Eric M. Simpson

1
Lehman Brothers / A.M. Best Company 2nd Annual
Insurance Conference
P/C Industry Sorting the Winners From the
Losers

• Eric M. Simpson
• Senior Vice President
• A.M. Best Company
• May 21, 2001

2
Discussion Outline

• More red flags!
• Bests top 10 P/C trends
• Financial review preview
• Bests market outlook
• Winning characteristics
• Bests rating trends

3
More Red Flags!

• Were talking to Ajit
• Were segregating our run-off
  obligations
• Were getting a 2nd reserve opinion
• The bank has reset our covenants
• We will service our fixed obligations by selling
  non-core assets

4
More Red Flags!

• Were taking a one-time charge to put this issue
  behind us
• Our stop loss attaches at . . .
• If you exclude ____, our run rate is . . .
• Our earnings release has been delayed
• Were pursuing strategic alternatives

5
Bests Top 10 P/C Trends

• 1. Prices firm, but what about margins?
• 2. Financial pain lingers
• 3. Investors become more discerning
• 4. Excess capital persists
• 5. Competition intensifies

6
Bests Top 10 P/C Trends

• 6. Personal auto/workers comp go south
• 7. Global financial services converge
• 8. Customers flex their muscles
• 9. Technology reshapes business models
• 10. Consolidation/withdrawals heat up

7
Pain Phase Persists In 2001

• Over-crowded markets
• Intensifying competition
• Rising loss costs/lagging price increases
• Too much E too little R in ROEs

8
Results Languish Amid Price Firming

• Good News....
• Retro firming robust ES premium growth
• Sustained commercial price firming through 2002
• Stronger margin pick-ups for leaders
• Bad News
• More reserve surprises asbestos heats up
• Ongoing cat losses earnings volatility
• Elevated expense ratios
• Low investment yields uncertain stock gains

9
Widespread Negative Economic Returns
10
Continued Cat and AE Drag
11
Widening Gap Between Winners Pack
12
Personal Lines Negative Outlook

• Negative economic returns through 2002
• Pricing power muted by regulators, consumers,
  Internet, State Farm
• Premium rates continue to lag loss costs
• Top 10 increase market share high-cost/
  undifferentiated carriers at risk
• Credit scoring increases U/W volatility
• Resurgence of involuntary pools
• Privacy issues class action suits loom

13
Personal Lines Top Ten Garner More Share
14
Personal Lines Winner Characteristics

• Low-cost platform
• Strong brand
• Effective distribution channel(s)
• Superior claims service
• Effective use of technology
• Above-average persistency
• Effective price segmentation strategies
• Profitable homeowners

15
Commercial Lines Negative Outlook

• Price increases on renewals accepted by market
  through 2002, then leveling off
• Core reserves short by 30 bil. more surprises
  middle-market casualties 2nd asbestos wave
• Weak reported results through 2001
• Cycle mgmt driver seat or rear-view mirror?
• Specialists stand-alone or bolt-on?
• Outliers no longer saved by white knights
• Consolidations/withdrawals accelerate

16
Commercial LinesFragmented, But More Disciplined
17
Commercial Lines Winner Characteristics

• Strong underwriting culture
• Unquestioned financial strength
• Stability in core markets
• Consistent reserve margins
• Good cycle management
• Above-average persistency
• Control influence over distribution

18
Reinsurance Mixed Outlook

• Strong overall U/W improvement in 2001
• Strong premium growth from property hardening and
  primary firming in pro rata
• Some Lloyds syndicate finite losses in 2001
• Integrated risk products pose opportunities
  threats (e.g. economic downturn)
• Mid-size reinsurers get squeezed
• Reinsurers facilitate exit strategies for
  insurers, including their run-off

19
Reinsurance Winners Big Global
20
Reinsurance Winner Characteristics

• Ability to influence terms conditions
• Unquestioned financial strength
• Highly specialized products services
• Truly global platform franchise
• Effective distribution channel(s)
• Large lines capacity

21
Bests Rating Perspective

• Operating fundamentals crucial to solvency
  viability
• Long-term viability depends on ability to
  integrate, innovate, execute perform
• Key enablers
• Distribution
• Technology
• Appropriate business partners
• Product services
• Intellectual capital
• Sustained profitability strong market profile
  to ensure viability and Bests highest ratings

22
Rating Distributions by Segment (_at_12/00)
Total
P/C
Personal
Comml
Rating Category
Reinsurers
Secure
Superior (A, A)
12
9
45
11
Excellent (A, A-)
44
54
48
49
Very Good (B, B)
28
25
6
27
84
88
100
87
Vulnerable (B through F)
16
12
0
13
Total Group Ratings
441
564
33
1,038
Negative
Negative
Mixed
Market Outlook
23
P/C Capital-Rich /Performance-Starved
2000 2000 BCAR
Capital Ratings Rating Category
Range Distribution Distribution Superior (A,
A) 160 66 11
Excellent (A, A-) 130-160 14
49 Very Good (B, B) 100-130
12 27 Secure 100
92 87 Vulnerable (B to F) 8 13 Total
100 100
24
Less Stand-Alone Groups
Source A.M. Best Company
25
Segments/Groups Ripe for Consolidation

• Inefficient personal standard comml carriers
• High-cost independent agent companies (ranking
  poorly within agency channel)
• Medical malpractice insurers
• Undisciplined middle-market insurers (with
  reserving/re-underwriting issues)
• Domestic reinsurers lacking global reach

26
Insurance Winners Will . . .

• Possess unquestioned financial strength
• Possess best-of-breed products services
• Leverage effective distribution channels
• Optimize underwriting cycles
• Innovate constantly business partner
• Invest effectively in technology
• Attract retain top talent
• Foster effective change management

27
The FundamentalsBoring But Effective

• Pricing
• Underwriting
• Reserving
• Service
• Efficiency

Key EXECUTION