latin american association of insurance agencies hollywood, fl july 17, 2009

1

Financial Crisis and the P/C Insurance Industry

Challenges & Opportunities Amidthe Economic Storm

Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 [email protected] www.iii.org

Latin American Association of Insurance AgenciesHollywood, FL

July 17, 2009

2

Presentation Outline

• The Economic Storm: Financial Crisis & Recession• Economic Trends: Personal, Commercial Exposure Implications• Impact of the Financial Crisis on Hispanic/Latino Populations• Key Threats and Issues Facing P/C Insurers Through 2015• Regulatory Reform• Financial Strength & Ratings• P/C Insurance Industry Overview & Outlook

• Profitability

• Premium Growth

• Underwriting Performance

• Financial Market Impacts

• Merger & Acquisition Activity

• Capital & Capacity• Catastrophe Loss Trends

3

THE ECONOMIC STORM

What the Financial Crisis and Recession Mean for the Industry’s

Exposure Base and Growth

4

3.7

%

0.8

% 1.6

% 2.5

% 3.6

%

3.1

%

2.9

%

0.1

%

4.8

%

4.8

%

0.9

%

2.8

%

-0.5

%

1.0

% 1.9

%

2.3

%

2.8

%

2.8

%

3.0

%

-1.8

%

-5.5%-6.3%

-0.2%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2

000

2

001

2

002

2

003

2

004

2

005

2

006

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

Real GDP Growth*

*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 7/09; Insurance Information Institute.

Recession began in December 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but recovery is in sight

The Q4:2008 decline was the steepest since the

Q1:1982 drop of 6.4%

Personal and commercial lines

exposure base have been hit

hard and will be slow to come

back

5

Length of U.S. Business Cycles, 1929-Present*

43

138 11 10 8 10 11

166

168 8

20

50

80

3745

39

24

106

36

58

12

92

120

73

0

10

20

30

40

50

60

70

80

90

100

110

120

Aug.1929

May1937

Feb.1945

Nov.1948

July1953

Aug.1957

Apr.1960

Dec.1969

Nov.1973

Jan.1980

Jul.1981

Jul.1990

Mar.2001

Dec.2007

Contraction Expansion Following

* As of July 2009, inclusive; **Post-WW II period through end of most recent expansion.

Sources: National Bureau of Economic Research; Insurance Information Institute.

Duration (Months)

Month Recession Started

Average Duration** Recession = 10.4 MonthsExpansion = 60.5 Months

Length of expansions

greatly exceeds

contractions

6

Total Industrial Production,(2007:Q1 to 2010:Q4F)

1.5%3.2%3.6%

0.3%0.2%

-4.6%

-9.0%

-13.0%

-19.0%

-10.5%

3.3%3.7%4.0%4.1%

-0.4%

2.7%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/09); Insurance Info. Inst.

Industrial production began

to contracted sharply in late

2008 and plunged in Q1 2009

End of recession in late 2009, Obama stimulus program are expected to benefit industrial production and

therefore insurance exposure both directly and indirectly

Figures for 2010 revised upwards to

reflect expected impact of Obama stimulus program

and a gradual economic recovery

7

5.2%

-0.9

%-7

.4%

-6.5

%-1

.5%

1.8%

4.3%

18.6

%20

.3%

5.8%

0.3%

-1.6

%-1

.0%

-1.8

%-1

.0%

3.1%

1.1%

0.8%

0.4%

0.6%

-0.4

%-0

.3%

1.6%

5.6%

13.7

%7.

7%1.

2%-2

.9% -0

.5%

-3.8

%-4

.4%

-3.0

%

-10%

-5%

0%

5%

10%

15%

20%

25%78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

Rea

l N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Rea

l G

DP

Gro

wth

Real NWP Growth Real GDP

Real GDP Growth vs. Real P/C Premium Growth: Modest Association

P/C insurance industry’s growth is influenced modestly by growth

in the overall economy

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 7/09; Insurance Information Inst.

8

Inflation Trends Pressures Claim Cost

Severities via Medical and Tort Channels

9

Annual Inflation Rates(CPI-U, %), 1990-2010F

4.9 5.1

3.0 3.2

2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

(0.6)

1.8

2.82.92.4

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, July 10, 2009 (forecasts).

Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The

recession and the collapse of the commodity bubble have produced temporary deflation.

10

Comparative 2008 Inflation Statistics Important to Insurers ( %)

3.8 3.7

2.71.8

4.0

7.4

0

1

2

3

4

5

6

7

8

CPI-U Core CPI* TotalMedical

Care

PhysicianServices

HospitalServices

LegalServices

Infl

atio

n R

ate

(%)

*Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs.Source: US Bureau of Labor Statistics; Insurance Information Institute.

CPI and “Core” CPI are not representative of

many of the costs insurers face Medical/Legal costs typically

run well ahead of inflation

11

Top Concerns/Risks for Insurers if Inflation is Reignited

CONCERNS: The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Govt. Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary. What are the potential impacts for insurers? What can/should insurers do to protect themselves from the risks of inflation?

KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION• Rising Claim Severities

Cost of claims settlement rises across the board (property and liability)• Rate Inadequacy

Rates inadequate due to low trend assumptions arising from use of historical data • Reserve Inadequacy

Reserves may develop adversely and become inadequate (deficient)• Burn Through on Retentions

Retentions, deductibles burned through more quickly• Reinsurance Penetration/Exhaustion

Higher costsrisks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly

Source: Ins. Info. Inst.

12

Labor Market Trends

Fast & Furious: Massive Job Losses Sap the Economy Workers Comp &

Other Commercial Exposure

13

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

January 2000 through June 2009

Unemployment will likely peak near 10 % during this cycle, impacting payroll

sensitive p/c and l/h exposures

Source: US Bureau of Labor Statistics; Insurance Information Institute.

June 2009 unemployment jumped to 9.5%, and is now at it highest level since August 1983

Unemployment Rate:On the Rise

Average unemployment rate 2000-07 was 5.0%

Previous Peak: 6.3% in June 2003

Trough: 4.4% in March 2007

Jun

-09

14

U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*

4.5%

4.5% 4.6% 4.

