  $10,872             difference in the price
       Telecommunications                  $10,000
  Elect. Equip., Instruments              $9,185                per million in liability
    Wholesale/Retail Trade                $9,122
                  Machinery               $9,117                   coverage across
             Metal Products              $8,611
Food, Ag., Tobacco Textiles
     Education, Non-Profit
                                         $8,594
                                       $7,277
                                                                   industry groups
      Pers/Biz Serv., Hotels          $6,749
                   Insurance         $5,853
   Finance: RE, Banks, etc           $5,737
      Printing & Publishing          $5,684

                            $0      $10,000 $20,000 $30,000 $40,000 $50,000 $60,000
 Source: Limits of Liability Survey (2005), Marsh, Inc.
      Umbrella/Excess Insurance: Avg. Cost
         per $1,000 of Revenue, 2005
 $3.50                       Size is very important when it comes to
           $2.94
                              the cost of umbrella/excess coverage.
 $3.00
                            There is a more than 14-fold difference in
 $2.50                       price between the smallest and largest
 $2.00
                                             buyers.
 $1.50             $1.31
                             $1.07    $1.17
                                               $0.95                                     $0.97
 $1.00                                                  $0.69
                                                                $0.43    $0.35
 $0.50                                                                           $0.21

 $0.00
            $0 -   $100M-    $250M-   $500M-   $750M-   $1B-    $2.5B-    $5B-   $10B+    ALL
           $100M   $250M     $500M    $750M      $1B    $2.5B    $5B      $10B


Source: RIMS Benchmark Survey (2005)
                   Excess Liability Market Capacity
           $3.0
Billions




                                        $2.011     $2.045
           $2.5                               $1.941
                                  $1.721                $1.710                $1.570
                                                              $1.575      $1.540
                  $1.432
           $2.0        $1.334
                             $1.405                                $1.425


           $1.5

           $1.0
                                    Capacity dropped 30% from 2000 to
           $0.5                    2003 but has since increased by 10.2%

           $0.0
                  1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

  Source: Marsh, 2005 Limits of Liability Report
                       Average Total Limits Purchased
                           by All Firms* ($ Millions)
  $110                                                          $105.0
                                                                     $101.8
                                                        $99.1
  $100                                                                    $95.7

                                                $88.7                             $87
    $90               $85.8             $85.9
                               $83.2

    $80 $77.9                                                                           $77
                                                                                              $75

    $70                                Limits purchased fell by 16%
                                         between 2003 and 2005.
    $60                                  Price/capacity are issues.

    $50
              1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
*Includes underlying primary limits.
Source: 2005 Limits of Liability Report, Marsh, Inc.
                            Average Underlying Limits
                                                   (Attachment Points)

                                                     $ Millions
      $2.4
                                                                          $2.2
      $2.2                                                                       $2.1
                                                                  $2.0
      $2.0                                 $1.9      $1.9
                       $1.8
      $1.8
      $1.6
      $1.4
      $1.2
      $1.0
                        2000                2001      2002         2003   2004   2005

Source: Marsh, 2005 Limits of Liability Report
  The Cost of
   Litigation
Cost is Chief Concern
    of Businesses
                          Predicted Trend of Legal
                                  Disputes
   One third of responding counsel expect the total number of legal disputes
          their organizations will face in the coming year to increase.



          None Pending
              6%                                                       Same
                                                                       52%
               Decrease
                 9%                                                           Forty percent of
                                                                              large companies
                                                                             expect the number
                                                                                of actions to
                                                                               increase in the
                                                                                coming year.
                          Increase
                            33%
Source: Third Annual Litigation Trends Survey, Fulbright & Jaworski, 2006.
                       Cost as a Top Litigation
                       Concern for Businesses
             Cost was the single
30%          most cited concern
             about litigation, in               26%
25%          general. Mid-sized
           companies ($100-$999
20%          million in revenues)                                             18%
               appeared most
15%         concerned about the
              costs of litigation.
10%
                   6%
5%

0%
            Under $100 Million             $100-$999 Million             $1 Billion or More

