June 18, 2009

The Evolution of Insurance

Executive Summary

• Insurers:• Insurance Markets – Operating Normally• Risk Transfer: from Insured to Insurer - Uninterrupted

– Insurers Continue to:� Pay claims� Renew existing policies� Write new policies

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� Write new policies� Develop new products

• Insureds:• Increased expectations• Cost sensitive or high expectations?

• “total cost of risk” vs. premium comparison

• Brokers:• Continued consolidation• Margin challenges

Industry Issues – Back to Basics?

1. Reduced (No) Insurer Profit• Poor combined loss ratios• Reduced investment income• Zero interest rates• Inadequate rates / premiums

2. Economy! (No) Insured Profit

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2. Economy! (No) Insured Profit• Reduced policyholder sales and payroll• Soaring and fraudulent claims activity

3. Regulatory / Political• Ontario Auto• Credit scoring• More oversight

Canadian Premiums

$9.8 B Ontario Auto

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Insurer - Summary Ratios

2008 2007

Combined Ratio 101.3% 93.8%

Loss Ratio 71.1% 64.1%

Expense Ratio 30.2% 29.7%

ROI 3.7% 5.9%

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ROI 3.7% 5.9%

ROE 6.1% 15.3%

Change in Equity -2.8% 11.1%

MCT 219.4% 234.1%

GAAP Reporting, Primary Insurers Only

Source: IBC with data from MSA

Personal vs. Commercial Lines Insurers

Personal Lines Insurers

Commercial Lines Insurers

Combined Ratio 104.5% 95.4%

Loss Ratio 74.9% 66.6%

ROI 3.3% 3.9%

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ROI 3.3% 3.9%

ROE 2.8% 8.4%

Change in Equity -8.0% 1.2%

Companies with more than 50% DWP in each grouping

Source: IBC with data from MSA

GAAP Reporting, Primary Insurers Only

1975 – Q3/2008 Canadian P&C Industry ROE

10%

20% Average ROE 11.2%

Average ROE 9.9%

Average ROE 10.6%

Average ROE 8.3%

7

0%

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

Source: IBC Data

P&C ROI Follows Interest Rates

8

Source: IBC, Fact Book, MSA; Bank of Canada, RBC

1st Underwriting Loss since 2002

9

GAAP Reporting, Primary Insurers Only

Source: IBC with data from MSA

Underwriting PerformanceAdjusted for Reserves

10

Source: IBC with data from MSA

GAAP Reporting, Primary Insurers Only

Catastrophe Losses in CanadaInsured Loss

11

2008* Based on preliminary data

Source:, IBC. With data from Swiss Re and Munic Re

Top 12 Most Costly Disasters in U.S. History, (Insured Losses, $2007)

12

Worldwide Disasters

13

Source: Swiss Re

U.S. Insured Catastrophe Losses

14

Canadian Premiums

$9.8 B Ontario Auto

15

Insurance by Line

16

GAAP Reporting, Primary Insurers Only

Source: IBC with data from MSA

Importance of Ontario Auto

17

GAAP Reporting, Primary Insurers Only

Source: IBC with data from MSA

Auto Accident Benefit Financial Loss Ratios

18

GAAP Reporting, Primary Insurers Only

Source: IBC with data from MSA

Hardening Market Expected in 2009-10

19

2008 * Based on preliminary data

Source: IBC FactBook

What’s Different this Time?

TRAVELERS

SWISS RE

HARTFORD

CHUBB

ACE

L&G

OLD MUTUAL

STANDARD LIFE

MAPFRE

AEGON

TRA VELERS

SWISS RE

A EGON

HA RTFORD

CHUB B

A CE

L&G

OLD M UTUA L

STA NDA RD LIFE

M A P FRE 22

21

20

19

18

17

1615

14

13

As of June 1st, 2007 (in mCHF) As of October 31, 2008

20

AIG

ALLIANZ

ING

AXA

GENERALI

MANULIFE

ZURICH

MUENCHENER

AVIVA

ALLSTATE

PRUDENTIAL

TRAVELERS

PRUDENTIAL FIN.

0 15000 30000 45000 60000 75000

A LLIA NZ

ING

A XA

M A NULIFE

ZURICH

M UENCHENER

A VIVA

A LLSTA TE

P RUDENTIA L

TRA VELERS

GENERA LI

P RUDENTIA L FIN.

0 15000 30000 45000 60000 75000 90000 105000 120000

13

12

11

10

98

7

6

5

4

3

2

1 AIG

232,002

What’s Different this Time?

Allstate

Chubb

Swiss Re

AIG

Muenchener

ING

Tokio F&M

Travelers

MetLife

Generali

Allianz SE

Zurich

Manulife

AXA

21

0 5 10 15 20 25 30 35 40 45 50

XL

Old Mutual

Hartford

L&G

MAP FRE

Standard

AEGON

Progressive

Prudential

Pru PLC

Aviva

ACE

Allstate

Market Capitalization (in USD) as of January 7, 2009

What’s Different this Time?

0.1

0.12

0.14

0.16

0.18

0.2

Ind

ust

ry R

OE

0.01

0.02

0.03

0.04

0.05

0.06

0.07

Can

adia

n G

DP

Canadian P&C Industry ROE vs. Canadian GDP Growth

22

0

0.02

0.04

0.06

0.08

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Ind

ust

ry R

OE

-0.04

-0.03

-0.02

-0.01

0

0.01

Can

adia

n G

DP

ROE GDP Growth

Open Discussion

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Financial Crisis – Issues & Threats2009 - 2015

1. Erosion of Capital2. Reloading Capital3. Long-term Loss of Investment Return4. Economic Collapse5. Regulatory Overreach

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5. Regulatory Overreach6. Creeping Restrictions on Indemnity7. Catastrophic Losses8. Emerging Tort Threat

Reasons Why P/C Insurers have Fewer Problems than Banks

• Superior Risk Management Model� Insurers overall approach to risk focuses on underwriting discipline: implies pricing

accuracy and management of potential loss exposure� Banks eventually sought to maximize volume, disregarded risk

• Low Leverage� Insurers do not rely on borrowed money to underwrite insurance or pay claims

• Conservative Investment Philosophy� High quality portfolio that is relatively less volatile and more liquid

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� High quality portfolio that is relatively less volatile and more liquid• Strong Relationship Between Underwriting and Risk Bearing

� Insurers always maintain a stake in the business they underwrite, keeping “skin in the game” at all times

� Banks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences

• Tight Regulation� Insurers are more stringently regulated than banks, investment banks & hedge funds

• Greater Transparency� Insurer companies are an open book to regulators and the public

Source: Insurance Information Institute

Better, not Bigger (but big enough)

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