Midwest Actuarial Forum

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Welcome
Midwest Actuarial Forum Aon Center March 26,
2002
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• I. Great Time To Be An Actuary
• II. Market Overview
• III. New World of Risk
• IV. Where the Industry is Headed

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It Is A Great Time To Be an Actuary

• Companies Looking for Ways To
• Quantify Risk
• Manage Risk/Reduce Volatility
• Price Their Product to Achieve Adequate ROEs

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It Is A Great Time To Be an Actuary

• Companies Looking for Ways To
• Quantify Risk
• Manage Risk/Reduce Volatility
• Price Their Product to Achieve Adequate ROEs
• Rapid Growth in Model Development and Usage
• DFA
• Catastrophe Models
• Workers Compensation (Overlaid With Property
  Exposures)
• Finite Reinsurance Covers

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It Is A Great Time To Be an Actuary

• A Focus on
• Innovation
• Solutions
• Is It Commercially Feasible?
• Financial Actuaries

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It Is A Great Time To Be an Actuary

• A Focus on
• Innovation
• Solutions
• Is It Commercially Feasible?
• Financial Actuaries
• Capital Management

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Catastrophe Risk and Capital Management Overview
Traditional Reinsurance
Alternative Reinsurance
Risk Transfer Securities
Contingent Capital
Exposure Swaps
Captives
Underwriting Strategies
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Management Overview

• Underwriting Strategy
• Risk Transfer
• Capital Resources

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Is Volatility an Issue?
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Earnings Volatility Peer Analysis
PC Large Cap Sector
Actual Results Through Third Quarter, 2001
Earnings Per Share Quarterly Growth (Decline)
Rate Current Quarter versus Same Quarter Prior
Year
PC Large Cap Sector Average
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Earnings Volatility Peer Analysis
American International Group
Actual Results Through Third Quarter, 2001
Earnings Per Share Quarterly Growth (Decline)
Rate Current Quarter versus Same Quarter Prior
Year
P/E AIG 37
PC Large Cap Sector Average
AIG
American International Group Earnings Volatility
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Earnings Volatility Peer Analysis
CNA Financial
Actual Results Through Third Quarter, 2001
Earnings Per Share Quarterly Growth (Decline)
Rate Current Quarter versus Same Quarter Prior
Year
P/E CNA 7
PC Large Cap Sector Average
CNA
CNA Financial Earnings Volatility
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Earnings Volatility Peer Analysis
Shareholder Value
Five Year
Volatility
EPS Growth Rate
PC Large Cap Sector
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Market Overview
9/11 3/31
Pre WTC
WTC/Enron Aftermath
New World Of Risk
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Pre 9/11

• Worsening Results
• Underwriting
• Investment

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Industry Pretax Operating Income Percent of NPE
Year 1975 - 2000
of NPE
Source Bests Aggregates And Averages
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Industry Pretax Operating Income Percent of NPE
Year 1975 - 2000
of NPE
Source Bests Aggregates And Averages
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Industry Pretax Operating Income Percent of NPE
Year 1975 - 2000
of NPE
Source Bests Aggregates And Averages
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Pre 9/11 (Contd)

• Worrysome Issues Beginning to Emerge
• Pricing Trends
• Adverse Development of Reserves
• Coverage Issues
• Mold, Cyber, Etc.
• Lower Investment Yields

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9/11 Aftermath

• Initial Shock, Disbelief
• Little Immediate Impact for Many Companies

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9/11 Aftermath

• Initial Shock, Disbelief
• Little Immediate Impact for Many Companies
• Some Market Segments in Disarray
• Losses Concentrated in Relatively Few Companies
• WTC
• Enron
• Spread Through Reinsurance Mechanism

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Effects of Insured Catastrophe Losses on Industry
Combined Ratios Year 1982 - 2001
Combined Ratio
Est.
WTC
Andrew
Hugo
Northridge
Source Bests Aggregates And Averages
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9/11 Aftermath

• Initial Shock, Disbelief
• Little Immediate Impact for Many Companies
• Some Market Segments in Disarray
• Losses Concentrated in Relatively Few Companies
• WTC
• Enron
• Spread Through Reinsurance Mechanism
• Dealing With the Terrorism Issue
• New Capital Flows

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New Capital Since 9/11
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9/11 Aftermath

• Increased Focus on Security
• Rating Agencies
• Regulators
• Customers
• Reinsurance
• Attempts to Better Manage Earnings Volatility
• Improved Risk Selection

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New World of Risk

• Where Is the Rest of the WTC Loss?
• Deteriorating Reserves
• Ongoing Issues in
• Asbestos and Environmental, Lead, Mold
• Weather Volatility
• Pricing
• Regulation, Rating Agencies, etc.

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New World of Risk

• Terrorism
• Permanent Change in
• Evaluation of Risk
• Some Lines of Insurance
• Where Are the Terminated Risks Going?

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New World of Risk

• A Look Ahead
• Capital Flows
• Security Thresholds
• Distribution
• Retail
• Reinsurance
• Technology
• Limiting Factors

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Thanks For Joining Us!