Navigating In A Perfect Storm

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Navigating In A Perfect Storm

• Fred Eppinger
• President and Chief Executive Officer
• Allmerica Financial Corporation
• April 18, 2005

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The Perfect Storm

• Market consolidation and uncertainty continues
• Downgrades and insolvencies at a historic high
• Reserves are inadequate and understated
• Tort system is out of control
• Loss costs risingespecially in health care
  inflation
• Regulatory scrutiny distracting large and weak
  players
• Agent market changing dramatically

Inadequate Returns to Shareholders
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ROE vs. Cost of Capital U.S. PC Insurance
1991 2004F
1.6 pts
-1.2 pts
-10.2 pts
-14.6 pts
Source The Geneva Association, Ins. Information
Inst.
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Insurer Downgrade/Upgrade Ratio
Downgrade to upgrade ratio is falling (primarily
because the number of downgrades is falling only
a small increase in upgrades)
Sources Impairment Rate and Rating Transition
Study1977 to 2002, A.M. Best Co.
U.S. property/casualty and life/health insurers
before 2000 P/C only 2000-2004.
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PC Insurance Industry
Prior-Year Reserve Development
( in billions, calendar year basis)
Negative numbers indicate favorable development
positive figures represent adverse
development. Source A.M. Best, Morgan Stanley,
Dowling Partners Securities, Prudential
Securities, Ins. Info. Inst.
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Cost of U.S. Tort System
( in billions)
Per capita tort tax was 845 in 2003, up from
680 in 2000
Tort costs will consume an estimated 2.24 of GDP
in 2005
Source Tillinghast-Towers Perrin
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Where the Tort Dollar Goes

• Tort System is Extremely Inefficient
• Only 22 of the Tort Dollar Compensates Victims
  for Economic Losses
• At Least 54 of Every Tort Dollar Never Reaches
  the Victim

2002
Source Tillinghast-Towers Perrin
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Med Claim Costs Rising Sharply
Average Medical Care Costs in 000s
Annual Change 19911995 3.9 Annual Change
19962002 9.0
Source Ins. Information Inst 2003p Preliminary
based on data valued as of 12/31/2003 1991-2002
Based on data through 12/31/2002, developed to
ultimate Based on the states where NCCI provides
ratemaking services Excludes the effects of
deductible policies
Accident Year
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Market Challenges for Agents

• Consolidation among carriers
• Pressure to meet carrier commitments
• Need to control expenses
• Leverage technology to improve efficiency
• Acquisition of new talent
• Meeting increasing customer expectations
• Selecting long-term business

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Consolidation of Agents
Consolidation of Agents will continue at a rapid
pace as winners will be more aggressive in
consolidation and market activity.
Revenue Market Share by Agency Size
Large Agents

Small Agents
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Consolidation of Shelf Space
Consolidation of shelf space is also significant
as Agents continue to partner with winning
carriers.
Number of Small Commercial Carriers Used by Agent
Distribution of Market Share of Small Commercial
Business
Agents Top 3 Markets
Agents Other Markets
Future One Study
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Opportunity for Best Players

• National Companies Distracted
• Legacy issues
• Uncertain commitment
• Internal focus/bureaucracy

• Regional Companies Lack Size/Talent
• Weak PL products
• CL strength limited
• Poor automation

• Independent Agents
• Concerned about concentration of business
• Searching for longer-term partners

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Historical Perspective

• Profit is concentrated among winning companies
• Long road from mediocre to good
• Winners share common characteristics
• Intently focused
• Distinctively positioned (skills based)
• Outstanding at execution

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Consolidation Will Continue

• Bigger players are troubled, distracted
• Smaller players are sub-scale and mediocre
• Tremendous opportunities exist for emerging
  companies that have distinctive market position
• Keys to success
• Financial strength and stability
• Shelf space
• Discipline

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The Winning Carriers

• Deep partnerships with distribution channel
• Appropriate capitalization/ratings
• Efficient and effective operating model
• Excellent execution
• Exploit market niches
• Invest in professionals

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The Marine Opportunity-A Microcosm Of PC
Industry

• Talent is key driver
• Potential for shakeout
• Recent transactions create instability
• Distribution and segmentation changing
• Operating models must be aligned
• Economic model is improving
• Opportunities exist for new winners in each
  segment

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Who We Are

• Regional Property and Casualty Company
• Market Capitalization of 1.9 Billion
• Among 35 largest property and casualty insurers
• 2.5 billion in revenue
• Strong underwriting heritage
• Partnerships with 1,800 local agencies in 25
  states
• Market products and services under the
  Hanover/Citizens brand names
• Delivering on our promises for over 150 Years

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Our Vision Strategy
World Class Regional Property and
Casualty Company
Deep Partnerships withWinning Agents
World Class Productand Underwriting Capability
Responsive Service Delivery via Cost Effective
Operating Model
Strong Financial Position
Provide World Class Front Line People
Strong Culture of Execution
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Our Journey
Sustain Superior Performance
Create a Distinctive Position
2006
2005
Build Our Foundation
2004
2003
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Significant Financial Progress
( in Millions)
198

• Dramatically Increased Earnings
• Generated Top-Quartile ROE
• Substantially Strengthened Balance Sheet

PC Earnings
68 Growth
118
2003
2004
10.8
52 Growth
7.1
PC ROE
2003
2004
1,103
30 Growth
834
PC Surplus
2004
2002
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• Local presence and size allows us to be
  responsive

• Sufficient scale to invest in new technologies

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• Local presence and size allows us to be
  responsive

• Sufficient scale to invest in new technologies

• Financial Strength

• Focus On Execution
• Clear Accountability
• Resources Aligned
• Tracking in Place

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• Local presence and size allows us to be
  responsive

• Sufficient scale to invest in new technologies

• Financial Strength

• Focus On Execution
• Clear Accountability
• Resources Aligned
• Tracking in Place

• Investment in Professionals
• Sense of Ownership
• Investment in Opportunity

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