PropertyCasualty Insurance Overview

1
Property/Casualty Insurance Overview Outlook
Focus on Excess Surplus Lines Operations

• Excess/Surplus Lines Annual Conference
• Hamilton, Bermuda
• October 10, 2006

Robert P. Hartwig, Ph.D., CPCU, Executive Vice
President Chief Economist Insurance Information
Institute ? 110 William Street ? New York, NY
10038 Tel [phone] ? Fax [phone]
? bobh_at_iii.org ? www.iii.org
2
Presentation Outline

• P/C Profit Overview
• Underwriting Trends
• Primary Reinsurance
• Excess Surplus Lines Overview
• Competitive Pressures Mounting Pricing Trends
• Financial Strength Ratings
• Investments
• Capital Capacity
• Catastrophe Loss Management
• Key Line Results
• Personal Commercial
• Terrorism Are TRIAs Days Numbered?
• Tort Environment
• Q A

3
Reasons Why Im High on ES

• Passage of Non-Admitted and Reinsurance Reform
  Act
• Increasing Risk Aversion Among Buyers of
  Insurance
• Rising Capacity Among Existing Insurers/Reinsurers
  
• Ample Fresh, New Capital
• New Entrants, Opportunistic Capital
• Primary Insurers Backing Away from CAT-Zones
• Emergence of Sharp Divergences in Insurer
  Risk-Tolerance
• Emergence of Sharp Philosophical Differences on
  How CAT Risk Should be Managed Financed
• Rising Wealth/Profits Among ES Lines Buyers
• Perceived Failure and Dissatisfaction/Distrust of
  Government
• Distinct Advantages of Operating through
  Non-Admitted Markets (e.g., greater price
  flexibility)
• Improvements in Tort System

