overview & outlook for p/c insurance an industry at the crossroads

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for P/C Insurance An Industry at the Crossroads 2007 PAAS Annual Forum Scottsdale, AZ June 4, 2007 Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038

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Overview & Outlook for P/C Insurance An Industry at the Crossroads. 2007 PAAS Annual Forum Scottsdale, AZ June 4, 2007. Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 - PowerPoint PPT Presentation

TRANSCRIPT

Page 1: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Overview & Outlook for P/C Insurance

An Industry at the Crossroads2007 PAAS Annual Forum

Scottsdale, AZJune 4, 2007

Robert P. Hartwig, Ph.D., CPCU, President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org

Page 2: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Presentation Outline

• P/C Profit Overview—2006, A Cyclical Peak• Underwriting Trends: Unsustainable?• Premium Growth: Approaching a Standstill• Pricing: Competitive Pressures Mounting• Capital & Capacity: UnderleveragedROE Pressure• Catastrophe Loss Management

What is the Appropriate Role for Government?

• Reinsurance Summary• Financial Strength & Ratings• Investments: Less Bang for the Buck• Tort System: Great News for a Change (Mostly)• Legislative & Regulatory Update• Q&A

Page 3: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

P/C PROFIT:An Historical Perspective

Profits in 2006 ReachedTheir Cyclical Peak

Page 4: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

P/C Net Income After Taxes1991-2006 ($ Millions)*

$14,178

$5,840

$19,316

$10,870

$20,598$24,404

$36,819

$30,773

$21,865

-$6,970

$3,046

$30,029

$63,695

$44,155

$20,559

$38,501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

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

*ROE figures are GAAP; 1Return on avg. Surplus.Sources: A.M. Best, ISO, Insurance Information Inst.

2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 10.5%2006 ROAS1 = 14.0%

Though up in 2006, insurer profits are highly volatile (2001 was the industry’s worst year ever). ROEs

generally fall below that of most other industries.

Page 5: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

-5%

0%

5%

10%

15%

20%

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2008E

*2007-08 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; Fortune

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

4 Hurricanes

Katrina, Rita, Wilma

P/C profitability is cyclical, volatile and vulnerable

Page 6: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

-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 0607

F08

F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F

*2007-08 P/C insurer ROEs are I.I.I. estimates.Source: Insurance Information Institute; ISO, A.M. Best.

1975: 2.4%

1977:19.0% 1987:17.3%

1997:11.6%

2006:14.0%

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

10 Years

10 Years 9 Years

Page 7: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

-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.

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

-13.

2 p

ts

+0.

2 p

ts

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

+1.

0 p

ts

+3.

0 p

ts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

+2.

0 p

ts

Page 8: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Insurance & Reinsurance Stocks: Slow Start in 2007 in P/C, Reins

11.29%

6.72%

6.81%

2.09%

2.69%

13.60%

8.30%

0.0% 5.0% 10.0% 15.0%

S&P 500

Life/Health

Reinsurers

P/C

All Insurers

Multiline

Brokers

Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

Total YTD Returns Through June 1, 2007

P/C insurance, reinsurance stocks lagging on soft market

concerns and worries over 2007 hurricane season

Page 9: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Top Industries by ROE: P/C Insurers Still Underperformed in 2006*

30.7%30.3%

26.4%24.6%

24.2%22.6%

21.8%21.5%

20.9%20.9%

20.5%19.6%19.4%19.1%

14.9%15.4%

31.8%

0% 5% 10% 15% 20% 25% 30% 35%

Oil & Gas Equip., ServicesPetroleum Refining

MetalsFood Services

Household & Pers. ProductsPharmaceuticals

Industrial & Farm EquipmentMining & Crude Oil Prod.

Aerospace & DefenseChemicalsSecurities

Food Consumer Prod.Medical Prod. & Equip.

