PIAA ANNUAL MEETING

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• PIAA ANNUAL MEETING
• Medical Malpractice Insurance Market Update
• May 28, 2005

Presented by Hope Maxwell Senior Vice
President
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2000 Top 20 Med Mal Carriers
Data per National Underwriter Insurance Data
Services
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2003 Top 20 Med Mal Carriers
Data per National Underwriter Insurance Data
Services
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Med Mal Financial Issues

• Premium Growth/Capitalization
• Key financial issue facing many specialty
  carriers
• Rate increases vs. exposure growth
• Surplus growth vehicles (Surplus Notes, Trust
  Preferreds)
• Unfavorable Loss Cost Trends - Severity
• Historically Low Interest Rate Environment
• Book yields drop significantly
• No reliance on future investment income to offset
  underwriting

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Peer Group Definitions

• PIAA Excl MLMIC
• Includes data for all PIAA Members, excluding
  MLMIC and its subsidiaries
• Specialty Med Mal
• Includes all PIAA Members, MLMIC, and other
  companies that specialize in med mal, including
  Med Pro. 54 companies total.
• All Med Mal
• Represents all med mal written in the US.
  Commercial carriers results for their med mal
  book only are included.

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Capitalization

• Capacity and capitalization are one of the most
  significant financial issues facing specialty med
  mal carriers
• Leverage ratios are traditional measure of
  capitalization
• Leverage ratios must be analyzed with
  profitability measures
• For rating agency purposes, leverage ratios
  should also stay close to peer group averages

Net written premiums/surplus
Net Premium Leverage All Liabilities/Surplus
Data per National Underwriter Insurance Data
Services and AM Bests Aggregates and Averages
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Capitalization
Data per National Underwriter Insurance Data
Services. AM Best rating levels as of 4/15/05.
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What is Driving Leverage?

• Surplus growth has not kept pace with premium
  growth

Data per National Underwriter Insurance Data
Services and AM Bests Aggregates and Averages
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What Has Happened to Surplus?
Data per National Underwriter Insurance Data
Services
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Will Surplus Improve from Operations?

• Underwriting results are key to success in the
  future
• Improvements in 2004 combined ratio must be
  sustainable
• Investment income margins continue to decline for
  most med mal companies, increasing the pressure
  on underwriting results

Data per National Underwriter Insurance Data
Services
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Combined Ratio Components
Data per National Underwriter Insurance Data
Services and AM Bests 2004 Aggregates and
Averages
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Combined Ratio Components
Data per National Underwriter Insurance Data
Services and AM Bests Aggregates Averages.
Note 2004 All Med Mal Combined Ratio is an
estimate per AM Best.
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Operating Ratio Components

• What is driving improved investment income?
• Significant improvement in underwriting cash flow

Data per National Underwriter Insurance Data
Services
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Invested Assets

• Where are companies investing the cash?

Data per National Underwriter Insurance Data
Services
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The Future

• Challenges to Future Underwriting Results
• AM Best expects a combined ratio of about 133 in
  2004 130 in 2005
• Breakeven combined per AM Best is 114
• Loss cost trends have frequency and severity
  stabilized?
• Adverse reserve development are we done yet?

Data per National Underwriter Insurance Data
Services