4
P/C PROFIT OVERVIEW2006 Outlook is Good
5
P/C Net Income After Taxes1991-2006E (
Millions)

• 2001 ROE -1.2
• 2002 ROE 2.2
• 2003 ROE 8.9
• 2004 ROE 9.4
• 2005 ROE 10.5
• 2006 ROAS1,2 13.0

2006 Net Income may shatter previous records
ROE figures are GAAP 1Return on avg. surplus.
2005 ROAS 9.8 after adj. for one-time special
dividend paid by the investment subsidiary of one
company. 2Based on H1 results Sources A.M.
Best, ISO, Insurance Information Inst.
6
ROE vs. Equity Cost of CapitalUS P/C
Insurance1991-2006E
The p/c insurance industry achieved its cost of
capital in 2005
5.9 pts
-9.0 pts
0.2 pts
1.0 pts
-13.2 pts
US P/C insurers missed their cost of capital by
an average 6.7 points from 1991 to 2002, but on
target 2003-05
Based on 2006H1 ROAS of 13.0 Source The
Geneva Association, Ins. Information Inst.
7
ROE P/C vs. All Industries 19872006H1
Insurers will outperform only if CAT losses are
normal
2004/5 ROEs excl. hurricanes
Sept. 11
Hugo
Katrina, Rita, Wilma
Lowest CAT losses in 15 years
Andrew
Northridge
4 Hurricanes
2006 P/C insurer ROE based on annualized H1
results. Source Insurance Information
Institute Fortune
8
WALL STREETMAINTAINING THE CONFIDENCE OF WALL
STREET IS CRITICAL FOR MANY INSURERS
9
P/C Insurance Stocks Slow Start, Strong Finish
in 2006
Total YTD Returns Through September 30, 2006
P/C insurer stocks now up in 2006. Investors
less worried about potential hurricane losses.
Broker stocks hurt by weak earnings
Source SNL Securities, Standard Poors,
Insurance Information Institute
10
UNDERWRITING Surprisingly Strong in 2005,
Stage is Set for a Good 2006!
11
P/C Industry Combined Ratio
2005 figure reflects heavy use of reinsurance
which lowered net losses, but still a substantial
deterioration from first half 2005
2006 is could produce the best underwriting
result since the 94.9 combined ratio in 1955
Sources A.M. Best ISO, III. III
forecasts/estimates for 2006 full year.
12
Personal LinesCombined Ratio, 1993-2006E
A very strong 2006 is order due underwriting
innovations and low CAT activity
Source A.M. Best Insurance Information
Institute.
13
Commercial Lines Combined Ratio, 1993-2006E
Outside CAT-affected lines, commercial insurance
is doing fairly well. Caution is required in
underwriting long-tail commercial lines.
2006 results will benefit from relatively
disciplined underwriting and low CAT losses
Source A.M. Best Insurance Information
Institute .
14
Underwriting Gain (Loss)1975-2006F
Insurers sustained a 5.9 billion underwriting
loss in 2005. First half 2006 underwriting gain
was 15.1B implying a record gain of about 30B
for full-year
Billions
Source A.M. Best, Insurance Information
Institute 2006F of 30.2B is annualized H1 gain
of 15.1B
15
A 100 Combined Ratio Isnt What it Used to Be 95
is Where Its At
Combined ratios today must be below 95 to
generate Fortune 500 ROEs
2006 figure is return on average statutory
surplus. Source Insurance Information Institute
from A.M. Best and ISO data.
16
Impact of Reserve Changes on Combined Ratio
Reserve adequacy is improving substantially
Source A.M. Best, Lehman Brothers for years
2005E-2007F
17
2004 Prior Year Reserve Development by Line (
Millions)
Longer-tail casualty coverages have been the
source of most reserve problems in recent years
Reserve Strengthening
Reserve Releases
Source A.M. Best, Lehman Brothers.
18
EXCESS SURPLUS LINESGrowth, Performance
Markets
19
Gross Surplus Lines Premiums Written
(Non-Admitted GPW)
The importance of Surplus Lines is demonstrated
by much faster growth than for the overall P/C
insurance industry
1.7B 5.3
4.4B 21.4
Source Business Insurance, Sept. 11, 2006
Insurance Information Institute.
20
Surplus LinesTaxes Collected
50.5M 4.6
Surplus Lines pay more than 1B annually in
premium taxes
114.9M 11.7
Source Business Insurance, Sept. 11, 2006
Insurance Information Institute.
21
Top 10 ES Insurers by Non-Admitted 2005 Direct
Premiums Written
Millions
The Top 10 ES insurers wrote 13.76 billion in
premiums in 2005, up 126 from 2001 but down 4.8
from 2003
Source Business Insurance, Sept. 11, 2006
Insurance Information Institute.
22
Top 10 ES Markets, by 2005 GrossSurplus Lines
Premiums Written (2005)
Millions
California and New York are by far the largest
ES markets
Source Business Insurance, Sept. 11, 2006
Insurance Information Institute.
23
Top 10 States With FastestGrowing ES Markets,
2003-2005
Change in Gross Premiums Written 2003-2005
Fastest growth is not usually in most CAT-prone
states as might be expected
Source Business Insurance, Sept. 11, 2006
Insurance Information Institute.
24
Most Common Classes of ESBusiness Written, 2005
Percentage of Most Common Types Offered
GL and Commercial Property are the biggest sellers
Source Business Insurance, Sept. 11, 2006
Insurance Information Institute.
25
Non-Admitted DWP by Top 10 Surplus Lines Insurers
(Bill)
3.4B 30.2
0.2B 1.0
-0.9B -5.7
5.0B 82.0
The Top 10 ES insurers wrote 13.76 billion in
premiums in 2005, up 126 from 2001 but growth
has slowed lately
Source Business Insurance, Sept. 11, 2006
Insurance Information Institute.
26
5 Lowest Highest Combined Ratios Among ES
Insurers in 2005
There was a wide performance gap in 2005 between
the divergence in combined ratios
Source A.M. Best Insurance Information
Institute.
27
REINSURANCE MARKETSHigher Reinsurance Costs
Squeezing Insurers, Pushing Property CAT Prices
Upward
28
Global Number of Catastrophic Events, 19702005
The number of natural and man-made catastrophes
has been increasing on a global scale for 20 years
Record 248 man-made CATs record 149 natural
CATs in 2005
Man-made disasters without road disasters.
Source Swiss Re, sigma No. 1/2005 and 2/2006.
29
Combined Ratio Reinsurance vs. P/C Industry
Katrina, Rita, Wilma
Sept. 11
4 Florida Hurricanes
HurricaneAndrew
Source A.M. Best, ISO, Reinsurance Association
of America, Insurance Information Institute
30
Share of Losses Paid by Reinsurers, by Disaster
Reinsurance is playing an increasingly important
role in the financing of mega-CATs Reins. Costs
are skyrocketing
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.
31
Reinsurance Prices Surged in 2006 Following
Record CATs in 2005
In hurricane-prone areas, property CAT
reinsurance prices are up 100-300
US cat reinsurance price index 1994 100
Sources Swiss Re, Cat Market Research Insurance
Information Institute estimate for 2006.
32
Changes in the 2006 Reinsurance Markets