Specialty RetailersHomebuilders

P/C Insurers (Stock)All Industries: 500 Median

*Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors.Source: Fortune, April 30, 2007 edition; Insurance Information Institute

P/C insurer profitability in 2006 ranked 30th out of 50

industry groups despite renewed

profitabilityP/C insurers

underperformed the All Industry median for the 19th consecutive

year

Page 10: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Advertising Expenditures by P/C Insurance Industry, 1999-2005

$ Billions

$1.736 $1.737 $1.803$1.708

$2.975

$2.111

$1.882

$1.5

$1.7

$1.9

$2.1

$2.3

$2.5

$2.7

$2.9

$3.1

99 00 01 02 03 04 05Source: Insurance Information Institute from consolidated P/C Annual Statement data.

Ad spending by P/C insurers is at a record high, signaling

increased competition

Page 11: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

UNDERWRITING

Extremely Strong 2006, Momentum for 2007/08

Page 12: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

115.8

107.4

100.198.3

100.7

92.4

98.696.6

90

100

110

120

01 02 03 04 05 06 07F 08F

P/C Industry Combined Ratio

Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Early Bird survey.

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

2006 produced the best underwriting result

since the 91.2 combined ratio in 1949

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

every dollar they earned in premiums

2007/8 deterioration due primarily to falling rates, but results still strong assuming

normal CAT activity

Page 13: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

87.6

91.2

92.1 92.3 92.4 92.493.1 93.1 93.3

93.0

85

86

87

88

89

90

91

92

93

94

1949 1948 1943 1937 1935 2006 1950 1939 1953 1936

Ten Lowest P/C Insurance Combined Ratios Since 1920

Sources: Insurance Information Institute research from A.M. Best data.

The 2006 combined ratio of 92.4 was the best since the 87.6 combined in 1949

The industry’s best underwriting years are associated with

periods of low interest rates

Page 14: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

-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

Underwriting Gain (Loss)1975-2006

Source: A.M. Best, Insurance Information Institute

$ B

illi

ons

Insurers earned an underwriting profit of $31.2 billion in 2006, the largest ever but only

the second since 1978. Despite the 2006 underwriting profit, the cumulative

underwriting deficit since 1975 is $419 billion.

Page 15: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

110.

3

110.

2

107.

6

103.

9

109.

7

112.

3

111.

1

122.

3

110.

2

102.

5

105.

1

94

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 06F

Commercial Lines Combined Ratio, 1993-2006E*

Source: A.M. Best; Insurance Information Institute .

Outside CAT-affected lines, commercial

insurance is doing fairly well. Caution is

required in underwriting long-

tail commercial lines.

2006 results will benefited from relatively disciplined underwriting

and low CAT losses

Commercial coverages have exhibited extreme variability. Are current

results anomalous?

Page 16: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

103.

9

104.

5

103.

5

104.

9

99.8 10

2.7

104.

5

109.

9

110.

9

105.

3

98.4

94.3 96

.4

91.0

85

90

95

100

105

110

115

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

Personal LinesCombined Ratio, 1993-2006E

Source: A.M. Best; Insurance Information Institute.

A very strong 2006 resulted from favorable frequency & severity

trends and low CAT activity

Page 17: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

$1

0.8

$2

2.7

$1

3.9

$9

.9

$8

.0

$5

.0

$2.0$0.4

2.41.9

1.1

0.4

6.5

3.63.5

0.1

$0

$5

$10

$15

$20

$25

2000 2001 2002 2003 2004 2005E 2006E 2007E

Re

se

rve

De

ve

lop

me

nt

($B

)

0

1

2

3

4

5

6

7

Co

mb

ine

d R

ati

o P

oin

ts

PY Reserve Development Combined Ratio Points

Impact of Reserve Changes on Combined Ratio

Source: A.M. Best, Lehman Brothers for years 2005E-2007F

Reserve adequacy has improved substantially

Page 18: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

PREMIUM GROWTH

Deceleration in 2006, Even Slower in 2007

Page 19: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

-10%

-5%

0%

5%

10%

15%

20%

25%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

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

F2

00

8F

20

09

F2

01

0F

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

*2007-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006-2008 figures from III Groundhog Survey.

