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					  The Insurance Cycle is
 Alive and Well and Ready
  to Kill Your Company:
   Are Actuaries to Blame?
                       Casualty Actuarial Society
                         Ratemaking Seminar
                           New Orleans, LA

                               March 10, 2005

Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
    Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org
                        Presentation Outline
• P/C Financial Overview & Outlook: The Cycle Returns
       Premiums
       Underwriting Performance
       Pricing, Profits
       Capital/Capacity
       Investments
       Financial Strength/Ratings
•   Will it Be Different This Time Around?
•   Actuaries: Are They to Blame?
•   3 Case Studies: PPA, Homeowners & WC
•   Investment Income Influence Considerations
•   Exogenous Influences
•   Possible Solutions
•   Summary
•   Q&A
P/C FINANCIAL
  OVERVIEW
             Highlights: Property/Casualty,
            9-Months 2004 vs. 9-Months 2003
                                Growth rate less than half
                                        2004          2003
                                  that of a year earlier          Change
Net Written Prem.                          321,225   307,472       +4.5%
Loss & LAE                                 223,687   216,796       +3.2%
Net UW Gain (Loss)                           2,848   (5,854)        N/A
Net Inv. Income
  Record Surplus!                           28,748   27,676       +3.9%
                                                      An underwriting profit?
                                                           What’s that?
Net Income (a.t.)                           26,707   20,819       +28.3%
Surplus*                                   369,018   346,987       +6.3%
Combined Ratio                                97.9   100.3**       -2.4 pts.
*2003 surplus figure is as of 12/31/03
**The combined ratio for full-year 2003 was 100.1         Combined < 100
CYCLICAL EVIDENCE:

    PREMIUMS
             Strength of Recent Hard Markets
                    by NWP Growth*
                       1975-78                1984-87                                       2001-04
25%
                                                         Real NWP Growth During
20%                                                        Past 3 Hard Markets
                                                                1975-78: 8.6%
15%
                                                               1984-87: 11.2%
10%
                                                               2001-04E: 6.8%
 5%

 0%

-5%                                        Premium growth is faltering. Real
                                          growth in 2005 will approach ZERO.
-10%




       2004F
        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

        2005
Note: Shaded areas denote hard market periods.          *2004 based on 1st half results from ISO.
Source: A.M. Best, Insurance Information Institute      2005 figure is III forecast.
CYCLICAL EVIDENCE:

  UNDERWRITING
  PERFORMANCE
                P/C Industry Combined Ratio
              2001 = 115.7                        Combined Ratios
120                                                 1970s: 100.3
              2002 = 107.2
                                                    1980s: 109.2
              2003 = 100.1                          1990s: 107.8

         2004: 9 mos. = 97.9                      2000-04E: 106.5

110            2005F = 99




100
                                The industry has just
                                 experienced its most
                               remarkable recovery in
                                    recent history
 90
       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
Sources: A.M. Best; ISO, III                   *9-month result.
                        Underwriting Gain (Loss)
                             1975-2004F
             $25
                               2004 is likely to produce the first
             $15                underwriting profit since 1978

              $5

              ($5)
$ Billions




             ($15)

             ($25)

             ($35)

             ($45)

             ($55)




                       04*
                      04**
                     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
    *Based on 9-month result.
    Source: A.M. Best, Insurance Information Institute
                     Commercial vs. Personal Lines
                         Combined Ratios
                      Commercial--Net Basis                                  Personal--Net Basis




                                                                                                122.2
125                                                                                                                Compression of results
                10-Year Average Combined Ratios*                                                                    is due to low interest.
            Commercial: 109.9                               Personal: 104.4                                         Underwriting is now
120                                                                                                                   more important in
                   112.5




                                                                                                                    long-tail commercial




                                                                          112.3




                                                                                                   110.9
                                                                                     111.5
                                                                                        109.9
        110.3




115
                              110.2




                                                                                                           110.2
                                                                                                                             lines

                                                               109.7
                                         107.6




                                                                                                              105.3
                                            104.9
                      104.5




                                                                             104.5
110
           103.9



                                 103.5


                                                    103.9


                                                                  102.7




                                                                                                                      101.9
105
                                                       99.8




                                                                                                                                      100
                                                                                                                         98.4



                                                                                                                                        98
100




                                                                                                                                98
                                                                                                                                 97
 95

 90
         93         94         95         96         97         98         99         00         01         02         03       04E 05F
Source: A.M. Best; Insurance Information Institute                                              *1994-2003 average
                                        Combined Ratios:
                                         2004 vs. 2005E
                                                                          Combined ratios are expected to
                                                                         change very little in 2005, masking




                                                        110.5
                                                                109.8
115
                 2004            2005                                      a deterioration of about 2 to 3


                                        106.6
                                                106.2
110                                                                        points associated with 2004’s
                                                                            catastrophe impacted results
                         100.9


105




                                                                              99.4
                                 98.6




                                                                                                                  97.6
                                                                                                                         97.3
                                                                         99
100




                                                                                            94.9
          93.3




                                                                                     93.3
                 93.1




  95
  90

  85




                                                                                                          80.3
                                                                                                   79.4
             Commercial auto, CMP, Inland
  80        Marine results remain reasonable,
  75          but WC, GL still problematic

  70
          PP Auto       Homeowners          WC           GL &           Comm Multi Comm Auto       Inland        ALL LINES
                                                        Products           Peril                   Marine
Source: A.M. Best Review/Preview, January 2005; Insurance Information Institute.
                              Combined Ratio:
                         Reinsurance vs. P/C Industry
                            Reinsurance                    All Lines Combined Ratio




                                                                                                          162.5
170
                            2001’s combined ratio was the worst-
160                         ever for reinsurers; 2002 was bad as well.
150                         2003: Big improvement in primary and
                            reinsurer segments
140
                 126.5




                                                                                                                      121.3
130
                                                119.2
                    115.8




                                                                                                              115.7
                                                                                        114.3
                                        113.6
         110.5




120




                                                                                                  110.0
        108.8




                                      108.5




                                                                                     107.7




                                                                                                                         107.2
                              106.9




                                                   106.5




                                                                                                106.5
                                                           105.8




                                                                             105.6
                             105.0




                                                           104.8


                                                                   101.6
                                                                   100.8

                                                                           100.5
110




                                                                                                                                 100.3
                                                                                                                                 100.1
                                                                                                                                           102
                                                                                                                                         97.9
100

 90
         91      92          93       94        95         96      97      98        99         00        01          02         03      04*
*Through 2004:Q3
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
             Underwriting Expense Ratio*
                                                           Insurers are keeping
29%
                                            28.0%
                                                          expenses under control
28%                                 27.6%           27.5%
                            27.0%
27%                                                         26.5%
                    26.3%
      25.9% 26.1%
26%
                                                                    25.3%
                                                                                        24.8%
25%                                                                         24.6% 24.7%