• Property CAT reins. rates up 20 - 30 nationally
• Property CAT coverage in hurricane exposed areas
  up 100-300
• Marine/Energy Reinsurance? Up 300
• Most challenging markets for reinsurers today
• Aggregate reinsurer exposure is down 20-30
• Cedants retaining more risk, often by 50-100 or
  more (higher attachment pts.)
• Increased demand for Excess of Loss cover
• XoL is potentially more volatile for reinsurers
• Some supply issues as a few small players enter
  run-off
• Retrocessional market is much tighter

Sources Morgan Stanley, Lehman Brothers, III
33
A Look Ahead to Reinsurance Markets for 2007

• Despite lack of major hurricane in 2006,
  reinsurance pricing strong in US for 2007
• New capital entry not sufficient to fully meet
  demand
• Reinsurance prices flat at best outside peak CAT
  zones
• Retrocessional market still tight
• Softening in European p/c reinsurance markets
• Softening in US casualty reinsurance markets
• More pronounced if property cat reinsurers shift
  emphasis
• Capital market role expanding
• Hedge funds, private equity
• Securitization Insurance Linked Securities
• Some concern over staying power, (lack of)
  regulation
• Complement or competitor to traditional
  reinsurance?

Sources Insurance Information Institute.
34
UNDERWRITING AFFECTS FINANCIAL STRENGTHIs There
Causefor Concern?
35
Reasons for US P/C Insurer Impairments, 1969-2005
2003-2005
1969-2005
Deficient reserves, CAT losses are more important
factors in recent years
Includes overstatement of assets. Source
A.M. Best P/C Impairments Hit Near-Term Lows
Despite Surging Hurricane Activity, Special
Report, Nov. 2005
36
Historical Ratings Distribution,US P/C Insurers,
2000 vs. 2005
2000
2005
A/A shrinkage
Ratings agencies increasing emphasis on multiple
events?require more capital
Source A.M. Best Rating Downgrades Slowed but
Outpaced Upgrades for Fourth Consecutive Year,
Special Report, November 8, 2004 for 2000 2006
Review Preview for 2005 distribution.
Ratings B and lower.
37
Ratings Agencies Tightening Requirements for CATs

• 2006 SRQ CAT Model Reqs.
• All Property Exposure
• Auto Physical Damage
• Reinsurance Assumed
• Pools Assessments
• All Flood Exposure
• WC Losses from Quake
• Fire Following
• Storm Surge
• Demand Surge
• Secondary Uncertainty

• ALSO A.M. Best will perform additional
  stress-tested risk-adjusted capital analysis
  for a second event in order to determine the
  potential financial condition of an entity post a
  severe event.
• IMPLICATION Some insurers may be required to
  carry more capital to maintain the same rating.

