Into the Looking Glass:Into the Looking Glass: Trends & Challenges in the g

P/C Insurance Industry

CPCU Society Annual MeetingPhiladelphia, PA

September 9, 2008

Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ bobh@iii.org ♦ www.iii.org

Presentation Outline

• Weakening Economy: Insurance Impacts & Implications

• Profitability

• Underwriting Trends• Underwriting Trends

• Premium Growth

• Capacity/Capital

• Investment Overview

• Catastrophic Loss

Shifti L l Li bilit T t & P liti l E i t• Shifting Legal Liability, Tort & Political Environment

THE ECONOMICTHE ECONOMIC STORMSTORM

What a Weakening Economy & Th Th f I fl i MThe Threat of Inflation Mean

for the Insurance Industryfo the nsu ance ndust y

Real GDP Growth*

6%

Economic toll of credit crunch, labor marketStimulus check,

7% %

4.8%

4.8%

%

5%

6% crunch, labor market contraction and high energy prices is growing, though no

official recession declared

,export effects

3.7

%

2.5%

3.6%

3.1%

2.9% 3.

3%

.0% 2.

5% 2.7%3%

4%

0.8%

1.6 %

.1%

0.9% 1.

2%

0.3%

1.1%

2 .

1%

2%0. 0

-0.2%-1%

0%

Q Q Q Q Q Q Q Q Q Q Q Q

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/08; Insurance Information Institute.

U.S. Unemployment Rate,(2007:Q1 to 2009:Q4F)*(2007:Q1 to 2009:Q4F)

6.5% Rising unemployment will

5.9%

6.1%6.1% 6.1% 6.1%

6.0%

6.5% g p yerode payrolls and workers

comp’s exposure base

5.4%

5.7%

5.5%

4.7%4.6%

4.7%4.6%

4.8%4.9%5.0%

4.5%4.5% 4.5%4.5%

4.0%06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4

* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/08); Insurance Info. Inst.

New Private Housing Starts,1990-2014F (Millions of Units)1990 2014F (Millions of Units)

07

Exposure growth forecast for HO insurers is dim for 2008/09

New home starts plunged 34% from 2005-2007;

2.0

1.801.

85

1.96

1.92.02.1

insurers is dim for 2008/09Impacts also for comml. insurers with construction risk exposure

Drop through 2008 trough is 54% (est.)—a

net annual decline of 1.1 million units

1

45

1.54 1.56

1.51

.48

46 .47

1.62 1.64

1.57 1.60

1.71

1.61.71.8

1.36 1.38 1.

411.

35

1.4

1.29

1.20

1.19

1

1 21.31.41.5

I.I.I. estimates that each incremental 100 000 decline in housing starts costs

0.97

0.971.

01

0 91.01.11.2 100,000 decline in housing starts costs

home insurers $87.5 million in new exposure (gross premium). The net

exposure loss in 2008 vs. 2005 is estimated at $963 million.

0.990 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F09F10F11F12F13F14F

Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 8/08 edition of BCEF; Insurance Info. Institute

P/C Direct Carrier Employment

600

p yThousands P/C direct carrier employment

h b t bl i thas been stable in recent years. Will focus on expenses impact

employment?

503.

7

511.

9

508.

3

503.

3

496.

6

502.

2

496.

2

89.1

91.4

92.2

495.

9

500

p y

4 4

48 49 49 4500

40098 99 00 01 02 03 04 05 06 07 08*

Source: U.S. Dept of Labor, Bureau of Labor Statistics *through June 2008, preliminary

Real GDP Growth vs. Real P/C Premium Growth: Modest Association

% 0.3%

25% 8%

Premium Growth: Modest AssociationP/C insurance industry’s growth i i fl d d tl b th

18.6

% 20

13.7

%

15%

20% 6%is influenced modestly by growth

in the overall economy

.2%

% 5.8%

5.6%

17.

7%10%

15%

WP

Gro

wth

2%

4%

DP

Gro

wth

5.

1.8%

4.3% 5

0.3%

3.1%

1.1%

0.8%

0.4%

0.6%

% %1.

