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					The Insurance Cycle and
Credit Crisis: Impacts &
  Implications for the
 P/C Insurance Industry
             NAMIC Personal Lines Marketing &
                 Underwriting Seminar
                      Orlando, FL

                              April 16, 2008
               Robert P. Hartwig, Ph.D., CPCU, President
Insurance Information Institute  110 William Street  New York, NY 10038
    Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org
                     Presentation Outline
• Weakening Economy: Insurance Impacts & Implications
     Implications of Treasury ―Blueprint‖ for insurers
•   Profitability
•   Underwriting Trends
•   Premium Growth
•   Rising Expenses
•   Capacity
•   Investment Overview
•   Catastrophic Loss
•   Shifting Legal Liability & Tort Environment
•   Regulatory and Legislative Environment
                              Q&A
   A STORMY
   ECONOMIC
   FORECAST
What a Weakening Economy
 & Credit Crunch Mean for
  the Insurance Industry
                     What’s Going On With the US and
                        Global Economies Today?
           Fundamental Factors Affecting Global Economy in 2008
  • Puncture of Two Bubbles: Credit and Housing in US
         Burst BubbleAsset Price Deflation
         Subprime mortgage market was first part of credit bubble to burst
  • Credit Crunch: Some credit markets have effectively seized
  • Global Contagion Effect: Securitization of asset back securities, derivatives
    based on those securities amplified via leverage produced contagion effect
         Many financial institutions around the world found they are exposed
         Many hedge funds, banks caught holding CDOs, credit default swaps and other
          instruments against which they borrowed heavily (sometimes 10:1)
         Some face margin calls, distressed selling of every type of asset except Treasuries
  • Global Economic Impacts: Global Economic Slowdown
         GDP growth in US down sharply, employment falling; Deceleration abroad too
         ―Decoupling‖ theory was naïve
         Crashing dollar is symptom of irresponsible US fiscal policy, trade deficits. IOUs
          are being redeemed for hard assets or states in corporations
         New bubbles forming in commodities and currencies
Source: Insurance Information Institute.
                                   Real GDP Growth*
 6%                                                                                        Economic growth is
                                                                                          slowing dramatically




                                                                        4.9%
 5%                                                                                             in 2008




                                                                3.8%
       3.7%




                                   3.6%

 4%                                       3.1%
                                                 2.9%




                                                                                                                                                 2.9%
                                                                                                                                         2.8%
                                                                                                                                 2.6%
                            2.5%




 3%




                                                                                                         2.1%


                                                                                                                         2.0%
                                                                                                                 1.9%
                     1.6%




 2%
              0.8%




                                                        0.6%




                                                                                0.6%
 1%




                                                                                                0.1%
 0%                                                                                     0.1%
                                                        07:1Q
                                                                07:2Q
                                                                        07:3Q
                                                                                07:4Q
                                                                                        08:1Q
                                                                                                 08:2Q
                                                                                                         08:3Q
                                                                                                                 08:4Q
                                                                                                                         09:1Q
                                                                                                                                 09:2Q
                                                                                                                                         09:3Q
                                                                                                                                                 09:4Q
       2000
              2001
                     2002
                            2003
                                   2004
                                          2005
                                                 2006




*Yellow bars are Estimates/Forecasts.
Source: US Department of Commerce, Blue Economic Indicators 4/08; Insurance Information Institute.
                                   Toward a New World
                                     Economic Order
 1. Credit Crunch (incl. Subprime) Issue Will Ultimately
    Cost Hundreds of Billions Globally (est. up to $600B)
       •     Problem exacerbated by leveraged bets taken by some financial
             institutions therefore its reach extends beyond simple defaults
 2. Heavy Toll on Capital Base of Some Large Financial
    Institutions Worldwide (e.g., Bear Stearns)
       •     Cash infusions necessary; Sovereign Wealth Funds important source
       •     Federal Reserve forced into playing a larger role; must improvise
 3. Most Significant Economic Event in a Generation
       •     US economy will recover, but will take 18-24 months
 4. Shuffling of Global Economic Deck; Economic
    Pecking Order Shifting
       •     China, oil producing countries hold the upper hand
 5. IOUs are Being Redeemed
       •     Stakes in hard assets/institutions demanded
 6. Good News: No Shortage of Available Capital
       •     Central banks are (generally) making right decisions; Dollar sinks
Source: Insurance Information Institute
                   What’s Being Done to Fix the
                  Economy?Impacts on Insurers
Economic Fix                                Impacts on Insurers
Fed Rate                          •Reduces bond yields (65% - 80% of portfolio)
Cuts                              •Potentially contributes to inflation longer run
Fed Debt                          •Fed will swap up to $200B in bank holdings of
                                  mortgage back securities for Treasuries up to
Swap                              28 days; Improves bank finances
Fed Bailout                       •Fed on 3/14 (via J.P. Morgan) provided Bear
                                  with cash after what is effectively a ―run on
of Bear                           the bank‖
Stearns                           •―Too Big to Fail‖ doctrine is activated
                                  •Fed acting to prevent broader loss of
                                  confidence
                                  •3/17: J.P. Morgan buys Bear for $236 million
                                  ($2/share); Price increased to $10 on 3/24
Source: Insurance Information Institute
                  What’s Being Done to Fix the
                 Economy?Impacts on Insurers
                                             (cont’d)
Economic Fix                                 Impacts on Insurers
Stimulus                      •Hope is that $168B plan boosts overall economic activity
                              and employment (by 500,000 jobs) and therefore p/c
Package                       personal and commercial exposures
                              •Contributes to already exploding budget deficits—
                              Washington may expand its search for people and
                              industries to tax
Housing                       •Keeps more people in their homes and hopefully paying
                              HO insurance premiums
Bailout (?)                   •Abandoned and neglected homes have demonstrably
                              worse loss performance
Regulatory/                   •Treasury March 31 ―Blueprint‖ affects all financial firms
                              •For insurers, major recommendation is established of
Legislative                   Optional Federal Charter under Office of National
Action (?)                    Insurance within Treasury
Source: Insurance Information Institute
              Post-Crunch: Fundamental
           Issues To Be Examined Globally
•   Adequacy of Risk Management, Control & Supervision
    at Financial Institutions Worldwide
       Colossal failure of risk management (and regulation)
       Implications for ERM?
       Includes review of incentives
•   Effectiveness and Nature of Regulation
       What sort of oversite is optimal given recent experience?
       Credit problems arose under US and European (Basel II) regulatory
        regimes
       Will new regulations be globally consistent?
       Can overreactions be avoided?
       Capital adequacy & liquidity
•   Accounting Rules
       Problems arose under FAS, IAS
       Asset Valuation, including Mark-to-Market
       Structured Finance & Complex Derivatives
•   Ratings on Financial Instruments
       New approaches to reflect type of asset, nature of risk
                                                       Source: Insurance Information Institute
Summary of Treasury
   ―Blueprint‖for
  Financial Services
   Modernization
  Impacts on Insurers
                      Treasury Regulatory
                Recommendations Affecting Insurers
•     Establishment of an Optional Federal Charter (OFC)
      Would provide system for federal chartering, licensing,
       regulation and supervision of insurers, reinsurer and
       producers (agents & brokers)
      OFC insurers would still be subject to state taxes,
       provisions for compulsory coverage, residual market and
       guarantee funds
      OFC would specify specific lines covered by charter;
       Separate charters needed for P/C and Life
•     OFC Would Incorporate Several Regulatory Concepts
      Ensure safety and soundness
      Enhance competition in national and international markets
      Increase efficiency through elimination of price controls,
       promote more rapid technological change, encourage
       product innovation, reduce regulatory costs and provide
       consumer protection
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
          Treasury Regulatory Recommendations
                Affecting Insurers (cont’d)
•     Establishment of Office of National Insurance (ONI)
          Department within Treasury to regulate insurance pursuant to OFC
          Headed by Commissioner of National Insurance
          Commissioner has regulatory, supervisory, enforcement and
           rehabilitative powers to oversee organization, incorporation, operation,
           regulation of national insurers and national agencies
•     Establishment of Office of Insurance Oversight (OIO)
          Department within Treasury to handle issues needing immediate
           attention such ―reinsurance collateral‖; [Recognizes that OFC debate
           is ―difficult and ongoing‖]
          OIO could focus immediately on ―key areas of federal interest in the
           insurance sector‖
          OIO would be the lead regulatory voice on international regulatory
           policy
          Would have authority to ensure states achieved uniform
           implementation of declared US international insurance policy goals
          OIO would also serve as advisor to Treasury Secretary on major
           domestic and international policy issues
          Ultimately incorporated into OFC framework
Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.
 Insurance &
 The Economy
Important But Somewhat
    Muted Impacts
                   A Few Facts About the Relationship
                     Between Insurance & Economy
  • Vast Majority of Insurance Business is Tied to Renewals
         Approximately 98+% of P/C business (units) is linked to renewals
         A very large share of p/c insurance premiums are statutorily or de facto
          compulsory (e.g., WC, auto liability, surety, usually HO…)
         P/C insurers have marginal exposure impact due to economy
         Most life revenues and units are renewals, but some products (e.g.,
          variable annuities are sensitive to market volatility)
         Life insurers who manage 401(k) assets seeing more loans and hardship
          withdrawals;
  • Insurers are Sensitive to Interest Rates
         About 2/3 of P/C invested assets and 75% if Life assets are fixed income
         Historically, yield on industry portfolios has tracked 10-year note closely
         All else equal, lower total investment gain implies greater emphasis on
          underwriting
         Historically, industry’s best underwriting performances are rooted in
          periods when interests rates were low and/or equity market performance
          poor (1930s – 1950s, early 2000s gave rise to strong 2006/07)
Source: Insurance Information Institute.
                                Real GDP Growth vs. Real P/C
                             Premium Growth: Modest Association
                      25%                                                                                  8%
                                                  P/C insurance industry’s growth