8% 4.9%

5.4%

6.1%

6.9%

8.1%

9.3%

9.8% 10

.0%

10.1

%

10.0

%

9.9%

9.7%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4

* Blue bars are actual; Yellow bars are forecasts

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/09); Insurance Info. Inst.

Rising unemployment is eroding payrolls and

workers comp’s exposure base.

Unemployment is expected to peak above

10% in early 2010.

15

Monthly Change Employment*(Thousands)

-72

-144 -122-160 -137-161

-128-175

-321-380

-597

-681-741

-681-652

-519

-322

-467

-800

-700

-600

-500

-400

-300

-200

-100

0

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08 Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Job losses since the recession began in Dec. 2007 total 7.2 mill; 14.7 million people are now defined as unemployed.

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute

Monthly losses in Dec. – May were the largest in the post-WW II period

but pace of loss is diminishing

January 2008 through June 2009

16

Impacts of the Recession on the

Hispanic and Latino Population

Impacts on Unemployment and Homeownership

17

Unemployment Rates by Race, June 2009 vs. June 2008

5.5% 5.1%

7.6%

9.8%9.5%8.7%

12.2%

14.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

All Races White Hispanic/Latino Black

Source: US Bureau of Labor Statistics; Insurance Information Institute.

Unemployment is up across all races, but

more so for minorities

18

Unemployment Rates by State, May 2009: Highest 25 States*

10.6

10.2

10.1

9.8

9.7

9.6

8.9

8.8

8.6

8.29.

0

8.2

8.39.

4

11.111

.5

10.6

10.7

10.7

10.811

.312.4

12.1

12.1

14.1

0

2

4

6

8

10

12

14

16

MI OR SC RI CA NV NC OH DC TN IN KY FL IL AL GA MS WA MO WI NJ WV AK AZ MA

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for May 2009, seasonally adjusted.

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

The unemployment rate has been rising across the country, with a wide range in states with

significant Hispanic/Latino populations

19

7.1

7.1

6.6

6.5

6.5

6.3

5.8

5.4

4.45.

05.

0

7.0

7.0

4.4

6.3

7.88.1

7.27.3

7.47.68.

08.2

8.2

8.2

8.2

0

2

4

6

8

10

ME MN NY PA DE CT ID CO HI VT MD VA TX AR KS LA NH NM OK MT IA UT SD WY NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, May 2009: Lowest 25 States*

*Provisional figures for May 2009, seasonally adjusted.

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

The unemployment rate has been rising across the country, with a

wide range in states with significant Hispanic/Latino populations

20

U.S. Homeownership Rate,1990 to 2009*

*1st quarter 2009.Source: U.S. Census Bureau

63.9

%

64.1

%

64.5

%

64.0

% 64.7

% 65.4

%

65.7

%

66.3

%

66.8

% 67.4

%

67.8

%

67.9

%

68.3

% 69.0

%

68.9

%

68.8

%

68.1

%

67.8

%

67.3

%

90 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

Homeownership reached a record high in 2004 and has been declining ever

since.

21

Homeownership Rates AmongMinorities, 1994 to 2009*

*First quarterSource: U.S. Census Bureau

42.3

%

42.7

% 44.1

%

44.8

% 45.6

%

46.3

% 47.2

%

47.7

%

47.4

%

48.1

% 49.1

%

48.2

%

47.9

%

47.2

%

47.4

%

46.1

%

41.2

% 42.1

%

42.8

%

43.3

% 44.7

% 45.5

% 46.3

% 47.3

%

47.0

%

46.7

% 48.1

% 49.5

%

49.7

%

49.7

%

49.1

%

48.6

%

40%

42%

44%

46%

48%

50%

52%

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

Blacks Hispanic/LatinoHomeownership rates among Hispanics/Latinos

surpassed that of Blacks in 2005 and is holding up better

during the recession

22

GREEN SHOOTS

Is the Recession Nearing an End?

23

Hopeful Signs That the EconomyWill Begin to Recover Soon

• Recession Appears to be Bottoming Out, Freefall Has Ended• Pace of GDP shrinkage is beginning to diminish

• Pace of job losses is slowing

• Major stock market indices well off record lows, anticipating recovery

• Some signs of retail sales stabilization are evident

• Financial Sector is Stabilizing• Banks are reporting quarterly profits

• Many banks expanding lending to credit worthy people & businesses

• Housing Sector Likely to Find Bottom Soon• Home are much more affordable (attracting buyers)

• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)

• Freefall in housing starts and existing home sales is ending in many areas

• Inflation & Energy Prices Are Under Control

• Consumer & Business Debt Loads Are Shrinking

Source: Ins. Info. Inst.

24

11 Industries for the Next 10 Years: Insurance Solutions Needed

GovernmentEducation

Health CareEnergy (Traditional)Alternative Energy

AgricultureNatural Resources

EnvironmentalTechnology

Light ManufacturingExport Oriented Industries

25

Crisis-Driven Exposure

ImplicationsHome, Contractor, Auto, Exposure Growth Slows

as Sales Nosedive

26

New Private Housing Starts,1990-2010F (Millions of Units)

2.07

1.80

1.36

0.90

0.55

0.76

1.48

1.351.

46

1.29

1.20

1.01

1.19

1.47

1.62 1.64

1.57 1.60 1.

71

1.85 1.

960.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F

Exposure growth due to home construction forecast for HO insurers is dim for 2009

with some improvement in 2010.

Impacts also for comml. insurers with construction risk exposure

New home starts plunged 34%

from 2005-2007; Drop through 2009 is 73% (est.)—a net

annual decline of 1.52 million

units, lowest since record

began in 1959

I.I.I. estimates that each incremental 100,000 decline in housing starts costs

home insurers $87.5 million in new exposure (gross premium). The net

exposure loss in 2009 vs. 2005 is estimated at about $1.3 billion.

