Overview & Outlook for the P/C Insurance Industry

An Industry at the Crossroads

John Street Insurance Association

New York, NYMay 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 bobh@iii.org www.iii.org

P/C PROFIT:An Historical Perspective

Profits in 2006 ReachedTheir Cyclical Peak

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.

-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

RETURN ON EQUITY (Fortune):Stock & Mutual vs. All Companies*

*Fortune 1,000 group.

Source: Fortune Magazine, Insurance Information Institute.

13%

13.4%14.6%

10.0%

14.9%13.0%

11%

13%

15%14%

13%

7%6%

11%12%

8%

11%12%

10%9%

-2%

8%7%

2%

10%

10.4%15.0%

14.0%

13.9%12.6%

-4%-2%0%2%4%6%8%

10%12%14%16%

1998 2000 2001 2002 2003 2004 2005 2006E 2007F 2008F

StockMutualAll Cos.*

Mutual insurer ROEs are typically lower than for stock

companies, but gap has narrowed. All are cyclical.

-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

-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

ROE Cost of Capital

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2006

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 2003-06

+1.

0 p

ts

+4.

5 p

ts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

Insurance & Reinsurance Stocks:Strong Finish in 2006

0.61%

9.53%

10.33%

16.57%

19.95%

16.24%

13.62%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

S&P 500

Life/Health

Reinsurers

P/C

All Insurers

Multiine

Brokers

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

Total Returns for 2006

P/C insurer & reinsurer stocks rallied in late 2006

as hurricane fears dissipated and insurers turned in strong resultsBroker stocks held back

by weak earnings

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

7.30%

2.32%

3.39%

0.20%

-0.51%

9.47%

5.34%

-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

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 April 27, 2007

P/C insurance, reinsurance stocks lagging on soft market

concerns and worries over 2007 hurricane season

UNDERWRITING

Extremely Strong 2006, Momentum for 2007

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

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

-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.

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?

$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

The Big Question: Is the Industry More Disciplined Today?

• Signs suggest that the answer is yes• Current period of sustained underwriting profitability is the first

since the 1950s• While prices are falling, underlying lost cost trends (frequency and

severity trends) are generally favorable to benign Suggest impact of falling prices will be less pronounced than late 1990s

• Reserve situation appears much improved an under control• Management Information Systems: Much More Sophisticated

Insurers can monitor and make adjustments much more quickly Adjustments made quickly by line, geographic area, producer, etc.

• Investment Income Relative to late 1990s, interest rates and stock markets returns are lower Has effect of imposing (some) discipline

• Ratings Agencies More stringent capital requirements Quicker to downgrade

PREMIUM GROWTH

Property Blip in 2006, Sluggish in 2007/8

-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

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

PRICING

Under Pressure in 2007

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

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

Average Commercial Rate Change by Account Size: 4Q99 – 1Q07

Source: Council of Insurance Agents & Brokers

Accounts of all sizes are renewing

downward and more quickly than in 2006

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

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 4th Qtr. 2006

25%

6% 6%

0%

8%6% 6%

3%

0%

11%

0%

5%

10%

15%

20%

25%

30%

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, but

are diminishing; Smallest in Midwest

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

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

11%

9%

0% 0%

8%

5%

9%

0% 0%

9%

0%

2%

4%

6%

8%

10%

12%

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

Commercial Accounts Rate Changes,2nd Qtr. 2006 vs. 1st Qtr. 2007

-4.5%-5.6%

-3.6%-2.3%

-10.2% -10.2%-11.9%

-9.8% -10.3%

-6.9%

9.3%

-9.4%

-15%

-10%

-5%

0%

5%

10%

CommercialAuto

WorkersComp

CommercialProperty

GeneralLiability

Umbrella Average

2Q06 1Q07

Source: Council of Insurance Agents and Brokers

Even commercial property is now

renewing down in 2007

CAPACITY/SURPLUS

The Industry in Underleveraged

$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

Capital Raising by Class Within 15 Months of KRW

Existing Cos., $12.145 , 36%

New Cos., $8.898 , 26%

Sidecars, $6.359 , 19%Insurance Linked

Securities, $6.253 , 19%

Insurers & Reinsurers raised $33.7 billion in the wake of Katrina,

Rita, Wilma

Source: Lane Financial Trade Notes, January 31, 2007.

$ Billions

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

£8.9

£10.

9

£10.

2

£10.

0

£10.

3

£10.

2

£10.

1 £11.

3 £12.

2

£14.

4

£15.

0

£13.

7 £14.

8

£16.