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




                                                                                     13.7%
                      15%
                                                                                                           4%
    Real NWP Growth




                                                                                                                  Real GDP Growth
                                                                7.7%
                      10%
                                                             5.8%




                                                            5.6%
                                                            5.2%




                                                                                                           2%
                                                          4.3%




                                                        3.1%
                       5%
                                                      1.8%




                                                     1.6%



                                                    1.2%
                                                    1.1%
                                                    0.8%

                                                   0.6%
                                                   0.4%
                                                   0.3%




                                                                                                           0%
                       0%



                                             -0.3%
                                            -0.4%




                                            -0.5%
                                           -0.9%




                                           -1.0%

                                           -1.0%
                                          -1.5%




                                          -1.6%

                                         -1.8%




                                       -2.7%
                                       -2.9%

                                       -2.9%
                      -5%                                                                                  -2%
                              81 -6.5%
                              80-7.4%




                                                Real NWP Growth           Real GDP
                      -10%                                                                                 -4%




                             08F
                              78
                              79


                              82
                              83
                              84
                              85
                              86
                              87
                              88
                              89
                              90
                              91
                              92
                              93
                              94
                              95
                              96
                              97
                              98
                              99
                              00
                              01
                              02
                              03
                              04
                              05
                              06
                              07
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/08; Insurance Information Inst.
       Summary of Economic Risks and
        Implications for (Re) Insurers
 Economic Concern                 Risks to Insurers
                       •Some insurers have some asset risk
Subprime Meltdown/     •D&O/E&O exposure for some insurers
Credit Crunch          •Client asset management liability for some
                       •Bond insurer problems; Muni credit quality
                       •Reduced exposure growth
Housing Slump          •Deteriorating loss performance on neglected,
                       abandoned and foreclosed properties
                       •Lower investment income
Lower Interest Rates
                       •Decreased capital gains (which are usually
Stock Market Slump     relied upon more heavily as a source of
                       earnings as underwriting results deteriorate)
                       •Reduced commercial lines exposure growth
General Economic       •Surety slump
Slowdown/Recession     •Increased workers comp frequency
                            New Private Housing Starts,
                            1990-2014F (Millions of Units)
                                                                                                                                     New home starts plunged




                                                                                                                2.07
              Exposure growth forecast for HO
2.1                                                                                                                                    34% from 2005-2007;
                insurers is dim for 2008/09




                                                                                                         1.96
                                                                                                                                        Drop through 2008
2.0                                                                                                                                   trough is 53% (est.)—a




                                                                                                  1.85
              Impacts also for comml. insurers                                                                                         net annual decline of




                                                                                                                       1.80
1.9
               with construction risk exposure                                                                                           1.09 million units




                                                                                           1.71
1.8



                                                                      1.64
                                                               1.62



                                                                                    1.60
1.7



                                                                             1.57




                                                                                                                                                                               1.56
                                                                                                                                                                        1.54
                                                                                                                                                                 1.51
1.6
                                                 1.48
                                                        1.47
                                   1.46




                                                                                                                                                          1.45
1.5




                                                                                                                                                   1.38
                                                                                                                              1.36
                                          1.35




1.4
                            1.29
                     1.20




1.3
       1.19




                                                  I.I.I. estimates that each incremental




                                                                                                                                            1.10
1.2                                              100,000 decline in housing starts costs
                                                   home insurers $87.5 million in new
              1.01




1.1




                                                                                                                                     0.98
                                                   exposure (gross premium). The net
1.0                                                  exposure loss in 2008 vs. 2005 is
                                                         estimated at $954 million.
0.9
       90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F 09F 10F11F 12F 13F 14F

Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from
4/08 edition of BCEF; Insurance Info. Institute
                         Auto/Light Truck Sales,
                       1999-2014F (Millions of Units)
                                      Weakening economy,                     New auto/light trick sales are
                                     credit crunch and high                  expected to experience a net
 18.0           17.8
                                     gas prices are hurting                    drop of 1.4 million units
                       17.5                                                  annually by 2008 compared
 17.5    17.4                               auto sales                       with 2005, a decline of 9.5%
                              17.1
                                            16.9 16.9                                                16.9 16.8
 17.0
                                     16.6               16.5                               16.6 16.7
                                                                                    16.4
 16.5
                                                               16.1
 16.0                                                                        15.7
 15.5          Impacts of falling auto sales will                     15.3
               have a less pronounced effect on
 15.0          auto insurance exposure growth
                than problems in the housing
 14.5           market will on home insurers