Source: US Department of Commerce; Blue Chip Economic Indicators (7/09); Insurance Information Inst.

27

16.916.916.6

17.117.5

17.817.4

16.516.1

13.1

10.1

11.7

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09F 10F

Weak economy, credit crunch are hurting auto sales; Gas prices

have been a factor too.

New auto/light truck sales are expected to experience a net drop of 6.7 million units annually by 2009 compared

with 2005, a decline of 40.3% and the lowest level

since the late 1960s

Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth

than problems in the housing market will on home insurers

Auto/Light Truck Sales,1999-2010F (Millions of Units)

Source: US Department of Commerce; Blue Chip Economic Indicators (7/09); Insurance Information Inst.

28

“Cash for Clunkers” or Car Allowance Rebate

System (CARS)Program to Increase Fuel

Efficiency and Stimulate Auto Sales Will Help Auto Insurers Too

29

Car Allowance Rebate System: How it Works

• President Obama in June 2009 signed into law the Car Allowance Rebate System (CARS) also knows as “Cash for Clunkers”

• Administered by the National Highway Traffic Safety Admin. (NHTSA), the program helps people purchase a new, more fuel efficient vehicle when trading in a less fuel efficient vehicle

• Program allocates $1 billion toward purchases between July 1 and Nov. 1, 2009 or until funds are exhausted (final rule July 24)

• Sense is that program will prove to be very popular and may be extended

• People can get between $3,500 and $4,500 per vehicle, depending on fuel efficiency of new vehicle vs. old vehicle

• Auto insurers should be able to generate between $75 - $125 million in net new auto premiums as people trade up and buy full coverage*

*III estimate based on 250,000 cars purchased via CARS program generating $300-$500 additional premium per vehicle.Source: www.CARS.gov; NHSTA; Insurance Information Institute.

30

Car Allowance Rebate System: How it Works

Source: www.CARS.gov; NHSTA; Insurance Information Institute.

Important Program Features• Car must be less than 25

years old• Only purchase or lease of

new vehicles qualify• Trade-in must get 18mpg or

less• Trade-in must have been

registered and continuously insured for the past year

• No voucher needed; dealer will apply credit at purchase

• Trade-in must be scrapped; Get scrap value

31

Crisis Implications

Top Crisis-Driven Claim Issues for Personal Lines

Insurers

32

Summary of Short-Run Changes in Claiming Behavior Due to Economy

• CLAIMING BEHAVIOR• Claim frequency falls with miles driven. History: Drop is temporary.• Claim severity continues to rise: med costs, collisions repair costs up• Likely maintenance on homes, cars deferredclaim. freq/sev. impact?

• PURCHASING BEHAVIOR: Efforts to Economize• More shopping around• Increased deductibles• Dropping optional coverages (collision, comprehensive)• Lower limits• Insuring fewer vehicles (3 or 4th vehicle sold)• Insuring older vehicles (old cars retained, new car purchases deferred)

• UNINSURED/UNDERINSURED MOTORIST % RISES• Expected to rise from 13.8% in 2007 to 16.1% in 2010

• FRAUD & ABUSE: • Evidence emerging of increased frequency of “give-ups” where car owners underwater

on payments commit fraud to obtain insurance money (e.g., car arson, fabricated theft, etc.)

• Anecdotal evidence of owner-caused home arson

33

Percentage Motorists Driving Without Insurance, 2003-2010F

14.9%14.6% 14.5% 14.3%

16.1%

13.8%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

2003 2004 2005 2006 2007 2010F

Source: Uninsured Motorists, 2008 Edition, Insurance Research Council; Insurance Information Institute

In 2007, 1-in-7.2 motorists was

uninsured; That figure is expected to

rise to 1-in-6.2 by 2010

A record 16.1% of motorists are expected to be driving

without insurance by 2010 as rising unemployment prompts some people to drop coverage

34

Do Changes in Miles Driven AffectAuto Collision Claim Frequency?

7.00

6.81

6.59

6.80 6.78

6.91

6.65

6.32

6.045.94

5.72

5.86

5.71 5.68

5.5

6.0

6.5

7.0

96 97 98 99 00 01 02 03 04 05 06 07 08 09*

Paid

Cla

im F

req

2400

2500

2600

2700

2800

2900

3000

3100

Bil

lio

ns

of

Mil

es D

rive

n

Collision Claim FrequencyBillions of Vehicle Miles

*2009 frequency data are for 12 months ending 3/31/09. Miles driven are annualized based on data through 3/31/09.

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: First Quarter 2009, published June 30, 2009 and earlier reports.

Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100

Miles driven fell 3.6% in 2008 but collision claim freq was down just

2.6; trend continuing in 2009

35

Auto Insurance: Claim Frequency Impacts of Energy Crisis of 1973/4

Source: ISO, US DOT.

Oct. 17, 1973: Arab oil embargo

begins

Frequency Impacts

Collision: -7.7%

PD: -9.5%

BI: -13.3%

March 17, 1974: Arab

oil states announce

end to embargo

Driving Stats

Gas prices rose 35-40%

Miles driven fell 6.7% in

1974

Frequency began to rebound almost

immediately after the embargo

ended

39

Key Threats Facing Insurers Amid

Financial Crisis

Challenges for theNext 5-8 Years

40

Important Issues & Threats Facing Insurers: 2009 - 2015

Source: Insurance Information Inst.

1. Erosion of Capital Losses are larger and occurring more rapidly than is commonly

understood or presumed Surplus down 13%=$66B since 9/30/07 peak; 12% ($80B ) in 2008 P/C policyholder surplus could be even more by year-end 2009 Some insurers propped up results by reserve releases Decline in PHS of 1999-2002 was 15% over 3 years and was

entirely made up and them some in 2003. Current decline is ~13% in 5 qtrs.

During the opening years of the Great Depression (1929-1933) PHS fell 37%, Assets fell 28% and Net Written Premiums fell by 35%. It took until 1939-40 before these key measures returned to their 1929 peaks.

