Insurance Markets in a Turbulent Economy

Trends & Challenges

Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ bobh@iii.org ♦ www.iii.org

Association of Insurance Financial Analysts33rd Annual Conference

Naples, FL

March 4, 2008

Presentation Outline

• The Economic StormWhat it Means for the Insurance Industry

• Financial & Underwriting Performance• Ratings & Financial Strength• Premium Growth• Capacity• Investment Overview• Shifting Legal Liability & Tort Environment

Q&A

A STORMY ECONOMIC FORECAST

What a Weakening Economy & Credit Crunch Mean for

the Insurance Industry

What’s Going On With the US Economy Today?

Fundamental Factors Affecting US Economy in 2008• Puncture of Two Bubbles: Credit and Housing• Credit Crunch: Credit is the lifeblood of the US economy, but

some markets have effectively seized (at least to some degree)Problem originated with interest rates being left too low for too long in the early 2000sSubprime mortgage market first part of credit bubble to burst; Spread via securitization and amplified via leverage and concentration of riskAs lenders tighten standards, credit issues have spread to primeborrowers, commercial mortgages, munis, credit cards, student loans

• General Economic Impacts: Burst Bubble Asset DeflationHome price bubble is bursting: Loss of value in most valuable asset impacts wealth via loss of home equity Negative “wealth effect” implies consumers (2/3 of spending) become more cautiousBusiness scale back as prospects diminish in classic economic slowdownJob growth stagnating (-17,000 in Jan. 2008, first decline since Aug. 2003)

Source: Insurance Information Institute.

3.7%

0.8%

1.6%

2.5%

3.6%

3.1%

2.9%

0.6%

3.8%

4.9%

0.5%

2.3% 2.

5% 2.7% 2.8% 2.9%

2.9%

0.6%

1.1%

0%

1%

2%

3%

4%

5%

6%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

Real GDP Growth*

*Yellow bars are Estimates/Forecasts.Source: US Department of Commerce, Blue Economic Indicators 2/08; Insurance Information Institute.

Economic growth is expected to slow

dramatically in the year ahead

Unemployment Rate,(2007:Q1 to 2009:Q4F)

4.5% 4.5% 4.6%4.8%

5.0%5.2% 5.3% 5.4% 5.3% 5.3% 5.2% 5.2%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/08); Insurance Info. Inst.

Rising unemployment rate negative impacts workers comp exposure and could signal a temporary claim

frequency surge

Toward a New WorldEconomic Order

Source: Insurance Information Institute

1. Credit Crunch (incl. Subprime) Issue Will Ultimately Cost Hundreds of Billions Globally

• Problem exacerbated by leveraged bets taken by some financial institutions therefore its reach extends beyond simple defaults

2. Heavy Toll on Capital Base of Some Large Financial Institutions Worldwide; US Bond Insurers

• Cash infusions necessary; Sovereign Wealth Funds important source3. Most Significant Economic Event in a Generation

• US economy will recover, but will take 18-24 months 4. Shuffling of Global Economic Deck; Economic

Pecking Order Shifting• China, oil producing countries hold the upper hand

5. IOUs are Being Redeemed• Stakes in hard assets/institutions demanded

6. Good News: No Shortage of Available Capital• Central banks are (generally) making right decisions; Dollar sinks

What’s Being Done to Fix the Economy? Impacts on Insurers

•Nothing solid proposed but in the wake of subprimecrisis and credit crunch, actions seem inevitable•Will actions be directed primarily toward banks or broadly affecting all financial institutions

Regulatory/ Legislative Action (?)

•Keeps more people in their homes and hopefully paying HO insurance premiums•Abandoned and neglected homes have demonstrably worse loss performance

Housing Bailout (?)

•Hope is that $168B plan boosts overall economic activity and employment (by 500,000 jobs) and therefore p/c personal and commercial exposures•Contributes to already exploding budget deficits—Washington may expand its search for people and industries to tax

Stimulus Package

•Reduces bond yields (65% - 80% of portfolio)•Potentially contributes to inflation longer run

Fed Rate Cuts

Impacts on InsurersEconomic Fix

Post-Crunch: Fundamental Issues To Be Examined Globally

Source: Insurance Information Institute

• Adequacy of Risk Management, Control & Supervision at Financial Institutions Worldwide

Implications for ERM?Includes review of incentives

• Effectiveness and Nature of RegulationWhat sort of oversite is optimal given recent experience?Credit problems arose under US and European (Basel) regulatory regimesWill new regulations be globally consistent? Can overreactions be avoided?Capital adequacy & liquidity