 14.0
          99     00    01     02     03     04    05    06     07F    08F     09F   10F    11F   12F   13F   14F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from
4/08 edition of BCEF; Insurance Info. Institute
                        US Unemployment Rate,
                         (2007:Q1 to 2009:Q4F)
6.0%
                                                                                5.6%
                                                                5.5% 5.5%               5.5% 5.5%
5.5%                                                    5.4%
                                                5.2%
5.0%                                    4.9%
                                4.8%
                        4.6%
       4.5% 4.5%
4.5%                                              Rising unemployment rate
                                                  negative impacts workers
4.0%                                              comp exposure and could
                                                  signal a temporary claim
3.5%                                                   frequency surge
3.0%
        07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/08); Insurance Info. Inst.
                        Inflation Rate (CPI-U, %),
                               1990 – 2009F
                   Inflation was just 2.2% in 2007 but is accelerating.
6                 Medical cost inflation, important in WC, auto liability
                    and other casualty covers is running far ahead of
     4.9 5.1         inflation. Rising inflation can also lead to rate
5                     inadequacy and adverse reserve development
                                                                                        3.8         4.0
4
                                                        3.3 3.4                                           3.4
               3.0 3.2      2.9 2.8                                               3.0
3                        2.4        2.6                                 2.5 2.3                                 2.4
                                                                                              2.2
                                                  1.9
2                                           1.5                   1.3
1

0
      90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F 09F
*12-month change Feb. 2008 vs. Feb. 2007;
Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Mar. 10, 2008; Ins. Info. Institute.
PROFITABILITY
  Profits in 2006/07 Reached
     Their Cyclical Peak;
By No Reasonable Standard Can
 Profits Be Deemed Excessive
                         P/C Net Income After Taxes
                          1991-2008F ($ Millions)*
                   2001 ROE = -1.2%
                   2002 ROE = 2.2%
                                                                                              Insurer profits




                                                                                                                                                              $65,777
                                                                                              peaked in 2006




                                                                                                                                                                        $61,940
                   2003 ROE = 8.9%
 $70,000
                   2004 ROE = 9.4%




                                                                                                                                                                                  $49,900
 $60,000           2005 ROE= 9.6%




                                                                                                                                                    $44,155
                   2006 ROE = 12.2%



                                                                          $36,819




                                                                                                                                          $38,501
 $50,000
                   2007 ROAS1 = 12.3%**




                                                                                    $30,773




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




                                                                                              $21,865
                                                      $20,598




                                                                                                        $20,559
                                  $19,316




 $30,000
               $14,178




                                            $10,870




 $20,000
                         $5,840




                                                                                                                       $3,046
 $10,000
        $0
 -$10,000                                                                                                  -$6,970
               91
                         92
                                  93
                                            94
                                                      95
                                                                96
                                                                          97
                                                                                    98
                                                                                              99
                                                                                                        00
                                                                                                                  01
                                                                                                                       02
                                                                                                                                03
                                                                                                                                          04
                                                                                                                                                    05
                                                                                                                                                              06
                                                                                                                                                                        07
                                                                                                                                                                                  08F
*ROE figures are GAAP; 1Return on avg. surplus. **Return on Average Surplus; Sources: A.M. Best, ISO,
Insurance Information Inst.
                        ROE: P/C vs. All Industries
                              1987–2008E
 20%
                       P/C profitability is cyclical, volatile and vulnerable
 15%


 10%
                                                                           Sept. 11
  5%

             Hugo                                     Lowest CAT                                           Katrina,
  0%                                                                                                      Rita, Wilma
                                                   losses in 15 years
             Andrew                         Northridge                                          4 Hurricanes
 -5%




                                                                                                                   08F
        87
             88
                  89
                       90
                            91
                                  92
                                       93
                                             94
                                                  95
                                                       96
                                                            97
                                                                 98
                                                                      99
                                                                           00
                                                                                01
                                                                                     02
                                                                                          03
                                                                                               04
                                                                                                    05
                                                                                                         06
                                                                                                              07
                                 US P/C Insurers                  All US Industries
2008 P/C insurer ROE is I.I.I. estimate.
Source: Insurance Information Institute; Fortune
               Personal/Commercial Lines &
              Reinsurance ROEs, 2006-2008F*
                                                                 ROEs are declining
18%         2006     2007E       2008F
                                         16.8%                    as underwriting
16%                                                              results deteriorate
         14.0%                                    13.2%
14%                                                                 12.3%
12%                                                                      10.7%
                   9.4%                                    9.8%                  9.8%
10%
 8%                        6.3%
 6%
 4%
 2%
 0%
                Personal                     Commercial               Reinsurance
Sources: A.M. Best Review & Preview (historical and forecast).
               Profitability Peaks & Troughs in the
               P/C Insurance Industry,1975 – 2008F*
 25%
                      1977:19.0%                 1987:17.3%                          2006:12.2%
 20%
                                                     1997:11.6%
 15%


 10%


  5%


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




        07E
        08F
         75
         76
         77
         78
         79
         80
         81
         82
         83
         84
         85
         86
         87
         88
         89
         90
         91
         92
         93
         94
         95
         96
         97
         98
         99
         00
         01
         02
         03
         04
         05
         06
*GAAP ROE for all years except 2007 which is actual ROAS of 12.3%. 2008 P/C insurer ROE is I.I.I.
estimate.
Source: Insurance Information Institute, ISO; Fortune
                           Factors that Will Influence the
                           Length and Depth of the Cycle
  • Capacity: Rapid surplus growth in recent years has left the industry with
    between $85 billion and $100 billion in excess capital, according to analysts
         All else equal, rising capital leads to greater price competition and a liberalization
          of terms and conditions
  • Reserves: Reserves are in the best shape (in terms of adequacy) in decades,
    which could extend the depth and length of the cycle
         Looming reserve deficiencies are not hanging over insurers they way they did
          during the last soft market in the late 1990s
         Many companies have been releasing redundant reserves, which allows them to
          boost net income even as underwriting results deteriorate
         Reserve releases will diminish in 2008; Even more so in 2009
  • Investment Gains: 2007 was the 5th consecutive up year on Wall Street. With
    sharp declines in stock prices and falling interest rates, portfolio yields are
    certain to fallContributes to discipline
         Realized capital gains are already rising as underwriting profits shrink, but like
          redundant reserves, realized capital gains are a finite resource
         A sustained equity market decline (and potentially a drop in bond prices at some
          point) could reduce policyholder surplus
Source: Insurance Information Institute.
                Factors that Will Influence the Length
                  and Depth of the Cycle (cont’d)
  • Sarbanes-Oxley: Presumably SOX will lead to better and more conservative
    management of company finances, including rapid recognition of deficient or
    redundant reserves
         With more ―eyes‖ on the industry, the theory is that cyclical swings should shrink
  • Ratings Agencies: Focus on Cycle Management; Quicker to downgrade
         Ratings agencies more concerned with successful cycle management strategy
         Many insurers have already had ratings ―haircut‖ over the last several years they
          way they did during the last soft market in the late 1990s; Less of a margin today
  • Finite Reinsurance: Had smoothing effect on earnings; Finite market is gone
  • Information Systems: Management has more and better tools that allow
    faster adjustments to price, underwriting and changing market conditions
    than it had during previous soft markets
  • Analysts/Investors: Less fixated on growth, more on ROE through soft mkt.
         Management has backing of investors of Wall Street to remain disciplined