Source: Second Annual Litigation Trends Survey, Fulbright & Jaworski, 2005.
              Most Costly Types of Litigation,
                       by Industry
               INDUSTRY                                TYPE OF LITIGATION
                   Energy                                  Intellectual Property
                  Finance                                       Employment
               Health Care                                         Contracts
                 Insurance                                      Employment
             Manufacturing                                 Intellectual Property
                Real Estate                                    Personal Injury
            Retail/Wholesale                               Intellectual Property
   Technology/Communications                               Intellectual Property

Source: Second Annual Litigation Trends Survey, Fulbright & Jaworski, 2005.
                     Expenditures on E-Discovery
                             ($ Millions)
        Expenses made on electronic discovery                                            $1,800
       preservation, collection and production in
        U.S. commercial litigation increased by
         nearly 300% between 1999 and 2005.
                                                                               $1,100

                                                                    $700
                                                       $430
                                          $270
                             $150
     $40          $70

       99           00          01           02           03          04*          05*    06*
*Projections.
Source: Socha-Gelbmann Electronic Discovery Survey; National Law Journal 8/2/04.
         Legal Budget as a Percentage of Gross
          Revenues Reported by Company Size
             Legal Budget is 0-1% of Gross Revenues                               Some 10%
             Legal Budget is 2% or More of Gross Revenues                           of U.S.
60%
                                           54%
                                                                                  companies
                                                                         52%       had legal
50%                                                                               budgets of
              42%                                                                 more than
40%                                                                                  5% of
                                                                                  their gross
30%                                                                                revenues.
                         24%                           23%
20%                                                                               18%


10%

  0%
            Under $100 Million            $100-$999 Million           $1 Billion or More
Source: Second Annual Litigation Trends Survey, Fulbright & Jaworski, 2005.
   Class Action
    Concerns
Class Action Fairness Act:
    Only a Beginning
                             Class Action Impact
           A significant majority (72%) feel the Class Action Fairness Act
         (CAFA) of 2005 has had no effect, but more than a quarter believe
                         the Act’s effect has been beneficial.


          Very Beneficial                                                Neutral/No
                2%                                                         Effect
             Somewhat                                                       72%
              Harmful
                2%                                                               Just 27% of
             Beneficial                                                       respondents said
               24%                                                           their organizations
                                                                             had a case removed
                                                                                from state to
                                                                                federal court
                                                                              because of CAFA
                                                                                 provisions.

Source: Third Annual Litigation Trends Survey, Fulbright & Jaworski, 2006.
                Percentage of Class Actions
                Settled Before Certification
                    The highest                        All     Some
                concentrations of
    20%         settlements before                                    18%
    18%         class certification
                were in Texas and
    16%        California. Energy
    14%       companies were most
    12%       likely to have settled       11%
              all their cases (29%).
    10%
     8%
     6%           5%                                                              5%
     4%                                                2%
     2%                     0%
     0%
                Under $100 Million         $100-$999 Million          $1 Billion or More
Source: Second Annual Litigation Trends Survey, Fulbright & Jaworski, 2005.
                 Leading Types of Class Actions
                         Response                                  Past Three Years
                  Labor/Employment                                           38%

       Securities Litigation/ Enforcement                                    28%

                         Contracts                                           23%
             Environmental/Toxic Tort                                        20%
                    Anti-Trust/Trade                                         20%
                       Class Action                                          19%
                    Product Liability                                        16%

Source: Third Annual Litigation Trends Survey, Fulbright & Jaworski, 2006.
                    Highest Incidence of Class
                         Actions in 2006
                           One or More Class Actions Filed
 80%
              69%
 70%                           65%
 60%                                             51%
 50%                                                               43%
                                                                             39%
 40%           Insurers were most likely to be
 30%             named as defendants in class
               actions in 2006. More than two-
 20%            thirds of them had at least one
 10%                 class action pending.

  0%
            Insurance     Retail/Wholesale Manufacturing Banking/Financial   Energy
                                                             Services


Source: Third Annual Litigation Trends Survey, Fulbright & Jaworski, 2006.
                            Summary
• 2006 represents profitability peak in the current cycle for p/c
  insurance (underwriting/earnings);
• Commercial lines pricing environment becoming increasingly
  competitive
    Terms & Conditions?
• Tort environment in US is “bad,” but not getting significantly
  worse at present time and there are some areas of
  improvement
• Major Challenges:
    Maintaining price/underwriting discipline w/slow growth
    Managing variability/volatility of results
    New/emerging/re-emerging risks
     Insurance Information
        Institute On-Line




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