• Accounting RulesProblems arose under FAS, IASAsset Valuation, including Mark-to-MarketStructured Finance & Complex Derivatives

• Ratings on Financial InstrumentsNew approaches to reflect type of asset, nature of risk

Insurance &The Economy

Important but Somewhat Muted Impacts

A Few Facts About the Relationship Between Insurance & Economy

• Vast Majority of Insurance Business is Tied to RenewalsApproximately 98+% of P/C business (units) is linked to renewalsA very large share of p/c insurance premiums are statutorily or de facto compulsory (e.g., WC, auto liability, surety, usually HO…)P/C insurers have marginal exposure impact due to economyMost life revenues and units are renewals, but some products (e.g., variable annuities are sensitive to market volatility)Life insurers who manage 401(k) assets seeing more loans and hardship withdrawals;

• Insurers are Sensitive to Interest RatesAbout 2/3 of P/C invested assets and 75% if Life assets are fixed incomeHistorically, yield on industry portfolios has tracked 10-year note closelyAll else equal, lower total investment gain implies greater emphasis on underwritingHistorically, industry’s best underwriting performances are rooted in periods when interests rates were low and/or equity market performance poor (1930s – 1950s, early 2000s gave rise to strong 2006/07)

Source: Insurance Information Institute.

5.2%

-0.9

%-7

.4%

-6.5

%-1

.5%

1.8%

4.3%

18.6

% 20.3

%5.

8%0.

3%-1

.6%

-1.0

%-1

.8%

-1.0

%3.

1%1.

1%0.

8%0.

4%0.

6%-0

.4%

-0.3

%1.

6%5.

6%13

.7%

7.7%

1.2%

-2.9

% -0.5

%-2

.9%

-2.7

%

-10%

-5%

0%

5%

10%

15%

20%

25%78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F

Rea

l NW

P G

row

th

-4%

-2%

0%

2%

4%

6%

8%

Real

GDP

Gro

wth

Real NWP Growth Real GDP

Real GDP Growth vs. Real P/C Premium Growth: Modest Association

P/C insurance industry’s growth is influenced modestly by growth

in the overall economy

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/08; Insurance Information Inst.

Summary of Economic Risks and Implications for Insurers

•Reduced commercial lines exposure growth•Surety slump•Increased workers comp frequency

General Economic Slowdown/Recession

•Decreased capital gains (which are usually relied upon more heavily as a source of earnings as underwriting results deteriorate)

Stock Market Slump

•Lower investment income Lower Interest Rates

•Reduced exposure growth•Deteriorating loss performance on neglected, abandoned and foreclosed properties

Housing Slump

•Some insurers have some asset risk•D&O/E&O exposure for some insurers•Client asset management liability for some•Bond insurer problems; Muni credit quality

Credit Crunch/ Subprime Meltdown

Risks to InsurersEconomic Concern

New Private Housing Starts,1990-2013F (Millions of Units)

2.07

1.80

1.36

1.02

1.17

1.54 1.

58 1.65

1.62

1.48

1.35

1.46

1.29

1.20

1.01

1.19

1.47

1.62 1.64

1.57 1.

60

1.71

1.85

1.96

1.01.11.21.31.41.51.61.71.81.92.02.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F 08F 09F 10F 11F 12F 13F

Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 2/08 edition of BCEF; Insurance Info. Institute

Exposure growth forecast for HO insurers is dim for 2008/09

Impacts also for comml. insurers with construction risk exposure

New home starts plunged 34% from 2005-2007; Drop

through 2008 trough is 51% (est.)—a net annual decline of 1.05 million units

I.I.I. estimates that each incremental 100,000 decline in housing starts costs

home insurers $87.5 million in new exposure (gross premium). The net

exposure loss in 2008 vs. 2005 is estimated at $920 million.