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




                                                                                                                            +1.7 pts

                                                                                                                                            +2.3 pts
12%
10%




                                                                                -9.0 pts




                                                                                                            -0.1 pts
8%




                                                                                                 +0.2 pts
                                                                   -13.2 pts
6%
4%
         US P/C insurers missed their                                                            The cost of capital
2%                                                                                              is the rate of return
0%
        cost of capital by an average 6.7                                                         insurers need to
                                                                                                 attract and retain
        points from 1991 to 2002, but on                                                            capital to the
-2%
            target or better 2003-07                                                                   business
-4%
       91    92   93    94   95    96   97    98   99    00   01               02          03   04          05         06              07
Source: The Geneva Association, Ins. Information Inst.                 ROE                      Cost of Capital
               Top Industries by ROE: P/C Insurers
                 Still Underperformed in 2006*
   Oil & Gas Equip., Services                                                  31.8%
           Petroleum Refining          P/C insurer                           30.7%
                       Metals                                               30.3%
                Food Services      profitability in 2006              26.4%
 Household & Pers. Products        ranked 30 th out of 50          24.6%
             Pharmaceuticals         industry groups              24.2%
Industrial & Farm Equipment                                     22.6%
   Mining & Crude Oil Prod.          despite renewed          21.8%
        Aerospace & Defense            profitability          21.5%
                    Chemicals                                20.9%
                     Securities                              20.9%         P/C insurers
        Food Consumer Prod.                                 20.5%        underperformed
      Medical Prod. & Equip.                              19.6%          the All Industry
            Specialty Retailers                           19.4%           median for the
                Homebuilders                             19.1%           19th consecutive
                                                                                          year
          P/C Insurers (Stock)                            14.9%
   All Industries: 500 Median                              15.4%
                              0%     5%       10%      15%      20%      25%      30%      35%
*Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors.
Source: Fortune, April 30, 2007 edition; Insurance Information Institute
               Advertising Expenditures by P/C
                Insurance Industry, 1999-2007E
                                               $ Billions
 $4.5        Ad spending by P/C insurers                                                $4.323

 $4.0
             is at a record high, signaling
                 increased competition                                         $3.695
 $3.5
                                                                    $2.975
 $3.0

 $2.5
                                                          $2.111
                                                 $1.882
 $2.0    $1.736 $1.737 $1.803 $1.708
 $1.5
            99        00        01        02        03        04        05        06     07E
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
  FINANCIAL
 STRENGTH &
   RATINGS
  Industry Has Weathered
the Storms Well, But Cycle
    May Takes Its Toll
                        P/C Insurer Impairment Frequency
                         vs. Combined Ratio, 1969-2007E
                        Impairment rates                            Combined Ratio after Div
                            are highly
                            correlated                              P/C Impairment Frequency
                  120      underwriting                                                        2
                         performance and                                                       1.8
                  115    could reach near-
                        record low in 2007                                                     1.6
                                                                                               1.4




                                                                                                     Impairment Rate
 Combined Ratio




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




                        07E
                         69
                         70
                         71
                         72
                         73
                         74
                         75
                         76
                         77
                         78
                         79
                         80
                         81
                         82
                         83
                         84
                         85
                         86
                         87
                         88
                         89
                         90
                         91
                         92
                         93
                         94
                         95
                         96
                         97
                         98
                         99
                         00
                         01
                         02
                         03
                         04
                         05
                         06
Source: A.M. Best; Insurance Information Institute
                        Reasons for US P/C Insurer
                         Impairments, 1969-2005
                      2003-2005                                               1969-2005
         Affiliate                                  Deficient                              Reinsurance         Deficient
                                                                              Sig. Change                        Loss
         Problems                                     Loss                                   Failure
                                                                               in Business                    Reserves/In-
           8.6%                                    Reserves/In-                               3.5%
                                                                                  4.6%                         adequate
                                                    adequate             Misc.
  Catastrophe                                                            9.2%                                   Pricing
                                                     Pricing
    Losses                                                                                                      38.2%
                                                     62.8%
     8.6%
                                                             Investment
     Alleged                                                 Problems*
     Fraud                                                      7.3%
     11.4%
                                                             Affiliate
                                       Deficient             Problems
       Rapid                           reserves,               5.6%
       Growth                         CAT losses             Catastrophe
        8.6%                           are more                Losses
                                      important                 6.5%          Alleged                       Rapid
                                       factors in                             Fraud                         Growth
                                                                               8.6%                         16.5%
                                     recent years
                                                                                        *Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
UNDERWRITING
     TRENDS
Extremely Strong 2006/07;
Relying on Momentum &
   Discipline for 2008
                  P/C Insurance Combined Ratio,
                          1970-2008F*
              Combined Ratios
  120
                1970s: 100.3
                1980s: 109.2
  115
                1990s: 107.8
                2000s: 102.0*
  110


  105


  100


    95


    90




         08F
          70
          71
          72
          73
          74
          75
          76
          77
          78
          79
          80
          81
          82
          83
          84
          85
          86
          87
          88
          89
          90
          91
          92
          93
          94
          95
          96
          97
          98
          99
          00
          01
          02
          03
          04
          05
          06
          07
Sources: A.M. Best; ISO, III   *Full year 2008 estimates from III.
                P/C Insurance Combined Ratio,
                         2001-2008F
                            As recently as 2001,                            2007/8 deterioration due
120                                                                      primarily to falling rates, but
                           insurers were paying                           results still strong assuming
           115.8
                            out nearly $1.16 for                             normal CAT activity
                              every dollar they
                            earned in premiums                    2006 produced the best
110
                         107.4                                      underwriting result
                                                                  since the 87.6 combined
                                                                        ratio in 1949

                                       100.1                    100.7
100                                                      98.3                                 98.6
                                                                                   95.6
           2005 figure benefited from
            heavy use of reinsurance                                     92.4
            which lowered net losses
  90
              01            02            03              04     05       06         07        08F
Sources: A.M. Best; ISO, III. *III estimates for 2008.
           Ten Lowest P/C Insurance Combined
                Ratios Since 1920 vs. 2007
97        The 2006 combined                            2007 was the 20th
                                                        best since 1920                         95.6
          ratio of 92.2 was the
95         best since the 87.6
           combined in 1949                                 93.0 93.1 93.1 93.3
93                       92.1 92.3 92.4 92.4
                91.2
91
                                                              The industry’s best
89                                                            underwriting years
       87.6                                                   are associated with
87
                                                                periods of low
                                                                 interest rates
85
       1949     1948     1943     1937     2006     1935     1950     1939    1953     1936     2007