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

(post-Andrew)

2005: biggest real drop in premium since early 1980s

Page 20: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Growth in Net Written Premium, 2000-2008F

Source: A.M. Best; Forecasts from the Insurance Information Institute’s Groundhog survey: http://www.iii.org/media/industry/financials/groundhog2007/.

5.1%

8.1%

14.1%

9.8%

4.7%

0.3%

4.3%

1.8% 1.9%

2000 2001 2002 2003 2004 2005 2006 2007F 2008F

P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are

expected to remain healthy

Page 21: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

PRICING

Under Pressure in 2007

Page 22: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

$651 $6

68 $691 $7

05

$703

$685

$690 $7

24

$780 $8

23 $851

$847

$838

$847

$600

$650

$700

$750

$800

$850

$900

$950

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

Average Expenditures on Auto Insurance

*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute

Countrywide auto insurance expenditures

are expected to fall 0.5% in 2007, the first drop

since 1999

Lower underlying frequency and modest

severity are keeping auto insurance costs in check

Page 23: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

$418$440 $455

$481 $488 $508$536

$593

$668

$729

$868

$787$835

$400$450$500$550$600$650$700$750$800$850$900

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

Average Expenditures on Homeowners Insurance**

*Insurance Information Institute Estimates/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute

Countrywide home insurance expenditures rose an estimated 6% in 2006, 4% in 2007

Homeowners in non-CAT zones will see

smaller increases, but larger in CAT zones

Page 24: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Average Commercial Rate Change,All Lines, (1Q:2004 – 1Q:2007)

-0.1%

-3.2%

-7.0%

-9.4%

-4.6%

-2.7%

-5.3%

-9.6%

-3.0%

-9.7%-11.3%

-5.9%

-8.2%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07

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

Magnitude of rate decreases diminished greatly after

Katrina but have grown again

KRW Effect

Page 25: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Average Commercial Rate Change by Line: 4Q99 – 1Q07

Source: Council of Insurance Agents & Brokers

Commercial accounts trended downward from early 2004 to mid-2005

though that trend moderated post-Katrina

Page 26: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2nd Qtr. 2006

71%

48%

28%21%

63%

32%

21%

12% 10%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest

Page 27: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 1st Qtr. 2007

11% 9%

0% 0%

8% 5%9%

0% 0%

9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

Commercial Property & Business Interruption

increases are disappearing in the

Southeast; Completely gone in the Midwest &

Northeast

“Soft” market seemed to hit Midwest about 1 year before the rest of the US

Page 28: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

CAPACITY/SURPLUS

The Industry in Underleveraged

Page 29: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

7576777879808182838485868788899091929394959697989900010203040506

U.S. Policyholder Surplus: 1975-2006

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

$ B

illi

ons

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

Capacity as of 12/31/06 was $487.1B (est.), 14.4% above year-

end 2005, 71% above its 2002 trough and 46% above its 1999

peak.Foreign reinsurance and residual market

mechanisms absorbed 45% of 2005 CAT

losses of $62.1B

Page 30: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Annual Catastrophe Bond Transactions Volume, 1997-2006

$966.9

$1,729.8

$4,693.4

$1,991.1

$1,142.8$1,219.5$846.1$984.8

$1,139.0

$633.0

$0$500

$1,000$1,500

$2,000$2,500$3,000

$3,500$4,000

$4,500$5,000

97 98 99 00 01 02 03 04 05 06

Ris

k C

apita

l Iss

ues

($ M

ill)

02

46

81012

1416

1820

Nu

mb

er o

f Iss

uan

ces

Risk Capital Issued Number of Issuances

Source: MMC Securities and Guy Carpenter; Insurance Information Institute.

Catastrophe bond issuance has soared in the wake of Hurricanes

Katrina and the hurricane seasons of 2004/2005

Page 31: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

MERGER & ACQUISITION

Few Catalysts for Major P/C Consolidation

Page 32: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

P/C Insurance-Related M&A Activity, 1988-2006

$2,4

35

$5,1

00

$19,

118

$40,

032

$1,2

49

$486

$20,

353

$425

$9,2

64

$35,

221

$55,825

$30,

873

$8,0

59

$11,

534

$1,8

82

$3,4

50

$2,7

80

$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

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

*Announced May 7, 2007.

