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Association of NYSAssociation of NYSSurplus Lines Market ReviewSurplus Lines Market Review

David S. Blades, CPCUDavid S. Blades, CPCU

Senior Financial Analyst – P/C RatingsSenior Financial Analyst – P/C Ratings

September 24, 2009September 24, 2009

2008 Surplus Lines 2008 Surplus Lines Market HighlightsMarket Highlights

Direct Premium Written declined by the largest percentage Direct Premium Written declined by the largest percentage since 1988.since 1988.The combined ratios rose due to weather-related losses on The combined ratios rose due to weather-related losses on natural-catastrophe exposed business.natural-catastrophe exposed business. Favorable loss reserve development reduced the combined Favorable loss reserve development reduced the combined ratio by 10.7 points.ratio by 10.7 points. Total investment losses of 161.3 million were generated, Total investment losses of 161.3 million were generated, after a $2.38 billion investment gain in 2007.after a $2.38 billion investment gain in 2007. Policyholder’s surplus for the surplus lines market as a Policyholder’s surplus for the surplus lines market as a whole declined for the first time since 2001.whole declined for the first time since 2001. Despite the aforementioned negative factors, the surplus Despite the aforementioned negative factors, the surplus lines market generated a profit in 2007, albeit that profit lines market generated a profit in 2007, albeit that profit represented a 67% decrease, year-over-year.represented a 67% decrease, year-over-year.

Surplus Lines Composite vs. Total Surplus Lines Composite vs. Total P/C IndustryP/C Industry

Combined RatiosCombined RatiosU.S. E&S Profit Companies vs. P/C Industry – Combined Ratios (1995-2008)

70

80

90

100

110

120

95 96 97 98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08

Co

mb

ined

Rat

io (

%)

DPSL* P/C Industry

* Domestic Professional Surplus LinesSource: A.M. Best Co., BestLink 99023, A.M. Best Custom QAR Report 79031

Surplus Lines Composite vs. Total Surplus Lines Composite vs. Total P/C IndustryP/C Industry

Net Loss & LAE RatiosNet Loss & LAE RatiosU.S. E&S Profit Companies vs. P/C Industry – Net Loss and Loss Adjustment Expense Ratio (1996-2008)

50

60

70

80

90

’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08Net

Lo

ss a

nd

LA

E R

atio

(%

)

DPSL* P/C Industry

* Domestic Professional Surplus LinesSource: A.M. Best Co., A.M. Best Custom QAR Report 79031

Surplus Lines vs. Total P/C IndustrySurplus Lines vs. Total P/C IndustryPretax Returns on RevenuePretax Returns on Revenue

Surplus Lines vs. Total P/C IndustrySurplus Lines vs. Total P/C IndustryTotal Return on SurplusTotal Return on Surplus

U.S. Surplus Lines – Market Share U.S. Surplus Lines – Market Share by Segmentby Segment

CY 2008CY 2008

Surplus Lines vs. Commercial Surplus Lines vs. Commercial Lines – DPWLines – DPW

(1988, 1998, 2008)(1988, 1998, 2008)

Surplus Lines Surplus Lines Specialists – Operating Specialists – Operating

Performance (2008)Performance (2008)GroupGroup ChgChg Loss/LAELoss/LAE Comb.Comb.PretaxPretax

NameName in DPWin DPW RatioRatio RatioRatio RORROR

Admiral Ins. GroupAdmiral Ins. Group -14.6%-14.6% 62.4%62.4% 87.6%87.6%31.4%31.4%

Markel Corp. Markel Corp. -9.5%-9.5% 59.9%59.9% 100.1%100.1% 12.9%12.9%

Alleghany Ins. Hldg.Alleghany Ins. Hldg. -14.9%-14.9% 59.8%59.8% 91.2%91.2%22.5%22.5%

Argo GroupArgo Group 5.1%5.1% 60.3%60.3% 93.9%93.9% 26.8%26.8%

RLI GroupRLI Group 8.3%8.3% 46.7%46.7% 85.7%85.7%30.5%30.5%

UAI GroupUAI Group -34.2%-34.2% 80.9%80.9% 116.8%116.8% 16.1%16.1%

HCC Ins. GroupHCC Ins. Group 4.4%4.4% 50.5%50.5% 80.3%80.3% 39.3%39.3%

IFG Cos.IFG Cos. -27.2%-27.2% 61.7%61.7% 98.7%98.7% 19.9%19.9%

Western WorldWestern World -17.5%-17.5% 65.0%65.0% 101.0%101.0% 21.5%21.5%

AXIS Ins. GroupAXIS Ins. Group -4.0%-4.0% 74.6%74.6% 107.9%107.9% 19.0%19.0%

Surplus Lines Surplus Lines -12.7%-12.7% 63.6%63.6% 92.8%92.8% 26.7%26.7%

Total P/C Ind.Total P/C Ind. -2.6%-2.6% 77.1%77.1% 105.1%105.1% 7.2%7.2%

U.S. Surplus Lines – Top 15 Companies U.S. Surplus Lines – Top 15 Companies (CY 2008)(CY 2008)