6%5

1.2%

0%

5%

Real

NW

0%

Rea

l GD

-0.9

%% 5%

-1.5

%

-1.6

%-1

.0%

-1.8

%-1

.0%

-0.4

%-0

.3%

-2.9

% -0.5

%-3

.4%

-4.9

%-5% -2%

Real NWP Growth Real GDP

-7.4

%-6

.5 -

-10%

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 07 08F

-4%Real NWP Growth Real GDP

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 8/08; Insurance Information Inst.

Regulatory Response &

Financial Services Modernization

I t IImpacts on Insurers

Treasury Regulatory Recommendations Affecting InsurersRecommendations Affecting Insurers

• Establishment of an Optional Federal Charter (OFC)Would provide system for federal chartering licensing regulation andWould provide system for federal chartering, licensing, regulation and supervision of insurers, reinsurer and producers (agents & brokers)

• OFC Would Incorporate Several Regulatory ConceptsEnsure safety and soundnessyEnhance competition in national and international marketsIncrease efficiency through elimination of price controls, promote more rapid technological change, encourage product innovation, reduce regulatory costs and provide consumer protectionregulatory costs and provide consumer protection

• Establishment of Office of National Insurance (ONI)Department within Treasury to regulate insurance pursuant to OFCHeaded by Commissioner of National InsuranceyCommissioner has regulatory, supervisory, enforcement and rehabilitative powers to oversee organization, incorporation, operation, regulation of national insurers and national agencies

• UPDATE: HR 5840 Introduced in April Would Establish

Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.

UPDATE: HR 5840 Introduced in April Would Establish Office of Insurance Information (OII)

Would create industry “voice” within Treasury

Post-Crunch: Fundamental Issues To Be Examined GloballyIssues To Be Examined Globally

• Adequacy of Risk Management, Control & Supervision at Financial Institutions Worldwideat Financial Institutions Worldwide

Failure of risk management (and regulation)Implications for ERM?Includes review of incentives

• Effectiveness and Nature of RegulationWhat sort of oversite is optimal given recent experience?Credit problems arose under US and European (Basel II) regulatory

iregimesWill new regulations be globally consistent? Can overreactions be avoided?Capital adequacy & liquidityp q y q y

• Accounting RulesProblems arose under FAS, IASAsset Valuation, including Mark-to-MarketS d Fi & C l D i i

Source: Insurance Information Institute

Structured Finance & Complex Derivatives• Ratings on Financial Instruments

New approaches to reflect type of asset, nature of risk

InflationInflation OverviewOverview

Pressures Claim Costs, Expands Probable & Possible Max LossesPossible Max Losses

Annual Inflation Rates(CPI U %) 1990 2009F(CPI-U, %), 1990-2009F

5.66In July 2008, on a year-over-year basis inflation

was 5 6% -- a level not seen since 1991

4.9 5.15.6

4.45

6 was 5.6% -- a level not seen since 1991.

3.0 3.22.6

3.3 3.4

2 53.0

3.8

2.8 2.92.82.92 43

4

2.6

1.51.9

1.3

2.5 2.32.4

2

3

0

1

090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F09F

*12-month change July 2008 vs. July 2007 Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, August 10, 2008. (forecasts)

Medical & TortMedical & Tort Cost InflationCost Inflation

Amplifiers of Inflation, Major I C D iInsurance Cost Driver

Consumer Price Index for Medical Care vs All Items 1960-2007Care vs. All Items, 1960 2007

(Base: 1982-84=100)

f i f i

351.1

400 Inflation for Medical Care has been surging

ahead of general inflation (CPI) for 25

years Since 1982-84 the

Soaring medical inflation is among the most serious

207 3

300

982-

84=1

00

years. Since 1982 84, the cost of medical care has

more than tripledthe most serious

long-term challenges facing

casualty disability 207.3200

ex V

alue

(19 casualty, disability

and LTC insurers

100Inde

All Items Medical Care

0

60 61 62 63 64 65 66 67 68 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 07

Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.

Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2008*vs. Overall Inflation (CPI U), 1961 2008

14% Tort System is an Inflation AmplifierTort costs move with

inflation but at twice the rate

10%

12%

% Inflation AmplifierAvg. Ann. Change: 1961-2008*

Torts Costs: +8.4%M d C 6 0%

inflation but at twice the rate

8%

10% Med Costs: +6.0%Overall Inflation: +4.2%

4%

6%

0%

2%Tort Costs Medical Costs CPI

1961-70 1971-80 1981-90 1991-2000 2001-08E*Medical cost and CPI-U through April 2008 from BLS. Tort figure is for full-year 2008 from Tillinghast.Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.

Med Costs Share of Total Costs is Increasing SteadilyCosts is Increasing Steadily

2007pMed cost inflation is one

Indemnity1997

2007pfactor to high WC severity. Med cost are now nearly 60%

of all lost time claim costsIndemnity

41%Medical

59%1987

1997

IndemnityMedical

46%

Indemnity53%

Medical47%

Indemnity54%

46%

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

PROFITABILITYP fit i 2006/07 R h dProfits in 2006/07 Reached

Their Cyclical Peak;y ;

By No Reasonable Standard CanBy No Reasonable Standard Can Profits Be Deemed Excessive

P/C Net Income After Taxes1991 2008 ($ Millions)*1991-2008 ($ Millions)

7

2001 ROE = -1.2%2002 ROE = 2.2% Insurer profits

i 2006

$61,

940

$65,

777

55$60,000

$70,0002003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.6%2006 ROE = 12 2%

peaked in 20066 8 40

4 $36,

819

30,7

73

65 30,0

29

$32,

936$4

4,15

9

$38,

501

$40,000

$50,000

$ , 2006 ROE = 12.2%2007 ROAS1 = 12.3%**2008 ROAS = 6.4%***

$14,

178

840 $1

9,31

6

$10,

870

$20,

598

$24,

4 $3

$21,

86

46

$ 3 $

$20,

559

$20,000

$30,000

$5,8 $

$3,0

4$10 000

$0

$10,000

-$6,970-$10,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*

*ROE figures are GAAP; 2008 figure is annualized Q1 net income of $8.234B; 1Return on avg. surplus.Sources: A.M. Best, ISO, Insurance Information Inst. ***9.5% excl. mortgage and finl. guarantee insurers.

ROE: P/C vs. All Industries 1987–2008:Q1

20%

1987–2008:Q1P/C profitability is Mortgage & Financial

Guarantee Impact

15%cyclical and volatile

5%

10%Sept. 11

0%

A d

Hugo Lowest CAT losses in 15 years

Katrina, Rita, Wilma

-5%87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08Q1

Andrew Northridge 4 Hurricanes

US P/C Insurers All US Industries2008 P/C insurer figure is annualized Q1 return on average surplus. Excluding mortgage and financial guarantee insurers = 9.5%. Source: ISO, Fortune; Insurance Information Institute.

Profitability Peaks & Troughs in the P/C Insurance Industry 1975 2008:Q1

25%

P/C Insurance Industry,1975 – 2008:Q1

1977:19.0% 1987:17.3% 2006:12.2%

15%

20%1997:11.6%

10%

15%

5%2008Q1: 6.4%(9 % & G)

5%

0%

1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2%

(9.5% excl. M&FG)

-5%

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 07 08

*GAAP ROE for all years except 2007 which is ROAS of 12.3%. All figures include mortgage an d financial guarantee insurers. Excluding M&FG insurers 2008:Q1 ROAS is 9.5%..Source: Insurance Information Institute, ISO; Fortune

Advertising Expenditures by P/C Insurance Industry 1999-2007EInsurance Industry, 1999 2007E

$ Billions

$3 695

$4.323

$4.0

$4.5 Ad spending by P/C insurers is at a record high, signaling

i d titi $3.695

$2.975$3.5

$4.0 increased competition

$2.975

$2 111$2.5

$3.0

$1.736 $1.737 $1.803 $1.708

$2.111$1.882

$1 5

$2.0

$1.599 00 01 02 03 04 05 06 07E

Source: Insurance Information Institute from consolidated P/C Annual Statement data.