Source: Conning Research & Consulting.

2006 surge due mostly to 2 deals. No

trend started.

Liberty Mutual acquired Ohio

Casualty for $2.7B*

No model for successful

consolidation has emerged

Page 33: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

INVESTMENT IRONY

Markets & Interest Rates Up, Returns Flat

Page 34: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Property/Casualty Insurance Industry Investment Gain*

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7$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*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. **2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.

Investment gains fell in 2006 and are now only

comparable to gains seen in the late 1990s

Page 35: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

CATASTROPHICLOSS

Insurers Accused of Crying Wolf Over Cats

Page 36: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

U.S. Insured Catastrophe Losses*$7

.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$1.2

$100

.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

07Q

1

20??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions

2006 was a welcome respite. 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 soon

Page 37: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

U.S. Catastrophe Losses 2006: States With Largest Losses ($ Millions)

*ISO defines a catastrophe event as an event causing $25 million or more in insured property losses.

Source: ISO; Insurance Information Institute

$601$688

$873$878

$1,500

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Indiana Missouri Tennessee Texas Kansas

SURPRISE!! Indiana led the US with $1.5 billion in

insured CAT losses in 2006

Some 33 catastrophe events* in 34 states cost insurers an estimated $8.8bn in 2006, compared with $61.9bn in 2005. Cat losses in the following five states -- totaling $4.5bn -- represent half the

total catastrophe losses for the year.

Page 38: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

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

1986-2005¹

Utility Disruption0.1%

Terrorism7.7%

All Tropical

Cyclones3

47.5%

Tornadoes2

24.5%

Water Damage0.1%

Civil Disorders0.4%

Fire6

2.3%

Wind/Hail/Flood5

2.8%

Earthquakes4

6.7%

Winter Storms7.8%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.

Insured disaster losses totaled $289.1 billion from

1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up

from 27.1% from 1984-2003.

Page 39: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Total Value of Insured Coastal Exposure (2004, $ Billions)

$1,901.6$740.0

$662.4$505.8

$404.9$209.3

$148.8$129.7$117.2$105.3

$75.9$73.0

$46.4$45.6$44.7$43.8

$12.1

$1,937.3

$0 $500 $1,000 $1,500 $2,000 $2,500

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide

Florida & New York lead the way for insured coastal property at more than $1.9 trillion each.

Northeast state insured coastal exposure totals

$3.73 trillion.

Page 40: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

New Condo Construction inSouth Miami Beach, 2007-2009

• Number of New Developments: 15

• Number of Individual Units: 2,111

• Avg. Price of Cheapest Unit: $940,333

• Avg. Price of Most Expensive Unit: $6,460,000

• Range: $395,000 - $16,000,000

• Overall Average Price per Unit: $3,700,167*

• Aggregate Property Value: At least $6 Billion*Based on average of high/low value for each of the 15 developments

Source: Insurance Information Institute from www.miamicondolifestyle.com accessed April 5, 2007.

Page 41: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

The 2007 Hurricane Season:

Preview to Disaster?

Page 42: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Outlook for 2007 Hurricane Season: 85% Worse Than Average

Average* 2005 2007F

Named Storms 9.6 28 17Named Storm Days 49.1 115.5 85

Hurricanes 5.9 14 9Hurricane Days 24.5 47.5 40Intense Hurricanes 2.3 7 5

Intense Hurricane Days 5 7 11

Accumulated Cyclone Energy 96.2 NA 170

Net Tropical Cyclone Activity 100% 275% 185%*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, May 31, 2007.

Page 43: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

REINSURANCE MARKETS

Big Risk, Big Reward orBig Government?

Page 44: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Share of Losses Paid by Reinsurers, by Disaster*

30%25%

60%

20%

45%

0%

10%

20%

30%

40%

50%

60%

70%

Hurricane Hugo(1989)

Hurricane Andrew(1992)

Sept. 11 TerrorAttack (2001)

2004 HurricaneLosses

2005 HurricaneLosses

*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.