1

£9.9

£7.0

£8.0

£9.0

£10.0

£11.0

£12.0

£13.0

£14.0

£15.0

£16.0

£17.0

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

Lloyd’s Capacity (Global)

Lloyd’s capacity is up 1.3 GBP or 8.8% in 2007 and 63% since its 1999 trough

Sources: Lloyd’s

Billions of GBP

INVESTMENT IRONY

Markets & Interest Rates Up, Returns Flat

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

CATASTROPHICLOSS

Insurers Accused of Crying Wolf Over Cats

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

$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

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

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.

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.

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

$994.8$437.8

$355.8$258.4

$199.4$121.3

$83.7$69.7

$52.6$45.3$43.3$39.4

$23.8$20.9$19.9$17.9$6.7

$1,389.6

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

New YorkFlorida

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaGeorgia

AlabamaMississippi

New HampshireDelaware

Rhode IslandMaryland

Source: AIR

Commercial property exposure also implies significant business interruption losses.

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.

Price Increases for Louisiana Citizens—State’s High Risk Insurer of Last Resort

$1,315

$2,165$2,630 $2,690

$4,235

$2,460

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2004 2005 2006

Coastal Homeowner Coastal Business

Source: Louisiana Citizens Property Insurance Corp. from USA Today, April 3, 2007, p. 1A..

+64.6%

+2.3%+13.6%

+57.4%

LACPIC went broke in 2005 by $965 million.

Figure 15.

Price Increases for MS Windstorm Underwriting Association—

State’s Insurer of Last Resort

22%

90%

22%

267%

0%

50%

100%

150%

200%

250%

300%

2003 2006

Coastal Homeowner Coastal Business

Source: Mississippi Windstorm Underwriting Association from USA Today, April 3, 2007, p. 1A..

MWUA went broke in 2005 by $595 million an

has received massive state tax subsidies

Figure 16.

The 2007 Hurricane Season:

Preview to Disaster?

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, April 3, 2007.

Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2007

Average* 2007F

Entire US Coast 52% 74%

US East Coast Including Florida Peninsula

31% 50%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 49%

ALSO…Above-Average Major Hurricane

Landfall Risk in Caribbean for 2007

*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

FINANCIAL STRENGTH &

RATINGS Industry Has Weathered

the Storms Well

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%

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

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006

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

Co

mb

ined

Rat

io

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Imp

airm

ent R

ate

Combined Ratio after DivP/C Impairment Frequency

Impairment rates are highly

correlated underwriting performance

Source: A.M. Best; Insurance Information Institute

2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969

REINSURANCE MARKETS

Big Risk, Big Reward orBig Government?

Announced Katrina, Rita, Wilma Losses by Segment

U.S. Primary, $14.2 , 39%

U.S. Reinsurer, $3.4 , 9%

Other, $0.3 , 1%

Lloyd's, $3.5 , 9%

Bermuda, $10.9 , 29%

Europe, $4.9 , 13%

Catastrophes are global events. Only 39% of

KRW losses were borne by US

primary insurers

*As of 2/21/06Source: Dowling & Partners, RAA.

$ Billions

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

US Reinsurer Net Income& ROE, 1985-2006

$1.9

4

$2.0

3

$1.9

5 $3.7

1

$4.5

3

$5.4

3

$1.4

7

$1.9

9

$1.3

1 $3.1

7

$3.4

1

$2.5

1

$9.6

8

($2.98)

$0.1

2

$1.9

5

$1.3

8

$1.2

2

$1.8

7

$1.1

7 $2.5

2

$1.7

9

($4)

($2)

$0

$2

$4

$6

$8

$10

$12

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

Net

Inco

me

($ B

ill)

-10%

-5%

0%

5%

10%

15%

20%

RO

E

Net Income ROE

Source: Reinsurance Association of America.

Reinsurer profitability has rebounded

$19.93 $19.44$21.21

$24.85$26.69

$29.50$30.63

$28.76

$25.33

$10

$15

$20

$25

$30

$35

97 98 99 00 01 02 03 04 05

$ B

illi

ons

Pre

miu

ms

Wri

tten

US reinsurance premiums written grew 54% between 1997 and 2003, but fell 17%

from 2003 through 2005

Source: Reinsurance Association of America; Insurance Information Institute Fact Book 2007, p. 38.

($ Billions)

Reinsurers Net Written Premiums, US Business, 1997 - 2005

Premiums written are actually falling

despite higher prices

U.S. Reinsurance Cos. vs. Alien Cos. Market Share, US Unaffiliated

Reinsurance Premium*61

.6%

59.5

%

55.7

%

54.8

%

52.0

%

54.2

%

53.2

%

51.8

%

48.2

%

38.4

%

40.5

%

44.3

%

45.2

%

48.0

%

45.8

%

46.8

%

48.2

%

51.8

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1997 1998 1999 2000 2001 2002 2003 2004 2005

U.S. Reinsurers Alien Reinsurers*Excludes pools.Sources: Reinsurance Association of America; Insurance Information Institute.