Best currently estimates PML for 100-yr. wind
250-yr. quake to determine capital adequacy
SRQ Supplemental Rating Questionnaire Source
A.M. Best Review Preview, January 2006.
38
COMPETITIVE PRESSURENon-CAT Pricing Momentum
Slows
39
Strength of Recent Hard Markets by NWP Growth
1975-78
1984-87
2001-04
2006-2010 (post-Katrina) period could resemble
1993-97 (post-Andrew)
2005 biggest real drop in premium since early
1980s
2006-10 figures are III forecasts/estimates.
2005 growth of 0.4 equates to 1.8 after
adjustment for a special one-time transaction
between one company and its foreign parent. 2006
figure of 2.9 is based on 2006H1 data.
Note Shaded areas denote hard market
periods. Source A.M. Best, Insurance
Information Institute
40
Property Catastrophe Price Index 1994 - 2006
US CAT prices are continue to rise faster than
anywhere else in the world
Insurance Information Institute figure of 13.8
for 2005 based estimated 2005 DPE of 417.7B and
insured CAT losses of 57.7B. Includes primary
and reinsurance coverage. Sources ISO, A.M.
Best, Swiss Re Economic Research Consulting
Insurance Information Institute.
41
Average Expenditures on Homeowners Insurance
Countrywide home insurance expenditures are
expected to rise 4 in 2006, but much more in
hurricane zones
Hurricane zone residents can expect increases in
the 20-100 range, especially if insured by a
state entity
42
Average Commercial Rate Change,All Lines,
(1Q2004 2Q2006)
Magnitude of rate decreases has diminished
greatly since mid-2005
Source Council of Insurance Agents Brokers
Insurance Information Institute
43
Average Commercial Rate Change by Account Size
Commercial accounts trended downward from early
2004 to mid-2005 but now that trend is shrinking
post-Katrina
Source Council of Insurance Agents Brokers
44
Average Commercial Rate Change by Line
Commercial property accounts are renewing sharply
upward (9.3) in 2Q06. All other lines are
renewing down.
Source Council of Insurance Agents Brokers
45
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 2nd Qtr. 2006
Largest increases for Commercial Property
Business Interruption are in the Southeast,
smallest in Midwest
Source Council of Insurance Agents and Brokers
46
Commercial Accounts Rate Changes,2nd Qtr. 2005
vs. 2nd Qtr. 2006
Only commercial property is renewing up in 2006
Source Council of Insurance Agents and Brokers
47
Average Rate Increase/Decreaseby Industry Class
Largest increases are in the energy sector
Source MarketScout.com
48
EXPOSURE GROWTH PRICINGAwash in Profits
Starved for Growth
49
Obstacles OpportunitiesRelated to Insurer
Growth

• OBSTACLES
• Softening/Competitive Rate Environment
• Slowest NWP growth since the soft market of late
  1990s
• Slowing Exposure Growth
• Slowing Economy
• Market Saturation
• Insurability Concerns
• OPPORTUNITIES
• Increased Risk Aversion of Buyers of Insurers
• Long-Term Growth in CAT Zones
• Emergent Risks
• Enhance Customer/Agent Relationships

50
Strength of Recent Hard Markets by NWP Growth
1975-78
1984-87
2001-04
2006-2010 (post-Katrina) period could resemble
1993-97 (post-Andrew)
2005 biggest real drop in premium since early
1980s
2006-10 figures are III forecasts/estimates.
2005 growth of 0.4 equates to 1.8 after
adjustment for a special one-time transaction
between one company and its foreign parent. 2006
figure of 1.9 is based on 2006Q1 data.
Note Shaded areas denote hard market
periods. Source A.M. Best, Insurance
Information Institute
51
Property Catastrophe Price Index 1994 - 2006
US CAT prices are continue to rise faster than
anywhere else in the world
Insurance Information Institute figure of 13.8
for 2005 based estimated 2005 DPE of 417.7B and
insured CAT losses of 57.7B. Includes primary
and reinsurance coverage. Sources ISO, A.M.
Best, Swiss Re Economic Research Consulting
Insurance Information Institute.
52
Private Residential FloodBig Opportunity for
2007

• Big potential customer base
• NFIP will only write 250,000 limit
• Property values gt 250,000 is growing universe
• Degree of risk aversion has increased
  post-Katrina?Inelastic Demand
• Eliminates wind/water concern of customers
• Will likely increase customer retention rates
• Apprehension over reliance on federal program
  (NFIP)
• Reforms may exclude second/vacation homes
• Can be highly selective Individual risk
  underwriting
• Can write excess and/or first dollar via
  non-admitted markets
• Relatively low penetration
• Rateable Risk
• Reinsurance available (Common in Europe)