24%

23%

22%
       94     95      96     97      98      99      00      01      02      03   04E   05F
*Ratio of expenses incurred to net premiums written.
Source: A.M. Best; Insurance Information Institute
CYCLICAL EVIDENCE:

  PROFITABILITY
                     P/C Net Income After Taxes
                      1991-2004E* ($ Millions)
             2001 ROE = -2.6%

$40,000      2002 ROE = 1.0%                        $36,819                                            $36,000
             2003 ROE = 9.4%
                                                             $30,773                            $29,877
             2004 ROE = 11.5%F
$30,000                                                                                               $26,707
                                              $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* 04F
  *9-Month results; F = Full Year forecast/estimate.
  Sources: A.M. Best, ISO, Insurance Information Institute.
                       ROE: P/C vs. All Industries
                             1987–2004E
 20%


 15%


 10%


  5%


  0%


 -5%
        87   88   89    90   91   92   93   94     95   96   97   98   99   00   01   02   03 04E

                             US P/C Insurers             All US Industries
Source: Insurance Information Institute; Fortune
              ROE vs. Equity Cost of Capital:
               US P/C Insurance: 1991 – 2004F
20%
                     The p/c insurance industry likely achieved its costs
                      of capital in 2004 for the first time in many years
15%




                                                                                                                                 +1.6 pts
                                                                                                                -1.2 pts
10%




                                                                                               -10.2 pts
                                                                              -14.6 pts
5%



0%
            US P/C insurers missed their
            cost of capital by an average
            6.5 points from 1991 to 2003
-5%
       91    92     93     94     95    96     97        98   99   00    01               02               03              04F
Source: The Geneva Association, Ins. Information Inst.             ROE              Cost of Capital
THE CYCLE LIVES:
 IT REALLY WILL BE
DIFFERENT THIS TIME
                         YES!
          It Be Different This Time Around!
• New Management: Benefit of 20/20 Hindsight
   Most (re)insurer CEOs have been replaced over past 5 years
   New management teams not eager to repeat past mistakes
   Management Mantra: Preaching Disciplined UW & Pricing
• Information Flow:
   Many insurers have now implemented MIS systems that
    reduce recognition lags & reaction times and increase info flow
• Compensation Structure: Not Just Volume Based
   Stock incentives playing a lesser role
   Strict adherence to UW manual and pricing
• Sarbanes-Oxley
   CEO/CFO’s personal assets on the line
   Board of Directors quality enhanced; less chummy
   Reserves become more adequate
   Actuaries, UWs, accountants all on board & getting tough
                         YES!
          It Be Different This Time Around!
• Ratings Agencies
   Have become de facto regulators
   Keeping a tight leash on upgrades and paying a lot of attention
    to capital/reserve adequacy & profitability-industry disciplined
• Investment Analysts
   Subject insurers to greater scrutiny
• Regulators
   Finally waking up
• Quasi-Regulators
   Spitzer, other AGs, SEC will keep industry on its toes
• Tort reform is finally happening
• Republican Domination of Congress/White House Good
  for Industry
• We’re Better at Anticipating New/Emerging Risks
• Better at Managing Existing Risks/Reducing Volatility
                                 NO!
                      It Won’t Be Different
                       This Time Around!
• Management Never Learns: Hindsight Means Nothing
   80 years of history show management repeats same mistakes
   Quarterly earnings and growth targets are still king
   Mantra of UW & Pricing discipline is just lip service
• P/C Insurance Will Always Be an Impossible Business
   Impossible to use past information to determine prices today
    for a product sold tomorrow for claims that may arise in the
    distant future AND expect to be right
• Investor Fatigue
   Wall Street is fed up with low returns; no capital for you
   Capital is now highly opportunistic; not committed to long run
• Investments: Still Used to Paper Over Poor UW &
  Pricing Decisions
   Cash flow underwriting is back in vogue (or soon will be)
                                 NO!
                      It Won’t Be Different
                       This Time Around!
• Regulators Still Asleep at the Switch
    E.g., Piling on to Spitzer investigation
    Vehement defense on status quo regulatory environment
• Still do Bad Job Managing Variability/Volatility
    2004 hurricane season, D&O, Products Liability
    Constantly blindsided
• Tort Reform: Keep on Dreamin’
    Big loopholes in Class Action Fairness Act
    Act was watered down (no atty. fee limits or damage caps)
    Forum shopping at the federal level still possible
• Republican Congress/White House Don’t Care About Us
    Except CAFA, little success in Washington over past few years
    Spitzer investigation = opportunity to heap scorn on industry
                        What Wall Street Thinks
 The commercial insurance market is softening as prices decline,
•*

particularly in short tail lines, and competition increases.

•Company X [name omitted] said that it would reduce pricing for
its best customers in what we view as a potentially troubling trend
because it’s a slippery slope.

•Falling pricing, less restrictive terms and conditions, and a shift in
negotiating leverage away from the insurers to the commercial
insurance buyers should result in a challenging operating
environment for the commercial insurers in 2005, as well as lower
premium growth and deteriorating margins

•Demand for reinsurance is flat, while supply has increased.
Source: Prudential Securities’ P/C insurance analyst, Jay Gelb, March 9, 2005
  CAUSE FOR
  CONCERN?
   THE CYCLE IS A
NATURAL BORN KILLER
FINANCIAL STRENGTH,
    SOLVENCY &
     SECURITY
                                           Downgrade/Upgrade Ratio*
                                  5                       4.93

                                                                         Downgrade to upgrade ratio
                                                                          is falling (primarily because
Ratio of Downgrades to Upgrades




                                  4
                                                                         the number of downgrades is




                                                                                                                                    3.3
                                                                         falling; only a small increase
                                  3
                                                                                   in upgrades)




                                                                                                                            1.99
                                                                                                                           1.92



                                                                                                                                          1.79
                                                                                     1.78
                                                       1.71




                                  2




                                                                                                     1.56
                                                1.22



                                                                 1.12




                                                                                                                   1.08
                                                                              1.05
                                                                              0.99



                                                                                               1.1




                                                                                                                  0.96
                                                                                            0.83
                                                                            0.82




                                                                                                                0.8
                                         0.68




                                  1
                                                                         0.58




                                                                                                             0.51
                                      0.45




                                                                        0.44
                                      0.43
                                      0.42
                                      0.41




