State of the Market Report

1
State of the Market - Report

• Since WTC bad news continues to outweigh the good
  news
• For Insureds underwriters changing philosophy,
  reducing coverage, increasing pricing, prefer
  property to casualty
• For carriers improvements in premium rates more
  than outweighed by continuing investment losses
  and need to strengthen reserves for claims from
  the past
• For all of us poor global economic prospects and
  considerable political uncertainty.
• Overseas Insurance market not chaotic, but
  still under significant stresses and strains

2
The Perfect Storm

• 
  

Capital Depletion
Asbestosis
Pollution
Equity Write -downs
Stress
The
Good Ship
EMF
Interest Rates
Insurance
Tobacco
Corp. Bond Default Rates
etc.
3
Assets Capital Depletion

• Exits and Entrances
• Exits around 250 billion lost to insurance
  industry over last two years (SP)
• - investment write-downs
• - reserve strengthening
• - underwriting losses
• Entrance around 30 billion raised
• - mainly additional capital to rebuild balance
  sheets
• - some new capital for start ups (mainly in
  Bermuda)

4
Assets Economic Prospects

• Poor corporate earnings
• Post Enron lack of confidence.
• Pension underfunding US pension schemes face
  300bn deficit (Financial Times 12 March 20003).
• Corporate bond default rates at all time high
• Corporate defaults in 2002 were higher than at
  any time since the Great depression. (Moodys
  26 February 2003)
• 141 companies defaulted on 163.4bn of debt.
• largest default in history when Worldcom
  defaulted on 23bn of bonds.
• Junk bond exposure will hurt US insurers
  (Moodys 26 February 2003)

5
Liabilities Old

• Continued reserve strengthening, announcement in
  2003 so far
• General Electric took 1.4bn charge in 4th
  quarter 2002 for poor performance of Employers
  Reinsurance.
• AIG takes 2.8bn pre-tax charge to boost reserves
  for years1997-2001on casualty claims (healthcare
  and workers comp) and DO liability
• Travellers increases reserves for asbestos by
  3bn (gross)
• Chubb increases reserves for DO and asbestos by
  742m (gross)
• ACE increases accident and environmental reserves
  (80asbestos) by 2.2bn (gross)
• Everest Re increases asbestos reserves by 105m
  (gross)
• XL Capital nearly doubles its asbestos reserves
  by 30m
• Total of 10.5bn

6
Liabilities Old and some New

• U.S. Property and Casualty reserves could be
  deficient by as much as 120 billion
• Morgan Stanley - 64billion of the shortfall is
  from specific lines of business, while the
  rest is made up of undiscounted asbestos and
  environmental reserve shortfalls
• AM Best for US based insurers asbestos losses
  expected to reach 65 billion and environmental
  losses 56 billion
• Future Liabilities? EMF, DVT, stress in the
  workplace etc.

7
Facultative Capacity

• Still a scarcity on certain lines
• - liabilities
• - energy
• - high property PMLs
• Reinsurers are becoming more selective especially
  for higher risk countries
• It is still high premium and restrictive terms
  and conditions

8
Impact of September 11th

• The insurance loss is roughly
• Three times.
• ...the size of the largest previous loss
• (Hurricane Andrew approx.US 20 billion,1992)
• Twenty times
• ...the size of the previous largest man-made
  loss
• (Piper Alfa, 1988 approx. US 3 bn)
• Sixty times
• the size of the previous largest terrorist
  loss
• (PAN AM, 1988,approx.US 800 mn)

9
Market reaction following 11th September

• The financial stability of the global insurance
  market was in question
• The worlds financial markets collapsed
• The aviation insurance market stood still for 72
  hours
• All aviation underwriters withdrew outstanding
  quotes and closed their underwriting offices to
  consult their financial capacity providers
• Significant questions raised regarding the future
  of Aviation insurance market

10
Yesterday I was insuring aeroplanes, today I am
insuring potential missiles
September 11, 2001
Lloyds Underwriter - 12th September 2001