53
INVESTMENTSDoes Investment Performance Affect
Discipline?
54
Property/Casualty Insurance Industry Investment
Gain
Investment gains are up but are only now
comparable to gains seen in the late 1990s
Investment gains consist primarily of interest,
stock dividends and realized capital gains and
losses. 2006 estimate based on actual annualized
2006H1 result of 25.375B. 2005 figure
includes special one-time dividend of 3.2B.
Source ISO Insurance Information Institute.
55
UNDERWRITING CAPACITYCan the Industry
Efficiently Employ Its Increasing Capital?
56
U.S. Policyholder Surplus 1975-2006
Capacity TODAY is 445.5B, 4.3 above year-end
2005, 56 above its 2002 trough and 33 above its
1999 peak.
Billions
Foreign reinsurance and residual market
mechanisms absorbed 45 of 2005 CAT losses of
62.1B
Surplus is a measure of underwriting capacity.
It is analogous to Owners Equity or Net Worth
in non-insurance organizations
Source A.M. Best, ISO, Insurance Information
Institute As of 3/31/06.
57
Announced Insurer Capital Raising( Millions,
as of December 1, 2005)
As of Dec. 1, 19 insurers announced plans to
raise 10.35 billion in new capital. Twelve
start-ups plan to raise as much as 8.75 billion
more for a total of 19.1 billion. Actual total
higher as Lloyds syndicates have added capacity
for 2006.
Existing (re) insurers. Announced amounts may
differ from sums actually raised. Sources
Morgan Stanley, Lehman Brothers, Company Reports
Insurance Information Institute.
58
Announced Capital Raising by Insurance
Start-Ups( Millions, as of April 15, 2006)
As of April 15, 14 start-ups plan to raise as
much as 10 billion.
Chubb, Trident are funding Harbor Point.
Announced amounts may differ from sums actually
raised. Stated amount is 750 million to 1
billion. XL Capital/Hedge Fund venture. Arrow
Capital formed by Goldman Sachs. Sources
Investment Bank Reports Insurance Information
Institute.
59
CATASTROPHE LOSS MANAGEMENTInsurers Have Done a
Fairly Good Job at Managing CAT Risk
60
Most of US Population Property Has Major CAT
Exposure
Is Anyplace Safe?
61
Insured Losses from Top 10 Hurricanes Adjusted to
2005 Exposure Levels
(Billions of 2005 Dollars)
Plurality of worst-case scenarios involve Florida
With rapid coastal development, 40B storms
will be more common
Source AIR Worldwide ISO/PCS estimate as
of June 8, 2006
62
Nightmare Scenario Insured Property Losses for
NJ/NY CAT 3/4 Storm
Insured Losses 110B Economic Losses 200B
Distribution of Insured Property Losses, by
State, ( Billions)
Total Insured Property Losses 110B, nearly 3
times that of Hurricane Katrina
Source AIR Worldwide
63
Insured Losses from Top 10 Earthquakes Adjusted
to 2005 Exposure Levels
(Billions of 2005 Dollars)
With development along major fault lines, the
threat of 25B quakes looms large
3 of the Top 10 are not West Coast events
Source AIR Worldwide
64
2005 Was a Busy, Destructive, Deadly Expensive
Hurricane Season
All 21 names were used for the first time ever,
so Greek letters were used for the final storms
2005 set a new record for the number of
hurricanes tropical storms at 28, breaking the
old record set in 1933.
Source WeatherUnderground.com, January 18, 2006.
65
2006 Hurricane Season Much Less Active Than
Expected
What a difference a year makes! Just 9 named
storms through Oct. 2, 2006 vs. 18 as of same
date in 2005!
Source WeatherUnderground.com, October 2, 2006.
66
2006 Hurricane Season Forecasts Repeatedly
Scaled Back
2006 hurricane seasons has turned out to be far
less severe than anticipated
Average over the period 1950-2000. Source
Insurance Information Institute compilation of
forecasts by Dr. William Gray, Colorado State
University.
67
U.S. InsuredCatastrophe Losses ( Billions)
100 Billion CAT year is coming soon
Billions
2005 was by far the worst year ever for insured
catastrophe losses in the US, but the worst has
yet to come.
Excludes 4B-6b offshore energy losses from
Hurricanes Katrina Rita. As of June 30,
2006. 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
68
Insured Property Catastrophe Losses as Net
Premiums Earned, 19832005E
US CAT losses were a record 13.8 of net premiums
earned in 2005 and were 4.2 times the 1984-2004
average of 3.3
Insurance Information Institute figure of 13.8
for 2005 based estimated 2005 DPE of 417.7B and
insured CAT losses of 57.7B. Sources ISO, A.M.
Best, Swiss Re Economic Research Consulting
Insurance Information Institute.
69
Number of Major (Category 3, 4, 5) Hurricanes
Striking the US by Decade
1930s mid-1960s Period of Intense Tropical
Cyclone Activity
Mid-1990s 2030s? New Period of Intense Tropical
Cyclone Activity
10
Tropical cyclone activity in the mid-1990s
entered the active phase of the multi-decadal
signal that could last into the 2030s
Already as many major storms in 2000-2005 as in
all of the 1990s
Figure for 2000s is extrapolated based on data
for 2000-2005 (6 major storms Charley, Ivan,
Jeanne (2004) Katrina, Rita, Wilma
(2005)). Source Tillinghast from National
Hurricane Center http//www.nhc.noaa.gov/pastint.
shtm.
70
Top 10 Most Costly Hurricanes in US History,
(Insured Losses, 2005)
Seven of the 10 most expensive hurricanes in US
history occurred in the 14 months from Aug. 2004
Oct. 2005 Katrina, Rita, Wilma, Charley, Ivan,
Frances Jeanne
Sources ISO/PCS Insurance Information
Institute.
71
Insured Loss Claim Count for Major Storms of
2005
Hurricanes Katrina, Rita, Wilma Dennis produced
a record 3.3 million claims
Property and business interruption losses only.
Excludes offshore energy marine losses. Source
ISO/PCS as of June 8, 2006 Insurance Information
Institute.
72
Hurricane Katrina Insured Loss Distribution by
State ( Millions)
Louisiana accounted for 62 of the insured losses
paid and 56 of the claims filed
Total Insured Losses 40.579 Billion
As of June 8, 2006 Source PCS division of ISO.
73
Hurricane Katrina Loss Distribution by Line (
Billions)
Total insured losses are estimated at 40.579
billion from 1.7438 million claims. Excludes
2-3B in offshore energy losses
As of June 8, 2006 Source PCS division of ISO.
