Andy KeefeCasualty Placement

Market Drivers Casualty Risk LandscapeChanging the Future

A Customer perspective

5th September 2006

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Market Drivers

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GLOBAL P&C MARKET OVERVIEW

Insurer profits for 2005 – “good” - despite $80bn Hurricane season

Market has surplus capital accumulation

P&C Industry “return on equity” remains inadequate at circa 9%

Comb ratios deteriorating but temporarily offset by Equity market recovery

Competition pressures remain – focus on retention & top-line growth

2006 rating correction targeted at specific risk elements & sectors

Fewer Accidents – More Disasters

Insurers worried by “cat-risk” more than price/underwriting discipline

Global & Regional divergence in insurer underwriting behaviour

New Bermuda capacity mainly focused on Excess PD/BI (Nat Cat)

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100

110

120

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

P/C Industry Combined Ratio*

2001 = 115.7

2002 = 107.2

2003 = 100.1

2004 = 98.3

2005:H1 = 92.7*

Combined Ratios1970s: 100.31980s: 109.21990s: 107.8

2000-05E: 103.9

Sources: A.M. Best; ISO, III. *2005 figure is though 6/30/05.

The industry has just experienced its most remarkable recovery in

recent history. Katrina will partially reverse this

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115.8

107.4

100.198.3

92.7

100.9

97.7

93.0

90

100

110

120

01 02 03 04 05H1 05 06H1 06F IIIForecast*

P/C Industry Combined Ratio

Sources: A.M. Best; ISO, III. *III forecasts/estimates for 2006 first half and full year.

2005 figure reflects heavy use of reinsurance which

lowered net losses, but still a substantial deterioration

from first half 2005

2006 is Off to a Strong Start

Expectation is for an underwriting profit

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-5%

0%

5%

10%

15%

20%

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

06F

07F

08F

09F

10F

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2010F*

*GAAP ROEs except 2005 P/C figure = return on average surplus. 2005E-10F are III estimates.Source: Insurance Information Institute; Fortune for all industry figures

P/C profits continue to disappoint. ROE stuck at 9-10%

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Market Cycle - Drivers

1974 Oil Price & Inflation

1985 Capacity Crisis

1992 Natural Catastrophes & Terrorism losses

1996 Insurer Consolidation

2000 Equity Markets & Sustained losses

2007? Declining ratios & Shareholder pressure?

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-10%

-5%

0%

5%

10%

15%

20%

25%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

F20

07F

2008

F20

09F

2010

F

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

Strength of Recent Hard Markets by NWP Growth*

1975-78 1984-87 2001-04

*2006-10 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 figure of 1.9% is based on 2006:Q1 data.

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

(post-Andrew)

2005: biggest real drop in premium since early 1980s

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Annualised Average Rate ChangeRisk Managed Portfolio

2007E-10%-10%-15%-10%2006E-5%-7%-12%-5%2005-5%-7.5%-9%-20%2004+10%+15%+10%-17%2003+25%+35%+35%+25%2002+50%+75%+100%+100%2001+10%+10%+10%+15%200000001999Base

Excess LiabilityPrimary PPLPrimary ELPrimary/Excess PD/BI

Year

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$6.10 $6.40

$8.30$7.70

$7.30$6.49

$5.70$5.25

$5.71

$8.42

$13.50$13.91

$11.95

$4.83$5.20

$4

$6

$8

$10

$12

$14

$16

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

* Cost of risk includes insurance premiums, retained losses and administrative expenses

Source: 2004 RIMS Benchmark Survey; Insurance Information Institute

Cost of Risk: 1990-2004*

1992-2000 = -41.8%

2000

-04 =

+188

%

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Fewer Accidents - More Disasters

0

50

100

150

200

250

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Natural catastrophes Man-made disasters

Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005, page 4.

The number of natural and man-made

catastrophes has been increasing on a global

scale for 20 years

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Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E

0%

2%

4%

6%

8%

10%

12%

14%

16%

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E

USWorldwideUS average: 1984-2004

*Insurance Information Institute estimate of 14.3% for 2005 based estimated 2005 DPE of $418.8B and estimated insured CAT losses of $60B.

Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.

US CAT losses were a record 14.3% of

net premiums earned in 2005 and were 4.3 times the 1984-2004 average

of 3.3%*

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U.S. InsuredCatastrophe Losses ($ Billions)*$7

.5$2

.7$4

.7$2

2.9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5$5

.9 $12.

9 $27.

5

$100

.0

$61.