Foreign reinsurer markets share continues to grow

Debate Over Reinsurance Market Performance & Government

• Reinsurance markets typically suffer large shocks, followed by a period of higher prices and transient capacity constraints

• A new equilibrium between Supply and Demand is typically found within 18 months, commensurate with changes in the risk landscape. This is Economics 101 and is a textbook illustration of how capitalism works.

• A competing hypothesis suggests that reinsurance markets “fail” because they do not provide a stable price or quantity of protection as is required in an economy with continuously exposed fixed assets, especially one that is growth oriented

• Public Policy Solution: Acting on this hypothesis generally results in displacement of private (re)insurance capital by government intermediaries

• Question Asked: Are policyholders and the economy better served through free markets, government or some hybrid?

Sources: Insurance Information Institute

What Role Should the Federal Government

Play in Insuring Against Natural Disaster Risks?

NAIC’s Comprehensive National Catastrophe Plan

• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private

insurance & reinsurance industry Includes “All Perils” Residential Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves

• Layer 2: Establishes system of state catastrophe funds (like FHCF)

• Layer 3: Federal Catastrophe Reinsurance Mechanism

Source: Insurance Information Institute

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

Legislation has been introduced and ideas

espoused by ProtectingAmerica.org will likely get a more

thorough airing in 2007/8

Legal Liability & Tort Environment

Definitely Improving ButNot Out of the Woods

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

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.

REGULATORY UPDATE

Busy Year for Insurersin Washington

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

Federal Legislative Update

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

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

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

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

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

Sources: Lehman Brothers, Insurance Information Institute

Federal Legislative UpdateOptional Federal Charter (OFC)• Large P&C and life insurers are the major supporters of OFC. Supporters

argue that the current patchwork of 50 state regulators reduces competition, redundant, slows new product introductions and adds cost to the system.

• In general, global P/C insurers , reinsurers and large brokers mostly support the concept, while regulators (state insurance commissioners), small single-state and regional insurers, and independent agency groups largely oppose the idea. An optional federal charter is more favorable for global P&C insurers, because an insurer that operates in multiple states could opt to be regulated under federal rules rather than multiple state regulations. As a result, this could increase innovation in the industry.

• A new bill should be introduced in May or June.  Currently appears to be more momentum for OFC for life than for P&C insurers based on the homogeneous nature of many life products.  The debate should intensify and although passage may not occur in the current session of Congress, it may lay the groundwork for passage in the 2009-2010 session.

Sources: Lehman Brothers, Insurance Information Institute

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

TRIA EXTENSION

The Burden Grows, and the Clock is Ticking

Terrorism Coverage Take-Up Rate Continues to Rise

Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute

24% 26%33%

44% 46% 44%48% 47%

54%59%

64%

03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4

Terrorism take-up rate for non-WC risk rose steadily

through 2003, 2004 and 2005

TAKE UP RATE FOR WC COMP TERROR

COVERAGE IS 100%!!

Insured Loss Estimates: Large CNBR Terrorist Attack ($ Bill)

Type of Coverage New York WashingtonSan

FranciscoDes

Moines

Group Life $82.0 $22.5 $21.5 $3.4

General Liability 14.4 2.9 3.2 0.4

Workers Comp 483.7 126.7 87.5 31.4

Residential Prop. 38.7 12.7 22.6 2.6

Commercial Prop. 158.3 31.5 35.5 4.1

Auto 1.0 0.6 0.8 0.4

TOTAL $778.1 $196.8 $171.2 $42.3

Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.

FLORIDA SPECIAL SESSION

LEGISLATIVE CHANGES

Insurer, Policyholder & State Impacts

Why There is Concern Over the Florida Legislature’s & Governor’s Changes

• Risk is Now Almost Entirely Borne Within State• Virtually Nothing Done to Reduce Actual Vulnerability• Creates Likelihood of Very Large Future Assessments• Potentially Crushing Debt Load• State May be Forced to Raise/Levy Taxes to Avoid Credit

Downgrades• Many Policyholder Will See Minimal Price Drop

“Savings” came from canceling recent/planned rate hikes• Residents in Lower-Risk Areas, Drivers, Business

Liability Policyholders Will Come to Resent Subsidies to Coastal Dwellers

• Governor’s Emergency Order for Rate Freezes & Rollbacks Viewed as Unfair & Capricious

Sources: Insurance Information Institute.

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

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

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

profitability reached its highest level (est. 14%) since 1988• Underwriting results were aided by lack of CATs & favorable underlying loss

trends, including tort system improvements• Property cat reinsurance market remains tight• 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

Insurance Information Institute On-Line

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