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					   Overview & Outlook for
       P/C Insurance
  Focus on Michigan Markets
                  Insurance Institute of Michigan

                             Boyne Falls, MI
                              June 19, 2007


      Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
    Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org
                      Presentation Outline
• P/C Profit Overview—2006, A Cyclical Peak
     Michigan Markets Overview
•   Underwriting Trends: Unsustainable?
•   Premium Growth: Approaching a Standstill
•   Pricing: Competitive Pressures Mounting
•   Capital & Capacity: UnderleveragedROE Pressure
•   Catastrophe Loss Management
     What is the Appropriate Role for Government?
•   Reinsurance Summary
•   Financial Strength & Ratings
•   Investments: Less Bang for the Buck
•   Tort System: Great News for a Change (Mostly)
•   Legislative & Regulatory Update
•   Q&A
P/C PROFIT:
  An Historical
   Perspective
Profits in 2006 Reached
  Their Cyclical Peak
                     P/C Net Income After Taxes
                      1991-2006 ($ Millions)*
                 2001 ROE = -1.2%                Though up in 2006, insurer
  $70,000        2002 ROE = 2.2%                  profits are highly volatile                    $63,695
                 2003 ROE = 8.9%                  (2001 was the industry’s
  $60,000        2004 ROE = 9.4%
                                                    worst year ever). ROEs
                                                  generally fall below that of
                 2005 ROE= 10.5%                   most other industries.
  $50,000                                                                                    $44,155
                 2006 ROAS1 = 14.0%
  $40,000                                     $36,819                                   $38,501
                                                   $30,773                        $30,029
  $30,000                               $24,404
                                   $20,598              $21,865
                       $19,316                                $20,559
  $20,000 $14,178
                              $10,870
  $10,000           $5,840
                                                                              $3,046
        $0

 -$10,000                                                              -$6,970
               91

                      92

                             93

                                  94

                                        95

                                             96

                                                  97

                                                       98

                                                             99

                                                                  00

                                                                         01

                                                                                 02

                                                                                       03

                                                                                            04

                                                                                                  05

                                                                                                       06
*ROE figures are GAAP; 1Return on avg. 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
 -5%
                                                                                               4 Hurricanes
     87
          88
               89
                    90
                         91
                              92
                                   93
                                        94
                                             95
                                                  96
                                                       97
                                                            98
                                                                 99
                                                                      00
                                                                           01
                                                                                02
                                                                                     03
                                                                                          04
                                                                                               05
                                                                                                    06

                                                                                                           F
                                                                                                           F
                                                                                                         07
                                                                                                         08
                              US P/C Insurers                    All US Industries
*2007-08 P/C insurer ROEs are I.I.I. estimates.
Source: Insurance Information Institute; Fortune
               Profitability Peaks & Troughs in the
               P/C Insurance Industry, 1975 – 2008F
 25%
                      1977:19.0%                  1987:17.3%            2006:14.0%
 20%
                                                      1997:11.6%
 15%


 10%


  5%


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




        07F
        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
*2007-08 P/C insurer ROEs are I.I.I. estimates.
Source: Insurance Information Institute; ISO, A.M. Best.
           Insurance & Reinsurance Stocks:
           Slow Start in 2007 in P/C, Reins.
                 Total YTD Returns Through June 15, 2007
                                      6.70%                                       S&P 500

                                                                         12.86%   Life/Health

                  2.58%                  P/C insurance, reinsurance               Reinsurers
                                        stocks lagging on soft market
           1.68%                          concerns and worries over
                                            2007 hurricane season                 P/C

                                  5.77%                                           All Insurers
                                        7.03%
                                                                                  Multiline
                                                         10.11%
                                                                                  Brokers


0.0%     2.0%       4.0%       6.0%       8.0%      10.0%      12.0%      14.0%
 Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
               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, 1999-2005
                                               $ Billions
 $3.1        Ad spending by P/C insurers                                               $2.975
 $2.9        is at a record high, signaling
 $2.7            increased competition
 $2.5
 $2.3
                                                                          $2.111
 $2.1
                                                              $1.882
 $1.9                               $1.803
          $1.736       $1.737                    $1.708
 $1.7
 $1.5
             99           00           01           02           03           04         05
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
  MICHIGAN
  MARKETS
Growth & Profitability
     Overview
                        Growth in Direct Written
                      Premiums: Michigan and US
 25%

 20%           Decline in premiums in MI was marginal (-0.50%)
                      in 2004-5 while US was down 2.5%
 15%

 10%

  5%

  0%

 -5%
          93     94     95     96     97     98   99   0        01   02   03   04   05
                                           Michigan        US
Source: Insurance Information Institute; NAIC.
                      ROE: P/C (US & MI) vs. All
                       Industries, 1991–2005*
 25%
                                  MI has recently under-
 20%                            performed US P/C insurers.
 15%


 10%


  5%


  0%


 -5%
         91    92    93    94     95    96    97    98    99   00   01   02   03      04     05

                    US P/C Insurers            All US Industries         Michigan
Source: Insurance Information Institute; NAIC, Fortune.                            *Latest available.
                     ROE for Major Commercial
                    Lines in Michigan, 1994 - 2005
45%                                                  Commercial Multi-Peril
                                                     Commercial Auto
35%




                                                                                                                                                 26.6%
                       Commercial Auto and CMP
                        rebounded in Michigan in




                                                                                                                                         18.8%
25%




                                                                                                                             16.6%
                              recent years




                                                                                                                                                         14.2%
                                                                                                          13.8%




                                                                                                                                     12.2%
            11.5%




                                                                                                                         10.9%
                    9.8%
                    9.1%




15%
                                                  7.2%
                                   6.6%




                                                                                    6.1%


                                                                                                   6.3%
        5.9%




                                                                                                                  5.2%
                                                          2.6%
                                                         1.3%




                                                                                 1.1%
 5%                                                                      -0.1%
                                          -0.7%