RankRank Company NameCompany Name Group NameGroup Name SurplusSurplus Surplus LinesSurplus Lines

Lines DPWLines DPW Mkt. Mkt. ShareShare

11 Lexington Ins. Co.Lexington Ins. Co. AIGAIG $5,962,384$5,962,384 17.3%17.3%

22 Amer. Int’l Spec.Amer. Int’l Spec. AIGAIG $1,184,418$1,184,418 3.4%3.4%

33 Steadfast Ins. Co.Steadfast Ins. Co. Zurich Fincl. Svcs.Zurich Fincl. Svcs. $1,179,278$1,179,278 3.4%3.4%

44 Scottsdale Ins. Co.Scottsdale Ins. Co. NationwideNationwide $1,095,157$1,095,157 3.1%3.1%

55 Columbia CasualtyColumbia Casualty CNA Ins. Cos.CNA Ins. Cos. $712,603$712,603 2.0%2.0%

66 Evanston Ins. Co.Evanston Ins. Co. Markel Corp.Markel Corp. $615,722$615,722 1.7%1.7%

77 Landmark AmericanLandmark American Alleghany Ins. Hldg.Alleghany Ins. Hldg. $588,217$588,217 1.7%1.7%

88 AXIS Surpl. LinesAXIS Surpl. Lines AXIS Ins. GroupAXIS Ins. Group $538,352$538,352 1.5%1.5%

99 Westchester Surpl. Lns.Westchester Surpl. Lns. ACE INA GroupACE INA Group $517,812$517,812 1.5%1.5%

1010 Colony Ins. Co.Colony Ins. Co. Argo GroupArgo Group $517,599$517,599 1.5%1.5%

1111 Illinois Union Ins. Co.Illinois Union Ins. Co. ACE INA GroupACE INA Group $508,365$508,365 1.4%1.4%

1212 Arch Specialty Ins. Co.Arch Specialty Ins. Co. Arch Ins. GroupArch Ins. Group $468,808$468,808 1.3%1.3%

1313 Admiral Ins. Co.Admiral Ins. Co. W.R. Berkley GroupW.R. Berkley Group $424,139$424,139 1,2%1,2%

1414 Indian Harbor Ins. Co.Indian Harbor Ins. Co. XL AmericaXL America $405,392$405,392 1.1%1.1%

1515 Nautilus Ins. Co.Nautilus Ins. Co. W.R. Berkley GroupW.R. Berkley Group $378,438$378,438 1.1%1.1%

Domestic Professional Surplus Domestic Professional Surplus Lines CompositeLines Composite

Ratings DistributionRatings DistributionLevelLevel CategoryCategory # of Rating# of Rating PercentagePercentage

UnitsUnits

A++A++ SuperiorSuperior 22 2.6%2.6%

A+A+ SuperiorSuperior 1515 20.0%20.0%

SubtotalSubtotal 1717 22.6%22.6%

AA ExcellentExcellent 3434 45.3%45.3%

A-A- ExcellentExcellent 2222 29.3%29.3%

SubtotalSubtotal 5656 74.6%74.6%

B++B++ Very GoodVery Good 22 2.6%2.6%

B+B+ Very GoodVery Good 00 0.0%0.0%

SubtotalSubtotal 22 2.6%2.6%

Total Secure RatingsTotal Secure Ratings 7575 100.0%100.0%

Total Vulnerable RatingsTotal Vulnerable Ratings 00 0.0%0.0%

Using A.M. Best data as of August 1, 2009Using A.M. Best data as of August 1, 2009

Total P/C Industry – Ratings Total P/C Industry – Ratings DistributionDistribution

LevelLevel CategoryCategory # of Rating# of Rating PercentagePercentage

UnitsUnits

A++A++ SuperiorSuperior 1616 1.4%1.4%

A+A+ SuperiorSuperior 8484 7.8%7.8%

SubtotalSubtotal 100100 9.3%9.3%

AA ExcellentExcellent 265265 24.7%24.7%

A-A- ExcellentExcellent 357357 33.2%33.2%

SubtotalSubtotal 622622 57.9%57.9%

B++B++ Very GoodVery Good 149149 13.8%13.8%

B+B+ Very GoodVery Good 101101 9.4%9.4%

SubtotalSubtotal 250250 23.3%23.3%

Total Secure RatingsTotal Secure Ratings 972972 90.5%90.5%

B/B-B/B- FairFair 6767 6.2%6.2%

C++/C+C++/C+ MarginalMarginal 1414 1.3%1.3%

C/C-C/C- WeakWeak 44 0.3%0.3%

D/E/FD/E/F Poor etc.Poor etc. 1616 1.4%1.4%

Total Vulnerable RatingsTotal Vulnerable Ratings 101101 9.4%9.4%

Total Rating OpinionsTotal Rating Opinions 1,0731,073 100.0%100.0%

Using A.M. Best data as of August 1, 2009Using A.M. Best data as of August 1, 2009