16.916.916.6

17.1

17.517.8

17.4

16.5

16.1

15.716.0

16.416.7 16.8 16.9

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

99 00 01 02 03 04 05 06 07F 08F 09F 10F 11F 12F 13F

Weakening economy, credit crunch and high gas prices are hurting

auto sales

New auto/light trick sales are expected to experience

a net drop of 1.2 million units annually by 2008 compared with 2005, a

decline of 7.1%

Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth

than problems in the housing market will on home insurers

Auto/Light Truck Sales,1999-2013F (Millions of Units)

Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 2/08 edition of BCEF; Insurance Info. Institute

$1,0

82

$1,1

44

$1,2

26

$1,3

07

$1,3

70

$1,3

96

$1,4

38

$1,4

95

$1,5

63

$1,6

41

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,80003 04 05 06 07E

08F

09F

10F

11F

12F

0%

1%

2%

3%

4%

5%

6%

7%

8%

% C

hang

e

Nonresidential Fixed Investment% Change Nonresidential Fixed Investment

Nonresidential Fixed Investment,* 2003 – 2012F

Sharp dip in business

investment in 2007/2008 will

slow commercial exposure growth

*Nonresidential fixed investment consists of structures, equipment and software.Sources: US Bureau of Economic Analysis (Historical), Value Line (2/22/08) estimates/forecasts for 2008-2012.

Non

resi

dent

ial F

ixed

Inve

stm

ent (

$ B

ill)

Total Industrial Production,(2007:Q1 to 2009:Q4F)

1.1%

3.5% 3.6%

-1.0%

0.2%0.7%

1.8%2.4%

2.7% 2.7% 2.6% 2.6%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/08); Insurance Info. Inst.

Industrial production shrank during the final quarter of 2007 and is expected to grow only very slowly

during the first half of 2008

Industrial production affects exposure both directly and indirectly

Employment Change by Industry

(27,000)(28,000)

11,000

(11,000)

47,000

19,000

(18,000)(40,000)(30,000)(20,000)(10,000)

010,00020,00030,00040,00050,00060,000

Construction Manuf. Retail Trade Professional& Biz

Services

Education &Health

Leisure &Hospitality

Government

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Employment fell by 17,000 in January, the first decline since Aug. 2003.

Manufacturing and Construction are always the hardest hit in an economic slowdown, with each losing more than 150,000 jobs over the past 12 months.

Dec. 2007 to Jan. 2008p

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*$0

$5

$10

$15

$20

$25

$30

$35

$40

$45Wage & SalaryDisbursementsWC NPW

*As of 7/1/07 (latest available).Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books

Wage & Salary Disbursements (Payroll Base) vs. Workers Comp

Net Written Premiums

7/90-3/91

Shaded areas indicate recessions

3/01-11/01

Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions

Weakening wage and salary growth is

expected to cause a deceleration in workers comp

exposure growth

Inflation Rate (CPI-U, %),1990 – 2009F

4.9 5.1

3.0 3.22.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

2.2

4.3

2.92.3

3.8

2.82.92.4

0

1

2

3

4

5

6

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F 09F*12-month change Jan. 2008 vs. Jan. 2007; CPI rose at 6.8% pace NSource: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Feb. 10, 2008; Ins. Info. Institute.

Inflation is Accelerating

Inflation often amplified in casualty lines (e.g, WC)Rising inflation can also lead to rate inadequacyAdverse reserve development

Favored Industry Groups for Insurer Exposure Growth

•Solar, Wind, Bio-Fuels, Hydro & OtherAlternative Energy

•Strong global demand, •Supplies remain tight…but beware of bubbles•Significant investments in R&D, plant & equip required

Natural Resources & Commodities

•Weak dollar, globalization persist; Cuba angle?Export Driven

•Consumer Staple Recession Resistant•Grain and land prices high due to global demand, weak dollar (exports)•Ethanol/Bio-Fuel Source•Acreage Growing Farm Equipment, Transport•Benefits many other industries

Agriculture & Food Processing & Manufacturing

•Economic Necessity Recession Resistant•Demographics: aging/immigration Growth

Health CareRationaleIndustry

Sources: Insurance Information Institute

Tort IssuesTurbulent Markets Give

Rise to Suits

Shareholder Class Action Lawsuits*

*Securities fraud suits filed in U.S. federal courts; 2008 figure is current through February 29.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute

164202

163

231188

111173

242210215

497

267226237

182

118176

24

0

100

200

300

400

500

600

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*

Pace of suits is up due in part to subprime issues,

housing collapse and market volatility.

Defendants include banks, investment banks,

builders, lenders, bond and mortgage insurers

Includes 44 suits related to subprime in 2007/08

A credit crunch creating a “contagion” effect resulting

in significant financial distress and bankruptcies in

other sectors could breed more securities litigation

Origin of D&O Claims for Public Companies, 2006

Customers & Clients, 4%Competitors,

6%

Employees, 25%

Government, 2%

Other 3rd Party, 22%

Shareholders, 40%

40% of D&O suits originate

with shareholders

Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.