Sources: Insurance Information Institute research from A.M. Best data. *2007: III Earlybird survey.
                      Underwriting Gain (Loss)
                           1975-2008F*
              35     Insurers earned a record underwriting profit of
              30    $31.7 billion in 2006, the largest ever but only the
              25   second since 1978. Cumulative underwriting deficit
              20
              15         from 1975 through 2007 is $422 billion.
              10
               5
$ Billions




               0
              -5
             -10
             -15
             -20
             -25
             -30
             -35
             -40
             -45
             -50
             -55
                   75
                   76
                   77
                   78
                   79
                   80
                   81
                   82
                   83
                   84
                   85
                   86
                   87
                   88
                   89
                   90
                   91
                   92
                   93
                   94
                   95
                   96
                   97
                   98
                   99
                   00
                   01
                   02
                   03
                   04
                   05
                   06
                   07
                   08
Source: A.M. Best, Insurance Information Institute
                                           Impact of Reserve Changes on
                                                 Combined Ratio
                                                                                   PY Reserve Development
                           $40                             8.6 8.9                 Combined Ratio Points  10
                           $35                                                                            9
Reserve Development ($B)




                                                                                      Reserve             8




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

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



                                                                                                          3


                                                                           $18.9
                           $10                                                                            2
                                           $10.8




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




                                                                       110.9
115




                                                               109.9


                                                                               105.3
110
                                104.9
                104.5




                                                       104.5
        103.9


                        103.5




105                                            102.7
                                        99.8




                                                                                                                          98.6
                                                                                       98.4


                                                                                                     96.4
100




                                                                                                                   95.6
                                                                                              94.3


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

 100                             99.5                                                                      99.5
                                                                          98.4
                                                                                                    97.5

               Average Combined                                                         95.1 95.5
  95                                                                             94.3
              Ratio for 1993 to 2006:
                       101.0
  90
         93     94   95     96    97     98     99    00     01    02     03     04     05   06     07E 08F
Sources: A.M. Best (historical and forecasts)
               Pure Premium Spread: Personal
               Auto PD Liability, 2000-2007:Q4
        Auto Insurance Component of CPI                  Personal Auto-PD Pure Premium
10%
              Margin necessary                                 Inversion of pure
  8%          to maintain PPA                                 premium spread is a
                profitability                               warning sign that price
  6%                                                        and costs are out of sync
  4%

  2%

  0%

 -2%               2000 PPA
                 Combined=110                                     2006 PPA
 -4%                                                            Combined=95.5
         00:Q1
         00:Q2
         00:Q3
         00:Q4
         01:Q1
         01:Q2
         01:Q3
         01:Q4
         02:Q1
         02:Q2
         02:Q3
         02:Q4
         03:Q1
         03:Q2
         03:Q3
         03:Q4
         04:Q1
         04:Q2
         04:Q3
         04:Q4
         05:Q1
         05:Q2
         05:Q3
         05:Q4
         06:Q1
         06:Q2
         06:Q3
         06:Q4
         07:Q1
         07:Q2
         07:Q3
         07:Q4
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
                   Bodily Injury: Severity Trend
                   Running Ahead of Frequency
         Medical                                  Frequency        Severity
 8%      inflation
            is a                                                                         6.0%
 6%      powerful      4.7%                                                     4.8%
            cost                          3.6%     3.8%
 4%                              3.0%                       3.4%
           driver                                                      2.8%
 2%

 0%
           -0.3%
-2%                                              -0.9%
       -2.2%                                              -2.6%
-4%                                     -3.3%
                               -4.0%                                          -3.8%
-6%              -5.3%                                              -5.4%              -5.0%
            99         00         01       02       03        04        05       06       07
Source: ISO Fast Track data.
                 PD Liability: Frequency Trend
                  No Longer Offsets Severity
            Frequency          Severity    Fewer accidents, but more
   8%                                      damage when they occur:
                        6.2%
   6%                                         Higher Deductibles?
             4.3%                 3.9%
                                            3.3%                                3.7%
   4%
                                                     2.8%              2.8%
                                                                                        2.1%
   2%
         0.8%                                                 0.5%                     0.6%
                                0.3%
   0%

  -2%              -1.5%
                                          -2.0%    -2.3%    -2.1%    -1.9%
  -4%
                                                                              -3.8%
  -6%
              99        00          01       02        03      04        05      06       07
Source: ISO Fast Track data.
             PIP: Severity Trend Now Offsets
             Smaller Claim Frequency Decline
            Frequency       Severity
                                                                        Fraud caused
  20%
                        16.1%                                           problems from
  15%                                                                     1999-2001
  10%
              6.3%                          6.5%                                            6.1%
                                                                          4.8%
   5%                            3.2%                                              2.3%
                    1.1%                                         0.5%
                                         0.0%
   0%
                              -1.1%                -0.6%
         -1.6%
  -5%
             Is No-Fault living on                     -4.0%
                                                                        -5.4%    -5.1%
                                                                                          -4.0%

 -10%
                borrowed time?                                 -7.2%

              99         00        01         02        03        04       05       06       07
*Average of 4 quarters ending with 3rd quarter 2007.
Source: ISO Fast Track data.
                    Collision: Frequency and
                  Severity Claim Trend Adverse
  8%                                                  Frequency     Severity
                       6.8%
  6%
            4.1%                           3.7%     3.7%              3.8%
  4%                              3.0%                                           3.1%
        2.6%                                                                            2.3%
                               1.9%                          1.5%
  2%
                                                                                          0.1%
  0%
                  -0.4%
 -2%
                                                                    -1.7%
 -4%
                                         -3.8%                                 -3.7%
                                                           -4.6%
 -6%                                              -5.1%
             99         00        01        02       03       04        05        06       07

Source: ISO Fast Track data.
                     Comprehensive: Favorable
                    Frequency and Severity Trends
                       Frequency             Severity




                                                                                                         14.9%
   20%
                                              Weather related claims
   15%                                       from Hurricanes Katrina,
                                     8.9%      Rita & Wilma: 681,900
   10%
                                            claims valued $3.29 billion
                                            3.3%
    5%                                      3.3%

    0%




                                                                                                                         -1.3%


                                                                                                                                      -1.4%
            -1.7%




                                                                         -2.1%
                            -2.6%




                                                            -2.4%




                                                                                                 -3.1%
   -5%




                                                                                         -4.1%
                    -4.7%




                                                    -5.7%




                                                                                                                                 -6.5%
                                                                    -6.9%

                                                                                 -8.0%
  -10%




                                                                                                                 -9.8%
  -15%
                    99              00        01            02           03              04              05              06           07*

