1

State Of The Market

March 7, 2008

Carol L. MurphyManaging DirectorAon Risk Services

2

Overall State of the P/C MarketP/C Net Income After Taxes 1991 - 2006 ($Millions)

$14,

178

$5,8

40 $19,

316

$10,

870

$20,

598

$24,

404

$36,

819

$30,

773

$21,

865

$3,0

46

$30,

029

$60,

000

-$6,970

$63,

695

$44,

155

$20,

559 $3

8,50

1

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F

3

Property/Casualty Insurance Industry Investment Gain1

$ Billions

$35.4$42.8

$47.2$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$63.6$56.9

$51.9

$57.9

$0

$10

$20

$30

$40

$50

$60

94 95 96 97 98 99 00 01 02 03 04 05* 06 07

**1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B. **Annualized 9-month result of $47.718B.Sources: ISO; Insurance Information Institute. Source: Insurance Information Institute

Investment rose in 2007 but are just 9.8% higher than what they were

nearly a decade earlier in 1998

4

Overall State of the P/C Market U.S. P/C policyholder surplus decreased $60B from 1999 through 2002 but increased $270B from 2002 through 2007.

P/C Industry Combined Ratio Calendar Year Combined Ratio (%)

U.S. Policyholder Surplus 1999 - 2007

0

100

200

300

400

500

600

1999 2000 2001 2002 2003 2004 2005 2006 2007

$ Bi

llion

s

Surplus

1999 106.52000 1082001 115.82002 107.42003 100.12004 98.12005 100.72006 92.72007 93.8

2008 * 97.3 * Projected 2007/2008 (to date) Results

5

Overall State of the P/C MarketP/C Industry Net Pretax Income

-60

-40

-20

0

20

40

60

80

100

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

$ B

illio

ns

UW Investment Pretax Income

6

-10%

-5%

0%

5%

10%

15%

20%

25%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

F20

08F

2009

F20

10F

Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute

Strength of Recent Hard Markets by NWP Growth*

1975-78 1984-87 2001-04

2006-2010 (post-Katrina) period could resemble 1993-97 (post-Andrew)

2005: biggest real drop in premium since early 1980s

7

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E

ROE Cost of Capital

ROE vs. Equity Cost of Capital: US P/C Insurance:1991-2007E

Source: The Geneva Association, Ins. Information Inst. Insurance Information Institute

The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years

-13.

2 pt

s

+0.2

pts

US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target or better

2003-07

-0.1

pts

+1.7

pts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

+3.1

pts

8

115.8

107.4

100.198.3

100.7

92.593.8

90

100

110

120

01 02 03 04 05 06 07F

P/C Insurance Combined Ratio, 2001-2007E

Sources: A.M. Best; ISO, III. *Actual 9-month result; Insurance Information Institute

2005 figure benefited from heavy use of reinsurance which lowered net losses

2006 produced the best underwriting result

since the 87.6 combined ratio in 1949

As recently as 2001, insurers were paying out nearly $1.16 for

every dollar they earned in premiums

2007 deterioration due primarily to falling rates,

but results still strong assuming normal CAT

activity

9

Reinsurance Marketplace

• Reinsurance markets remained stable in 2007.• January 1, 2008 renewal rates continued in softening

mode.• Barring any major catastrophe, soft conditions are

expected to continue throughout 2008.• Catastrophe bond issuance has soared since the

hurricane seasons of 2004/2005.

10

US Reinsurer Net Income & ROE, 1985-2006

$1.9

4

$2.0

3

$1.9

5 $3.7

1$4

.53

$5.4

3$1

.47

$1.9

9

$1.3

1 $3.1

7$3

.41

$2.5

1$9

.68

($2.98)

$0.1

2

$1.9

5

$1.3

8$1

.22

$1.8

7

$1.1

7 $2.5

2$1

.79

($4)($2)$0$2$4$6$8

$10$12

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Net

Inco

me

($ B

ill)

-10%

-5%

0%

5%

10%

15%

20%

RO

E

Net Income ROE

Source: Reinsurance Association of America, Insurance Information Institute

Reinsurer profitability has rebounded

11

State of the Property Marketplace• In 2007, there was significant softening of the property

marketplace with increased market competition.• Most clients can expect favorable renewals in 2008 including

significant rate decreases, increased capacity, and improved terms. Incumbent markets are responding to competitive pressures to retain quality insureds.

