The Dilemmas in the D

1
The Dilemmas in the DO Market

• Where do We Go From Here?

2
CFRA At A Glance

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3
Schedule P Other Liability Claims
MadeLeading DO Liability InsurersStatutory
Gross Accident Year Combined Ratio(Assumes 23
Expense Ratio for All Companies) Source A.M.
Best, CFRA
4
Schedule P Other Liability Claims
MadeLeading DO Liability InsurersGross Premium
Earned vs. Gross Losses LAE/Underwriting
Expenses(Assumes 23 Expense Ratio for All
Companies) (In Millions) Source A.M. Best,
CFRA
5
Net Insurer vs. Reinsurer Accident Year Ceded
Loss and LAE Ratio Source A.M. Best, CFRA
6
Schedule P Other Liability Claims Made
Leading DO Liability Insurers

• Key Takeaways
• While seemingly improved, recent accident years
  are unseasoned and subject to deterioration as
  pending litigation unfolds. As the average
  duration on cases is about three years, the 2002
  through 2004 years are still relatively immature.
• During 1998 2002, the industry experienced
  roughly 4 billion of net adverse loss reserve
  development, averaging about 20 loss ratio points
  per year. The 2002 underwriting year has already
  exhibited meaningful adverse development through
  2004 of nearly 800 million or 13 loss ratio
  points.
• During 1998 2001, ceded loss LAE ratios
  exceeded net by 44 points on average, reflecting
  that reinsurers paid a significantly
  disproportionate share of soft market losses.
• Recent premium growth trends reversed in 2005,
  with an expectation for a moderate decline of
  roughly 10 for the year, which reverses the
  trend seen from 2002 and 2003. In those years
  growth in gross premiums exceeded 35 in both
  2002 and 2003.

7
Schedule P Other Liability Claims Made
Leading DO Liability Insurers

• Key Takeaways
• In part as a result of pricing strength in 2003
  and 2004, there appears to be improvement in
  recent gross accident year results with combined
  ratios of roughly 90. However, it is unclear if
  the trend of adverse development exhibited in
  accident years 1998 2002 has abated and if 2003
  and 2004 will ultimately prove to be profitable
• One factor which gives us pause about the
  ultimate loss development is that through the
  first ten months of 2005, there were 971
  financial restatements as compared to 619 for the
  full year in 2004. Its possible that class
  action suits could follow.
• Finally, overall results for DO could in fact be
  worse than shown. The data is skewed by the
  inclusion of other specialty classes in other
  liability claims made section in the convention
  statements. Had these other lines been excluded,
  the combined ratio for just the DO only line
  would have been worse.
  

8
Key Discussion Points to be Reviewed By Panel
With Regard to CFRA Schedule Review

• Discussion by reinsurers of their results as
  compared to the CFRA analysis.
• Discussion by cedant company panelist as to
  their specific results compared to CFRA numbers.
• What are the factors that produce significantly
  different underwriting results when comparing
  insurer to reinsurer?
• How are they rationalized between the reinsurers
  loss ratios and CFRA loss ratios?

9
Key Discussion Points to be Reviewed By Panel
With Regard to CFRA Schedule Review

• Can underwriters truly produce a better loss
  ratio with the free flow of capital that exists
  in the insurance market today?
• Will the insurance market ever have 10-12 return
  on investment with the free flow of capital the
  way it is today or are we doomed to
  underperforming results?

10
If Underwriting Management Liability Insurance is
such a losing proposition, Why Do Insurers and
Reinsurers Remain in the Business?

• If both the cedant companies and reinsurers
  results in management liability business are so
  poor why would anyone remain in this line of
  insurance? Is there cause for concern that
  result is this line of insurance being
  non-lucrative will result in a lack of interest
  on the part of insurers in the future?
• Over the last two years reinsurers conservative
  underwriting approach has differed vastly from
  cedant companies more liberal underwriting of the
  same business where does that put our industry?
• Why would reinsurers continue to reinsure books
  of business that are not profitable?
• A discussion of the availability of insurance in
  the management liability arena and the potential
  players today versus those players in the year
  2000.

11
Has Sarbanes Oxley Changed the Landscape of Doing
Business? Are There Other Implosions in
Management Liability Business Yet to Occur? (i.e.
Mutual Funds, IV Banking, Insurance Industry
Meltdown)

• Has Sarbanes Oxley and the slow down in the newly
  filed security cases had a significant impact on
  the projected losses in the management liability
  business?
• Is there a new wave of issues to be dealt with or
  are better times ahead of us relative to losses
  in management liability insurance?
• Are there are new undefined issues ahead of us
  and what are they?
• Do these new issues still to be dealt with mean
  there are better times ahead relative to losses?

12
Is there any way to make a profit?

• With the issues behind us and ahead of us in the
  management liability business is there any way we
  can construct a business model where underwriters
  can make money?
• As a cedant company has the free flow of capital
  in the insurance business ruled out any
  possibility of a decent return on investment for
  investors in the insurance industry? Is our
  business doomed?
• As a reinsurer has the free flow of capital in
  the insurance business ruled out any possibility
  of a decent return on investment for investors in
  the insurance industry? Is our business doomed?

13
Hit and Run?