Reinsurance is playing an increasingly

important role in the financing of mega-CATs; Reins. Costs

are skyrocketing

Page 45: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Ratio of Reinsurer Loss & Underwriting Expense to Premiums Written, 1985-2006

1.1

0

1.0

8

1.1

0

1.0

3

1.0

2

1.0

6 1.1

4

1.1

3

1.1

7

1.0

1 1.0

6

1.2

6

0.9

5

1.3

9

1.2

1

1.0

6

1.0

7

1.0

7

1.0

9 1.1

8

1.0

7 1.0

8

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

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

Lo

ss

& L

AE

Ra

tio

Source: Reinsurance Association of America.

Despite the respite in 2006, reinsurers paid an average of $1.11 in loss and expense

for every $1 in written premium since 1985

Page 46: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

FINANCIAL STRENGTH &

RATINGS Industry Has Weathered

the Storms Well

Page 47: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Reasons for US P/C Insurer Impairments, 1969-2005

*Includes overstatement of assets.

Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;

Catastrophe Losses8.6%

Alleged Fraud11.4%

Deficient Loss

Reserves/In-adequate Pricing62.8%

Affiliate Problems

8.6%

Rapid Growth

8.6%

2003-2005 1969-2005

Deficient reserves,

CAT losses are more important factors in

recent years

Reinsurance Failure3.5%

Rapid Growth16.5%

Misc.9.2%

Affiliate Problems

5.6%

Sig. Change in Business

4.6%

Deficient Loss

Reserves/In-adequate Pricing38.2%

Investment Problems*

7.3%

Alleged Fraud8.6%

Catastrophe Losses6.5%

Page 48: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

P/C Insurer Impairments,1969-2006

815

127

11 934

913 12

199

16 14 1336

4931

3449 49

5460

5841

2915

1231

18 1949 50

4735

1813 15

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

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

Page 49: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

STATE RESIDUAL MARKETS

How Big is Too Big?

Page 50: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Florida Citizens Exposure to Loss (Billions of Dollars)

Source: PIPSO; Insurance Information Institute

408.8

$210.6$206.7$195.5

$154.6

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2002 2003 2004 2005 2006

Exposure to loss in Florida Citizens nearly doubled in 2006

Page 51: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)

* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.Source: Insurance Information Institute

-$516

-$1,425

-$1,770

-$954

-$595 *

-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000

-$800-$600-$400-$200

$0

Florida HurricaneCatastrophe Fund

(FHCF) Florida Citizens Louisiana Citizens

Mississippi WindstormUnderwriting

Association (MWUA)

2004 2005

Hurricane Katrina pushed all of the residual market property plans in

affected states into deficits for 2005, following an already record hurricane loss year in 2004

Page 52: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

What Role Should the Federal Government

Play in Insuring Against Natural Disaster Risks?

Page 53: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Comprehensive National Catastrophe Plan Schematic

Personal Disaster Account

Private Insurance

State Regional Catastrophe Fund

National Catastrophe Contract Program

Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

State Attachment

1:50 Event

1:500 Event

Page 54: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Legislation has been introduced and ideas

espoused by ProtectingAmerica.org will likely get a more

thorough airing in 2007/8

Page 55: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

FLORIDA’S APPROACH TO

MANAGING HURRICANE RISK

Does it Add Up?

Page 56: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Pre- vs. Post-Event in FL for 2007 Hurricane Season

$12.

4

$15.

0

$17.

6

$25.

8

$9.9

$14.

6

$24.

1

$31.

4

$34.

5

$37.

4

$54.