BOTTOM LINE: Capital and assets could fall much farther and faster than many believe. It will take years to return to the 2007 peaks (likely until 2011 with a sharp hard market and 2015 without one)

41



2. Reloading Capital After “Capital Event” Continued asset price erosion coupled with major “capital

event” could lead to shortage of capital among some companies

Possible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirements

P/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after major events (post-9/11, Katrina). This assumption may be incorrect in the current environment

Cost of capital is much higher today, reflecting both scarcity & risk

Implications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh capital & generate internally. Already a reality for some life insurers.

42



3. Long-Term Reduction in Investment Earnings Low interest rates, risk aversion toward equities and many

categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gains

Price bubble in Treasury securities keeps yields low Many insurers have not adjusted to this new investment

paradigm of a sustained period of low investment gains Regulators will not readily accept it; Many will reject it Implication 1: Industry must be prepared to operate in

environment with investment earnings accounting for a smaller fraction of profits

Implication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.

Lessons from the period 1920-1975 need to be relearned

43Source: Insurance Information Inst.

4. Regulatory Overreach Principle danger is that P/C insurers get swept into

vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)

Danger is high as feds get their nose under the tent Status Quo is viewed as unacceptable by all Pushing for major change is not without significant

risk in the current highly charged political environment

Insurance & systemic risk Disunity within the insurance industry Impact of regulatory changes will be felt for decades Bottom Line: Regulatory outcome is uncertain and

risk of adverse outcome is high

Important Issues & Threats Facing Insurers: 2009 – 2???


5. Creeping Restrictions on Underwriting Attacks on underwriting criteria such as credit,

education, occupation, territory increasing Industry will lose some battles View that use of numerous criteria are discriminatory

and create an adverse impact on certain populations Impact will be to degrade the accuracy of rating systems

to increase subsidies Predictive modeling also at risk Current social and economic environment could

accelerate these efforts Danger that bans could be codified at federal level

during regulatory overhaul Bottom Line: Industry must be prepared to defend

existing and new criteria indefinitely



6. Emerging Tort Threat No tort reform (or protection of recent reforms) is

forthcoming from the current Congress or Administration

Erosion of recent reforms is a certainty (already happening)

Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability

Torts twice the overall rate of inflation Influence personal and commercial lines, esp. auto liab. Historically extremely costly to p/c insurance industry Leads to reserve deficiency, rate pressure Bottom Line: Tort “crisis” is on the horizon and will be

recognized as such by 2012-2014

Important Issues & Threats Facing Insurers: 2009 -2015

46

Regulatory Reform

Obama Administration’s Plan for Reforming Financial

Services Industry Regulation Will Impact Insurers

49

REGULATORY REFORM: 2009 AND BEYOND

50

Obama Regulatory Reform Proposal: Plan Components

I. Office of National Insurance (ONI) Duties

1. Monitor “all aspects of the insurance industry”

2. Gather information

3. Identify the emergence of any problems or gaps in regulation that could contribute to a future crisis

4. Recommend to the Federal Reserve insurance companies it believes should be supervised as Tier 1 FHCs

5. Administer the Terrorism Risk Insurance Program

6. Authority to enter into international agreements and increase international cooperation on insurance regulation

Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.

51

II. Systemic Risk Oversight & Resolution Authority Federal Reserve given authority to oversee systemic risk

of large federal holding companies (Tier 1 FHCs) Insurers are explicitly included among the types of entities that could be

found to be a Tier 1 FHC

ONI given authority to “recommend to the Federal Reserve any insurance companies that the ONI believes should be supervised as Tier 1 FHC.”

Proposal also recommends “creation of a resolution regime to avoid disorderly resolution of failing bank holding companies, including Tier 1 FHCs “…in situations where the stability of the financial system is at risk.” Directly affects insurers in 2 ways: Resolution authority may extend to an insurer within the BHC structure if

the BHC is failing

If systemically important insurer is failing (as identified by ONI as Tier 1 FHC) resolution authority may apply

Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.

Obama Regulatory Reform Proposal: Plan Components (cont’d)

52

III. Consumer Financial Protection Agency (CFPA) Recommendation that “CFPA should have broad jurisdiction to protect

consumers in consumer financial products and services such as credit, savings and payment products.”

Appears that Administration does not intend that the CFPA have jurisdiction over the insurance industry products or market practices

At the same time, there is no language that expressly excludes insurance from the scope of the CFPA’s authority

CFPA proposal contains numerous references specific to credit and savings products but none to insurance. However, the Administration clearly anticipates that CFPA would have broad powers with the scope of the agency’s agenda defined by several “Principles for Action,” which clearly could apply to insurance regulation:

Transparency: Disclosures and communications with clients should be “reasonable”

Simplicity: Standards for simplified products, straightforward pricing

Fairness: Restrictions on products if benefits outweigh costsSource: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009; “Obama .Proposal Would Create Office of National Insurance But is Unclear on Federal Chartering,” Dewey & LeBoeuf, Client Alert, June 17, 2009.

Obama Regulatory Reform Proposal: Plan Components (cont’d)

54

Rating of Auto/Home Insurance Regulatory & Operating Environment*

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WVVA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJ

RI

MDDE

AL

VT

NY

**DC

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

GRADE 2009 2008A 4 7

B 10 25 C 17 10D 12 5F 6 4

*Criteria considered were auto/home residual mkts., auto/home mkt. concentration, loss ratio stability, reg. env., regulatory clarity, credit scores, auto market entry/exit, territorial restrictions, political oversight.