                                                                                           -1.7%
                           -1.0%




-5%
                                                                 -8.5%




-15%
        1994        1995   1996           1997           1998    1999            2000      2001             2002         2003        2004        2005
Source: NAIC
                            ROE for Personal Lines
                           in Michigan, 1994 - 2005
30%                                                       Personal Auto                               24.7%
                                                          Homeowners                          21.4%
20%
               13.8%                                                                  13.5%
       12.1%            10.7%
                                   9.0%7.2%
10%                                              4.7%                                        6.1%
                                                         2.7%                  3.3%
                    0.8%
 0%
                                                                           -4.1%    -3.5%            -2.2%
         -4.9%             -4.9%    -6.2%
-10%                                        -8.6%                -5.8%
                                                             -9.3%
                                                    -14.5%
-20%

-30%               12-Year Average:
                                                                    -29.1%
               Auto: 4.2% Home: -1.2%
-40%
        1994     1995   1996       1997   1998    1999       2000   2001     2002     2003    2004    2005
 Source: NAIC
                 Rates of Return on Net Worth for
                   Homeowners Ins: US vs. MI
  30%                                      Will coastal insurers reallocate                        24.7%
                                           resources to Midwest/Plains?
  20%
                                   12.4%
                                                                                    9.7% 21.4%
  10%             3.6%                     5.4% 5.4% 3.8%                           13.5%
                                                                             1.4%           3.7%
      -1.7%
   0%                      -4.9%
       -4.9%
                  0.8%
                           -4.2%                                    -7.2% 3.3%
                                                                                                   -2.8%
 -10%                              -6.2%
                                           -8.6%            -9.3%
 -20%                                              -14.5%
                   Averages: 1994 to 2005
 -30%            US HO Insurance = 2.46%                                                     US
                                                                    -29.1%                   Michigan
              Michigan HO Insurance = -1.2%
 -40%
          1994    1995     1996    1997    1998    1999     2000    2001     2002   2003    2004   2005
Source: NAIC, Insurance Information Institute
                  Rates of Return on Net Worth for
                  Pvt. Passenger Auto: US vs. MI
  18%                                                            US
                                                                 Michigan
          12.1%
  13%             13.8% 10.7%
                                  12.4%                                                13.3%
          11.4% 11.6% 12.1%                                                                    11.0%
    8%                                    10.1%                                 9.4% 6.1%
                                   9.0%         4.7%
                                           7.2% 7.7%
                                                          2.7%
    3%
                                                                         4.1%
                                                         2.2%    2.0%                          -2.2%
   -2%
                    Averages: 1994 to 2005                               -4.1% -3.5%
                                                                 -5.8%

   -7%
                  US PPA Insurance = +8.94%
              Michigan PPA Insurance = +4.2%
 -12%
          1994     1995    1996    1997    1998   1999   2000    2001    2002   2003   2004    2005


Source: NAIC, Insurance Information Institute
                 Rates of Return on Net Worth for
                    Workers Comp: US vs. MI
 25%                                            Averages: 1994 to 2005
                  22.7%
                                            US WC Insurance = +8.5%
 20%                      18.6%
         17.2%                         Michigan WC Insurance = +14.2%                   17.6%

                                                                                14.1%
 15%                                                        13.0%
                                   15.8%           11.2%                                        11.4%
         14.4% 14.3%
                                  12.8%                                  9.2%
 10%                      12.4%            12.2%                  7.8%
                                                                                        10.1% 9.6%
                                           8.8%
   5%                                                      6.0%                 6.9%
                                                   4.5%
                   US
   0%                                                                    2.4%
                   Michigan
                                                                  0.2%

  -5%
          1994    1995    1996    1997     1998    1999    2000   2001   2002   2003    2004    2005


Source: NAIC, Insurance Information Institute
                 Rates of Return on Net Worth for
                     Comm. M-P: US vs. MI
  30%                        Averages: 1994 to 2005                                                26.6%
  25%                US Comm. M-P Insurance = +5.4%
                 Michigan Comm. M-P Insurance = +6.9%                                      18.8%
  20%                                                                              16.6%
                                                                           13.8%
  15%
                  9.8%
  10%     5.9%                                                                     11.2%
                                   8.9%
    5%                                          3.5%       6.7%                            8.8%
                  7.5%                                                     7.4%
                            5.2%                                                                   5.7%
          3.7%                                                     -1.7%
    0%                                     2.6%    1.6%
                                                            1.1%
                           -1.0% -0.7%
   -5%             US                              -8.5%
                   Michigan                                        -5.5%
 -10%

 -15%
          1994     1995    1996    1997    1998    1999    2000    2001    2002    2003    2004    2005


Source: NAIC, Insurance Information Institute
                 Rates of Return on Net Worth for
                     Comm. Auto: US vs. MI
 20%                         Averages: 1994 to 2005
                    US Comm. Auto Insurance = +6.9%
                                                                                               14.2%
 15%             Michigan Comm. Auto Insurance = +7.5%                                 14.0%
         11.5%
                                                                               10.9%           13.7%
                  9.1%                                                                12.2%
 10%
                                                                                 10.1%
         10.1% 9.7%         6.6%   7.2%                          6.3%
                                                                        5.2%
   5%                      7.0% 7.6%    3.9%              6.1%
                                                                          3.5%
                                                 0.1%
                   US                                    1.5%
   0%                                     1.3%
                                                 -0.1%           1.0%
                   Michigan

  -5%
          1994    1995    1996     1997   1998   1999    2000    2001   2002    2003    2004   2005


Source: NAIC, Insurance Information Institute
             PP AUTO: 10yr Avg Return on
              Equity, MI & Nearby States
                                       1996-2005
                                                                10.7%    Ohio

                                                     9.3%                Indiana
                                                  8.4%                   US
               2.5%                                                      Michigan
                                                           10.0%
                                                                         Wisconsin
                                                    9.0%
                                                                         Illinois
                                                         8.8%
                                                                         Iowa
                           4.5%
                                                                         Kentucky


0%        2%          4%          6%         8%          10%       12%

 Source: NAIC, Insurance Information Institute
              HOME: 10yr Avg Return on
              Equity, MI & Nearby States
                                        1996-2005
                                           -0.6%                      Ohio

                                                               2.8%   US
                     -7.1%                                            Indiana
                                         -5.2%
                                                                      Michigan
                                         -1.2%
                                                                      Wisconsin
                                                        0.5%
                                                                      Illinois
                              -3.9%
                                                                      Iowa
-14.0%
                                                                      Kentucky