Source: ISO Fast Track data.
 Auto Insurance
Claim Cost Drivers
                   Percent of Claimants With No
                   Disability from Auto Injuries
                        Bodily Injury Claimants        PIP Claimants
80%                                                                                 76%
75%                                                               72%                      72%
                                               70%
70%                                                                      68%
                                                       66%
65%
                             59%
60%                                 56%
55%               52%
50%        48%                                   Fewer claimants
45%                                             reporting any type
40%                                            of disability helping
35%                                             to hold down costs
30%
              1987              1992              1997               2002              2007
Sources: Insurance Research Council, Auto Insurance Claims: Countrywide Patterns in Treatment,
Cost and Compensation, 2008 Edition; Insurance Information Institute.
                  Percent of Claimants Admitted
                    for 1+ Nights in Hospital
                              Bodily Injury Claimants        PIP Claimants
14%
                12%
12%       11%                                         Fewer claimants are
                                   10%            spending time in the hospital
10%

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

 2%

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

 0%
                  1997                           2002                           2007
Sources: Insurance Research Council, Auto Insurance Claims: Countrywide Patterns in Treatment,
Cost and Compensation, 2008 Edition; Insurance Information Institute.
                           Percent of Claimants
                          Represented by Attorney
                                       Bodily Injury Claimants        PIP Claimants
60%                         57%
          55%
55%                                           52%
                                                                                   49%
50%                                                              47%
45%                                Attorney representation
40%                                was falling until recently
35%             32%                32%                                                    31%
                                                      30%
30%                                                                     28%
25%
20%
            1987               1992              1997               2002              2007
Sources: Insurance Research Council, Auto Insurance Claims: Countrywide Patterns in Treatment,
Cost and Compensation, 2008 Edition; Insurance Information Institute.
Homeowners Insurance
                   Homeowners Insurance
                     Combined Ratio
165
          158.4
                                  Average 1990 to 2006= 111.8
155
                             Insurers have paid out an average of
145                          $1.12 in losses for every dollar earned
                              in premiums over the past 17 years
135

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

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

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




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




                                                            112.3

                                                                    111.1
           110.3



                            110.2




                                                                                    110.2
                                                    109.7
 115
                                    107.6




                                                                                                              105.4
 110
                                            103.9




                                                                                                      102.5
                                                                                            102.0
 105




                                                                                                                                    97.5
 100




                                                                                                                             94.0
                               Recent results benefited from




                                                                                                                      91.2
   95
                            favorable loss cost trends, improved
   90
                             tort environment, low CAT losses,
                              WC reforms and reserve releases
   85
           93       94      95      96      97      98      99      00      01      02      03       04       05      06 07E 08F
Sources: A.M. Best (historical and forecasts)
  PREMIUM
  GROWTH
At a Virtual Standstill
     in 2007/08
              Strength of Recent Hard Markets
                     by NWP Growth*
                     1975-78              1984-87                           2001-04
 25%

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


 10%


  5%


  0%


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




        2007F
        2008F
         1970
         1971
         1972
         1973
         1974
         1975
         1976
         1977
         1978
         1979
         1980
         1981
         1982
         1983
         1984
         1985
         1986
         1987
         1988
         1989
         1990
         1991
         1992
         1993
         1994
         1995
         1996
         1997
         1998
         1999
         2000
         2001
         2002
         2003
         2004
         2005
         2006
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
                                   Growth in Net Written
                                   Premium, 2000-2008F
                                                     P/C insurers are experiencing
                          15.3%
                                                       their slowest growth rates
                                                      since 1943… underwriting
                                      10.0%             results are deteriorating
               8.4%

   5.0%                                                                  4.3%
                                                  3.9%

                                                              0.5%

                                                                                -0.6% -1.0%
    2000        2001        2002        2003       2004        2005      2006   2007   2008F
*2008 forecast from A.M. Best.
Source: A.M. Best; Forecasts from the Insurance Information Institute.
                 Personal/Commercial Lines &
             Reinsurance NPW Growth, 2006-2008F

30%                   Net written premium                        28.1%
25%
                    growth is expected to be
                     slower for commercial
20%                 insurers and reinsurers
15%
10%
  5%       2.0%-0.1%1.4%                   3.5%
  0%
 -5%                                              -1.5%-2.3%
-10%                                                                      -5.0%
              2006     2007E       2008F                             -8.5%
-15%
                 Personal                    Commercial           Reinsurance
Sources: A.M. Best Review & Preview (historical and forecast).
                    All P/C Lines Distribution Channels,
                        Direct vs. Independent Agents
                       Direct     Independent Agents
   70%

   60%

   50%

   40%

   30%
                                Independent agents steadily lost market share
                                 from the early 1980s through the early 2000s
   20%                          across all P/C lines, but have gained in recent
                                   years. Direct channels include exclusive
   10%                             agency companies, direct marketers and
                                           direct sales (e.g., internet)
     0%
           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: Insurance Information Institute; based on data from Conning and A.M. Best.
WEAK PRICING
  Under Pressure in
 2007/08, Especially
 Commercial Lines
                        Average Expenditures on
                            Auto Insurance

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




                                                                                              $851
                                                                                       $847



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




                                                                  $780
$800
                  since 1999



                                                           $724
                               $705

                                      $703

$750
                        $691




                                                    $690
                                             $685
                 $668




                                                                       Lower underlying
          $651




$700
                                                                     frequency and modest
$650                                                               severity are keeping auto
                                                                    insurance costs in check
$600
          94 95 96 97 98 99 00 01 02 03 04 05* 06* 07*
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute
                      Average Expenditures on
                      Homeowners Insurance**
                Countrywide home insurance
 $900          expenditures rose an estimated                  $868
 $850                    4% in 2006                       $835
 $800                                                  $787
               Homeowners in non-
 $750                                             $729
               CAT zones have seen
 $700                                        $668
              smaller increases than
 $650
 $600
                those in CAT zones      $593
                                    $536
 $550                          $508
                     $481 $488
 $500           $455
           $440
 $450 $418
 $400
       95 96 97 98 99 00 01 02                         03 04 05* 06* 07*
*Insurance Information Institute Estimates/Forecasts
**Excludes cost of flood and earthquake coverage.
Source: NAIC, Insurance Information Institute
RISING EXPENSES
Expense Ratios Will Rise as
 Premium Growth Slows
               Personal vs. Commercial Lines
               Underwriting Expense Ratio*
32%                             31.1%                             Personal     Commercial


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

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

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

        $350
                     The premium-to-surplus
$ Billions




        $300
                      fell to $0.85:$1 at year-
        $250
                      end 2007, approaching
                          its record low of
        $200
                          $0.84:$1 in 1998                                      “Surplus” is a measure of
        $150                                                                    underwriting capacity. It is
                                                                                analogous to “Owners
        $100
                                                                                Equity” or “Net Worth” in
             $50                                                                non-insurance organizations
              $0
                   75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07


Source: A.M. Best, ISO, Insurance Information Institute.                           *As of December 31, 2007
                                            Annual Catastrophe Bond
                                         Transactions Volume, 1997-2007
                                                         Risk Capital Issued         Number of Issuances