                                                                                                            0.41
                                  0




                                                                                                                                    04E
                                      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
Sources: Impairment Rate and Rating Transition Study—                                *U.S. property/casualty and life/health insurers before
1977 to 2002, A.M. Best & Co.                                                        2000; P/C only 2000-2004.
                P/C Company Insolvency Rates,
                       1993 to 2002
                •Insurer insolvencies are increasing
                                                                    1.33%
                 •10-yr industry failure rate: 0.72%
     1.20%
           •Failure rating for B+ or better rating: 0.49%
            •Failure rate for D through B rating: 1.29% 1.02% 1.03%
                     10-yr Failure Rate
                           = 0.72%            0.79%

               0.58%                                  0.60%

                                                                       30    30     38
                                    0.28%
                         0.21%                                0.23%




      1993      1994       1995      1996      1997   1998    1999    2000   2001   2002
Source: A.M. Best; Insurance Information Institute
              Reason for P/C Insolvencies
                       (218 Insolvencies, 1993-2002)
                           Impaired Affiliate
                                 3%                                          Deficient Loss
                  Unidentified                                                 Reserves
                     17%                                                          51%

                                                                 Reserve
     CAT Losses                                                deficiencies
        3%                                                     account for
                                                              more than half
 Reinsurer Failure                                               of all p/c
       0%                                                        insurers
                                                               insolvencies
Change in Business
      3%

      Discounted Ops
           8%
       Overstated Assets
             2%
                     Alleged Fraud      Rapid Growth
                          3%                10% Source: A.M. Best, Insurance Information Institute
RESERVING
PROBLEMS:
ARE ACTUARIES TO
     BLAME?
                     P/C Insurance Industry Reserve
                     Development from Prior Year*
                                 $ Billions, Calendar Year Basis
   $25                                                                                          $22.7
                      Adverse reserve development totaled
   $20                $47.8 billion from 2000 through 2003
   $15               Adverse reserve development is                                                   $13.7
                                                                                        $11.0
   $10
                      the #1 killer of p/c insurance
                      companies: Strength Matters
     $5    $2.3           $2.2 $1.2                                              $0.4
                   $0.3
     $0

    ($5)                                     ($1.5)
                                                                        ($3.7)
  ($10)                                                  ($6.7)
                                                    ($7.5)
                                      ($8.5)
                                                              ($10.0)
  ($15)
             90     91     92    93     94     95     96    97     98     99     00      01      02     03
*Negative numbers indicate favorable development; positive figures represent adverse development.
Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, Prudential Securities, Ins. Info. Inst.
                    CALENDAR Year Loss & ALAE
                  Reserve Development Through 2003*
                                          $ Billions, Calendar Year Basis
$70
          $58.7



                                                            Adverse reserve
                  $53.6


$60




                                                                                                                                $47.8
                                                            development is a




                                                                                                                                        $40.9
$50
                          $39.1


                                                           perpetual problem
                                  $37.8
                                          $33.6




                                                                                                                        $32.9
$40                                               $30.3
$30                                                       $18.8




                                                                                                                $14.1




                                                                                                                                                $13.9
$20
$10
                                                                  $2.7


                                                                                                                                                        NA
  $0                                                                               ($1.5)




                                                                                                       ($3.0)
($10)
                                                                                              ($7.9)
                                                                         ($11.3)



                                                                                            ($8.7)
($20)
         85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
*Negative numbers indicate favorable development; positive figures represent adverse development.
Figures represent total development relative initial calendar year reserves
Source: A.M. Best; Ins. Info. Inst.
                ACCIDENT Year Loss & ALAE
              Reserve Development Through 2003*
                                              $ Billions, Accident Year Basis
   $20




                                                                                                                                               $13.6
                                                                                                                                       $13.0
   $15
                            AY1998-2001 claims
                            source of great pain
            $8.4




                                                                                                                                $7.8
   $10
                              in the industry




                                                                                                                                                       $3.8
    $5
                                                                                                                                                                       NA
    $0




                                                                                                                       ($1.9)
   ($5)
                   ($4.5)




                                              ($3.9)




                                                                                                                                                              ($4.8)
                                                                                                              ($6.7)
                                     ($7.3)
                            ($8.2)




  ($10)
                                                                                               ($10.4)

                                                                                                         ($9.8)
                                                                 ($11.3)




  ($15)
                                                       ($14.1)


                                                                           ($15.2)
                                                                                     ($15.5)




  ($20)
           85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
*Negative numbers indicate favorable development; positive figures represent adverse development.
Figures represent total development relative initial accident year reserves
Source: A.M. Best; Ins. Info. Inst.
                 P/C Insurance Industry Prior Year
               Reserve Development by Line, 2002-03*
                                 $ Billions, Calendar Year Basis                                        $5.5
   $6
   $5                Major adverse                        Why did most lines develop
                    development in                          so adversely in 2003?
   $4
                   casualty segments                                                         $2.9
   $3                                                                                 $2.3
                                                                $1.6       $1.7
   $2
                                                      $1.1
   $1                                 $0.5    $0.6
            ($1.5) ($0.9) ($0.8)
   $0
  ($1)                                       Who’s to blame?
  ($2)
                                                      s




                                                                                  C
                            O




                                                                                           ns


                                                                                                    b
                                     ab


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                                                                       al
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                                                                                             th
                                     Fi




                                                                                             O
*Negative numbers indicate favorable development; positive figures represent adverse development.
Source: A.M. Best, Ins. Info. Inst.
                        Combined Ratio:
               Impact of Reserve Changes (Points)
                                   Points (Reduced)/Increased
   7                                                               6.3
   6
             Prior-year adverse reserve
            development totaling nearly                     5.2
   5        $14 billion in 2003 added 3.5
   4         points to the p/c combined                                   3.5
   3                 ratio in 2002
   2
   1         0.5
   0
  -1                        (0.4)
  -2
  -3                                        (2.4)
            1998            1999            2000            2001   2002   2003


Source: ISO, A.M. Best, MorganStanley, Prudential Securities.
 PRICING
PROBLEMS:
ARE ACTUARIES TO
     BLAME?
      POLL: Who’s to Blame for
    Problem Pricing? (by Applause)
1. Actuaries
2. Senior Management of Company
3. Your Underwriting Department
4. Your Marketing Department
5. Regulators
                                                  Cost of Risk vs. Commercial
                                                    Lines Combined Ratio
                                      125                                                                                       $11.96         $12
                                                                         Commercial Operating Ratio                     122.3
   Commercial Lines Operating Ratio




                                                                         Cost of Risk                                                          $10




                                                                                                                                                     Cost of Risk/$1000 Revenue
                                      120               118.8
                                                                                                                                      $8.91

                                                                      $7.70                                                                    $8
                                                         $8.30              $7.30
                                      115                                                                           $6.46
                                                                        112.5     $6.49
                                                     $6.40                                            $5.71112.3
                                              $6.10                                         $5.70            111.5                             $6
                                                  110.2                       110.2                109.7               110.3
                                            109.4               109.5                                            $4.83
                                      110                                                      $5.25     $5.20
                                                                                      107.6
                                                                                                                                               $4