-15%            -10%              -5%              0%            5%

  Source: NAIC, Insurance Information Institute
           WC: 10yr Avg Return on Equity,
                MI & Nearby States
                                      1996-2005

                                                  12.6%         Indiana

                                   7.4%                         US

                                                   13.1%        Michigan
                                   7.2%                         Wisconsin
                               6.6%
                                                                Illinois
                                   6.5%
                                                                Iowa
                            5.9%
                                                                Kentucky


0%                   5%                     10%           15%

 Source: NAIC, Insurance Information Institute
UNDERWRITING
Extremely Strong 2006,
Momentum for 2007/08
                 P/C Insurance Combined Ratio,
                          1970-2008F
                  Combined
 120               Ratios
                1970s: 100.3
 115            1980s: 109.2
                1990s: 107.8
 110            2000s: 102.4*


 105


 100


  95


  90




       07F
       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
Sources: A.M. Best; ISO, III    *Through 2008E; 103.6 through 2006 actual.
                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                                                                      underwriting result
                         107.4                                         since the 91.2 combined
                                                                             ratio in 1949


                                       100.1                      100.7
100                                                  98.3                                             98.6
                                                                                            96.6
            2005 figure benefited from
             heavy use of reinsurance                                            92.4
             which lowered net losses
  90
              01            02            03           04            05            06       07F        08F
Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Early Bird survey.
                   Ten Lowest P/C Insurance
                  Combined Ratios Since 1920
94                                                                                     93.3
                                                                93.0     93.1   93.1
93                                  92.3     92.4      92.4
                          92.1
92
                 91.2
91
90
                                                                  The industry’s best
89
                                                                  underwriting years
88     87.6          The 2006 combined                            are associated with
87                   ratio of 92.4 was the                          periods of low
                      best since the 87.6                            interest rates
86                    combined in 1949
85
       1949      1948      1943     1937      1935     2006      1950    1939   1953   1936

Sources: Insurance Information Institute research from A.M. Best data.
                        Underwriting Gain (Loss)
                              1975-2006
              35     Insurers earned an underwriting profit of
              30   $31.2 billion in 2006, the largest ever but only
              25
              20      the second since 1978. Despite the 2006
              15        underwriting profit, the cumulative
              10   underwriting deficit since 1975 is $419 billion.
               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
    Source: A.M. Best, Insurance Information Institute
                        Commercial Lines Combined
                           Ratio, 1993-2006E*
                  Commercial coverages                                                                     Outside CAT-
                                                                                                           affected lines,
                  have exhibited extreme




                                                                                   122.3
                                                                                                            commercial
125               variability. Are current                                                              insurance is doing
                    results anomalous?                                                                fairly well. Caution is
120                                                                                                         required in
                    112.5




                                                               112.3
                                                                                                       underwriting long-




                                                                           111.1
          110.3



                             110.2




                                                                                           110.2
                                                                                                      tail commercial lines.


                                                       109.7
115
                                      107.6




                                                                                                                   105.1
110
                                               103.9




                                                                                                           102.5
                                                                                                   102.0
105

100                 2006 results will benefited from




                                                                                                                           94
 95               relatively disciplined underwriting
 90
                          and low CAT losses

 85
          93       94       95        96       97      98      99          00      01      02      03      04      05      06F
Source: A.M. Best; Insurance Information Institute                     .
                                Personal Lines
                          Combined Ratio, 1993-2006E




                                                                          110.9
115




                                                                  109.9



                                                                                  105.3
110                                104.9
                  104.5




                                                          104.5
         103.9



                           103.5




                                                  102.7
105
                                           99.8




                                                                                          98.4



                                                                                                        96.4
100




                                                                                                 94.3
 95




                                                                                                               91.0
                 A very strong 2006 resulted from
 90               favorable frequency & severity
                    trends and low CAT activity
 85
        93        94       95      96      97     98      99      00      01      02      03     04     05     06F
Source: A.M. Best; Insurance Information Institute.
                                         Impact of Reserve Changes on
                                               Combined Ratio
                                         PY Reserve Development             Combined Ratio Points
                           $25                        6.5                                                7
                                                                        Reserve adequacy
Reserve Development ($B)




                                                                          has improved                   6




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


                           $10                                          2.4                              3
                                                                                1.9
                                                                $13.9
                                                                                                         2
                                              $10.8




                                                                                        1.1
                           $5                                            $9.9


                                                                                 $8.0
                                                                                                0.4       1




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

Source: A.M. Best, Lehman Brothers for years 2005E-2007F
  PREMIUM
  GROWTH
Deceleration in 2006,
Even Slower in 2007
              Strength of Recent Hard Markets
                     by NWP Growth*
                     1975-78              1984-87                                     2001-04
 25%
                                                         2006-2010 (post-Katrina)
 20%                                                   period could resemble 1993-97
                                                               (post-Andrew)
 15%


 10%


  5%


  0%


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




        2007F
        2008F
        2009F
        2010F
         1970
         1971
         1972
         1973
         1974
         1975
         1976
         1977
         1978
         1979
         1980
         1981
         1982
         1983
         1984
         1985
         1986
         1987
         1988
         1989
         1990
         1991
         1992
         1993
         1994
         1995
         1996
         1997
         1998
         1999
         2000
         2001
         2002
         2003
         2004
         2005
         2006
                                                     *2007-10 figures are III forecasts/estimates. 2005 growth of
                                                     0.4% equates to 1.8% after adjustment for a special one-time
Note: Shaded areas denote hard market periods.       transaction between one company and its foreign parent.
Source: A.M. Best, Insurance Information Institute   2006-2008 figures from III Groundhog Survey.
                                  Growth in Net Written
                                  Premium, 2000-2008F
                         14.1%                        P/C insurers will experience
                                                       their slowest growth rates
                                                        since the late 1990s…but
                                      9.8%
                                                        underwriting results are
               8.1%                                   expected to remain healthy
   5.1%                                          4.7%                   4.3%