**Information not available.

= A

= B

= C

= D

= F

Source: Heartland Institute, May 2009

http://www.heartland.org/custom/semod_policybot/pdf/25091.pdf

Study suggest the insurance regulatory and operating

environments deteriorated in 2009 for auto and home

insurance

56

FINANCIAL STRENGTH &

RATINGS Industry Has Weathered

the Storms Well

57

P/C Insurer Impairments,1969-2008

815

12

711

934

913

12

19

916

14

13

36

49

31 3

450

48

55

60

58

41

29

16

12

31

18 19

49 50

47

35

18

14 15

75

0

10

20

30

40

50

60

70

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

The number of impairments varies significantly over the p/c insurance cycle,

with peaks occurring well into hard markets

Source: A.M. Best; Insurance Information Institute

58

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2008

90

95

100

105

110

115

120

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Co

mb

ined

Rat

io

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

ent R

ate

Combined Ratio after DivP/C Impairment Frequency

Impairment rates are highly

correlated with underwriting

performance and reached record lows in 2007/08

Source: A.M. Best; Insurance Information Institute

2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and barely one-fourth the 0.82% average since 1969

59

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*

Under Review, 63 , 4.3%

Upgraded, 59 , 4.0%

Initial, 41 , 2.8%

Other, 59 , 4.0%

Affirm, 1,183 , 81.0%

Downgraded, 55 , 3.8%

*Through December 19.Source: A.M. Best.

59

Despite financial market turmoil, high cat losses and a soft market in 2008, 81% of ratings actions by A.M. Best

were affirmations; just 3.8% were downgrades

and 4.0% upgrades

P/C insurance is by design a resilient in business. The dual threat of financial

disasters and catastrophic losses are

anticipated in the industry’s risk

management strategy.

60

Historical Ratings Distribution,US P/C Insurers, 2008 vs. 2005 and 2000

Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.

A/A-48.4%

D0.2%C++/C+

1.9%

E/F2.3% A++/A+

11.5%

C/C-0.6%

B++/B+28.3%

B/B-6.9%

2008 2005

P/C insurer financial strength has improved since 2005 despite financial crisis

A/A-52.3%

A++/A+9.2%

B++/B+26.4%

Vulnerable*12.1%

A/A-60.0%

A++/A+10.8%

B++/B+21.3%

Vulnerable*7.9%

2000A++/A+ and A/A- gains

61

Reasons for US P/C Insurer Impairments, 1969-2008

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008

Deficient loss reserves and inadequate

pricing are the leading cause of

insurer impairments,

underscoring the importance of

discipline. Investment

catastrophe losses play a much smaller role.

Reinsurance Failure3.7%

Rapid Growth14.3%

Misc.9.1%

Affiliate Impairment

7.9%

Sig. Change in Business

4.2%

Deficient Loss

Reserves/In-adequate Pricing38.1%

Investment Problems

7.0%

Alleged Fraud8.1%

Catastrophe Losses7.6%

62

Critical Differences Between P/C

Insurers and BanksSuperior Risk Management Model

& Low Leverage Makea Big Difference

63

How Insurance Industry Stability Has Benefitted Consumers

BOTTOM LINE:• Insurance Markets—Unlike Banking—Are Operating

Normally• The Basic Function of Insurance—the Orderly Transfer

of Risk from Client to Insurer—Continues Uninterrupted• This Means that Insurers Continue to:

Pay claims (whereas 79 banks have gone under as of 7/10/09) The Promise is Being Fulfilled

Renew existing policies (banks are reducing and eliminating lines of credit)

Write new policies (banks are turning away people who want or need to borrow)

Develop new products (banks are scaling back the products they offer)

Source: Insurance Information Institute63

64

• Emphasis on Underwriting Matching of risk to price (via experience and modeling) Limiting of potential loss exposure Some banks sought to maximize volume and fees and disregarded risk

• Strong Relationship Between Underwriting and Risk Bearing Insurers always maintain a stake in the business they underwrite, keeping “skin in the game”

at all times Banks and investment banks package up and securitize, severing the link between risk

underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101

• Low Leverage Insurers do not rely on borrowed money to underwrite insurance or pay claimsThere is no

credit or liquidity crisis in the insurance industry• Conservative Investment Philosophy

High quality portfolio that is relatively less volatile and more liquid• Comprehensive Regulation of Insurance Operations

The business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds, private equity, complex securitized instruments, credit derivatives—CDS’s)

• Greater Transparency Insurance companies are an open book to regulators and the public

Source: Insurance Information Institute64

Reasons Why P/C Insurers Have Fewer Problems Than Banks:

A Superior Risk Management Model

65

P/C INSURANCE FINANCIAL

PERFORMANCE

A Resilient Industry in Challenging Times

66

Profitability

Historically Volatile

67

P/C Net Income After Taxes1991-2009:Q1 ($ Millions)*

$14,

178

$5,8

40

$19,

316

$10,

870

$20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$62,

496

$2,3

79

-$1,

309

-$6,970

$65,

777

$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 07

08F

09:Q

1

*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guarantee insurers yields an 4.2% ROAS for 2008 and 2.2%. 2009:Q1 net income was $2.4 billion excl. M&FG.Sources: A.M. Best, ISO, Insurance Information Inst.

2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.4%2008 ROAS = 0.5%*2009:Q1 ROAS = -1.2%*

Insurer profits peaked in 2006 and 2007, but fell 96.2% during the economic

crisis in 2008

67

68

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809:Q1

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2009: Q1*

*Excludes Mortgage & Financial Guarantee in 2008 and 2009Sources: ISO, Fortune; Insurance Information Institute.

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

4 Hurricanes

Katrina, Rita, Wilma

P/C profitability is cyclical and volatile

Excludes Mortgage & Financial Guarantee Insurers

69

-5%

0%

5%

10%

15%

20%

25%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 06 0809

Q1

1975: 2.4%

1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years10 Years

9 Years

Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2% and 2.2 in Q1 2009.Sources: ISO; A.M. Best; Insurance Information Institute.

2008: 0.5%

P/C Insurance Industry ROEs,1975 – 2009:Q1*

09:Q1: -1.2%

69

70

97.5

100.6 100.1 100.7

92.6

98.4101.0

8.9%4.2%

12.7%

14.3% 15.9%

9.6%

2.2%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009:Q1*

Co

mb

ine

d R

ati

o

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Re

tru

n o

n E

qu

ity

*

Combined Ratio ROE*

* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.