Average Settlement Value of Shareholder Class Actions*

(Excl. Settlements Above $1 Billion)

$8.5 $8.8$10.7 $11.1

$15.7$13.9

$21.6$19.7

$24.7$22.7

$33.2

$23.8

$0

$5

$10

$15

$20

$25

$30

$35

96 97 98 99 00 01 02 03 04 05 06 07

Settlement values have been on the rise

The average settlement reached $33.2 million in 2007

*Does not include partial or tentative settlements.Source: NERA Economic Consulting, Recent Trends in Shareholder Class Actions, Dec. 2007.

$ Millions

Shareholder Class Actions:Median Investor Losses vs. Ratio of

Settlement to Loss, 1991-2007*

$60 $62 $63$85

$66

$119$113

$176

$296$319$333

$407

$310

$162

$217

$94$96

4.7%4.8%

5.9% 6.1%

7.2%

4.9%

4.0%3.4%

2.1%2.4%

3.1%

2.4%2.9%

2.9%

4.7%

5.5%5.8%

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Med

ian

Inve

stor

Los

ses

0%

1%

2%

3%

4%

5%

6%

7%

8%

Med

ian

Rat

io o

f Inv

esto

r L

oss t

oSe

ttle

men

t

Median Investor Losses Median Rate of Settlement to Investor Losses (%)

Source: NERA Economic Consulting, Recent Trends in Shareholder Class Actions, Dec. 2007. *Refers to settlement year.

As losses rise, ratio of settlement

to loss has been falling.

Shareholders recovered 2.4% of losses in 2007

PROFITABILITY & PERFORMANCE

Profits in 2006/07 ReachedTheir Cyclical Peak

P/C Net Income After Taxes1991-2008F ($ Millions)*$1

4,17

8

$5,8

40

$19,

316

$10,

870

$20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$59,

200

$46,

300

-$6,970

$63,

695

$44,

155

$20,

559

$38,

501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

07E

08F

*ROE figures are GAAP; 1Return on avg. surplus. **Return on Average Surplus; Actual 9-month 2007 result.Sources: A.M. Best, ISO, Insurance Information Inst.

2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.6%2006 ROE = 12.2%2007E ROAS1 = 13.1%**

Insurer profits peaked in 2006

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F

08F

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2008E

*2007 is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

4 Hurricanes

Katrina, Rita, Wilma

P/C profitability is cyclical, volatile and vulnerable

-5%

0%

5%

10%

15%

20%

25%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 0607

E08

F

Profitability Peaks & Troughs in the P/C Insurance Industry,1975 – 2008F*

1975: 2.4%

1977:19.0% 1987:17.3%

1997:11.6%

2006:12.2%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years 9 Years

*GAAP ROE for all years except 2007 which is actual 9-month ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E

ROE Cost of Capital

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2007E

Source: The Geneva Association, Ins. Information Inst.

The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years

-13.

2 pt

s

+0.2

pts

US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on

target or better 2003-07

-0.1

pts

+1.7

pts

-9.0

pts

The cost of capitalis the rate of return

insurers need to attract and retain

capital to the business

+3.1

pts

P/C, L/H Stocks: Ahead of the S&P 500 Index in 2008

-11.76%

-36.25%

-9.68%

-18.90%-9.59%

-5.08%

-11.49%

-9.38%

-40.0% -30.0% -20.0% -10.0% 0.0%

S&P 500

All Insurers

P/C

Life/Health

Multiline

Reinsurance

Mortgage*

Brokers

*Includes Financial Guarantee.Source: SNL Securities, Standard & Poor’s, Insurance Information Inst.

Total YTD Returns Through February 29, 2008

P/C insurance stocks not affected as much as the overall

market by credit, subprimeconcerns

Mortgage & Financial Guarantee insurers were

down 69% in 2008

FINANCIAL STRENGTH &

RATINGS

Financially Fit

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007E

90

95

100

105

110

115

120

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E

Com

bine

d R

atio

00.20.40.60.811.21.41.61.82

Impa

irmen

t Rat

e

Combined Ratio after DivP/C Impairment Frequency

Impairment rates are highly correlated

underwriting performance and could reach near-record low in 2007

Source: A.M. Best; Insurance Information Institute

2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969;

2007 will be lower; Record is 0.24% in 1972

Reasons for US P/C Insurer Impairments, 1969-2005

*Includes overstatement of assets.Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;