                                                                                    1.8%    1.9%
                                                             0.3%

    2000        2001       2002        2003       2004        2005       2006       2007F   2008F
Source: A.M. Best; Forecasts from the Insurance Information Institute’s Groundhog
survey: http://www.iii.org/media/industry/financials/groundhog2007/.
   PRICING
Under Pressure in 2007
                        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 Homeowners Insurance
                  Expenditure, Selected States, 2004*
                       5 most expensive states are mostly coastal
              $1,362


 $1,600                                              Most Midwest states have below
                                                     average home insurance costs.
 $1,400                                                OH ranks 45th and WI 49th
                       $1,074




 $1,200
                                $991
                                       $929
                                              $907
                                                                                                   ID, UT are the
 $1,000                                                                                          least expensive
                                                       $767
                                                              $729
                                                                     $726
                                                                            $659
                                                                                   $636
                                                                                          $615
    $800




                                                                                                  $575
                                                                                                           $523
                                                                                                                  $483


                                                                                                                              $448
    $600

    $400

    $200

       $0
             TX        LA OK           FL MS          MN US          MI     IL     IN     KY      IA       OH     WI          ID
Source: NAIC; Insurance Information Institute.                                                           *Latest available.
                      Average Expenditures on
                      Homeowners Insurance**
      Countrywide home insurance expenditures
 $900 rose an estimated 6% in 2006, 4% in 2007            $868
 $850                                                      $835
 $800                                                   $787
         Homeowners in non-
 $750                                              $729
           CAT zones will see
 $700   smaller increases, but                $668
 $650
         larger in CAT zones             $593
 $600
                                    $536
 $550                          $508
                     $481 $488
 $500           $455
           $440
 $450 $418
 $400
       95 96 97 98 99 00 01 02 03 04 05* 06* 07*
*Insurance Information Institute Estimates/Forecasts
**Excludes cost of flood and earthquake coverage.
Source: NAIC, Insurance Information Institute
            Average Commercial Rate Change,
              All Lines, (1Q:2004 – 1Q:2007)
  0%
        -0.1%         Magnitude of rate decreases
                       diminished greatly after
 -2%                 Katrina but have grown again
                                                                -2.7%
 -4%           -3.2%                                                -3.0%
                                                         -4.6%
 -6%                                                                             -5.3%
                       -5.9%
 -8%                       -7.0%
                                                   -8.2%
-10%                                -9.4%
                                         -9.7%            KRW Effect                 -9.6%

-12%                                                                                     -11.3%
          1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
                Average Commercial Rate
               Change by Line: 4Q99 – 1Q07
                                                  Commercial accounts
                                                trended downward from
                                                 early 2004 to mid-2005
                                                   though that trend
                                                moderated post-Katrina




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

80%                    Commercial Property           Business Interruption
          71%
70%              63%                        Largest increases for Commercial
60%                                       Property & Business Interruption are
                            48%           in the Southeast, smallest in Midwest
50%
40%                                          35%
                                  32%
30%                                                      28%
                                                   21%                21%
20%
                                                               12%           10%
10%
0%
          Southeast        Southwest        Pacific NW   Northeast    Midwest
Source: Council of Insurance Agents and Brokers
    Percent of Commercial Accounts Renewing
      w/Positive Rate Changes, 1st Qtr. 2007

80%                    Commercial Property        Business Interruption

70%
                                                      Commercial Property &
                                                       Business Interruption
60%
                ―Soft‖ market seemed to                    increases are
                hit Midwest about 1 year                disappearing in the
50%             before the rest of the US              Southeast; Completely
40%                                                    gone in the Midwest &
                                                             Northeast
30%
20%
          11%               9%                9% 9%
                 8%
10%                                5%
                                                       0% 0%       0% 0%
0%
          Southeast        Southwest Pacific NW Northeast          Midwest
Source: Council of Insurance Agents and Brokers
CAPACITY/
 SURPLUS
The Industry in
Underleveraged
                         U.S. Policyholder Surplus:
                                1975-2006
        $550                       Capacity as of 12/31/06 was
        $500                    $487.1B (est.), 14.4% above year-
                                  end 2005, 71% above its 2002
        $450
                                 trough and 46% above its 1999
        $400                                   peak.
        $350         Foreign reinsurance
$ Billions




        $300
                     and residual market
        $250
                     mechanisms absorbed
        $200
                      45% of 2005 CAT
                       losses of $62.1B                               “Surplus” is a measure of
        $150                                                          underwriting capacity. It is
        $100
                                                                      analogous to “Owners
                                                                      Equity” or “Net Worth” in
             $50                                                      non-insurance organizations
              $0
                   7576 77 7879 8081 82 8384 8586 87 8889 9091 9293 94 9596 9798 99 0001 0203 04 0506

Source: A.M. Best, ISO, Insurance Information Institute.
                                            Annual Catastrophe Bond
                                         Transactions Volume, 1997-2006
                                                      Risk Capital Issued   Number of Issuances
                                                                                                  $4,693.4
                                $5,000        Catastrophe bond issuance has                                  20
                                $4,500      soared in the wake of Hurricanes                                 18
 Risk Capital Issues ($ Mill)




                                $4,000           Katrina and the hurricane                                   16




                                                                                                                  Number of Issuances
                                $3,500                seasons of 2004/2005                                   14
                                $3,000                                                                       12
                                $2,500                                                                       10
                                                                              $1,729.8    $1,991.1
                                $2,000                                                                       8
                                                            $1,139.0
                                $1,500                            $966.9$1,219.5
                                                                                                             6
                                              $846.1 $984.8                         $1,142.8
                                $1,000 $633.0                                                                4
                                  $500                                                                       2
                                    $0                                                                       0
                                           97    98     99     00     01    02   03   04     05      06
Source: MMC Securities and Guy Carpenter; Insurance Information Institute.
  MERGER &
 ACQUISITION
Few Catalysts for Major
  P/C Consolidation
                                                 P/C Insurance-Related M&A
                                                     Activity, 1988-2006
                                                                   Transaction Values                                                Number of Transactions

                              $60,000        IN 2007, Liberty Mutual                                                        $55,825                          No model for                                       140
                                              acquired Ohio Casualty
                                                                                                                                                               successful