A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At

Combined ratios must me must lower in today’s depressed

investment environment to generate risk

appropriate ROEs

71

Advertising Trends

72

Advertising Expenditures by P/C Insurance Industry, 1999-2008

$ Billions

$1.736 $1.737 $1.803 $1.708

$3.426

$4.102$4.354

$2.975

$2.111$1.882

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

99 00 01 02 03 04 05 06 07 08

Source: Insurance Information Institute from consolidated P/C Annual Statement data.

Ad spending by P/C insurers was at a

record high in 2008, signaling strong

competition despite the recession.

73

P/C Premium Growth

Primarily Driven by the Industry’s Underwriting Cycle, Not the Economy

74

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

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

2008

09:Q

1

Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute

Strength of Recent Hard Marketsby NWP Growth

1975-78 1984-87 2000-03

74

Net written premiums fell 1.0%

in 2007 (first decline since 1943)

by 1.4% in 2008, and 3.6% in Q1 2009, the first 3-

year declines since 1930-33

Shaded areas denote “hard

market” periods

75

$651 $6

68 $691 $7

05

$703

$685

$690 $7

26

$786

$875

$830

$841

$817

$820$8

42

$831

$600

$650

$700

$750

$800

$850

$900

$950

94 95 96 97 98 99 00 01 02 03 04 05 05 07* 08* 09*

Average Expenditures on Auto Insurance

*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.

Countrywide auto insurance expenditures increased 2.6% in 2008 and are rising at a

4% pace in 2009

76

0.8%

0.8%

0.5%

0.4%

0.3%

0.3% 0.5% 0.6%

0.5%

0.1% 0.

5% 0.9% 1.1% 1.3% 1.

7%2.

6%2.

6% 2.7% 3.

0% 3.1% 3.

4% 3.7% 4.

0%4.

0% 4.3% 4.4% 4.

7%4.

4% 4.7%

0.2%

0%

1%

2%

3%

4%

5%

6%

Jan

-07

Feb

-07

Mar-

07

Ap

r-07

May-0

7Ju

n-0

7

Ju

l-07

Au

g-

Sep

-07

Oct-

07

No

v-0

7D

ec-0

7Jan

-08

Feb

-08

Mar-

08

Ap

r-08

May-0

8

Ju

n-0

8Ju

l-08

Au

g-

Sep

-08

Oct-

08

No

v-0

8D

ec-0

8

Jan

-09

Feb

-09

Mar-

09

Ap

r-09

May-0

9Ju

n-0

9

Monthly Change in Auto Insurance Prices*

*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics

Auto insurance prices have clearly

begun to rise in recent months

77

$508 $5

36

$593

$668

$729 $7

64 $804

$807

$820

$841

$500

$550

$600

$650

$700

$750

$800

$850

$900

$950

00 01 02 03 04 05 06 07* 08* 09*

Average Premium for Home Insurance Policies**

*Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.

Countrywide auto insurance expenditures increased 1.6% in 2008 and are increasing at 2.6% annual rate in 2009

78

Average Commercial Rate Change,All Lines, (1Q:2004 – 1Q:2009)

-3.2

%

-5.9

%

-7.0

%

-9.4

%

-9.7

% -8.2

%

-4.6

% -2.7

%

-3.0

%

-5.3

%

-9.6

%

-11.

3%

-11.

8%

-13.

3% -12.

0%

-13.

5%

-12.

9% -11.

0%

-6.0

% -5.0

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

-0.1

% Magnitude of price declines is now

shrinking. Reflects shrinking capital,

reduced investment gains, deteriorating

underwriting performance, higher cat losses and costlier

reinsurance

79

Merger & Acquisition

Barriers to Consolidation Will Diminish in 2009/10

80

P/C Insurance-Related M&A Activity, 1988-2008

$2,4

35

$5,1

00

$19,

118

$40,

032

$1,2

49

$486

$20,

353

$425

$9,2

64$3

5,22

1

$13,

615

$16,

294

$55,825

$30,

873

$8,0

59

$11,

534

$1,8

82

$3,4

50$2

,780

$5,1

37

$5,6

38

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Tran

sact

ion

Val

ue ($

Mill

)

0

20

40

60

80

100

120

140

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

.

Source: Conning Research & Consulting.

2009 off to a stronger start with AIG unit sales and

Bermuda consolidation

$ Value of deal up 20% in 2009,

volume down 12%

81

Distribution Sector: Insurance-Related M&A Activity, 1988-2008

$542

$446

$5,8

12

$1,9

34

$7

$1,633

$2,7

20

$689

$60

$212 $9

44

$15,205

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

96 97 99 00 01 02 03 04 05 06 07 08

Tran

sact

ion

Val

ue ($

Mill

)

0

50

100

150

200

250

300

350

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

Source: Conning Research & Consulting.

Consolidation within the distribution sector

remains elevated

82

Distribution Sector M&A Activity, 2008 vs. 2006

Source: Conning Research & Consulting

Title2%

Insurer Buying

Distributor12%

PE Buying Agency

4% Agency Buying Agency

67%

Other2%

Bank Buying Agency

13%

2008 2006

Title4%

Insurer Buying

Distributor7%

Agency Buying Agency

62%

Other2%

Bank Buying Agency

25%

Number of bank acquisitions is falling; More private equity

interest

83

Capital/Policyholder

Surplus

Shrinkage, but Capital is Within Historic Norms

84

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809*

U.S. Policyholder Surplus: 1975-2009:Q1*

Source: A.M. Best, ISO, Insurance Information Institute. *As of 3/31/09

$ B

illi

ons

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Actual capacity as of 3/31/09 was $437.1, down 4.2% from 12/31/08 at $455.6B, but still 53% above its 2002 trough. Recent peak was $521.8 as of 9/30/07. Surplus

as of 3/31/09 is 16.2 below 2007 peak.

The premium-to-surplus ratio stood at $1.03:$1 as of

3/31/09, up from near record low of $0.85:$1 at

year-end 2007

84

85

Policyholder Surplus, 2006:Q4 – 2009:Q1

$ Billions

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$505.0$515.6

$517.9

$380

$400

$420

$440

$460

$480

$500

$520

$540

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1

Source: ISO.