                                      105                                                     103.9
                                                                                                                                               $2
                                                                                                                                       101.9

                                      100                                                                                                      $0
                                             90    91    92      93      94    95      96      97      98   99     00    01      02      03



Source: RIMS, A.M. Best; Insurance Information Institute
                  World Rate-On-Line Index
                                     (1990 = 100)
                                            Reinsurance prices rising, limits
400                     372                  falling: ROL up significantly,
350                           337             though not as much as after
                                    288        Hurricane Andrew in 1992
300               283
                                                                                  260
                                          248                               239
250                                                                                     230
                                                193                   194
200
                                                      160
150                                                         138 142
            116
      100
100

 50

  0
      90    91    92    93    94    94    96    97    98    99   00   01    02    03    04

 Source: Guy Carpenter
             P/C Soft Spots: % Accounts With
             Negative Price Change(4th Qtr. 2004)
 100%
              86%
                                               Casualty/Liability/Terrorism
  90%
  80%           Propert                                               70%
  70%              y                                                                    62%
  60%                    53%                    53%        55%
  50%
  40%                                                                            35%
  30%
  20%                                16%
                                              Significant moderation now evident
  10%                                           in the commercial casualty lines
   0%
          Comm Prop Biz      Terror Comm Auto WC                       GL        EPL   Umbrella
                 Interruption
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
             P/C Soft Spots: % Accounts With
             Negative Price Change(4th Qtr. 2003)
 60%            Propert                        Casualty/Liability/Terrorism
 55%
 50%
                   y
 45%        42%
 40%
 35%
 30%
 25%
 20%                    18%
 15%                               13%                    13%         12%               11%
 10%                                           5%
  5%                                                                             2%
  0%
         Comm Prop Biz       Terror Comm Auto WC                       GL        EPL   Umbrella
                Interruption
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
             P/C Soft Spots: % Accounts With
             Negative Price Change(4th Qtr. 2002)
 60%
                                               Casualty/Liability/Terrorism
 55%
 50%
                Propert
 45%
 40%               y
 35%
 30%
 25%
 20%
 15%
 10%                                7%
  5%         2%          0%                    1%          0%         0%                 1%
                                                                                 0%
  0%
         Comm Prop Biz       Terror Comm Auto WC                       GL        EPL   Umbrella
                Interruption
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
                                         10%
                                               15%
                                                     20%
                                                             25%
                                                                     30%
                                                                             35%




                               0%
                                    5%
                           Jul-01              14%
                          Aug-01            11%
                          Sep-01              13%
                          Oct-01                 16%
                          Nov-01                    19%
                          Dec-01                       22%
                          Jan-02                             28%
                          Feb-02                                31%




Source: MarketScout.com
                          Mar-02                                31%
                          Apr-02                             28%
                          May-02                               30%
                          Jun-02                                 32%
                           Jul-02                                 33%
                          Aug-02                             28%
                          Sep-02                              29%
                          Oct-02                               30%
                          Nov-02                                 32%
                          Dec-02                               30%
                          Jan-03                            27%
                          Feb-03                          25%
                          Mar-03                             28%
                          Apr-03                       22%
                          May-03                   18%
                          Jun-03                   18%
                           Jul-03                 17%
                          Aug-03                 16%
                          Sep-03             12%
                          Oct-03             12%
                          Nov-03           10%
                          Dec-03             12%
                          Jan-04            11%
                          Feb-04          9%
                          Mar-04          9%
                          Apr-04          9%
                          May-04        7%
                          Jun-04        7%
                                                                                       Commercial Premium Rate


                                                           realization of
                                                                                       Changes Are Sharply Lower




                           Jul-04     5%
                          Aug-04     4%
                                                           goals, increasing




                          Sep-04     4%
                          Oct-04   2%
                                                           capacity/ capital, or




                          Nov-04   2%
                                                           Is moderation due to




                          Dec-04   2%
                                                           performance and profit




                          Jan-05 1%
                                                           market- share strategies?




                          Feb-05 0%
 A TALE OF THREE
PRICING STRATEGIES

PPA: Pricing Success Story
WC: Slow Mo Train Wreck?
     HO: Jury’s Out
Private Passenger Auto
                      Average Expenditures on
                          Auto Insurance
$950
$900         Countrywide auto insurance
             expenditures are expected to                                               $870
                                                                                 $857
$850                                                                      $834
                  rise 1.5% in 2005
$800                                                               $774
$750                                                        $720
                       $706 $704
                  $691           $683 $687
$700 $668
$650
$600
            95      96      97      98      99         00   01     02     03* 04* 05*
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute
                          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
       101.7 101.3 101.3
                               101.0          101.1
 100                                   99.5
                                                                                      98.4
              Average Combined 1993 to 2004= 102.7
  95           Many auto insurers have shown sig-                                            93.3 93.1
              nificant improvements in underwriting
                    performance since mid-2002
  90
         93      94       95    96      97     98      99      00      01      02      03    04E   05F
Sources: A.M. Best; III
                       Private Passenger Auto:
                   Incurred Loss Ratios, 1999-2004:Q3
                  Collision         Comprehensive            Liability (BI & PD)
110%                                                                 Loss ratios for all major
                                                                      coverage are trending
100%                                                                       downward
90%

80%

70%

60%

50%
          99:Q1


                    99:Q3


                            00:Q1


                                     00:Q3


                                             01:Q1


                                                     01:Q3


                                                             02:Q1


                                                                      02:Q3


                                                                              03:Q1


                                                                                      03:Q3


                                                                                              04:Q1


                                                                                                      04:Q3
Source: ISO Fast Track; Insurance Information Institute.
                  Pure Premium Spread: Personal
                  Auto PD Liability, 2000-2004:Q3
        Auto Insurance Component of CPI                                                   Personal Auto-PD Pure Premium
12%
                          Margin necessary to
10%                         maintain PPA
                             profitability
  8%
  6%
  4%
  2%
  0%
-2%          2000 PPA                                                               2003 PPA
           Combined = 110                                                         Combined = 98
-4%
          00:Q1

                  00:Q2

                          00:Q3

                                  00:Q4

                                          01:Q1

                                                  01:Q2

                                                          01:Q3

                                                                  01:Q4

                                                                          02:Q1

                                                                                  02:Q2

                                                                                          02:Q3

                                                                                                  02:Q4

                                                                                                          03:Q1

                                                                                                                  03:Q2

                                                                                                                          03:Q3

                                                                                                                                  03:Q4

                                                                                                                                          04:Q1

                                                                                                                                                  04:Q2

                                                                                                                                                          04:Q3
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
                 RNW: Private Passenger Auto,
                   United States, 1992-2002
16%                                                   Segmentation                    15%
                                                       should help              15%
14%
         14% 14%                           12%         profitability
12%                                   12%
                      11% 12%                     10%
10%                                                                             10%