2

$10.9$10.4$10.1$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250

Pre-Event Funding Post-Event Funding (Assessments & Bonds)

Bil

lion

s

Total = $20.0 Billion

Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not includefinancing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.”Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

$35.0B

$25.0B

$43.8B $49.5B

$55.0B

$80.0BThere is a very significant likelihood of major, multi-year assessments in 2007

Page 57: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Per Household Savings vs. Long-Term Costs of FL Legislation for

2007 Hurricane Season

$3,5

03

$4,4

16

$4,6

94

$4,9

56

$7,8

55

$2,5

28

$3,2

19

$3,4

97

$3,7

52

$6,1

16

$265$1,005 $1,486

$1,066$721

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

Savings 1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250

Direct Costs Indirect Costs

Bil

lion

s

Total = $1,726

Notes: Assumes average homeowners insurance premium of $1300 in 2007. Savings for 2007 reflects 24.3% savings on hurricane costs, assumed to be 63% of premium. Savings based on statewide OIR estimate. Actual savings may be less.Direct costs include assessments paid by policyholders on home and personal auto premiums. Indirect costs includeassessments on commercial lines passed on to policyholders via higher prices. Amounts are in nominal dollars, or the totalcost of borrowing including finance charges over the term of the bond. Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

$2,552

$6,031 $7,635

$8,191 $8,708

$13,971

Savings dwarfed by potential costs under

most scenarios

Page 58: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Average Annual Assessment per Household, 1-in-100 Year Event in 2007

Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

The average Florida household will pay $8,699 over 30 years in assessments if a 1-in-100 year

event strikes in 2007. Assessments could rise if additional storms hit

in 2007 or beyond.

Page 59: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Savings vs. Costs by Region: Neither Equitable nor Proportionate

TALLAHASSEEAverage Savings: $20

Cost of 1-in-30 Storm: $2,000Cost is 100 times avg. savings

TAMPAAverage Savings: $100

Cost of 1-in-30 Storm: $2,300Cost is 23 times avg. savings

ORLANDO

Average Savings: $30

Cost of 1-in-30 Storm: $2,075

Cost is 69 times avg. savings

MIAMI

Average Savings: $1,120

Cost of 1-in-30 Storm: $3,375

Cost is 3 times avg. savings

STATEWIDE AVERAGEAverage Savings: $265

Cost of 1-in-30 Storm: $2,550Cost is 10 times avg. savings

Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

Page 60: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

29% 25% 30%

22% 34% 31%

0%

10%

20%

30%

40%

50%

60%

70%

Coastal Counties Interior Counties Noncoastal States

Very unfair

Somewhat Unfair

Source: Insurance Research Council

Public Attitude Monitor 2006: Unfairness of Taxpayer Subsidies

Most non-coastal dwellers believe taxpayer subsidies for coastal property owners are unfair

Coastal States

Page 61: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

KEY LINES

Discipline Will Remain (Mostly) Intact in 2007

Page 62: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Private Passenger Auto

Page 63: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

101.7101.3101.3101.0

99.5

101.1

103.5

109.5

107.9

104.2

98.4

94.395.1

93.0

90

95

100

105

110

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

Private Passenger Auto Combined Ratio

Average Combined 1993 to 2005= 101.4

Most auto insurers have shown sig-nificant improvements in underwriting

performance since mid-2002

Sources: A.M. Best; III

PPA is the profit juggernaut of the p/c

insurance industry today

Page 64: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Homeowners Insurance

Page 65: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

117.7

158.4

113.6118.4

112.7

121.7

101.0

108.2111.4

121.7

109.3

98.294.4

100.3

93

113.0109.4

90

100

110

120

130

140

150

160

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

Homeowners Insurance Combined Ratio

Average 1990 to 2005= 113.1

Insurers have paid out an average of $1.13 in losses for every dollar earned

in premiums over the past 16 years

Sources: A.M. Best; III

Page 66: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

COMMERCIAL MULTI-PERIL & COMMERCIAL

AUTO

Page 67: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

119.0

119.8

108.5

125.0

113.1

115.0

121.0

116.2

116.1

104.9

101.9

100.7

116.8

113.6

115.3

122.4

115.0

117.0

97.3

89.0

97.7

93.8

80

85

90

95

100

105

110

115

120

125

130

95 96 97 98 99 00 01 02 03 04 05

CMP-Liability

CMP-Non-Liability

Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion)

Liab. Combined 1995 to 2004 = 114.6

Non-Liab. Combined = 107.1

Sources: A.M. Best; III

CMP- has improved recently

Page 68: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

112.