74
Hurricane Rita Loss Distribution, by Line (
Millions)
Total insured losses are estimated at 5.0
billion (excl. offshore energy of 2-3B) from
383,000 claims.
As of June 8, 2006 Source PCS division of ISO.
75
Hurricane Wilma Loss Distribution by Line (
Millions)
Total insured losses are estimated at 10.3
billion from 1.047 million claims
As of June 8, 2006. All losses are in
FL. Source PCS division of ISO.
76
2005 Storms Have Developed Adversely
18.0
Are the models inaccurate?
Wilma is the storm with the most extraordinary
adverse development
54.0
6.3
Source Insurance Information Institute from PCS
survey data.
77
Inflation-Adjusted U.S. Insured Catastrophe
Losses By Cause of Loss, 1986-2005¹
Insured disaster losses totaled 289.1 billion
from 1984-2005 (in 2005 dollars). Tropical
systems accounted for nearly half of all CAT
losses from 1986-2005, up from 27.1 from
1984-2003.
1 Catastrophes are all events causing direct
insured losses to property of 25 million or more
in 2005 dollars. Catastrophe threshold changed
from 5 million to 25 million beginning in 1997.
Adjusted for inflation by the III. 2 Excludes
snow. 3 Includes hurricanes and tropical storms.
4 Includes other geologic events such as volcanic
eruptions and other earth movement. 5 Does not
include flood damage covered by the federally
administered National Flood Insurance Program. 6
Includes wildland fires.
Source Insurance Services Office (ISO)..
78
Total Value of Insured Coastal Exposure (2004,
Billions)
Florida New York lead the way for insured
coastal property at more than 1.9 trillion each.
Texas has 740B.
Source AIR Worldwide
79
Insured Coastal Exposure as a of Statewide
Insured Exposure (2004, Billions)
After FL, many Northeast states have among the
highest coastal exposure as a share of all
insured exposure in the state.
Source AIR Worldwide
80
Percentage of California Homeowners with
Earthquake Insurance, 1994-2004
The vast majority of California homeowners forego
earthquake coverage play Russian Roulette with
their most valuable asset.
Includes CEA policies beginning in 1996. Source
California Department of Insurance Insurance
Information Institute.
81
ENERGY MARKET OVERVIEWThe Biggest Casualtyof
2004/5
82
Katrinas Path of Destruction Through the
Offshore Energy Industry
Katrina ( Rita) tore through offshore facilities
Source Hurricane Katrina Profile of a Super
Cat, RMS, October 2005.
83
Hurricane Ritas Path Was at Least as Devastating
for Energy Concerns
Rita did significant damage to onshore facilities
too
Source Energy Information Administration
iMapData Inc.
84
Insured Offshore Energy Losses for Recent Major
Gulf Storms
Hurricanes Katrina, Rita and Ivan cost energy
insurers at least 7 billion
Sources Insurance Information Institute research
estimates. Midpoint of estimated range for
2.0 to 2.5 billion)
85
KEY LINE RESULTSA SUCCESSFUL SHIFT TO THE
UNDERWRITING CULTURE?
86
Homeowners
87
Homeowners Insurance Combined Ratio
Average 1990 to 2005 113.1 Insurers have paid
out an average of 1.13 in losses for every
dollar earned in premiums over the past 16 years
Sources A.M. Best III
88
Underwriting Gain (Loss) in Florida Homeowners
Insurance, 1992-2005E
Billions
Floridas homeowners insurance market produces
small profits in most years and enormous losses
in others
2005 estimate by Insurance Information Institute
based on historical loss and expense data for FL
adjusted for estimated 2005 residential windstorm
losses of 7.35B.
89
Cumulative Underwriting Gain (Loss) in Florida
Homeowners Insurance, 1992-2005E
Billions
It took insurers 11 years (1993-2003) to erase
the UW loss associated with Andrew, but the 4
hurricanes of 2004 erased the prior 7 years of
profits 2005 deepened the hole.
2005 estimate by Insurance Information Institute
based on historical loss and expense data for FL
adjusted for estimated 2005 residential windstorm
losses of 7.35B.
90
COMMERCIAL MULTI-PERIL COMMERCIAL AUTO
91
Commercial Multi-Peril Combined (Liability vs.
Non-Liability Portion)
CMP- has improved recently
Liab. Combined 1995 to 2004 114.6 Non-Liab.
Combined 107.1
Sources A.M. Best III
92
Commercial Auto Liability PD Combined Ratios
Average Combined Liability 110.2 PD 97.1
Commercial Auto has improved dramatically
Sources A.M. Best III
93
MEDICAL MALPRACTICE
94
Medical MalpracticeCombined Ratios
Average Med Mal Combined Ratio 1995-2005 121.3
Reforms/Award Caps and higher rates have helped
to improve med mal dramatically
Sources A.M. Best III
95
PRODUCTS LIABILITY
96
Products LiabilityCombined Ratios
Average Combined Ratio 1995-2005 176.7
Improvements in the tort environment, rates have
contributed to performance
Sources A.M. Best III
97
WORKERS COMPENSATION OPERATING ENVIRONMENT
98
Workers Comp Combined Ratios, 1994-2005P
Percent
p Preliminary AY figure. Accident Year data is
evaluated as of 12/31/2005 and developed to
ultimate Source Calendar Years 1994-2004, A.M.
Best Aggregates Averages Calendar Year 2005p
and Accident Years 1994-2005pbased on NCCI Annual
Statement Analysis. Includes dividends to
policyholders
99
Workers Comp Lost-Time Claim Frequency ( Change)
Cumulative Change of 45.8 (1991-2004)
Percent Change
Accident Year
2005p Preliminary based on data valued as of
12/31/2005 1991-2003 Based on data through
12/31/2004, developed to ultimate Based on the
states where NCCI provides ratemaking
services Excludes the effects of deductible
policies Source NCCI
100
Workers Comp Medical Claims Continue to Climb
Medical Claim Cost (000s)
Annual Change 19921996 4.1 Annual Change
19972005 9.5
Cumulative Change 176.8 (1993-2005p)
Accident Year
2005p Preliminary based on data valued as of
12/31/2005 1991-2004 Based on data through
12/31/2004, developed to ultimate Based on the
states where NCCI provides ratemaking services
Excludes the effects of deductible policies
101
OTHER LIABILITY(INCLUDING DO)
102
Other LiabilityCombined Ratios
Average Combined Ratio 1995-2005 116.1
Improvements in tort and DO environment have
contributed to performance
Sources A.M. Best III