2

$5.2

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 0506

**20

??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. ** As of June 30, 2006.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

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

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Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2004)

$3.4 $3.7 $4.6 $4.7 $6.1 $6.4 $7.1 $7.5

$20.9

$40.0

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Georges(1998)

Jeanne(2004)

Frances(2004)

Rita(2005)*

Wilma(2005)*

Hugo(1989)

Ivan (2004)

Charley(2004)

Andrew(1992)

Katrina(2005)*

$ B

illio

ns

*Hurricanes Katrina, Rita and Wilma stated in 2005 dollars.Sources: ISO/PCS; Insurance Information Institute.

Seven of the 10 most expensive hurricanes in US history

occurred in the 14 months from Aug. 2004 – Oct. 2005:

Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne

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Casualty Risk Landscape

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Risk Perception

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Risk Landscape for Liability Underwriters

Low investment returns

FSA & Risk based capital constraints

Reserving surprises & Emerging Hazards

Latent disease (Asbestos, Silica, Lead, Manganese)

Medical & Injury costs inflation(+50% last 5 years)

Junk science & Defence costs

US exposure & Mass Torts

Impact of Catastrophe losses on Global risk capital

Calculating impact of changes in Technology & Societal values

Claims challenges & Contract Certainty

Pressure on Technical pricing & Deteriorating ratios

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Emerging Risks (Real or Phantom)

Asbestos, Lead, Silica

Alcohol & Obesity

Antibiotic resistance

Benzene

Chemical Additives

Construction Defects

Cyber Quake

EMF & mobile telephony

Defence Allocations

Diacetyl

Endocrine Disrupters

GMO & Labelling

Accidental GM & Non-GM mixing

Human mobility

Life expectancy

Lifestyle Products

Mega-cities

Nanotech (Beyond the brink)

Perchlorate

Pharma – Grey Market Drugs

Terrorism/MPT

Toxic Shock

Welding Rods

Xeno transplants

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Employers LiabilityInflationary pressures

Settlements increase average 19%, according to the DWP

Costs increase average 12% pa, according to the DWP

Courts Act

NHS chargeback– emergency ambulance call-out charge– out-patient charge– in-patient charge overnight rate– capped at £35,000 per claim (RTA rates)– 5% on EL rates– effective April 2005

Discount rate on future loss: 0.05 to 5%, according to Ogden’s Tables 5th EditionAsbestos liability – anarchy in the UK?

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Liability Catastrophes do exist

20010.8EUToulouse Explosion

20021.0EUMt Blanc Tunnel fire

20031.6EUProduct Failure

19882.8UKPiper Alpha

20053.0USKatrina

1990’s6.0USSilicone breast implants

19769.0USAlaska oil spill

200115.5US9/11

1990’s30-60USAsbestos

1999145USTobacco Litigation

YearAmount (USDbn)CountryEvent

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Cost of U.S. Tort System($ Billions)

Source: Tillinghast-Towers Perrin.

$129$130$141$144$148$159$156$156$167$169$180$205

$233$246$260

$277$295

$314

$0

$50

$100

$150

$200

$250

$300

$350

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

Tort costs will consume an estimated 2.25% of GDP in 2006

Per capita “tort tax” was $886 in 2004, up from $680 in 2000

Reducing tort costs relative to GDP by just 0.25% (to about 2%) would

produce an economic stimulus of $27.5B

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Trends in Million Dollar Verdicts*

4%

10%

9%

25%

26%

40%

51%

5%

10% 15

%

39% 44

%

53%

63%

5%

15% 17%

36%

37%

54%

66%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

VehicularLiability

PersonalNegligence

PremisesLiability

BusinessNegligence

GovernmentNegligence

MedicalMalpractice

ProductsLiability

1997-1999 2000-2001 2002-2003

*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.

Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants. Across all liability types, million dollar-plus awards rose from 11% of all awards from 1997-99 to 16% in 2002-03.

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Top Ten US Jury Verdicts 2005

Source: LawyersWeekly USA, January 2006.

FloridaProducts Liability (Ford Explorer)$61.2 Million

CaliforniaAge Discrimination$64 Million

FloridaProducts Liability, Electrocution$65 Million

TexasConflict of Interest, Estate Planning$65.5 Million

IllinoisUnfair Business Practice$90 Million

New JerseyVicarious Liquor Liability$135 Million

FloridaNegligence/Products Liability Traffic Death$164 Million

TexasPharmaceutical Liability (Vioxx)$253 Million

FloridaMedical Malpractice (Chemo overdose)$606 Million

TexasInvestment Fraud$1.45 Billion

StateIssueValue

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Factors Driving Severity

More Sophisticated & Innovative Plaintiff’s Bar

Declining frequency means remaining cases are “better”

Trial Bar is Flush With Cash

Medical Inflation

Venue—Judicial “Hellholes” in these states:− FL, IL, TX and WV

Class Actions Still an Issue

Erosion of Tort Reform/Acceptance of “Junk Science” as Fact

Jury Desensitization to Money/Deep Pockets Syndrome

Sensationalized Media Coverage (e.g., Rollovers, Mold)

Concern over Corporate Image—Cos. Quick to Settle

Why Are Awards Getting Bigger?