1

112

113 11

5.9 12

0.5

120.

1

106.

6

99.4

96.6

93.396

.7

102.

2

99.0

99.7

99.0

103.

6

102.

3

95.9

92.1

87.1 90

.7

122.5

80

85

90

95

100

105

110

115

120

125

95 96 97 98 99 00 01 02 03 04 05

Comm Auto Liab Comm Auto PD

Commercial Auto Liability& PD Combined Ratios

Average Combined: Liability = 110.2

PD = 97.1

Sources: A.M. Best; III

Commercial Auto has improved dramatically

Page 69: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

WORKERS COMPENSATION

OPERATING ENVIRONMENT

Page 70: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Workers Comp Calendar Year vs. Ultimate Accident Year – Private Carriers

101

97

111

110

107

103

97

101 10

6

119

131

140

135

123

88 87 87

100

101 10

7 115 11

8 122

97

104

96

80

90

100

110

120

130

140

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

Calendar Year Accident Year

Percent

p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2006 and developed to ultimateSource: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders

Workers Comp Combined Ratios, 1994-2006P

Page 71: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Lost-Time Claims

-4.2 -4.4

-6.9

-4.5 -4.1 -3.9

-6.8

-9.2

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5

-6.6

-10

-8

-6

-4

-2

0

2

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

Cumulative Change of –52.1%since 1991 means that lost work

time claims have been cut by more than half

Accident Year

Percent Change

Workers Comp Lost-TimeClaim Frequency (% Change)

2003p: Preliminary based on data valued as of 12/31/20061991-2005: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI

Page 72: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

IndemnityClaim Cost (000s)

Lost-Time Claims

$9.9 $9.6 $9.4 $9.8 $10.0$10.6

$11.4$12.4

$13.6

$15.1$16.5$16.9

$17.7$18.0$18.6

$19.6

$5

$7

$9

$11

$13

$15

$17

$19

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

Annual Change 1991–1996: +1.2%Annual Change 1997–2005: +6.6%

2005p: Preliminary based on data valued as of 12/31/20061991-2005: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI

Accident Year

Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2006p

Cumulative Change = +108.5%(1993-2006p)

Page 73: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

$8.3 $8.4 $8.2 $8.9 $9.4 $10.1$11.1

$12.0$13.3

$14.4

$16.4$17.6

$19.2$20.5

$22.9$24.6

$5

$10

$15

$20

$25

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

Annual Change 1991–1996: +4.1%Annual Change 1997–2005: +9.5%

Accident Year

MedicalClaim Cost ($000s)

2006p: Preliminary based on data valued as of 12/31/20061991-2005: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies

Workers Comp Medical Claims Continue to Climb

Cumulative Change = +200%(1993-2006p)

Page 74: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Med Costs Share of Total Costs is Increasing Steadily

Indemnity55%

Medical45%

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

Indemnity52%

Medical48%

Indemnity41%

Medical59%1986

1996

2006p

Page 75: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Legal Liability & Tort Environment

Definitely Improving ButNot Out of the Woods

Page 76: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Personal, Commercial & Self (Un) Insured Tort Costs*

$17.0$49.6 $58.7

$95.2

$17.1

$51.0$70.9

$86.7

$5.2

$20.4

$30.0

$49.4

$0

$50

$100

$150

$200

$250

1980 1990 2000 2005

Commercial Lines Personal Lines Self (Un)Insured

Bil

lion

s

Total = $39.3 Billion

*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.

Total = $121.0 Billion

Total = $159.6 Billion

Total = $231.3 Billion

Page 77: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Tort System Costs,2000-2008F

$179

$233$246

$270

$295

$260

$261

$261

$205

1.82%2.03%

2.22% 2.22%

2.04%2.09% 2.03%2.05%

2.24%

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

$300

00 01 02 03 04 05 06E 07F 08F

Tor

t S

yste

m C

osts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t C

osts

as

% o

f G

DP

Tort Sytem Costs Tort Costs as % of GDP

After a period of rapid escalation, tort system costs as % of GDP are now falling

Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.