Includes Officers Directors coverage.
103
DO Premium Index(1974 Average 100)
Average DO pricing is off 18 since 2003, after
rising 146 from 1999-2003
Source Tillinghast Towers-Perrin, 2005
Directors and Officers Liability Survey.
104
LITIGATION UPDATEInsurers Are Ahead
105
Cost of U.S. Tort System( Billions)
Tort costs will consume an estimated 2.25 of GDP
in 2006
Per capita tort tax was 886 in 2004, up from
680 in 2000
Reducing tort costs relative to GDP by just 0.25
(to about 2) would produce an economic stimulus
of 27.5B
Source Tillinghast-Towers Perrin.
106
Personal, Commercial Self (Un) Insured Tort
Costs
Total 309.5 Billion
Total 291.0 Billion
Total 209.1 Billion
Billions
Total 150.6 Billion
Source Tillinghast-Towers Perrin
107
Tort System Costs,2000-2007F
After a period of rapid escalation, tort system
costs as of GDP appear to be stabilizing
Source Insurance Information Institute estimates
from Tillinghast-Towers Perrin methodology.
108
Business Leaders Ranking of Liability Systems for
2005
New in 2005 ND, IN, SD, WY Drop-Offs ID, UT, NH,
KS

• Best States
• Delaware
• Nebraska
• North Dakota
• Virginia
• Iowa
• Indiana
• Minnesota
• South Dakota
• Wyoming
• Idaho

