The Insurance Industry The Insurance Industry OutlookOutlook

Presented By

Frederick EppingerFrederick Eppinger,

Executive Vice President, Field & Service OperationsThe Hartford

To

The MetroHartford Regional Economic Alliance/ CBIA The MetroHartford Regional Economic Alliance/ CBIA Economic Summit and Outlook ConferenceEconomic Summit and Outlook Conference

January 3, 2003

The Insurance Industry in 2001 The stock market significantly under performed – and

the beginnings of a real recession in almost a decade

September 11 became the largest tragedy in American history

As a result of 9/11, the insurance industry suffered the single largest insurable loss to date

After declining prices since the 1980s, rates began to increase in mid 2000 and accelerated in 2001, surging after 9/11

Many carriers began raising new replacement capital

The Current Landscape

Firming market conditions will continue into 2003

Companies continue to focus on underwriting profitability given current industry underwriting trends

Continued pressure on personal and auto lines due to increase in loss costs due to increasing medical, repair, litigation and fraud costs

Winners' and losers' performance continues to separate

Potential share consolidation due to "flight to quality"

-5%

0%

5%

10%

15%

20%

US P/C Insurers All US Industries

*2002 figures are estimates; P/C figure based on first-half 2002 data.Source: Insurance Information Institute; Fortune

ROE: P/C vs. All Industries

ROE (1998-2002*)

-5%

0%

5%

10%

15%

20%

ROE Cost of CapitalSource: The Geneva Association, III

ROE v. Cost of CapitalUS Non-Life: 1991-2002

14.6 pts

7.9 pts

$14,178

$5,840

$19,316

$10,870

$20,598

$24,404

$36,819

$30,773

-$7,921

$9,278

$20,223$21,865

-$10,000

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

91 92 93 94 95 96 97 98 99 00 01 02*

*Insurance Information Institute Estimate based on first half 2002 data.

P/C Net Income After Taxes (’91-’02*)($Millions)

-$0.8-$1.8

-$4.1

-$6.2

-$9.1

-$3.8

-$0.8

-$17.8 -$18.0

-$1.9

-$20

-$18

-$16

-$14

-$12

-$10

-$8

-$6

-$4

-$2

$0HO PPA Liab CA Liab WC CMP Med Mal*

SpecialLiab

OtherLiab*

XS LiabReins

ProdLiab*

*Occurrence and claims made Source: Morgan Stanley, Insurance Information Institute

Estimated Deficiency

Total Excluding A&E: $64 Billion

A&E Deficiency: $55 Billion

Total Including A&E: $120 Billion

Reserve Deficiency, by Line(Accident Year 1992-2001, as of 12/01)

0%

2%

4%

6%

8%

10%

12%

14%

16%

3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note*Average for week ending September 6, 2002.Source: Board of Governors, Federal Reserve System; Insurance Information Institute

Interest Rates

3.1%3.2%

3.3%3.4%3.5%3.6%

3.6%3.6%3.7%3.8%

3.0%

3.2%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

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

Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and A.M. Best data.

Net Written Premium as % of GDP

Challenges Facing the Industry

• Managing Terrorism Risk

• Losses due to 9/11 estimated at $40+ billion• Reinsurance for terrorism has disappeared• Federal backstop legislation requires careful management of exposures

• Tort Reform

• Class actions filed in state courts has risen by 1,043% in ten years• Asbestos liability could reach $55-$65 billion in U.S. alone• Last year only 6% of claimants were actually sick

• Corporate Governance

• We must overcome the “crisis of confidence” in American businesses• Opens companies to class action lawsuits• Must involve management in attesting to accuracy of financials

The Winning Carriers

Deep partnerships with distribution channel

Maintain top rating

Excellent execution

Acquire carefully

Exploit market niches

Invest in technology