FINANCIAL STRENGTH &

RATINGSIndustry Has Weathered y

the Storms Well, But Cycle May Takes Its TollMay Takes Its Toll

P/C Insurer Impairment Frequency vs Combined Ratio 1969 2007Evs. Combined Ratio, 1969-2007E

Combined Ratio after DivP/C I i t F

Impairment rates are highly

115

120

1 61.82

P/C Impairment Frequencyg ycorrelated

underwriting performance and could reached a

record low in 2007

110

d R

atio

1.21.41.6

nt R

ate

record low in 2007

100

105

Com

bine

d

0.60.81

Impa

irmen

90

95

00.20.4

2007 impairment rate was a record low 0.12%, one-seventh the 0.8% average since 1969; Previous

record was 0.24% in 197290

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 07

0

Source: A.M. Best; Insurance Information Institute

UNDERWRITINGTRENDS

Extremely Strong 2006/07;R l i M t &Relying on Momentum &

Discipline for 2008p

P/C Insurance Combined Ratio, 1970 2008F*

120Combined Ratios

1970 100 3

1970-2008F*

115

1970s: 100.31980s: 109.21990s: 107.8

1102000s: 102.0*

100

105

95

90

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 07 08F

Sources: A.M. Best; ISO, III *Full year 2008 estimates from III.

P/C Insurance Industry Combined Ratio, 2001-2010F Including

120

Ratio, 2001 2010FAs recently as 2001, insurers

paid out nearly $1.16 for every Relatively low CAT

Including Mortgage

& Fin. Guarantee i

115.82005 ratio benefited from heavy use of reinsurance

$1 in earned premiums low CAT losses, reserve releases

insurers

Cyclical Deterioration

107.4 107110

ywhich lowered net losses

Best combined ratio since 1949

(87 6)

Deterioration

100.198.3

100.7103102.5

99.0100

(87.6)

92.4

95.6

902001 2002 2003 2004 2005 2006 2007 2008 2008* 2009F 2010F

*Includes Mortgage & Financial Guarantee insurers. Sources: A.M. Best, ISO; III.

Underwriting Gain (Loss)1975 2008:Q1*

3035 Insurers earned a record underwriting profit of

$31 7 billi i 2006 h l b l h

1975-2008:Q1*

1015202530 $31.7 billion in 2006, the largest ever but only the

second since 1978. Cumulative underwriting deficit from 1975 through 2007 is $422 billion.

-10-505

10

$ B

illio

ns

-30-25-20-1510$

$561 mill underwriting loss in 08:Q1

55-50-45-40-35

loss in 08:Q1 incl. mort. & FG insurers

-55

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 07 08

Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage * finl. guarantee insurers

PREMIUMPREMIUM GROWTH &GROWTH &

PRICINGPRICINGSluggishness PersistsSluggishness Persists

Strength of Recent Hard Markets by NWP Growth

20%22%24%

1975-78 1984-87 2000-03

Shaded areas

14%16%18%20% denote “hard

market” periods

8%10%12%14%

Negative or zero growth

likely

2%4%6%8%

In 2007 net written

-2%0%2%

971

972

973

974

975

976

977

978

979

980

981

982

983

984

985

986

987

988

989

990

991

992

993

994

995

996

997

998

999

000

001

002

003

004

005

006

007

08F

09F 0F

In 2007 net written premiums fell 0.6%, the first decline since 1943

19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 200

200

201

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

Average Expenditures on Auto InsuranceAuto Insurance

Countrywide auto

3 851

4738 847$900

$950 Countrywide auto insurance expenditures

are expected to fall 0.5%

4 $780 $8

2 3 $8 $8$83

$8

$800

$850p f

in 2007, the first drop since 1999

651

$668 $6

91 $705

$703

$685

$690 $7

24

$700

$750Lower underlying

frequency and modest

$6 $

$600

$650frequency and modest

severity are keeping auto insurance costs in check

94 95 96 97 98 99 00 01 02 03 04 05* 06* 07**Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute

Cumulative Commercial Rate Change by Line: 4Q99 – 2Q08Change by Line: 4Q99 2Q08

Commercial account pricing has been trending down for 4+ years and is now

on par with prices in late 2001

Source: Council of Insurance Agents & Brokers

U.S. Domiciled Captives- Net Premiums Written ($ Millions)Premiums Written ($ Millions)

$10 5Following a five-year period of

id th U S ti

$9.9

$10.2

$10.0

$10.5 rapid growth, U.S. captive insurers saw net premiums written increase by just 2.7 percent in 2006 after 6 2

$9.3$9.5

ions

percent in 2006, after 6.2 percent growth in 2005.

$9.0$9.0$

Mill

i

$8.4$8.5

$8.02002 2003 2004 2005 2006

Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review

RISING EXPENSESRISING EXPENSES

Expense Ratios Will Rise asExpense Ratios Will Rise as Premium Growth Slows

Personal vs. Commercial Lines Underwriting Expense Ratio*Underwriting Expense Ratio

31 1%32% Personal Commercial

30.8% 30.0%

31.1%

29.4%29 9%

30%

32% Personal Commercial

25 0%27.1%

26 6%

27.5%27.0%26.3%26.4%25.6%

29.9%29.1%

26.6%

25 0%26%

28%

23.4%24.3%

25.0%

24.4%

24.5%24.8%25.6%

24.6%

25.6%24.7%

26.1%26.6%25.0%

24%

26%

20%

22% Expenses ratios will likely rise as premium growth slows

96 97 98 99 00 01 02 03 04 05 06 07E 08F

*Ratio of expenses incurred to net premiums written.Source: A.M. Best; Insurance Information Institute

CAPACITY/SURPLUS

Accumulation of Capital/ pSurplus Depresses ROEs

U.S. Policyholder Surplus: 1975 2008:Q1*

$550

1975-2008:Q1*Capacity as of 3/31/08 was $515.6, down 0.4% from

$400

$450

$500 12/31/07 was $517.9B, but 80% above its 2002 trough.

Recent peak was $521.8 as of 9/30/07

$300

$350

$400

$ B

illio

ns

The premium-to-surplus fell to $0.85:$1 at year-end 2007 approaching

$150

$200

$250

$

“Surplus” is a measure of underwriting capacity It is

end 2007, approaching its record low of $0.84:$1 in 1998

$50

$100

$150 underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

$075 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 07 08

Source: A.M. Best, ISO, Insurance Information Institute. *As of March 31, 2008

Annual Catastrophe Bond Transactions Volume 1997 2007Transactions Volume, 1997-2007

Risk Capital Issued Number of Issuances

$7,329.6

$7,000

$8,000

l) 30

35

p

Catastrophe bond issuance has soared in the wake of Hurricanes

$4,693.4$5,000

$6,000

sues

($ M

ill

20

25

30

ssua

ncesKatrina and the hurricane

seasons of 2004/2005, despite two quiet CAT years

$1 729 8 $1 991 1$2 000

$3,000$4,000

Cap

ital I

ss

10

15

20

umbe

r of I

s

q y

$1,729.8

$966.9

$1,991.1

$1,142.8$1,219.5$846.1$984.8$1,139.0

$633.0

$0

$1,000$2,000

Ris

k

0

5

10

Nu

$097 98 99 00 01 02 03 04 05 06 07

0

Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.

MERGER & ACQUISITIONQ

Are Catalysts for P/C C lid ti G iConsolidation Growing

in 2008?in 2008?

P/C Insurer M&A Activity,* 1997 2008**1997-2008

Transaction Values Number of Transactions

$36,40715

$35,000

$40,000

l)

14

16

s

M&A activity began to accelerated in 2007. The largest deals as of mid 2008

are Liberty Mutual’s acquisition of

109

$25,000

$30,000

alue

($ M

ill

10

12

nsac

tionsSafeco for $6.2B and Allied World’s

acquisition of Darwin for $550 million

$18,289

$12,823$13,8087

9

$15,000$20,000

sact

ion

Va

68

ber o

f Tra

$6,750$599 $800

$9,325$3,318$8,683

2 21

21 2$5,000

$10,000

Tran

s

24

Num

0 02

$097 98 99 00 01 02 03 04 05 06 07 08**

0

Source: Lehman Brothers. *Deals exceeding $500 million. *Through June 30, 2008.