• Worst States
• Hawaii
• Florida
• Arkansas
• Texas
• California
• Illinois
• Louisiana
• Alabama
• West Virginia
• Mississippi

Newly Notorious HI, FL Rising Above MO, MT
LA, AL and MSs liability systems are ranked
among the worst in the country by the US Chamber
of Commerce
Source US Chamber of Commerce 2005 State
Liability Systems Ranking Study Insurance Info.
Institute.
109
The Nations Judicial Hellholes(2005)
There were notably fewer Judicial Hellholes in
2005
Dishonorable Mention WI Supreme Ct. Watch
List California Eastern Kentucky Eastern
Alabama Philadelphia New Mexico Delaware Oklahoma
Orleans Parish, LA Washington, DC
ILLINOIS Cook County Madison County St. Clair
County
Source American Tort Reform Association
Insurance Information Institute
110
TRIA EXTENSIONThe Burden Grows, and the Clock
is Ticking
111
Terrorism Coverage Take-Up Rate Continues to Rise
Terrorism take-up rate for non-WC risk rose
steadily through 2003, 2004 and 2005
TAKE UP RATE FOR WC COMP TERROR COVERAGE IS 100!!
Source Narketwatch Terrorism Insurance 2006,
Marsh, Inc. Insurance Information Institute
112
Insurance Industry Retention Under TRIA (
Billions)
Extension

• Individual company retentions rise to 17.5 in
  2006, 20 in 2007
• Above the retention, federal govt. pays 90 in
  2006, 85 in 2007

Congress Administration want TRIA dead
Source Insurance Information Institute
113
Insured Loss Estimates Large CNBR Terrorist
Attack ( Bill)
Source American Academy of Actuaries, Response
to Presidents Working Group, Appendix II, April
26, 2006.
114
Surplus Under TRIA/TRIEA Covered Lines
(Billions of Dollars)
Shrinkage in 2006 (-11) surplus is due to
elimination of several lines covered under TRIA
though 2005 but dropped under the Acts extension
effective 1/1/06
2006 figure uses 2005 estimated year-end surplus
and premiums by line as basis for
calculations. Source Insurance Information
Institute.
115
Summary

• Personal Commercial lines are doing well in
  2006 (including ES) due in part to low CAT loss
  activity
• Concern about pricing discipline in some some
  commercial lines, including casualty segments
• Rising investment returns insufficient to support
  deep soft market in terms of price, terms
  conditions
• Clear need to remain underwriting focused
• How/where to deploy/redeploy capitalES??
• Major Challenges
• Slow Growth Environment Ahead
• Maintaining price/underwriting discipline
• Managing variability/volatility of results

116
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