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Highest Indemnity Award for aSingle Bodily Injury

$124.0$10.8

$7.3$7.2

$5.9$5.8$5.5$5.0$4.3

$3.4$3.3$3.2

$2.0$1.9$1.4$0.6$0.6

$0 $20 $40 $60 $80 $100 $120 $140

U.S.Switzerland

AustraliaGermanyBelgium

UKFrance

CanadaItaly

SpainHong Kong

JapanAustriaSwedenNorway

DenmarkPortugal

Sources: Swiss Re; 2003 Marsh Limits of Liability Survey

Geography Matters

U.S. awards are gargantuan compared to those in other

countries

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189.5179.1

131.9 138.8156.4

133.3

215.4

355.2

167.2 159.8

100

150

200

250

300

350

400

95 96 97 98 99 00 01 02 03 04

Products LiabilityCombined Ratio

Average Combined 1995 to 2004 = 180.0

Sources: A.M. Best; III

Products Liability has improved dramatically, but

remains very much a problem

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Points (Reduced)/Increased

0.5

(2.4)

5.26.3

3.52.5

1.91.1

(0.4)

0.4

-3-2-101234567

1998 1999 2000 2001 2002 2003 2004 2005E 2006F 2007F

Combined Ratio:Impact of Reserve Changes (Points)

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

Reserve adequacy is improving

substantially, which bodes well for 2010

Far less adverse reserve development

from casualty side

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US Class Action Claims Cost Skyrocket

02000400060008000

100001200014000160001800020000

Class Action Recoveries

$m

73-75 76-80 81-85 86-90 90-95 96-00 00-03Periods

Source : classactionreports

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Leading Types of Class Actions

4%10%Insurance

4%10%Personal Injury

6%10%Contracts

12%15%Environmental/Toxic Tort

13%17%Product Liability

10%31%Securities Litigation/ Enforcement

29%38%Labor/Employment

In the FuturePast Three YearsResponse

Source: Second Annual Litigation Trends Survey, Fulbright & Jaworski, 2005.

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Business Leaders Ranking of Liability Systems for 2005

Best States1. Delaware2. Nebraska3. North Dakota4. Virginia5. Iowa6. Indiana7. Minnesota8. South Dakota9. Wyoming10. Idaho

Worst States41. Hawaii42. Florida43. Arkansas44. Texas45. California46. Illinois

47. Louisiana48. Alabama49. West Virginia

50. MississippiSource: US Chamber of Commerce 2005 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2005ND, IN, SD, WY

Drop-OffsID, UT, NH, KS

NewlyNotorious

HI, FL

RisingAbove

MO, MT

LA, AL and MS’s liability systems are

ranked among the worst in the country by the US Chamber of Commerce

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The Nation’s Judicial Hellholes(2005)

Source: American Tort Reform Association; Insurance Information Institute

TEXASRio Grande

Valley and Gulf Coast

South Florida

ILLINOISCook County

Madison CountySt. Clair County

West Virginia

There were notably fewer “Judicial

Hellholes” in 2005

Dishonorable Mention

WI Supreme Ct.Watch ListCalifornia

Eastern KentuckyEastern Alabama

PhiladelphiaNew Mexico

DelawareOklahoma

Orleans Parish, LAWashington, DC

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Changing the Future

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Challenges for our Customers

Market Cycle volatility Litigious climate & severity cost growth Sarbanes Oxley pressuresAdequacy and Security of Liability LimitsCan “Occurrence” form survive Capital market angstContractual Liability risk managementNew EU Directives – Products, Environment, REACH, Services taxNew Exclusions – impact on M&A and retained Legacy exposuresStacking of Aggregate retentions and associated CollateralAccumulation of exposures in fewer locationsInsurer service levels under pressureReducing Global insurer networksDriving down Cost of Risk

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Liability Development Risk

Injury developments

Injury cost developments

Standard of care developments

Claiming developments

Emerging risks

Law on the books

Liability rules

Damages rules

Procedural rules

Contract rules

Broad Social Forces Legal Developments

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Underwriting Challenge

Elasticity issues & number of claimants

Geographic diversity & forum shopping

Indeterminate plaintiffs & defendants

Causation issues

Statutes of limitation & unimpaired claimant

Standards of liability & fairness

“All or Nothing” risk

Claims admin failures

EMF

Genetic modification

Nanotechnology

Lifestyle – obesity

Legacy occupational disease

Environmental

Epidemics

Technology

Demographic change

Legal Hazard

1. Baseline risk Past experience2. Development risk Change in rate or cost3. Contract risk Change in legal meaning

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Thought for the Day – Always have an Exit Strategy