Distribution Sector: Insurance-Related M&A Activity 1988 2006Related M&A Activity, 1988-2006

Transaction Values Number of Transactions

$2,7

20

$

$3,000 300

Transaction Values Number of Transactions

No extraordinary t d id t

$1,9

34

$1 633$2,000

$2,500

ue ($

Mill

)

200

250

sact

ions

trends evident

$1,633

$944

$1 000

$1,500

ctio

n Va

lu

100

150

er o

f Tra

ns

$542

$446$6

89

$212

$

$500

$1,000

Tran

sa

50

100

Num

be

$7 $60 $

$096 97 99 00 01 02 03 04 05 06

0

Source: Conning Research & Consulting.

All P/C Lines Distribution Channels, Direct vs Independent Agents

70%Direct Independent Agents

Direct vs. Independent Agents

60%

70%

40%

50%

20%

30% Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained in recent

0%

10%

across all P/C lines, but have gained in recent years. Direct channels include exclusive agency companies, direct marketers and

direct sales (e.g., internet)0%

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

INVESTMENTINVESTMENT OVERVIEWOVERVIEW

More Pain, Littl G iLittle Gain

Property/Casualty Insurance Industry Investment Gain1Industry Investment Gain

$ Billions$63 6

$42 8$47.2

$52.3

$44.4 $45.3$48.9

$59.4$55.7

$63.6$56.9

$51.9

$57.9

$50

$60

$35.4$42.8 $44.4

$36.0

$

$30

$40

Investment gains are off in$12.2

$10

$20Investment gains are off in

2008 due to lower yields and poor equity market conditions.

$0

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

08Q1

p q y

08

1Investment 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.Sources: ISO; Insurance Information Institute.

CATASTROPHICCATASTROPHICLOSSLOSS

What Will 2008 Bring?What Will 2008 Bring?

U.S. Insured Catastrophe Losses*

0

$ Billions2008 CAT losses already exceed

$100 Billion CAT year is

$100

.0

9

$100

$120 2008 CAT losses already exceed all of 2006/2007. 2005 was by far the worst year ever for insured

catastrophe losses in the US but

CAT year is coming soon

9 .5 .5$6

1.

$60

$80catastrophe losses in the US, but

the worst has yet to come.

$7.5

$2.7

$4.7

$22.

9$5

.5 $16.

9$8

.3$7

.4$2

.6 $10.

1$8

.3$4

.6$2

6.$5

.9 $12.

9 $27.

$6.7

$9.3

$9.2$20

$40

$ $

$0

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07:Q

2**

20??

*Excludes $4B $6b offshore energy losses from Hurricanes Katrina & Rita

08:Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.

**Based on preliminary PCS data through June 30. 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

REINSURANCE MARKETS

Reinsurance Prices are F lli i N C t lFalling in Non-Coastal Zones, Casualty LinesZones, Casualty Lines

Share of Losses Paid by Reinsurers, by Disaster*, y

60%70% Reinsurance is playing

an increasingly 60%

45%50%

60% an increasingly important role in the financing of mega-

CATs; Reins. Costs are

30%25%30%

40%CATs; Reins. Costs are

skyrocketing

20%

10%

20%

0%

10%

Hurricane Hugo(1989)

Hurricane Andrew(1992)

Sept. 11 TerrorAttack (2001)

2004 HurricaneLosses

2005 HurricaneLosses(1989) (1992) Attack (2001) Losses Losses

*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.

Reinsurer Market Share Comparison: 1990 vs 20061990 vs. 2006

1990 2006

Off hU.S.