Catastrophe Losses8.6%

Alleged Fraud11.4%

Deficient Loss

Reserves/In-adequate Pricing62.8%

Affiliate Problems

8.6%

Rapid Growth

8.6%

2003-2005 1969-2005

Deficient reserves,

CAT losses are more important factors in

recent years

Reinsurance Failure3.5%

Rapid Growth16.5%

Misc.9.2%

Affiliate Problems

5.6%

Sig. Change in Business

4.6%

Deficient Loss

Reserves/In-adequate Pricing38.2%

Investment Problems*

7.3%

Alleged Fraud8.6%

Catastrophe Losses6.5%

Cumulative Average Impairment Rates by Best Financial Strength Rating*

0%

10%

20%

30%

40%

50%

60%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Average Years to Impairment

D

C/C-

C++/C+

B/B-

B++/B+

A/A-

A++/A+

Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.

Insurers with strong ratings are far less likely to become impaired over

long periods of time. Especially important in long-tailed lines.

*US P/C and L/H companies, 1977-2002

UNDERWRITINGTRENDS

Extremely Strong 2006/07

90

95

100

105

110

115

120

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*

08F

Combined Ratios1970s: 100.31980s: 109.21990s: 107.82000s: 101.8*

Sources: A.M. Best; ISO, III *2007 is actual 9-month result; 2008F from A.M. Best.

P/C Insurance Combined Ratio, 1970-2008F*

115.8

107.4

100.198.3

100.7

92.4

98.6

93.8

90

100

110

120

01 02 03 04 05 06 07F 08F

P/C Insurance Combined Ratio, 2001-2008F

Sources: A.M. Best; ISO, III. *2007 is actual 2007 9-monoth result; 2008 is from A.M. Best.

2005 figure benefited from heavy use of reinsurance which lowered net losses

2006 produced the best underwriting result

since the 87.6 combined ratio in 1949

As recently as 2001, insurers were paying out nearly $1.16 for

every dollar they earned in premiums

2007/8 deterioration due primarily to falling rates, but results still strong assuming

normal CAT activity

87.6

91.292.1 92.3 92.4 92.5

93.1 93.1 93.393.8

93.0

85

86

87

88

89

90

91

92

93

94

95

1949 1948 1943 1937 1935 2006 1950 1939 1953 1936 2007E

Ten Lowest P/C Insurance Combined Ratios Since 1920 vs. 2007E

Sources: Insurance Information Institute research from A.M. Best data. *2007: Actual 9-mo. result.

2007 was one of the Top 12

best since 1920

The industry’s best underwriting years are associated with

periods of low interest rates

The 2006 combined ratio of 92.5 was the best since the 87.6 combined in 1949

-55-50-45-40-35-30-25-20-15-10-505

101520253035

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 0607

E08

F

Source: A.M. Best. *Actual 2007:9M underwriting profit = $18.146B

$ B

illio

ns

Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the

second since 1978. Expected gain for 2007 is approximately $20 billion. Cumulative underwriting

deficit since 1975 is $421 billion.

Underwriting Gain (Loss)1975-2008F*

110.

3

110.

2

107.

6

103.

9 109.

7

112.

3

111.

1

122.

3

110.

2

102.

5 105.

4

91.2 94

.0 97.5

102.

0

112.

5

85

90

95

100

105

110

115

120

125

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08F

Recent results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases

Commercial coverages have exhibited significant

variability over time.

Commercial Lines Combined Ratio, 1993-2008F

Outside CAT-affected lines, commercial

insurance is doing fairly well. Caution is required in

underwriting long-tail commercial lines.

Sources: A.M. Best (historical and forecasts)

103.

9

104.

5

103.

5

104.

9

99.8 10

2.7

104.

5

109.

9

110.

9

105.

3

98.4

94.3 96

.4

94.3 95

.6 98.6

85

90

95

100

105

110

115

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08FSource: A.M. Best; Insurance Information Institute.

Recent strong results attributable favorable frequency

trends and low CAT activity

Personal LinesCombined Ratio, 1993-2007E

CATASTROPHICLOSS

What Will 2008 Bring?

U.S. Insured Catastrophe Losses*$7

.5$2

.7$4

.7$2

2.9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5$5

.9 $12.

9 $27.

5

$6.5

$100

.0

$61.

9

$9.2

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0720

??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. 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

$ Billions

2006/07 were welcome respites. 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come.