                                $8,000           Catastrophe bond issuance has                                    $7,329.6   35
                                $7,000          soared in the wake of Hurricanes                                             30
 Risk Capital Issues ($ Mill)




                                                   Katrina and the hurricane




                                                                                                                                  Number of Issuances
                                $6,000                                                                                       25
                                                seasons of 2004/2005, despite two                            $4,693.4
                                $5,000                  quiet CAT years                                                      20
                                $4,000
                                                                                                                             15
                                $3,000
                                                                                    $1,729.8        $1,991.1                 10
                                $2,000                           $1,139.0
                                                  $846.1$984.8         $966.9
                                                                             $1,219.5        $1,142.8                        5
                                $1,000   $633.0

                                   $0                                                                                        0
                                           97       98    99       00    01    02       03     04       05     06       07
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
INVESTMENT
 OVERVIEW
 More Pain,
 Little Gain
                    Property/Casualty Insurance
                     Industry Investment Gain1
                                                        $ Billions
                                                                                                              $63.6
                                        $57.9                                                 $59.4
  $60                                                 $56.9                                           $55.8
                                $52.3         $51.9
                        $47.2                                                         $48.9
  $50                                                         $44.4           $45.3
                $42.8
  $40 $35.4                                                           $36.0

  $30              Investment rose in 2007 but are just
  $20               9.8% higher than what they were
  $10
                     nearly a decade earlier in 1998
    $0
           94     95     96      97      98     99     00      01      02      03      04 05* 06               07
1Investment  gains consist primarily of interest, stock dividends and realized capital gains and losses.
2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.
*2005 figure includes special one-time dividend of $3.2B.
Sources: ISO; Insurance Information Institute.
CATASTROPHIC
    LOSS
What Will 2008 Bring?
   Most of US Population & Property
      Has Major CAT Exposure




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




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




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




                                                                                    $27.5
                                                                  $26.5
                          $22.9




  $40
                                     $16.9




                                                                                 $12.9
                                               $10.1




                                                                                                    $9.2
                                              $8.3




                                                         $8.3
           $7.5




                                              $7.4




                                                                                                           $6.7
                                                                          $5.9
                                  $5.5




  $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
                                                                                                             07
                                                                                                           20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and
personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.
Source: Property Claims Service/ISO; Insurance Information Institute
                      States With Largest Insured
                      Catastrophe Losses in 2007
                                             $ Millions
 $1,400                                             2007 CAT STATS
           $1,230
 $1,200
                                              •1.18 million CAT claims
 $1,000                                        across 41 states arising
   $800             $747
                            $677
                                                •23 catastrophic events
   $600

   $400                             $320 $272 $270
                                                   $262 $223
                                                             $202 $200 $200
   $200

      $0
             CA      MN      TX      GA       IL    OK    KS   MO   NY   CO   AL
Source: PCS/ISO; Insurance Information Institute.
                 Distribution of 2007 US CAT
               Losses, by Type and Insured Loss
                                                $ Billions
                           Commercial, $1.3 ,
                               20%
   Personal (home,                                                    Vehicle, $0.8 , 12%
     condo, rental,
     contents etc.)
  accounted for 68%
   of all US insured
  CAT losses paid in
   2007. CAT claim
    count was 1.18
                                                   Personal, $4.4 ,
        million.
                                                        68%
Source: PCS division of ISO.
                         Top Catastrophic Wildland Fires In
                           The United States, 1970-2007
                                         Insured Losses (Millions 2007 $)
                  Oct. 20-21, 1991: Oakland, Alameda Cos., CA                                                                 $2,589.3
                                   Oct. 2003: Southern CA Fires                                                          $2,294.4
                                 Oct. 2007: Southern CA Fires*                                                          $2,260.0
                            Nov. 2-3, 1993 Los Angeles Co., CA            $538.4
                               Oct. 27-28, 1993 Orange Co., CA           $502.5
                Jun. 27-Jul. 2, 1990 Santa Barbara County, CA          $420.7
                           May 10-16, 2000 Cerro Grande, NM       $168.7
                                  July 2007: Lake Tahoe, CA**
                Jun. 23-28, 2002 Rodeo-Chediski Complex, AZ
                                                                  $154.4
                                                                  $138.4
                                                                                            Fourteen of the
                  Sep. 22-30, 1970 Oakland-Berkeley Hills, CA
      Nov. 24-30, 1980 Los Angeles, San Bernardino, Orange,
                                                                 $132.6                   top 17 catastrophic
                    Riverside, San Diego Cos., CA
                Jul. 26-27, 1977 Santa Barbara, Montecito, CA
                                                                 $108.3
                                                                $68.4
                                                                                            wildfires since
                                       May 17-20, 1985 Florida  $63.6                      1970 occurred in
               Oct. 23-25, 1978 Los Angeles, Ventura Cos., CA
Nov. 16-17, 1980 Bradbury, Pacific Palisades, Malibu, Sunland,
              Carbon Canyon, Lake Elsinore, CA
                                                                $47.7
                                                               $40.2
                                                                                              California
       Oct. 9-10, 1982 Los Angeles, Ventura, Orange Cos., CA $34.4
                          Sep. 12-18, 1979 Hollywood Hills, CA $14.3

                                                                  $0        $500       $1,000      $1,500      $2,000   $2,500    $3,000
*Estimate from CA Insurance Dept., Jan. 10, 2008.
Source: ISO's Property Claim Services Unit; California Department of Insurance; Insurance Information Institute.
                          Inflation-Adjusted U.S. Insured
                       Catastrophe Losses By Cause of Loss,
                                                           1987-2006¹
               Fire, $6.6 , 2.2%        Civil Disorders, $1.1
                                               , 0.4%           Water Damage, $0.4
          Wind/Hail/Flood,                                            , 0.1%
            $9.3 , 3.1%                                               Utility Disruption,
 Earthquakes, $19.1 ,                                                     $0.2 , 0.1%
        6.4%
                                                                               Tornadoes, $77.3 ,
        Winter Storms,                                                              26.0%
         $23.1 , 7.8%
                                                                                   Insured disaster losses
                                                                                 totaled $297.3 billion from
                                                                                1987-2006 (in 2006 dollars).
    Terrorism, $22.3 ,                                                             Wildfires accounted for
          7.5%                                                                  approximately $6.6 billion of
                                                   All Tropical                   these—2.2% of the total.
                                               Cyclones, $137.7 ,
                                                      46.3%
   1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars.

   Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.
   2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions

   and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood
   Insurance Program. 6 Includes wildland fires.
Source: Insurance Services Office (ISO)..
The 2008 Hurricane
     Season:
 Preview to Disaster?
                     Outlook for 2008 Hurricane
                  Season: 60% Worse Than Average
                                                              Average*               2005      2008F
 Named Storms                                                      9.6               28         15
 Named Storm Days                                                  49.1             115.5       80
 Hurricanes                                                        5.9               14          8
 Hurricane Days                                                    24.5             47.5        40
 Intense Hurricanes                                                2.3                7          4
 Intense Hurricane Days                                              5                     7     9
 Accumulated Cyclone Energy                                        96.2               NA        150
 Net Tropical Cyclone Activity                                   100%               275%       160%
*Average over the period 1950-2000.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 9, 2007.
                    Landfall Probabilities for 2008
                   Hurricane Season: Above Average
                                                                     Average*              2008F
      Entire US East & Gulf Coasts                                       52%                69%
      US East Coast Including                                            31%                45%
      Florida Peninsula
      Gulf Coast from Florida                                            30%                44%
      Panhandle to Brownsville
      Caribbean                                                           NA               Above
                                                                                           Average


*Average over the past century.
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 9, 2007.
REINSURANCE
  MARKETS
Reinsurance Prices are
Falling in Non-Coastal
Zones, Casualty Lines
                   Share of Losses Paid by
                   Reinsurers, by Disaster*
70%       Reinsurance is playing
               an increasingly                    60%
60%
           important role in the
50%          financing of mega-                                                         45%
          CATs; Reins. Costs are
40%             skyrocketing
            30%
30%                      25%
                                                                     20%
20%

10%

0%
         Hurricane Hugo Hurricane Andrew          Sept. 11 Terror 2004 Hurricane      2005 Hurricane
               (1989)              (1992)          Attack (2001)      Losses               Losses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer,
which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at
$3.85 billion for 2004 and $4.5 billion for 2005.
Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
                                                       US Reinsurer Net Income
                                                        & ROE, 1985-2007*
                                                                  Reinsurer profitability
                        $12                                      rebounded post-Katrina                                                                                                           20%




                                                                                                                                                                                  $9.68
                                                                    but is now falling




                                                                                                                                                                                          $7.96
                        $10
                                                                                                                                                                                                  15%
                        $8




                                                                                                                     $5.43
  Net Income ($ Bill)




                                                                                                                                                                                                  10%




                                                                                                             $4.53
                        $6


                                                                                                     $3.71




                                                                                                                                                                  $3.41
                                                                                                                                                          $3.17
                                                         $1.95




                                                                                                                                                                          $2.51




                                                                                                                                                                                                        ROE
                                                                                   $1.79
                                                                  $2.03


                                                                                   $2.52




                                                                                                                                     $1.99
                                                        $1.94




                        $4                                                                   $1.95                                                                                                5%




                                                                                                                             $1.47
                                               $1.38




                                                                 $1.87




                                                                                                                                                  $1.31
                                       $1.22




                                                                           $1.17




                        $2
                               $0.12




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




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




                                                                                                                                     00
                                                                                                                                             01
                                                                                                                                                  02
                                                                                                                                                          03
                                                                                                                                                                  04
                                                                                                                                                                          05
                                                                                                                                                                                  06
                                                                                                             97
                                                                                                                     98
                                                                                                                             99




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




                                                     Source: San Diego Union Tribune, 9/19/07
        ―King of Class Actions‖ Bill Lerach
  •Former partner in class action firm Milberg
  Weiss
  •Admitted felon. Guilty of paying 3 plaintiffs
  $11.4 million in 150+ cases over 25 years &
  lying about it repeatedly to courts
  •Will serves 1-2 years in prison and forfeit
  $7.75 million; $250,000 fine
           ―King of Torts‖ Dickie Scruggs




                                                                           Source: Wall Street Journal, 3/15/07
  •Won billions in tobacco, asbestos and Katrina
  litigation
  •Pleaded guilty for attempting to offer a judge
  $40,000 bribe to resolve attorney fee allocation
  from Katrina litigation in his firm’s favor. His
  son/othersguilty on related charges
  •Could get 5 years in prison, $250,000 fine
Bad Year for Tort Kingpins*
       (Continued)
      ―King of Class Actions‖ Melvyn Weiss




                                                    Source: Wall Street Journal, 3/24/07
  •Former partner in class action firm Milberg
  Weiss; Earned $251 million in legal fees
  •Pled guilty to federal charges of racketeering
  and conspiracy for paying kickbacks to
  professional plaintiffs
  •Will serve 18-33 months in prison, pay $9.75
  million in restitution; $250,000 fine



       This Space
       Available
                      Personal, Commercial &
                    Self (Un) Insured Tort Costs*
            $250   Commercial Lines           Personal Lines             Self (Un)Insured
                                                                                         Total = $216.7 Billion


            $200                                                                             $45.5
                                                                Total = $159.6 Billion
 Billions




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




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




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

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

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

Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.
REGULATORY &
 LEGISLATIVE
ENVIRONMENT
 Isolated Improvements,
   Mounting Zealoutry
                             Legal, Legislative &
                              Regulatory Issues
•   Florida ―Seeing the Light‖: State finally recognizing that it is overexposed with its
    2007 legislation having failed to deliver on political promises made
      Size of FL Hurricane Catastrophe Fund may be scaled back
      Private reinsurance sector role may expand
      Citizens actuary: extending rate freeze through 2010 unwise; 44% increase not excessive
•   Massachusetts Auto: Reforms have led to more competition, lower rates
•   Optional Federal Chartering: Recommended in Treasury plan; Still divisive issue
•   Tax Issue: Treatment of locales like Bermuda; Effort to ―level the playing field‖
•   National CAT Plan: Hearing in February and in 2007, but no current catalyst
•   Flood Reform: Likely to happen, but MS Rep. Gene Taylor unsuccessful pushing
    for NFIP to cover wind. Sen. Clinton supports idea.
•   McCarran-Ferguson: Even though Trent Lott is gone, some may still push for
    scaling back of M-F
•   Profusion of Quasi-Regulators: AGs, Governors, Congressional representatives
• Bad Faith Legislation: Attempts by trial lawyers and legislative allies to
  open new tort channels (WA referendum, Florida SB 2862)               Source: III
PRESIDENTIAL
POLITICS & P/C
PROFITABILITY
                  Political Quiz
• Does the P/C insurance industry perform
  better (as measured by ROE) under
  Republican or Democratic administrations?

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

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

                0%     2%       4%      6%       8%      10%     12%      14%     16%     18%
 *ROE for 2007/8 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52.
 Source: Insurance Information Institute
                             Summary
• Results were excellent in 2006/07; Overall profitability reached
  its highest level (est. 13-14%) since 1988
    Strong 2007 but ROEs slipping; Momentum for 2008
• Underwriting results were aided by lack of CATs & favorable
  underlying loss trends, including tort system improvements
• Property cat reinsurance markets past peak & more competitive
• Premium growth rates are slowing to their levels since WW II;
  Commercial leads decreases. Firming in personal lines?
• Rising investment returns insufficient to support deep soft
  market in terms of price, terms & conditions as in 1990s
• How/where to deploy/redeploy capital??
• Major Challenges:
    Slow Growth Environment Ahead; Cyclical & Economic
    Maintaining price/underwriting discipline
    Managing variability/volatility of results
    Managing regulatory/legislative activism
      Insurance Information
         Institute On-Line




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