Stamping Office Statistics – Stamping Office Statistics – 2008 vs. 20072008 vs. 2007

StateState Premium (millions)Premium (millions) Number of ItemsNumber of Items

20082008 20072007 % Chg% Chg 20082008 20072007 % Chg% Chg

AZAZ $444.5$444.5 $540.0$540.0 -17.5%-17.5% 69,32569,325 66,55466,554 4.2%4.2%

CACA $5,723.5$5,723.5 $5,864$5,864 -2.4%-2.4% 466,397466,397 489,998 489,998 -4.8%-4.8%

FLFL $4,400.3$4,400.3 $4,780.3$4,780.3 -7.9%-7.9% 1,140,1241,140,1241,213,6511,213,651-6.1%-6.1%

IDID $75.8$75.8 $86.3$86.3 -1.0%-1.0% 14,59814,598 14,74714,747 -1.0%-1.0%

ILIL $1,062.0$1,062.0 $1,089.9$1,089.9 -2.6%-2.6% 102,353102,353 109,294109,294 -6.4%-6.4%

MSMS $352.3$352.3 $387.5$387.5 -9.1%-9.1% 86,19486,194 69,61469,614 23.8%23.8%

MTMT $54.2$54.2 $68.8$68.8 -21.2%-21.2% 13,17413,174 16,26116,261 -19.0%-19.0%

NVNV $293.1$293.1 $360.2$360.2 -18.6%-18.6% 28,67628,676 29,87829,878 -4.0%-4.0%

NYNY $3,416.2$3,416.2 $4,042.4$4,042.4 -15.5%-15.5% 215,698215,698 218,566218,566 -1.3%-1.3%

OROR $300.03$300.03 $250.2$250.2 20.0%20.0% 38,87738,877 35,37835,378 9.9%9.9%

PAPA $989.0$989.0 $973.7$973.7 1.6%1.6% 170,803170,803 159,076159,076 7.4%7.4%

TXTX $3,282.6$3,282.6 $3,726.2$3,726.2 -11.9%-11.9% 850,757850,757 890,105890,105 -4.4%-4.4%

UTUT $178.5$178.5 $176.3$176.3 1.2%1.2% 19,15419,154 17,82917,829 7.4%7.4%

WAWA $595.1$595.1 $711.4$711.4 -16.3%-16.3% 93,79593,795 100,893100,893 -7.0%-7.0%

TOTALTOTAL $21,168.5$21,168.5$23,057.2$23,057.2-8.2%-8.2% 3,309,9253,309,9253,431,8443,431,844-3.6%-3.6%

Stamping Office Statistics – Stamping Office Statistics – First Half of 2009 vs. 2008First Half of 2009 vs. 2008

State State Premium (millions)Premium (millions) Number of ItemsNumber of Items20092009 20082008 % Chg% Chg 20092009 20082008 % Chg% Chg

AZAZ $205.2$205.2 $249.3$249.3 -17.7%-17.7% 34,05534,055 36,05936,059 -5.6%-5.6%CACA $2,252.9$2,252.9 $3,116.8$3,116.8 -27.7%-27.7% 217,842217,842 232,638 232,638 -6.4%-6.4%FLFL $2,351.4$2,351.4 $2,585.8$2,585.8 -9.1%-9.1% 550,116550,116 586,476586,476 -6.2%-6.2%IDID $29.2$29.2 $38.9$38.9 -24.9%-24.9% 6,7846,784 7,3867,386 -8.2%-8.2%ILIL $526.5$526.5 $608.4$608.4 -13.5%-13.5% 57,81657,816 51,85451,854 11.5%11.5%MNMN $114.0$114.0 N/AN/A N/AN/A 11,50711,507 N/AN/A N/AN/AMSMS $171.2$171.2 $156.9$156.9 9.1%9.1% 46,58646,586 40,85740,857 14.0%14.0%MTMT $34.6$34.6 $24.0$24.0 44.2%44.2% 7,1307,130 5,4125,412 -31.7%-31.7%NVNV $116.5$116.5 $360.0$360.0 -27.2%-27.2% 13,21213,212 14,68614,686 -10.0%-10.0%NYNY $1,811.3$1,811.3 $1,841.0$1,841.0 -1.6%-1.6% 102,059102,059 111,305111,305 -7.5%-7.5%OROR $105.1$105.1 $148.5$148.5 -29.2%-29.2% 18,23018,230 19,55319,553 -6.8%-6.8%PAPA $453.5$453.5 $504.2$504.2 -10.1%-10.1% 86,23186,231 88,89488,894 -3.0%-3.0%TXTX $1,770.9$1,770.9 $1,577.8$1,577.8 12.2%12.2% 420,852420,852 426,494426,494 -1.3%-1.3%UTUT $90.6$90.6 $88.2$88.2 2.7%2.7% 10,02310,023 9,4799,479 5.7%5.7%WAWA $595.1$595.1 $711.4$711.4 -2.5%-2.5% 42,17042,170 43,36043,360 -1.5%-1.5%TOTALTOTAL $10,300.0$10,300.0$11,373.8$11,373.8-9.4%-9.4% 1,625,1531,625,1531,673,4531,673,453-2.9%-2.9%