Page 78: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

KATRINA TORT UPDATE

Suits Add to Uncertainty, Expense

Page 79: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Likely Market Impacts of Post-Katrina Litigation

• Litigation Creates an Additional Layer of Uncertainty in What is Already a Very Difficulty Market

Ultimate Thrust of Litigation is to Compel Insurers to Pay Water Damage (Flood/Surge) Losses for Which They Have Never Received A Penny in Premium

• Some Courts’ Apparent Willingness to Retroactively Rewrite Long-Standing, Regulator Approved Terms & Conditions of Insurance Contracts Creates an Unpriceable Risk

Compounded by juries willing to award millions in punitives• People Discouraged from Buying Flood Coverage• BOTTOM LINE: Weather, Courts, Juries Together

Create Nearly Impossible Operating Environment• Coverage Under These Circumstances Will Necessarily

Become More Expensive, Less Available

Page 80: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

REGULATORY UPDATE

Busy Year for Insurersin Washington

Page 81: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Federal Legislative UpdateFederal Terrorism Reinsurance (TRIA)• TRIA expires 12/31/07.  The current federal program offers $100 billion of

coverage subject to a $27.5B industry aggregate retention.

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

• Potential changes include extensions of coverage for domestic terrorism losses

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

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

Sources: Lehman Brothers, Insurance Information Institute

Page 82: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Federal Legislative Update

Natural Disaster Coverage• Some insurers are pushing for federal catastrophic risk fund coverage in the

wake of billions of dollars of losses suffered by insurers from the 2004-2005 hurricane seasons.

• Legislative relief addressing property/casualty insurers’ exposure to natural catastrophes, such as the creation of state and federal catastrophe funds, has been advocated by insurers include Allstate and State Farm recently.  However, there is active opposition many other insurers and all reinsurers.

• There are supporters in Congress, mostly from CAT-prone states. Skeptics in Congress believe such a plan would be a burden on taxpayers like the NFIP and that the private sector can do a better job. Unlike TRIA, the industry is not unified on this issue.

• Allowing insurers to establish tax free reserves for future catastrophe losses has also been proposed, but Congress has not yet indicated much support.

Sources: Lehman Brothers, Insurance Information Institute

Page 83: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Federal Legislative UpdateMcCarran-Ferguson Insurance Antitrust Exemption• Under McCarran-Ferguson Act of 1945, insurers have limited immunity under

federal anti-trust laws allowing insurers to pool past claims information to develop accurate (actuarially credible) rates.

• Very low level of understanding of M-F in Washington

• Certain legislators threaten to revoke McCarran-Ferguson because of alleged collusion in the wake of Hurricane Katrina.  However, the view among some Washington insiders is that such a move would hurt small insurers with less resources rather than the large insurers perhaps being targeted.  The current bills designed to revoke McCarran-Ferguson are S.618 and H.R. 1081.

• The government appointed Antitrust Modernization Commission in an April 2007 report strongly encouraged Congress to re-examine the McCarran-Ferguson Act.  Notably, 4 of the commissions 12 members called for a full repeal of the law.

Sources: Lehman Brothers, Insurance Info. Institute

Page 84: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Summary• Personal & Commercial lines results were unsustainably good 2006; Overall

profitability reached its highest level (est. 14%) since 1988. Strong momentum into 2007 and maybe 2008

• Underwriting results were aided by lack of CATs & favorable underlying loss trends, including tort system improvements

• Property cat reinsurance markets peaking & more competitive• Premium growth rates are slowing to their levels since the late 1990s; Commercial

leads decreases• Rising investment returns insufficient to support deep soft market in terms of

price, terms & conditions• Clear need to remain underwriting focused• How/where to deploy/redeploy capital??• Major Challenges:

Slow Growth Environment AheadMaintaining price/underwriting disciplineManaging variability/volatility of results

Page 85: Overview & Outlook for  P/C Insurance An Industry at the Crossroads

Insurance Information Institute On-Line

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