Declines Since 2007:Q3 Peak

08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%)

08:Q4: -$66.2 (-12.9%) 09:Q1: -$84.7B (-16.2%)

Capacity peaked at $521.8 as of 9/30/07

85

86

Premium-to-Surplus Ratios Before Major Capital Events*

$1.65

$1.42 $1.40

$1.03 $1.03$0.88

$1.05$1.15

$0.5

$0.7

$0.9

$1.1

$1.3

$1.5

$1.7

$1.9

6/3

0/1

98

9H

urr

ica

ne

Hu

go

6/3

0/1

99

2H

urr

ica

ne

An

dre

w

12

/31

/93

No

rth

rid

ge

Ea

rth

qu

ak

e

6/3

0/0

1S

ep

t. 1

1A

tta

ck

s

6/3

0/0

4F

lori

da

Hu

rric

an

es

6/3

0/0

5H

urr

ica

ne

Ka

trin

a

6/3

0/0

7F

ina

nc

ial

Cri

sis

As

of

3/3

1/0

9**

*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.

P/C insurance industry was better capitalized going into the

financial crisis than before any “capital event” in recent history

87

0.8

1.0

1.2

1.4

1.6

1.8

2.0

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

U.S. P/C Industry Premiums-to-Surplus Ratio: 1985-2009:Q1

Sources: A.M. Best, ISO, Insurance Information Institute *As of 3/31/09.

19980.84:1–the lowest

(strongest) P:S ratio in recent history.

Premiums measure risk accepted; surplus is funds beyond reserves to pay unexpected losses. The larger

surplus is in relation to premiums—the lower the ratio of premiums to surplus—the greater the

industry’s capacity to handle the risk it has accepted.

1.03:1 as of 3/31/09

P/C insurers remain well capitalized despite recent erosion of capital. 50-year average = 1.52.

88

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

3.3%

9.6%

6.9%

10.9%

16.2%

13.8%

6.2%

0%2%4%6%8%

10%12%14%16%18%

6/3

0/1

98

9H

urr

ica

ne

Hu

go

6/3

0/1

99

2H

urr

ica

ne

An

dre

w

12

/31

/93

No

rth

rid

ge

Ea

rth

qu

ak

e

6/3

0/0

1S

ep

t. 1

1A

tta

ck

s

6/3

0/0

4F

lori

da

Hu

rric

an

es

6/3

0/0

5H

urr

ica

ne

Ka

trin

a

Fin

an

cia

lC

ris

is a

s o

f3

/31

/09

**

*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.

The financial crisis now ranks as the largest

“capital event” over the past 20+ years

89

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

NWP % changeSurplus % change

*2009 NWP and Surplus figures are % changes for Q1:09 vs Q1:08Sources: A.M. Best, ISO, Insurance Information Institute

Historically, Hard Markets Follow When Surplus “Growth” is Negative*

Sharp decline in capacity is a necessary but not sufficient

condition for a true hard market

90

Investment Performance

Investments are the Principle Source of Declining

Profitability

91

Property/Casualty Insurance Industry Investment Gain:1994- 2009:Q11

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.4

$3.7

$56.9$51.9

$57.9

$0

$10

$20

$30

$40

$50

$60

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

Investment gains fell by 51% in 2008 due to lower yields, poor equity market

conditions. Falling again in 2009.

91

92

P/C Insurer Net Realized Capital Gains, 1990-2009:Q1

$2.88$4.81

$9.89

$1.66

$6.00

$9.24$10.81

$13.02

$16.21

$6.63

-$1.21

$6.61$8.92

-$7.99

-$19.80

$18.02

$3.52

$9.70$9.13$9.82

-$20-$18-$16-$14-$12-$10-$8-$6-$4-$2$0$2$4$6$8

$10$12$14$16$18$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

09Q

1

Sources: A.M. Best, ISO, Insurance Information Institute.

Realized capital losses hit a record $19.8 billion in 2008 due to financial market turmoil, a $27.7 billion swing from 2007, followed by an $8.0B drop in Q1 2009. This is a primary cause of 2008/2009’s large drop in profits and ROE.

$ Billions

92

9393

0.14% 0.18% 0.30%0.50%

0.93%

1.39%

2.13%

2.81%

3.29%

4.22% 4.23%

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00% 5.19%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Current Yield Curve*Pre-Crisis (July 2007)

Treasury Yield Curves: Pre-Crisis vs. Current*

*May 2009.Sources: Federal Reserve; Insurance Information Institute.

Stock dividend cuts will further pressure investment income

Treasury Yield Curve is at its most depressed level in at least 45 years. Investment income will fall as a result.

94

Underwriting Trends

Financial Crisis Does Not Directly Impact Underwriting

Performance: Cycle, Catastrophes Were 2008’s Drivers

95

115.8

107.5

100.198.4

100.8

92.6

98.4

101.0

95.7

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009:Q1*

P/C Insurance Industry Combined Ratio, 2001-2009:Q1*

*Excludes Mortgage & Financial Guarantee insurers in 2008/09. Including M&FG, 2008=105.1, 2009=102.2 Sources: A.M. Best, ISO.

Best combined ratio since 1949

(87.6)

As recently as 2001, insurers paid out nearly $1.16 for every

$1 in earned premiums

Relatively low CAT

losses, reserve releases

Cyclical Deterioration

95

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

96

-55-50-45-40-35-30-25-20-15-10-505

101520253035

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

:Q1

Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers

$ B

illi

ons

Insurers earned a record underwriting profit of $31.7B in 2006 and $19.3B in 2007, the largest ever but only the 2nd and 3rd since 1978. Cumulative underwriting deficit from

1975 through 2008 is $442B.

Underwriting Gain (Loss)1975-2009:Q1*

$19.8 Bill underwriting loss in 2008

incl. mort. & FG insurers, -2.5B in Q1:09

96

97

Number of Years With Underwriting Profits by Decade, 1920s –2000s

67

10

8

45

0 0

3

0

2

4

6

8

10

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*

Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.