                                                                                                                                                  $40,032
                                               for $2.7B, D.E. Shaw                                                                                                                                             120
 Transaction Value ($ Mill)




                              $50,000




                                                                                                                                                                                                                      Number of Transactions
                                                                                                                                                             consolidation




                                                                                                                                                                                                      $35,221
                                             acquired James River for
                                                                                                                                                             has emerged




                                                                                                                           $30,873
                                                   $575 million*                                                                                                                                                100
                              $40,000
                                                                                                                                                                                                                80




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




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

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


                                                                             $2,435




                                                                                                                                                            $1,249
                                                                                      $1,882




                              $10,000                                                                                                                                                                           20



                                                                                                                                                                     $486


                                                                                                                                                                                      $425
                                  $0                                                                                                                                                                            0
                                        88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
*Announced May 7 and June 11, respectively.
Source: Conning Research & Consulting.
  INVESTMENT
     IRONY
 Markets & Interest
Rates Up, Returns Flat
                   Property/Casualty Insurance
                    Industry Investment Gain*
                                                         $ Billions
                                         $57.9                                                   $59.4
 $60                                                     $56.9                                           $55.7
                                 $52.3           $51.9
                         $47.2                                                           $48.9
 $50                                                             $44.4           $45.3
                 $42.8
 $40     $35.4                                                           $36.0

 $30
                  Investment gains fell in
 $20              2006 and are now only
                   comparable to gains
 $10
                   seen in the late 1990s
   $0
          94      95      96      97      98      99       00     01      02      03      04 05** 06
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.
 **2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.
CATASTROPHIC
    LOSS
 Insurers Accused of
Crying Wolf Over Cats
              U.S. Insured Catastrophe Losses*
                                                $ Billions                $100 Billion




                                                                                                                  $100.0
$120
             2006 was a welcome respite.                                  CAT year is
$100                                                                      coming soon
              2005 was by far the worst




                                                                                            $61.9
  $80            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




                                                                          $5.9
                                  $5.5
                   $4.7




  $20


                                                         $4.6
          $2.7




                                             $2.6




                                                                                                           $1.2
   $0
          89
          90
                   91
                   92
                   93
                   94
                                             95
                                             96
                                             97
                                             98
                                                        99
                                                        00
                                                        01
                                                        02
                                                                                 03
                                                                                 04
                                                                                 05
                                                                                 06
                                                                                                           07Q1
                                                                                                            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 = $12.2B.
Source: Property Claims Service/ISO; Insurance Information Institute
               U.S. Catastrophe Losses 2006: States
                 With Largest Losses ($ Millions)
                                  Some 33 catastrophe events* in 34 states cost
     $1,600         $1,500       insurers an estimated $8.8bn in 2006, compared
                                 with $61.9bn in 2005. Cat losses in the following
     $1,400                      five states -- totaling $4.5bn -- represent half the
     $1,200                            total catastrophe losses for the year.

     $1,000                          $878            $873
       $800                                                          $688
                                                                                     $601
       $600

       $400                         SURPRISE!! Indiana led the
                                       US with $1.5 billion in
       $200                         insured CAT losses in 2006
          $0
                    Indiana        Missouri       Tennessee          Texas           Kansas
*ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.
Source: ISO; Insurance Information Institute
                                   Number of Tornadoes,
                                      1985 – 2006p
                    There are usually more than 1,000
                   confirmed tornadoes each year in the
                   US. They accounted for about 25% of




                                                                                                                                          1819
 2,000
                       catastrophe losses since 1985
 1,800




                                                                                                 1424




                                                                                                                                   1376
 1,600




                                                                                                        1345




                                                                                                                                                        1333
                                                       1297




                                                                                                                                                 1254
                                                                            1234




                                                                                                                      1216
                                                              1173



                                                                                   1173
 1,400




                                                                                          1148
                                         1133
                                                1132



                                                                     1082




                                                                                                               1071
 1,200




                                                                                                                             941
                                   856




 1,000
                 765


                             702
           684


                       656




   800
   600
   400
   200
      0




                                                                                                                                                        06p
           85
                 86
                       87
                             88
                                   89
                                         90
                                                91
                                                       92
                                                              93
                                                                     94
                                                                            95
                                                                                   96
                                                                                          97
                                                                                                 98
                                                                                                        99
                                                                                                               00
                                                                                                                      01
                                                                                                                             02
                                                                                                                                   03
                                                                                                                                          04
                                                                                                                                                 05
Source: US Dept. of Commerce, Storm Prediction Center, National Weather Service; Ins. Info. Inst.
                          Inflation-Adjusted U.S. Insured
                       Catastrophe Losses By Cause of Loss,
                                                         1986-2005¹
                 Wind/Hail/Flood5            Civil Disorders         Water Damage
                      2.8%                                                0.1%
                                                 6 0.4%
                                            Fire                                  Tornadoes 2
       Earthquakes 4
                                            2.3%             Utility Disruption     24.5%
           6.7%
                                                                    0.1%

      Winter Storms
                                                                                     Insured disaster losses
          7.8%                                                                    totaled $289.1 billion from
                                                                                 1984-2005 (in 2005 dollars).
            Terrorism                                                            Tropical systems accounted
              7.7%                                                                 for nearly half of all CAT
                                                                                   losses from 1986-2005, up
                                                                                from 27.1% from 1984-2003.
                                                                         All Tropical
                                                                            Cyclones 3
                                                                               47.5%
   1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars.