  8%

  6%        Private passenger auto                     8%
           profitability deteriorated
  4%       hroughout the 1990s but                                         4%
  2%
          has improved dramatically
                                                                      2%
                                                            2%
  0%
         92    93     94     95    96     97     98   99    00   01    02 03E 04E 05F
Source: NAIC; Insurance Information Institute
Workers Compensation
                     Workers Comp Combined Ratios,
                              1994-2005F
             Workers Comp Calendar Year vs. Ultimate Accident Year –
Percent                          Private Carriers
140                                    138
                                              133
                                129
130                                                  125
                                                  122
                         119               118
120                                115
                                                         111
                             108                                108 107
110                 106                                     106                                                                   106
     101      101 100 101                                          101
100      97 97

 90
         1994       1995        1996       1997       1998       1999        2000       2001       2002 2003p 2004E 2005F

p Preliminary AY figure.                            Calendar Year             Accident Year
Accident Year data is evaluated as of 12/31/2003 and developed to ultimate
Source: Calendar Years 1994-2002, A.M. Best Aggregates & Averages; Calendar Year 2003p and Accident Years 1994-2003p and 2004/5
estimate and forecast, NCCI
Includes dividends to policyholders
                         Workers Comp Medical Claims
                              Continue to Climb
     Medical
Claim Cost ($000s)

     $19                                                                                                                     $17.8
               Annual Change 1991–1995:                  +3.9%
     $17       Annual Change 1996–2002:                  +9.0%                                                       $16.3
                                                                                                             $14.7
     $15
                                                                                                     $13.1
     $13                                                                                     $12.0
                                                                                     $11.1
     $11                                                                     $10.3
                                                                      $9.6
                                              $8.5       $8.9
       $9      $7.9      $8.0       $7.8
       $7

       $5
               1991      1992       1993      1994       1995         1996   1997    1998    1999    2000    2001    2002 2003p
                                                               Accident Year
 2003p: Preliminary based on data valued as of 12/31/2003
 1991-2002: Based on data through 12/31/2002, developed to ultimate
 Based on the states where NCCI provides ratemaking services
 Excludes the effects of deductible policies
                 WC Medical Severity Rising Far
                   Faster than Medical CPI
 14%
            WC medical severity is rising                           12.0%
 12%                                                                           11.0%
             2.3 times faster than the
 10%               medical CPI                             9.0%                            9.0%
                                                 8.7%
                   7.4%      7.7%
  8%                                   7.3%




                                                                                        5.0 pts
  6%     5.1%

  4%                                                                           4.7%
         4.5%                                                        4.6%
                                                           4.1%                            4.0%
                   3.6%                          3.5%
  2%                                   3.2%
                             2.8%
                                               Change in Medical CPI
  0%
                                               Change Med Cost per Lost Time Claim
          1995      1996      1997      1998      1999      2000      2001      2002        2003
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
                    Med Costs Share of Total
                   Costs is Increasing Steadily
                                                                          2003p

                                        1993                  Indemnity
                                                                                  Medical
                                                                 45%
                                                                                   55%

           1983
                               Indemnity         Medical
                                  51%             49%

                   Medical
   Indemnity        44%
      56%




Source: NCCI (based on states where NCCI provides ratemaking services).
             Cost Drivers in Workers Comp

   Average rate if               Other          Physical
                                 25%            Medicine
  inflation in the 5                             20%
   specific areas is                                   Diagnostic
                                                       Radiology
 likely to continue                                       16%
 at 5%-6%for the
 indefinite future,
   which bodes ill
                          Surgery/
 given current WC        Anesthesia
 rate environment           12%
                                                Hospital &
                                 Prescription    Facility
                                    Drugs        Charges
                                    14%           13%
Source: Morgan Stanley
                   Proportion of Workers Comp
                Accounts Renewing With Increase of
                          20% or More
                                            More than half of all
     54%
                                                WC accounts
                                            renewed up at least
                                             20% in mid-2002,                      55% of WC
              38% 38%
                                               two years later                     accounts renewed
                                 32%
                                             virtually none did.                   negative during the
                                                                                   4th quarter of 2004
                                          20%

                                                   12% 12%

                                                                      3%
                                                                               1%      1%    1%

      02:II 02:III 02:IV          03:I    03:II 03:III 03:IV          04:I     04:II 04:III 04:IV

Source: Council of Insurance Agents and Brokers; Insurance Information Institute
Homeowners
                      Average Expenditures on
                      Homeowners Insurance
$700                                                                                    $677
                 Countrywide home                                                $660
$650           insurance expenditures                                     $636
              are expected to rise 2.5%                            $593
$600                  in 2005
$550                                                        $536
                                                   $508
$500                               $481 $488
                          $455
$450 $418 $440

$400
            95      96      97      98      99         00   01     02     03* 04* 05*
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute
                                 Homeowners Insurance
                                   Combined Ratio
                     158.4
 160                                             Average 1990 to 2004E= 114
 150                                      Insurers have paid out an average of
                                          $1.15 in losses for every dollar earned
 140                                       in premiums over the past 14 years
 130
                                               121.7                         121.7
 120        117.7                   118.4
        113.0                  113.6     112.7
                                                            109.4 108.2111.4        109.3
 110
                                                      101.0                                        100.9
 100                                                                                        98.2           98.6


  90
         90     91        92    93   94   95     96    97     98   99   00     01    02      03 04E 05F
Sources: A.M. Best; III
         ROE for Homeowners Insurance in
                Texas, 1992 - 2002
30%
                                                 20.7% 19.4%
20%                                                            14.7%
                                         11.9%
10%              6.2%

 0%

-10%                    -6.0%
                                            States like TX &           -10.9%
-20%
                                              FL make the
                                              Homeowners
-30%
                                -23.5%      proposition more
                                                difficult
-40%
       -38.8%
                                                                              -42.4%-41.9%
-50%
        1992    1993    1994    1995     1996    1997   1998   1999    2000     2001   2002

 Source: NAIC
WHY UNDERWRITING
DISCIPLINE MATTERS
                          A 100 Combined Ratio Isn’t What it
                            Used to Be: 95 is Where It’s At
                    110                                                                              18%
                                                                       Combined Ratio         ROE*

                    105                     15.9%                                                    16%
                             14.3%      100.6     100.1                             15.0%




                                                                                                           Retrun on Equity*
   Combined Ratio




                    100   97.5                                                              97.9     14%