Number of Years with Underwriting ProfitsUnderwriting profits were common before the 1980s (40 of the 60 years

before 1980 had combined ratios below 100)—but then they vanished. Not a single underwriting profit was recorded in the 25 years from 1979

through 2003.

97

98

117.7

158.4

113.6118.4

112.7

121.7

101.0

108.2111.4

121.7

109.3

98.394.2

100.1

89.4

95.7

116.5

98

113.0109.4

85

95

105

115

125

135

145

155

165

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F

Homeowners Insurance Combined Ratio

Average 1990 to 2008E= 111.1

Insurers have paid out an average of $1.11in losses for every dollar earned in premiums over the past 17 years

Sources: A.M. Best (historical and forecasts)

99

Number and Percentage of Problem Chinese Drywall Reports by State*

Other States, 34 , 6.0%

Virginia, 22 , 3.9%

Alabama, 7 , 1.2%

Florida, 438 , 77.1%

Louisiana, 67 , 11.8%

* First report was received 12/22/08.Source: US Consumer Product Safety Commission, http://www.cpsc.gov/info/drywall/where.html accessed 7/16/09.

99

The vast majority of problem Chinese drywall

was used in FL in the wake of the 2004/2005

hurricanes

Coverage for defective drywall is excluded under a standard

homeowners insurance policy (construction defect and pollution exclusions apply and there is no covered

cause of loss)

100

States With Problem Chinese Drywall Reports*

* First report was received 12/22/08.Source: US Consumer Product Safety Commission, http://www.cpsc.gov/info/drywall/where.html accessed 7/16/09.

100

As of July 16, 2009, the Consumer Product Safety Commission

had received 608 reports of defective

Chinese drywall from 21 states plus DC, 77%

of those from FL

Most problems have arisen in hotter, more

humid climates such as FL and LA

101

101.7101.3 101.0

99.5

101.1

103.5

109.5

107.9

104.2

98.4

94.495.1 95.5

98.3 98.597.5

101.3

90

95

100

105

110

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F

Private Passenger Auto (PPA) Combined Ratio

Average Combined Ratio for 1993 to 2006:

100.7


PPA is the profit juggernaut of the

p/c insurance industry today

Auto insurers have shown significant

improvement in PPA underwriting

performance since mid-2002, but results

are deteriorating.

102

110.

3

110.

2

107.

6

103.

9

109.

7

112.

3

111.

1

122.

3

110.

2

102.

5

105.

4

91.1

95.1

106.

5

105.

1

102.

0

112.

5

85

90

95

100

105

110

115

120

125

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F

2006/07 benefited from favorable loss cost trends, improved tort environment, low CAT

losses, WC reforms and reserve releases. Most of these trends reversed in 2008 and

mortgage and financial guarantee segments have big influence. 2009 is transition year.

Commercial coverages have exhibited significant

variability over time.

Commercial Lines Combined Ratio, 1993-2009F

Mortgage and financial guarantee may account for up to 4 points on the commercial

combined ratio in 2008


103

Catastrophic Loss

Catastrophe Losses Trends Are Trending Adversely

104

U.S. Insured Catastrophe Losses$7

.5$2

.7$4

.7$2

2.9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5$5

.9 $12.

9 $27.

5

$6.7

$26.

0$2

.7$1

00.0

$61.

9

$9.2

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

20??

*Based on PCS data through March 31 = $2.66 billion.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions2008 CAT losses exceeded

2006/07 combined. 2005 was by far the worst year ever for

insured catastrophe losses in the US, but the worst has yet to come.

$100 Billion CAT year is coming

eventually

104

2009 cat losses were down 25% in Q1 from $3.545 in Q1 2008

105

States With Highest Insured Catastrophe Losses in 2008

$ Billions

$10.2

$2.2$1.6 $1.3 $1.0

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

Texas California Minnesota Ohio Georgia

Source: PCS; Insurance Information Institute.

In 2008, insurers paid $26 billion to 3.9 million victims of 37 major

natural catastrophes across 40 states. 64% of the payouts (in $ terms) went

to homeowners, 27% to business owners and 9% to vehicle owners

106

Number of PCS Catastrophe Events, 1998-2008*

$ Billions

37

27

24

20

24

33

23

37

2221

25

15

20

25

30

35

40

98 99 00 01 02 03 04 05 06 07 08*PCS defines a catastrophe as an even that caused at least $25 million in insured property damage andaffects and significant number of policyholders and insurers.Source: PCS; Insurance Information Institute

The number of catastrophe events

reached a 10-year high in 2008

107

Top 12 Most Costly Disasters in US History, (Insured Losses, $2007)

$4.0 $5.0 $6.0 $7.0 $7.8 $8.2$10.7 $10.9 $10.9

$22.0 $22.9

$43.6

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Ike(2008)*

Wilma(2005)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

$ B

illi

ons

*PCS estimate as of 12/15/08.Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.

9 of the 12 most expensive disasters in US history

have occurred since 2004

In 2008, Ike became the 6th most expensive insurance event and 4th most

expensive hurricane in US history

107

108

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1988-2007¹

Fire, $8.1 , 2.6%

Tornadoes, $82.4 , 26.5%

All Tropical Cyclones, $141.6 ,

45.6%

Civil Disorders, $1.1 , 0.4%

Utility Disruption, $0.2 , 0.1%

Water Damage, $0.4 , 0.1%Wind/Hail/Flood,

$9.9 , 3.2%

Earthquakes, $19.5 , 6.3%

Winter Storms, $24.4 , 7.9%

Terrorism, $22.9 , 7.4%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.

Insured disaster losses totaled $310.5 billion from 1988-2007 (in 2007 dollars)

109

Insurance Information Institute On-Line

THANK YOU FOR YOUR TIME AND

YOUR ATTENTION!

109

latin american association of insurance agencies hollywood, fl july 17, 2009

Documents

blue economic indicators

insurance exposure

us bureau of economic

end of recession

economic toll of credit

blue bars

commodity crisis

pc insurers