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

   and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood
   Insurance Program. 6 Includes wildland fires.
Source: Insurance Services Office (ISO)..
               Hurricane Katrina Claim Status
                on Storm’s 1 st Anniversary*

   95% of the 1.2                                                  In Process, 3%
million homeowners                                                           Mediation/
insurance claims in                                                        Litigation, 2%
    Louisiana &
  Mississippi were
settled by Katrina’s
 1st anniversary of
 Katrina, with just
   2% in dispute
                          Settled, 95%


*Hurricane Katrina made its north Gulf coast landfall August 29, 2005.
Source: Insurance Information Institute survey, August 2006.
                       Total Value of Insured
                   Coastal Exposure (2004, $ Billions)
        Florida                                                $1,937.3
     New York                                                 $1,901.6
         Texas                           $740.0
 Massachusetts                        $662.4
    New Jersey                    $505.8
   Connecticut                 $404.9
      Louisiana           $209.3
                                         Florida & New York lead the
    S. Carolina
       Virginia
                        $148.8
                        $129.7
                                            way for insured coastal
         Maine         $117.2             property at more than $1.9
 North Carolina
      Alabama
                       $105.3
                      $75.9
                                                 trillion each.
       Georgia        $73.0
      Delaware       $46.4                  CAT losses will drive or
New Hampshire
     Mississippi
                     $45.6
                     $44.7
                                         influence much of industry’s
  Rhode Island
      Maryland
                     $43.8
                    $12.1
                                               legislative agenda
                   $0         $500          $1,000   $1,500   $2,000      $2,500
Source: AIR Worldwide
REINSURANCE
  MARKETS
Big Risk, Big Reward or
   Big Government?
                   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.
                             Ratio of Reinsurer Loss & Underwriting
                             Expense to Premiums Written, 1985-2006
                                         Despite the respite in 2006,
                                         reinsurers paid an average
                                         of $1.11 in loss and expense
                                            for every $1 in written




                                                                                                                                    1.39
                     1.5
                                             premium since 1985




                                                                                                                                                                1.26
                     1.4
                           1.21
  Loss & LAE Ratio




                                                                     1.18




                                                                                                                                           1.17
                     1.3




                                                                                                                      1.14
                                                                                                                             1.13
                                                                                   1.08
                                                1.10




                                                                                          1.10
                                                1.06


                                                       1.09
                                                              1.08
                                  1.07
                                         1.07




                     1.2




                                                                                                               1.06




                                                                                                                                                         1.06
                                                                            1.07




                                                                                                 1.03
                                                                                                        1.02




                                                                                                                                                  1.01
                     1.1




                                                                                                                                                                       0.95
                     1.0
                     0.9
                     0.8
                           85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: Reinsurance Association of America.
  FINANCIAL
 STRENGTH &
   RATINGS
Industry Has Weathered
   the Storms Well
                        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;
                              P/C Insurer Impairments,
                                     1969-2006
                   The number of impairments varies
               significantly over the p/c insurance cycle,
   70         with peaks occurring well into hard markets




                                                                                      60
                                                                                     58
   60




                                                                                54




                                                                                                                      50
                                                                49


                                                                           49
                                                                           49




                                                                                                                      49

                                                                                                                     47
   50




                                                                                           41
   40                                                      36




                                                                                                                           35
                              34




                                                                      34
                                                                     31




                                                                                                           31
                                                                                                29
   30
                                            19




                                                                                                                19
                                                                                                                18




                                                                                                                                18
   20
                                                      16
               15




                                                                                                      15




                                                                                                                                      15
                                                     14
                                       13




                                                     13




                                                                                                                                     13
              12




                                       12




                                                                                                     12
                         11
                        9

                                   9



                                                 9




   10
          8


                    7




     0
          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
  STATE
 RESIDUAL
 MARKETS
How Big is Too Big?
                 Florida Citizens Exposure to
                  Loss (Billions of Dollars)
                     Exposure to loss in Florida
   $450            Citizens nearly doubled in 2006
                                                                   408.8
   $400
   $350
   $300
   $250                                                   $210.6
                                $195.5           $206.7
   $200
                $154.6
   $150
   $100
     $50
       $0
                 2002            2003             2004    2005     2006
Source: PIPSO; Insurance Information Institute
              Major Residual Market Plan Estimated
              Deficits 2004/2005 (Millions of Dollars)

                Florida Hurricane                 2004      2005               Mississippi Windstorm
                Catastrophe Fund                                                    Underwriting
                      (FHCF)          Florida Citizens    Louisiana Citizens    Association (MWUA)
      $0
   -$200
   -$400
   -$600                             -$516
                                                                                        -$595 *
   -$800
 -$1,000
                                                                  -$954
 -$1,200
 -$1,400                                           Hurricane Katrina pushed all of the
 -$1,600              -$1,425                       residual market property plans in
                                                   affected states into deficits for 2005,
 -$1,800
                                           -$1,770     following an already record
 -$2,000                                                hurricane loss year in 2004

* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.
Source: Insurance Information Institute
What Role Should the
Federal Government
  Play in Insuring
  Against Natural
  Disaster Risks?
                        Comprehensive National
                       Catastrophe Plan Schematic
   1:500 Event




                       National Catastrophe Contract Program

  1:50 Event



                              State Regional Catastrophe Fund
State Attachment

                        Personal
                        Disaster                         Private Insurance
                        Account
Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.
 Legislation has been
 introduced and ideas
       espoused by
ProtectingAmerica.org
  will likely get a more
   thorough airing in
           2007/8
  FLORIDA’S
 APPROACH TO
  MANAGING
HURRICANE RISK
  Does it Add Up?
                        Pre- vs. Post-Event in FL for
                          2007 Hurricane Season
            $90     Pre-Event Funding          Post-Event Funding (Assessments & Bonds)
                                                                                                          $80.0B
            $80       There is a very significant
            $70       likelihood of major, multi-
            $60
                       year assessments in 2007                                            $55.0B
 Billions




                                                                                                              $54.2
                                                                            $49.5B
            $50                                              $43.8B
            $40                              $35.0B




                                                                                              $37.4
                                                                               $34.5
                    Total =

                                                                $31.4
            $30                 $25.0B
                  $20.0 Billion
                                                $24.1
                                 $14.6




            $20
                     $9.9




                                                                                                              $25.8
                                                                                              $17.6
                                                                               $15.0
            $10
                                                                $12.4

                   $10.1       $10.4          $10.9
             $0
                  1-in-20     1-in-30        1-in-50         1-in-70        1-in-85       1-in-100        1-in-250
Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available
 through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not include
financing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.”
Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
                  Average Annual Assessment per
               Household, 1-in-100 Year Event in 2007
                                                          The average Florida household
                                                          will pay $8,699 over 30 years in
                                                           assessments if a 1-in-100 year
                                                        event strikes in 2007. Assessments
                                                         could rise if additional storms hit
                                                                 in 2007 or beyond.




Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
                      Savings vs. Costs by Region:
                  Neither Equitable nor Proportionate
                                                                            STATEWIDE AVERAGE
                                                                             Average Savings: $265
                                                                           Cost of 1-in-30 Storm: $2,550
                                                                           Cost is 10 times avg. savings
                                                                                            ORLANDO
        TALLAHASSEE                                                                  Average Savings: $30
     Average Savings: $20                                                        Cost of 1-in-30 Storm: $2,075
  Cost of 1-in-30 Storm: $2,000
                                                                                  Cost is 69 times avg. savings
  Cost is 100 times avg. savings



               TAMPA                                                                           MIAMI
      Average Savings: $100                                                        Average Savings: $1,120
    Cost of 1-in-30 Storm: $2,300                                                Cost of 1-in-30 Storm: $3,375
    Cost is 23 times avg. savings                                                 Cost is 3 times avg. savings

Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.
                    Public Attitude Monitor 2006:
                   Unfairness of Taxpayer Subsidies
                   Most non-coastal dwellers believe taxpayer
                 subsidies for coastal property owners are unfair
     70%
                      Very unfair
     60%              Somewhat Unfair
     50%
                                                34%                  31%
     40%                  22%
     30%
     20%
                          29%                   25%                  30%
     10%
       0%
                 Coastal Counties          Interior Counties   Noncoastal States


                               Coastal States
Source: Insurance Research Council
  KEY LINES
Discipline Will Remain
(Mostly) Intact in 2007
Private Passenger Auto
                          Private Passenger Auto
                             Combined Ratio
 110              PPA is the profit                           109.5
                                                                      107.9
                juggernaut of the p/c
              insurance industry today
 105                                                                          104.2
                                                      103.5
       101.7 101.3101.3
                               101.0          101.1
 100                                   99.5
                                                                                      98.4
              Average Combined 1993 to 2005= 101.4
                                                                                                    95.1
  95            Most auto insurers have shown sig-                                           94.3
                                                                                                           93.0
              nificant improvements in underwriting
                    performance since mid-2002
  90
         93     94        95    96      97     98      99      00      01      02     03     04      05    06F
Sources: A.M. Best; III
Homeowners Insurance
                              Homeowners Insurance
                                Combined Ratio
                     158.4
 160                                              Average 1990 to 2005= 113.1
 150                                    Insurers have paid out an average of
                                        $1.13 in losses for every dollar earned
 140                                     in premiums over the past 16 years
 130
                                            121.7                        121.7
 120       117.7               118.4
        113.0              113.6   112.7                       111.4
                                                     109.4 108.2               109.3
 110
                                                  101.0                                           100.3
 100                                                                                  98.2
                                                                                             94.4         93
  90
         90     91    92     93   94   95    96     97    98   99   00    01     02    03    04     05 06F
Sources: A.M. Best; III
COMMERCIAL
MULTI-PERIL &
COMMERCIAL
   AUTO
           Commercial Multi-Peril Combined
                 (Liability vs. Non-Liability Portion)



                                             125.0
 130                                                                                               CMP-Liability




                                                             122.4



                                                                                121.0
                                                                                                   CMP-Non-Liability
                        119.8
 125
         119.0




                                                                             117.0
                      116.8




                                                                                        116.2

                                                                                                   116.1
                                                 115.3



                                                                     115.0
                                                                     115.0
 120                                113.6



                                                         113.1
 115
                                108.5




                                                                                                              104.9
 110




                                                                                                                         101.9
             100.7




 105
                                               CMP- has




                                                                                                                  97.7
                                                                                            97.3
 100
                                            improved recently




                                                                                                                             93.8
  95




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




                                                      120.5

                                                                 120.1
 125                                                                         122.5               Liability = 110.2


                                           115.9
 120
                                                                                                      PD = 97.1
           112.1




                                  113
                      112



 115




                                                                                        106.6
 110




                                                                     103.6


                                                                                102.3
                          102.2




 105
                                               99.7




                                                                                                   99.4
                                    99.0




                                                          99.0
               96.7




                                                                                                             96.6
                                                                                            95.9
 100




                                                                                                                         93.3
                                                                                                      92.1
   95




                                                                                                                       90.7
                       Commercial Auto has




                                                                                                                87.1
   90
   85                 improved dramatically
   80
            95        96          97        98         99         00           01        02         03        04       05
Sources: A.M. Best; III
  WORKERS
COMPENSATION
 OPERATING
ENVIRONMENT
                     Workers Comp Combined Ratios,
                              1994-2006P
                      Workers Comp Calendar Year vs. Ultimate Accident Year –
                                        Private Carriers
Percent




                                                                     140

                                                                                 135
140



                                                         131




                                                                                        123
130




                                                                                       122
                                             119




                                                                           118
                                                               115
120




                                                                                                111

                                                                                                      110
                                                   107




                                                                                                                 107
                               106




                                                                                              104




                                                                                                                            103
110
         101



                101



                                       101
                             100
               97




                                                                                                                                       97
               97




                                                                                                            96
100




                                                                                                                       88

                                                                                                                                  87


                                                                                                                                            87
 90

 80
         1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p

p Preliminary AY figure.                             Calendar Year                 Accident Year
Accident Year data is evaluated as of 12/31/2006 and developed to ultimate
Source: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI
Annual Statement Analysis.
Includes dividends to policyholders
                   Workers Comp Lost-Time
                  Claim Frequency (% Change)
  Percent                                                                         Cumulative Change of –52.1%
  Change                                   Lost-Time Claims                      since 1991 means that lost work
  2                                                                                time claims have been cut by
                             0.3                   0.5                                    more than half
  0

 -2
                                                                 -2.3
 -4
                                                          -3.9                                    -3.9
 -6
       -4.2 -4.4                           -4.5                           -4.5          -4.5 -4.1

 -8                                 -6.5                                         -6.9                    -6.6 -6.8