                                                                                94.3
                     95                                                                              12%
                             Combined ratios
                     90    today must be below                                                  9.9% 10%
                              95 to generate                      9.4%
                     85
                            Fortune 500 ROEs                                                         8%

                     80                                                                              6%
                          1978          1979           2003 Actual 2003 for 15%             2004F
                                                                       ROE
* 2004 figure is return on average statutory surplus based in first 9 monhts data
Source: Insurance Information Institute from A.M. Best and ISO data.
 INVESTMENT
   INCOME:
    THE SOLUTION TO
 UNDERWRITING, PRICING
AND RESERVING BLUNDERS?
                                   Net Investment Income
             $45

                               Growth History
             $36               2002: -1.3%
                               2003: +3.9%
                                                                                     History
                               2004E: -1.0%
$ Billions




             $27
                                                                              1997 Peak = $41.5B
                                                                                      2000= $40.7B
             $18
                                                                                     2001 = $37.7B
                                                                                     2002 = $37.2B
              $9                                                                     2003 = $38.7B
                                                                                   2004E = $38.3B
              $0
                   75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
         Source: A.M. Best, ISO, Insurance Information Institute
                       Total Returns for Large
                     Company Stocks: 1970-2005*
                  S&P 500 was up 9% in 2004. Fears of higher interest rates, inflation,
                      the falling dollar, resurgent oil prices are concerns in 2005
  40%

  30%

  20%

  10%

   0%

 -10%
                                                2003/4 were the first
                                                consecutive gains since 1999
 -20%

 -30%




                                                                                                                                           2005
           1970

                    1972

                           1974

                                  1976

                                         1978

                                                1980

                                                       1982

                                                              1984

                                                                     1986

                                                                            1988

                                                                                   1990

                                                                                          1992

                                                                                                 1994

                                                                                                        1996

                                                                                                               1998

                                                                                                                      2000

                                                                                                                             2002

                                                                                                                                    2004
Source: Ibbotson Associates, Insurance Information Institute.                                       *Through March 7, 2005
                   Property/Casualty Insurance
                    Industry Investment Gain*
                          $ Billions
                                           $57.9
 $60                                                       $56.9
                                   $52.3           $51.9
 $50                      $47.2                                                       $45.6 $46.9
                  $42.8                                             $44.4

 $40     $35.4                                                               $36.0

 $30
                          Investment gains are
 $20                       rising but are still
                           nearly 20% below
 $10
                            their 1998 peak
   $0
          94       95      96       97      98       99      00       01      02       03     04E
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
2004 estimate is annualized figure based on first 9-months results.
Source: Insurance Services Office; Insurance Information Institute.
 OTHER
POSSIBLE
FACTORS:
(Besides Actuaries)
         9 Competing Hypotheses on
           the Underwriting Cycle
Hypothesis 1:    Past losses can explain
Pt=f(Lt-j)       current premiums

Hypothesis 2:  Premiums are information-
               ally efficient predictors of
P=PV E(L, LAE) future losses

Hypothesis 3:    Inverse relationship between
dP/dSt-j<0       current premiums and past
                 surplus changes
     9 Competing Hypotheses on
       the Underwriting Cycle
Hypothesis 4:   Inverse relationship between
 dP/di <0       interest rates and premiums

Hypothesis 5:   Positive relationship between
 dP/dU>0        underwriting expenses and
                premiums

Hypothesis 6:   Positive relationship between
 dP/ds>0        uncertainty and premiums
     9 Competing Hypotheses on
       the Underwriting Cycle
Hypothesis 7:   Impact of changes in interest
                rates is more important to
                premiums in long-tail lines
                than those in short-tail lines
Hypothesis 8:   Response of premiums to
                shock in variables (such as
                loss or interest rates) is more
                volatile in long-tail lines and
                highly regulated lines than
                short-tail lines
     9 Competing Hypotheses on
       the Underwriting Cycle
Hypothesis 9:   Regulatory lags lead to
                underwriting cycle (e.g., rate
                surpression, delays in form
                filings, licensing).
           The Holy Grail? Rosetta Stone?

     Pt = a0 + a1Pt-1 + a2Pt-2 + et
Period (P) = 2p/cos-1(a1/2(-a2)-1/2)
                 Pt = underwriting profit
                   et = random error term

  E. Venezian, “Ratemaking Methods and Profit Cycles in Property and
  Liability Insurance,” Journal of Risk and Insurance, v. 52, 1985.
       Cycles, Cycles Everywhere
                (Cycle Periods in Years)
Netherlands        12.03      Austria                 None
Malaysia           12.01      Denmark                 None
France             10.19      S. Korea                None
United States      7.39       Taiwan                  None
Japan              7.07
Canada             5.79
Spain              5.73    Sources: J. Lamm-Tenant and M. Weiss, “International
                           Insurance Cycles” Rational Expectations/Institutional
Australia          5.18    Intervention, Journal of Risk and Insurance, September 1997;
                           R. Chen, K. Wong and H. Lee, “Underwriting Cycles in
Italy              4.84    Asia,”, ibid, March 1999.
EXOGENOUS
INFLUENCES
INVESTMENT SHOCKS
                       Total Returns for Large
                     Company Stocks: 1970-2005*
                  S&P 500 was up 9% in 2004. Fears of higher interest rates, inflation,
                      the falling dollar, resurgent oil prices are concerns in 2005
  40%

  30%

  20%

  10%

   0%

 -10%
                                                Do investment shocks cause
 -20%                                           cycles or does management
                                                overestimate future returns?
 -30%




                                                                                                                                           2005
           1970

                    1972

                           1974

                                  1976

                                         1978

                                                1980

                                                       1982

                                                              1984

                                                                     1986

                                                                            1988

                                                                                   1990

                                                                                          1992

                                                                                                 1994

                                                                                                        1996

                                                                                                               1998

                                                                                                                      2000

                                                                                                                             2002

                                                                                                                                    2004
Source: Ibbotson Associates, Insurance Information Institute.                                       *Through March 8, 2005
                         Interest Rates: Lower Than
                       They’ve Been in Decades, But…
16%                        About 2/3 of invested assets                                            Lower bond yields were the primary
                                                                                                   driver behind declining investment
14%
                            are in the form of bonds                                               income in recent years, with the 10-
                                                                                                   year note reaching a 45-year low in
12%                                                                                                2003
                                                                                                   Higher ST rates as Fed tightens. In
10%                                                                                                long run budget & current account
                                                                                                   deficits may force rates higher
8%