• Insurers continue to differentiate between insureds with difficult catastrophe exposures and those without in terms of their underwriting aggressiveness.

• The Terrorism Risk Insurance Act (TRIA) was extended for seven more years. Pricing and capacity are expected to remain stable for terrorism insurance.

12

State of the Casualty Market• Capacity

– Abundant choice of markets for most risks.– Excess capacity has remained fairly stable since 2001– Currently, there is approximately $2 billion of total available

capacity with about $1 billion for US risks• Pricing

– Financial responsibility (fronting) – very competitive– Risk transfer rates above client loss retentions for WC, GL and

Auto continue to decrease– Underwriting scrutiny continues, especially as respects

concentration of employees in major metropolitan areas.– Umbrella excess liability rates continued to decline throughout

2007 and into 2008.

13

Umbrella/Excess MarketUmbrella/Excess Liability Average Year Over Year Rate

Change (07 vs. 06 & Jan. 07 vs. 08)

-7.3

-10.8

-8.3

-10.7

-9.9

-8.4

-11.1

-8.5

-9.9-9.6

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.01Q07 2Q07 3Q07 4Q07 1Q08

% R

ate

Cha

nge

Lead Total Program

14

Umbrella/Excess MarketCouncil of Insurance Agents and Brokers - Historical Umbrella Rate Changes

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

4Q99

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

Data Source: Council of Insurance Agents and Brokers, CIAB market surveys and Aon estimate.

% C

hang

e

15

Cost of US Tort System ($ Billions)

$129

$130 $1

41

$144

$148 $1

59

$156

$156 $1

67

$169 $1

80 $205 $2

33 $246 $2

60

$261

$247

$253 $2

65 $277

$0

$50

$100

$150

$200

$250

$300

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

07E

08E

09E

Tort costs consumed 1.87% of GDP in 2006, down from 2.24% in 2003

Per capita “tort tax” was $825 in 2006, up from $680 in 2000

Reducing tort costs relative to GDP by just 0.25% (to 1.84%) would produce an economic stimulus of

$31.1B

Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends; Insurance Information Institute

16

State of the Casualty Market • Loss Retentions

– In general, retentions have not retreated, however in some cases, we are obtaining reduced retentions with little or no cost impact.

• Coverage Issues– Areas of concern include: silica, mold, electromagnetic

fields (EMF), bovine spongiform encephalopathy (BSE), genetically modified food and labeling, nutraceuticals and avian flu.

• Collateral– Credit rating of insured impacts level of collateral

required for a “fronted” program.

17

State of the Casualty Market• WC Pass Through Costs

- State Assessments & Surcharges- Boards & Bureaus

- Premium taxes- Assigned Risk Charges- 2nd Injury Funds

- NY, GA, SC have closed

18

Med Costs Share of Total WC Costs is Increasing Steadily

Indemnity55%

Medical45%

Source: NCCI (based on states where NCCI provides ratemaking services). Insurance Information Institute

Indemnity52%

Medical48%

Indemnity41%

Medical59%1986

1996

2006p

19

Summary• Strong P/C Industry results in 2007 with overall profitability at its

highest point since 1988.• Underwriting results are aided by lack of CAT’s and favorable

loss trends, including tort system improvements.• Premium growth rates are slowing considerably.• Investment returns are insufficient to support deep soft market

in terms of price, terms & conditions.• Major challenges:

– Slow Growth Environment (Economy and market driven)– Maintaining price / underwriting discipline– Managing variability / volatility of results – Widening impact of credit crunch on major insurers / reinsurers.

Source: Insurance Information Institute