Key Federal Legislation Impacting the Key Federal Legislation Impacting the Surplus Lines MarketSurplus Lines Market

Non-admitted and Reinsurance Reform ActNon-admitted and Reinsurance Reform Act Passed by the House on 9/9/09; Expected to be voted on in the SenatePassed by the House on 9/9/09; Expected to be voted on in the Senate

National Association of Registered Agents and Brokers National Association of Registered Agents and Brokers Reform Act (NARAB II)Reform Act (NARAB II) Reintroduced in the House of Representatives in 2009Reintroduced in the House of Representatives in 2009

Insurance Information Act of 2009Insurance Information Act of 2009 Rep. Paul Kanjorski, D-Pa, introduced the bill in May of 2009Rep. Paul Kanjorski, D-Pa, introduced the bill in May of 2009

Insurance Industry Competition Act of 2009Insurance Industry Competition Act of 2009 Reintroduced in the House of Representatives in March of 2009Reintroduced in the House of Representatives in March of 2009

National Insurance Consumer Protection ActNational Insurance Consumer Protection Act Introduced in the House of Representatives in April of 2009; the Introduced in the House of Representatives in April of 2009; the

Senate has yet to introduce a companion billSenate has yet to introduce a companion bill

Current Distribution Issues Impacting Current Distribution Issues Impacting the Surplus Lines Marketthe Surplus Lines Market

The Impact of the RecessionThe Impact of the Recession Submission Activity has Increased but Revenue is Submission Activity has Increased but Revenue is

DownDown The Admitted Market is still Competing The Admitted Market is still Competing

Aggressively on Some traditional Surplus Lines Aggressively on Some traditional Surplus Lines BusinessBusiness

Mergers and AcquisitionsMergers and Acquisitions Utilizing Current Market Conditions to Spark Utilizing Current Market Conditions to Spark

InnovationInnovation Outlook (Near-term)Outlook (Near-term)

U.S. Admitted Companies vs. Surplus U.S. Admitted Companies vs. Surplus Lines – Annual Impairment Count Lines – Annual Impairment Count

(1977-2008)(1977-2008)

U.S. Admitted Companies vs. Surplus Lines – Annual Impairment Count (1977-2008)

0

10

20

30

40

50

60

70

'77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07

Imp

aire

d C

om

pan

ies

Surplus Lines Admitted

Source: A.M. Best Co.

Primary Causes of Impairments – Primary Causes of Impairments – Surplus Lines, Admitted & Total Surplus Lines, Admitted & Total

IndustryIndustryTotalTotal SurplusSurplus AdmittedAdmitted

IndustryIndustry % of% of LinesLines % of% of Mkt.Mkt. % of% of

Primary CausePrimary Cause # of Cos.# of Cos. TotalTotal # of Cos.# of Cos. TotalTotal # of Cos.# of Cos. TotalTotal

Affiliate ProblemsAffiliate Problems 5454 9%9% 88 16%16% 4646 8%8%

Alleged FraudAlleged Fraud 5353 9%9% 77 14%14% 4646 8%8%

Catastrophe LossesCatastrophe Losses 4848 8%8% 22 4%4% 4646 8%8%

Deficient ReservesDeficient Reserves 241241 40%40% 1919 38%38% 222222 40%40%

Investment ProblemsInvestment Problems 4141 7%7% 55 10%10% 3636 6%6%

MiscellaneousMiscellaneous 4646 8585 22 4%4% 4444 8%8%

Rapid GrowthRapid Growth7777 13%13% 44 8%8% 7373 13%13%

Reinsurance FailureReinsurance Failure 2424 4%4% 22 4%4% 2222 4%4%

Significant Chg. Significant Chg.

In BusinessIn Business 2626 4%4% 11 2%2% 2525 4%4%

SubtotalSubtotal 610610 100%100% 5050 100%100% 560560 100%100%

UnidentifiedUnidentified 314314 99 305305

TOTALTOTAL 924924 5959 865865

Source: A.M. BestSource: A.M. Best

Questions?Questions?