6%

4%

2%
                     3-Month T-Bill                                         1-Yr. T-Bill                               10-Year T-Note
0%
      1980
             1981
                    1982
                           1983
                                  1984
                                         1985
                                                1986
                                                       1987
                                                              1988
                                                                     1989
                                                                            1990
                                                                                   1991
                                                                                          1992
                                                                                                 1993
                                                                                                        1994
                                                                                                               1995
                                                                                                                      1996
                                                                                                                             1997
                                                                                                                                    1998
                                                                                                                                           1999
                                                                                                                                                  2000
                                                                                                                                                         2001
                                                                                                                                                                2002
                                                                                                                                                                       2003
                                                                                                                                                                              2004

                                                                                                                                                                                         *
                                                                                                                                                                                     2005
Source: Board of Governors, Federal Reserve System; Insurance Info. Institute                                                                             *As of 2/25/05.
        US P/C Net Realized Capital Gains
            1990-2004E ($ Millions)
$20,000             Realized capital                          $18,019
                    gains rebounded                                          $16,205
$15,000            strongly in 2003/4                                 $13,016
                                                       $10,808
                       $9,893 $9,818              $9,244
$10,000                                                                                                $8,724
                                                                                     $6,631        $6,917
                                           $5,997
              $4,806
 $5,000
        $2,880
                                    $1,664

     $0
                                                                                            -$1,214
-$5,000
            90    91    92     93     94     95     96   97      98     99      00     01     02      03 04*
*Annualized 9-month result.
Sources: A.M. Best, ISO, Insurance Information Institute.
CAPACITY/SURPLUS
                             U.S. Policyholder Surplus:
                                    1975-2004*
        $400                                                   Capacity TODAY is just 8.8%
                    •Surplus (capacity) peaked at
                    $339.3 Billion in mid-1999 and               above its mid-1999 peak
        $350
                    fell by 15.9% ($53.9 billion) to
        $300        $285.4 billion at year-end 2002

        $250
                    •Surplus is up $83.6B or 29.3%
$ Billions




                    since year-end 2002
        $200
                    •Surplus increased by $22B or
        $150        6.3% to $369B by 2004:Q3
                    from $347B at year-end 2003                     “Surplus” is a measure of
        $100                                                        underwriting capacity. It is
                                                                    analogous to “Owners
             $50                                                    Equity” or “Net Worth” in
                                                                    non-insurance organizations
              $0
                   75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

       Source: A.M. Best, ISO, Insurance Information Institute                                *As of 9/30/04.
                       US Reinsurers: Change in
                     Policyholder Surplus ($ Billions)
                                                              Reinsurer PHS fell 20% from
               $70
                                                            1998-2002. Capacity today similar
                                                              to 1998. Same story globally.
                                                                                 $64.6
               $65
                     $60.9
               $60               $58.9
                                                $56.4
  $ Billions




               $55


               $50                                                    $48.8
                                                            $45.2
               $45


               $40
                     1998         1999               2000   2001       2002      2003E
Source: A.M. Best; Insurance Information Institute
CATASTROPHES
                       U.S. Insured
               Catastrophe Losses ($ Billions)
        2004 was the second worst year ever for natural
                              $ Billions
      disaster losses in the US after adjusting for inflation.
         About 79% of those losses originated in Florida.
$30                                                                         $26.5            $27.3
$25                    $22.9
$20                               $16.9
$15                                                                                     $12.9
                                                          $10.1
$10 $7.5                                 $8.3 $7.4             $8.3
                  $4.7       $5.5                                      $4.6        $5.9
 $5        $2.7                                      $2.6
 $0
       89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
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.
Source: Property Claims Service/ISO; Insurance Information Institute
                         ROE: P/C vs. All Industries
                              1987–2004E*
 20%
                                                                    2004 ROE excl.
                                                                      hurricanes
 15%


 10%
                                                                              Sept. 11
  5%
             Hugo                                          Lowest CAT
                                                                                                   2004 ROE
                                                        losses in 15 years                       reduced due to
  0%
              Andrew                                                                               hurricanes
                                             Northridge
 -5%
        87    88    89   90   91   92   93    94   95     96   97    98      99   00   01   02   03

          US P/C Insurers               All US Industries                    P/C excl. Hurricanes
*2004 p/c estimate based on first 9 months data.
Source: Insurance Information Institute; Fortune
FLORIDA HURRICANES
  & UNDERWRITING
   PERFORMANCE:
 Homeowners Insurers
  Have Lost Billions
     in Florida
                            Underwriting Gain (Loss) in
                          Florida Homeowners Insurance,
                                                         1992-2004E*
              $4

                                                                           $1.43 $1.16 $1.47   $1.88
              $2
                                     $0.69 $0.43   $0.86 $1.08 $1.23 $1.28
              $0
                            ($0.21)
              ($2)
$ Billions




              ($4)
                                               Florida’s homeowners
              ($6)
                                            insurance market produces
              ($8)                         small profits in most years and
             ($10)
                                             enormous losses in others
                                                                                                       ($9.31)
                     ($10.60)
             ($12)
                       92       93    94    95      96    97    98    99    00     01     02     03     04E
         *2004 estimate by Insurance Information Institute based on historical loss and expense data for FL
          adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from III
         estimates of loss and expense.
TORT SYSTEM
                             Cost of U.S. Tort System
                                                ($ Billions)
                   Tort costs will consume an estimated 2.24% of GDP in 2005
   $350
                Per capita “tort tax” was $845                                                               $297
   $300                                                                                               $279
                in 2003, up from $680 in 2000                                              $246
                                                                                               $262
   $250                                                                             $233
                                                                             $205
   $200                                                   $167 $169
                                                                      $180
                                          $159 $156$156
                         $141 $144 $148
   $150      $129$130

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

            $200                                                                        $45.3
                                                               Total = $157.7 Billion
 Billions




            $150                      Total = $120.2 Billion       $29.6
                                                                                        $82.5
                                            $20.1
            $100
                                                                   $70.9
                   Total = $39.5 Billion    $51.0
            $50                                                                         $91.4
                        $5.4
                       $17.1                $49.1                  $57.2
                       $17.0
             $0
                       1980                  1990                  2000                  2003
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin
                Class Action Fairness Act of 2005:
                  Potential Hazards for Insurers
1. Overestimate Class Action Fairness Act’s Impact
      1.      Reduce rates too much
      2.      Reduce rates too quickly
      3.      Assume reserves are redundant when they’re not
      4.      Reserve inadequately
2. Rapid expansion into lines with little or no experience
   to seize post-CAFA territory
3. Unwarranted broadening of terms and conditions
4. Commit too much capital to some casualty lines
5. Entry of new capital = accelerated casualty market
   softening
6. Succumb to regulatory pressure to reduce rates when
   reductions can’t be justified actuarially
Source: Insurance Information Institute
CONSOLIDATION/