Reinsurer64.7%

Offshore Reinsurer

35.3% U.S. Reinsurer

Offshore Reinsurer

53 1% 46.9%53.1%

U.S. Reinsurer market

Sources: Reinsurance Association of America; Insurance Information Institute.

share fell precipitously between 1990 and 2006

Shifting LegalShifting Legal Liability & TortLiability & Tort

EnvironmentIs the Tort Pendulum

Swinging Against Insurers?Swi gi g gai st su e s?

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

$250 Commercial Lines Personal Lines Self (Un)Insured

Self (Un) Insured Tort Costs

$45.5$200

Total = $216.7 Billion

$85.6$30.0$150

Bill

ions

Total = $121.0 Billion

Total = $159.6 Billion

$51.0$70.9

$20.4$100

Total = $39.3 Billion

$17.0$49.6 $58.7

$85.6$17.1$5.2

$0

$50

$01980 1990 2000 2006

*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

Tort System Costs and Tort Costs as a Share of GDP, 2000-2009Ff

$246$265$260

1

$277

1.82%2.03%

2.22% 2.23%

1.83%1 84%

2.10%1.83%1.87%

2.24%

$260

$280

$300

2.0%

2.5%

DP

$233$246

$253$2

61

$247

$205

1.84%

$200

$220

$240

$260

tem

Cos

ts

1.5%

2.0%

as %

of G

D

$179

$160

$180

$200

Tor

t Sys

t

1.0%

ort C

osts

a

After a period of rapid escalation, tort system costs

$100

$120

$140

0 0%

0.5% Toescalation, tort system costs

as % of GDP are now falling$100

00 01 02 03 04 05 06 07E 08E 09E0.0%

Tort Sytem Costs Tort Costs as % of GDPSource: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

REGULATORY & LEGISLATIVE

ENVIRONMENT

Isolated Improvements, Mounting ZealoutryMounting Zealoutry

Rating of Auto/Home Insurance Regulatory & Operating Environment*Regulatory & Operating Environment

Most states (25) get a “B”, but 7 got A’s, 10 got C’s (including DC) 5 earned D’s and 4 got F’s

ME

NH

ND

MN

WA

AL

VTMT

AK

C s (including DC), 5 earned D s and 4 got F s

NH

MA

CT

PA

NE

MN

MI

IL

IA

ID

OR

NJRI

MDDE

NY

DC

SD WI

INOH

WY

= A= B= C= D

WVVA

NC

OK

IL

AZ

MD

SC

TN

ARNM

KYMOKS

IN

CA

NVUT

CO

D= F

Source: James Madison Institute, February 2008.

LATX

HI GAAL

FL

MS

NM

*Criteria considered were auto/home residual mkts., auto/home mkt. concentration, loss ratio stability, reg. env.,form regulation, credit scores, territorial restrictions Source: James Madison Institute, Feb. 2008

PRESIDENTIALPRESIDENTIAL POLITICS & P/CPOLITICS & P/C PROFITABILITYPROFITABILITY

Political QuizQ

• Does the P/C insurance industry performDoes the P/C insurance industry perform better (as measured by ROE) under Republican or Democratic administrations?epub ca o e oc at c ad st at o s?

• Under which President did the industry realize• Under which President did the industry realize its highest ROE (average over 4 years)?

• Under which President did the industry realize its lowest ROE (average over 4 years)?

ELECTION IMPACT

P/C Insurance Industry ROE byPresidential Administration,1950-2008*

15 10%16.43%Carter

Reagan II

ELECTION IMPACT

15.10%10.13%

8.93%8.65%

Reagan IIG.W. Bush II

NixonClinton I

OVERALL RECORD: 1950 2008*8.35%

7.98%7.68%

G.H.W. BushClinton IIReagan I

1950-2008*Republicans 8.05%

6.98%6.97%

5.43%5 03%

Nixon/FordTruman

Eisenhower IEisenhower II

Democrats 7.14%

Party of President has marginal bearing on5.03%

4.83%4.43%

3.55%

Eisenhower IIG.W. Bush I

JohnsonKennedy/Johnson

marginal bearing on profitability of P/C insurance industry

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

y

*ROE for 2008 based on Q1 data. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute

Insurance Information Institute On LineInstitute On-Line

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