-10                  -9.2
        91     92     93 94          95     96     97      98        99   00     01     02   03   04     05 06p
                                                    Accident Year
2003p: Preliminary based on data valued as of 12/31/2006
1991-2005: Based on data through 12/31/2005, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
Source: NCCI
                    Workers Comp Indemnity Claims
                   Costs Have Accelerated, 1993-2006p
    Indemnity
Claim Cost (000s)
                                                      Lost-Time Claims
                                                                                                                                  $19.6
                                                                                                                          $18.6
 $19          Annual Change 1991–1996:                  +1.2%                                               $17.7 $18.0
 $17
              Annual Change 1997–2005:                  +6.6%                                 $16.5 $16.9
                                                                                      $15.1
 $15                                                                          $13.6
 $13                                                                  $12.4
                                                              $11.4
                                                     $10.6
 $11 $9.9 $9.6           $10.0
               $9.4 $9.8
  $9                                                                          Cumulative Change = +108.5%
                                                                                     (1993-2006p)
   $7
   $5
           91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06p
                                                               Accident Year
2005p: Preliminary based on data valued as of 12/31/2006
1991-2005: Based on data through 12/31/2005, developed to ultimate
Based on the states where NCCI provides ratemaking services
Excludes the effects of deductible policies
Source: NCCI
                          Workers Comp Medical Claims
                               Continue to Climb
     Medical
Claim Cost ($000s)

                                                                                                                                 $24.6
     $25        Annual Change 1991–1996:                   +4.1%                                                            $22.9
                Annual Change 1997–2005:                   +9.5%
                                                                                                 $20.5
     $20                                                                                    $19.2
                                                                                       $17.6
                                                                                  $16.4
                                                                             $14.4
     $15                                                                $13.3
                                                                   $12.0
                                                              $11.1
                                                         $10.1
                             $9.4
     $10 $8.3 $8.4 $8.2 $8.9                                                              Cumulative Change = +200%
                                                                                                (1993-2006p)
       $5
                91       92       93      94       95       96       97       98      99       00       01   02   03   04    05   06p
                                                                  Accident Year
 2006p: Preliminary based on data valued as of 12/31/2006
 1991-2005: Based on data through 12/31/2005, developed to ultimate
 Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
                    Med Costs Share of Total
                   Costs is Increasing Steadily
                                                                          2006p

                                        1996                    Indemnity
                                                                   41%
                                                                                  Medical
          1986                                                                     59%
                               Indemnity         Medical
                                  52%             48%

                   Medical
  Indemnity         45%
    55%




Source: NCCI (based on states where NCCI provides ratemaking services).
Legal Liability &
Tort Environment
  Definitely Improving But
   Not Out of the Woods
                     Personal, Commercial &
                   Self (Un) Insured Tort Costs*
            $250   Commercial Lines           Personal Lines             Self (Un)Insured
                                                                                         Total = $231.3 Billion

                                                                                             $49.4
            $200
                                                                Total = $159.6 Billion
 Billions




            $150                       Total = $121.0 Billion             $30.0              $86.7
                                               $20.4
            $100                                                          $70.9
                   Total = $39.3 Billion
                                               $51.0
            $50                                                                              $95.2
                        $5.2                                              $58.7
                       $17.1                   $49.6
                       $17.0
             $0
                       1980                    1990                       2000               2005
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.
                                          Tort System Costs,
                                             2000-2008F
                     $300                                                                       $295   2.5%
                                            2.22% 2.24% 2.22%
                     $280           2.03%                               2.09% 2.05% $270 2.03%
                                                                                     2.04%
                                                               $260
                            1.82%




                                                                                                              Tort Costs as % of GDP
                     $260                           $246                                               2.0%




                                                                           $261


                                                                                   $261
                                            $233
 Tort System Costs




                     $240
                     $220           $205                                                               1.5%
                     $200
                            $179
                     $180                                                                              1.0%
                                                  After a period of rapid
                     $160
                     $140
                                               escalation, tort system costs                           0.5%
                     $120                      as % of GDP are now falling
                     $100                                                                              0.0%
                             00      01      02       03        04        05      06E     07F   08F
                                            Tort Sytem Costs         Tort Costs as % of GDP

Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.
REGULATORY
  UPDATE
Busy Year for Insurers
   in Washington
               Federal Legislative Update
  Federal Terrorism Reinsurance (TRIA)
  • TRIA expires 12/31/07. The current federal program offers $100 billion of
    coverage subject to a $27.5B industry aggregate retention.

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

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

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

Sources: Lehman Brothers, Insurance Information Institute
               Federal Legislative Update
 Natural Disaster Coverage
 • Some insurers are pushing for federal catastrophic risk fund coverage in the
   wake of billions of dollars of losses suffered by insurers from the 2004-2005
   hurricane seasons.
 • Legislative relief addressing property/casualty insurers’ exposure to natural
   catastrophes, such as the creation of state and federal catastrophe funds, has
   been advocated by insurers include Allstate and State Farm
   recently. However, there is active opposition many other insurers and all
   reinsurers.
 • There are supporters in Congress, mostly from CAT-prone states. Skeptics in
   Congress believe such a plan would be a burden on taxpayers like the NFIP
   and that the private sector can do a better job. Unlike TRIA, the industry is
   not unified on this issue.
 • Allowing insurers to establish tax free reserves for future catastrophe losses
   has also been proposed, but Congress has not yet indicated much support.
Sources: Lehman Brothers, Insurance Information Institute
            Federal Legislative Update
McCarran-Ferguson Insurance Antitrust Exemption
• Under McCarran-Ferguson Act of 1945, insurers have limited immunity
  under federal anti-trust laws allowing insurers to pool past claims
  information to develop accurate (actuarially credible) rates.
• Very low level of understanding of M-F in Washington
• Certain legislators threaten to revoke McCarran-Ferguson because of
  alleged collusion in the wake of Hurricane Katrina. However, the view
  among some Washington insiders is that such a move would hurt small
  insurers with less resources rather than the large insurers perhaps being
  targeted. The current bills designed to revoke McCarran-Ferguson are
  S.618 and H.R. 1081.
• The government appointed Antitrust Modernization Commission in an
  April 2007 report strongly encouraged Congress to re-examine the
  McCarran-Ferguson Act. Notably, 4 of the commissions 12 members
  called for a full repeal of the law. Sources: Lehman Brothers, Insurance Info. Institute
      Insurance Information
         Institute On-Line




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