M&A ACTIVITY
                  Private Passenger Auto:
                Top 25 Writers Market Share

85%                                                                Substantial consolidation
                                                             81.4% evident over the past 25
80%                                                                years, suggesting:
                                            74.2%                      •M&As more successful
75%
                                                                       •Scale economies
70%                         68.8%
           66.3%                                                       •Barriers to entry exist
65%                                                                    •Capital (esp. foreign
                                                                       capital) cannot enter
60%                                                                    easily
55%
50%
           1977             1986             1997             2001

Sources: A.M. Best, Morgan Stanley, Insurance Information Institute.
                     Commercial Lines:
                Top 25 Writers Market Share*
                                                                       Virtually no
                                                                       consolidation in
                             61.9%                                     commercial p/c
62%                                                           61.3%
                                                                       sector over the past
                                                                       25 years, suggesting:
60%         59.1%
                                                                       •M&As not generally
58%                                                                    successful
                                                                           •Scale?
56%                                          55.5%
                                                                           •Execution?
54%                                                                        •Legacy
                                                                           •Distribution?
52%
                                                                       •Deconsolidation
50%                                                                    (asset sales, spin-
                                                                       offs, failures)
            1977             1986             1997             2002
                                                                       •Low barriers to
* By direct premiums written.                                          entry
Sources: A.M. Best, Morgan Stanley, Insurance Information Institute.
NEW & EMERGING
     RISKS
                                                             Texas: Mold Losses/Claims
                                                              Continuing to Moderate*
                                            $250                                                                                           30000
   Water Damage Paid Losses * ($Millions)




                                                                         Paid Losses
                                                                         Claim Count                                                       25000
                                            $200

                                                                                                                                           20000




                                                                                                                                                      Claim Count
                                            $150
                                                                                                                                           15000
                                            $100
                                                                                                                                           10000

                                             $50
                                                                                                                                           5000

                                              $0                                                                                           0
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                                                                                                     * Data are for TDI Cause 61: Discharge – Other Damage.
                                                                                                     Not all claims in cause 61 are mold and mold claims may
Source: Texas Department of Insurance; Insurance Information Institute                               also arise from other (non-water) causes of loss.
           Sept. 11 Industry Loss Estimates
                                           ($ Billions)

                                                 Property -
                                        Life
                Other                            WTC 1 & 2
                                    $1.0 (3.1%)                    Property -
               Liability                        $3.6 (11.1%)
             $4.0 (12.3%)                                            Other
                                                                  $6.0 (19.5%)

              Aviation
              Liability
            $3.5 (10.8%)                                                   Biz
                                                                      Interruption
                Event                                                $11.0 (33.8%)
             Cancellation                            Workers
             $1.0 (3.1%)                               Comp
                                Aviation Hull       $1.8 (5.8%)
                                 $0.5 (1.5%)

      Current Insured Losses Estimate: $32.5B
Source: Insurance Information Institute
                                   Estimated Workers Comp Insured
                                  Losses & Deaths for Terrorist Events
                                             Fatalities                                        173,000
                           $100                                                                  $91.0
                            $90
                            $80
  WC Losses ($ Billions)




                            $70                               12,300
                            $60
                            $50
                                   1,300
                            $40
                            $30
                                                  1,000
                            $20                                                      $15.4
                            $10
                                                                         $7.4
                                   $0.9          $1.1        $1.8
                             $0
                                   Sears        El Paso   9/11 Attack Rockefeller    Nuclear    New York
                                   Tower        Energy                Ctr. Truck     Power        City
                                  Airplane       Truck                  Bomb          Plant     Anthrax
                                   Attack        Bomb                               Sabotage    Release
Source: Eqecat, NCCI.
                D&O: Financial Restatements
                  Filed Continue to Grow
450       Restatements are fodder for                                            414
400       plaintiffs attorneys looking
350          to form class actions                                 330    323
300                                                    270
250                                         233
                                216
200
                     158                Are the benefits of Sarbanes-
150      116
                                        Oxley worth the cost? Many
100
                                       business want S-O scaled back
 50                                        and they may succeed.
  0
         1997        1998       1999        2000       2001        2002   2003   2004

Sources: Huron Consulting Group; Insurance Information Institute
                        Environmental Reserves:
                       3-Year Net Survival Ratios
                                            The current estimated industry
             9.4      9.3                     three year net survival ratio
        10
                                               of 5 years is low by recent
                              7.7                 historical standards
         8                           6.8
                                                   6.0
                                            5.3           5.6    5.2     5.0
Years




         6

         4         The survival ratio is the
                number of years that current
         2     reserves can support recent loss
                      payment activity.
         0
             1996    1997     1998   1999   2000   2001   2002   2003   2004E
Source: Morgan Stanley data
                 Investigations: Do They
               Threaten Industry Stability?
                                           •Loss of incentive-based
                                           compensation bodes ill
                                           for control of
                                           underwriting process

                                           •Buyers/(re) insurers
                                           back away from
                                           legitimate products (e.g.,
                                           finite)

                                           •Compliance costs will
Eliot Spitzer, NY State Attorney General
                                           raise expense ratio
                  Insurer/Broker Stocks:
                Hammered by the Spitzer Suit*
 Change in YTD Total Return from October 8 to October 15, 2004
 Spitzer suit announced                                             -1.24%
                                                                                   S&P 500

Oct. 14 produced huge hit
                                                                  -1.79%           P/C
 on all insurance sectors,
    especially brokers                                  -5.02%                     Life/Health

                                                         -5.20%                    All

                                    -12.36%
                                                                                   Multiline
-26.73%
                                                                                   Brokers


-30%        -25%         -20%         -15%         -10%          -5%          0%

 *Percentage point change.
 Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
                         SOLUTIONS
1.   Shorten information lags: Invest in MIS systems
2.   Shift basis of competition to emphasize underwriting
        Pure price/market share competition eventually destructive
        Competition based extensively on terms & conditions can be fatal
3.   Maintain underwriting & pricing discipline
4.   Get your CEOs ear (and hold on to it) [pricing, reserving]
5.   Grab CFO’s ear with the other hand (S-O helps grip)
6.   Align management incentives with long-term
     performance based on AY results
7.   Remove regulatory barriers an inefficiencies that
     contribute to cyclicality
8.   Rein-in Marketing Dept. if necessary
                            Summary
• Cycle is by now means dead
• Not at all obvious that cycle will be more tame in the future
• Personal lines better behaved than commercial
• Rising investment returns insufficient to support deep soft
  market in terms of price, terms & conditions
• Exogenous Factors:
    Some getting better (tort environment)
    Others unclear (terrorism)
• Major Challenges:
    Maintaining price/underwriting discipline
    Managing variability/volatility of results
     Insurance Information
        Institute On-Line




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