$100 Billion CAT year is coming soon

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1987-2006¹Fire, $6.6 , 2.2%

Tornadoes, $77.3 , 26.0%

All Tropical Cyclones, $137.7 ,

46.3%

Civil Disorders, $1.1 , 0.4%

Utility Disruption, $0.2 , 0.1%

Water Damage, $0.4 , 0.1%Wind/Hail/Flood,

$9.3 , 3.1%

Earthquakes, $19.1 , 6.4%

Winter Storms, $23.1 , 7.8%

Terrorism, $22.3 , 7.5%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 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.

Insured disaster losses totaled $297.3 billion from

1987-2006 (in 2006 dollars). Wildfires accounted for

approximately $6.6 billion of these—2.2% of the total.

Annual Catastrophe Bond Transactions Volume, 1997-2007

$1,729.8

$966.9

$7,329.6

$4,693.4

$1,991.1

$1,142.8$1,219.5$846.1$984.8$1,139.0

$633.0

$0

$1,000$2,000

$3,000

$4,000

$5,000$6,000

$7,000

$8,000

97 98 99 00 01 02 03 04 05 06 07

Ris

k C

apita

l Iss

ues

($ M

ill)

0

5

10

15

20

25

30

35

Num

ber o

f Iss

uanc

es

Risk Capital Issued Number of Issuances

Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.

Catastrophe bond issuance has soared in the wake of

Hurricanes Katrina and the hurricane seasons of 2004/2005,

despite two quiet CAT years

The 2008 Hurricane Season:

Less Activity Predicted

Outlook for 2008 Hurricane Season: 25% Worse Than Average

115NA96.2Accumulated Cyclone Energy675Intense Hurricane Days

125%275%100%Net Tropical Cyclone Activity

372.3Intense Hurricanes3047.524.5Hurricane Days7145.9Hurricanes

60115.549.1Named Storm Days13289.6Named Storms

2008F2005Average*

*Average over the period 1950-2000.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.

Landfall Probabilities for 2008 Hurricane Season: Above Average

Above Average

NACaribbean

36%30%Gulf Coast from Florida Panhandle to Brownsville

37%31%US East Coast Including Florida Peninsula

60%52%Entire US East Coast

2008FAverage*

*Average over the past century.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.

PREMIUM GROWTH

At a Virtual Standstillin 2007/08

-10%

-5%

0%

5%

10%

15%

20%

25%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

F20

08F

Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute

Strength of Recent Hard Markets by NWP Growth*

1975-78 1984-87 2001-04

*2007 figure is actual 9-month figure.

Post-Katrina period resembles

1993-97 (post-Andrew)

2007/2008: Premium growth of 0% or less would be slowest since a decline in 1943

109.4110.2

118.8

109.5

112.5110.2

107.6

104.1

109.7 110.2

102.5

105.4

90.5

102.0

111.1112.3

122.3

$7.3

0

$6.4

9

$13.

91

$13.

15

$11.

94

$11.

95

$8.3

0

$13.

50

$8.4

2

$4.8

3

$5.2

0

$5.7

1

$5.2

5

$5.7

0

$7.7

0

$6.4

0

$6.1

0

90

95

100

105

110

115

120

125

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

($1)

$1

$3

$5

$7

$9

$11

$13

$15

Cos

t of R

isk/

$100

0 R

even

ue

CommercialCombined RatioCost of Risk

Source: RIMS, A.M. Best 2007 Aggregates & Averages; Insurance Information Institute

Cost of Risk vs. Commercial Lines Combined Ratio

CAPACITY/SURPLUS

Accumulation Continues

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 0607*

U.S. Policyholder Surplus: 1975-2007*

Source: A.M. Best, ISO, Insurance Information Institute. *As of September 30, 2007

$ B

illio

ns

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Capacity as of 9/30/07 was $521.8B, 5.3% above year-end 2006, 80% above its 2002 trough and 54%

above its 1999 peak.

Premium-to-surplus ratio neared a record

low of $0.84:$1 at year end 2007, suggesting

excess capital

Capacity exceeded a half trillion dollars for the first time during

the 2nd quarter of 2007

Q3 = First 3 quarters as of 9/30/07Source: Insurance Information Institute; 1985–2006, A.M. Best Aggregates & Averages;; 2007 ISO

0

100

200

300

400

500

600

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 0607

Q3

0.0

0.5

1.0

1.5

2.0

2.5

NWP Surplus P:S Ratio

$ Billions P:S Ratio

Calendar Year

P/C Industry Premium-to-SurplusRatio, 1985-2007:Q3

Private Carriers

$521.8B

$76 B

$145 B

$450 B

Low P:S Ratio 0.84:1 in 1998 0.86:1

1.92:1

At 0.86:1 as of 9/30/07, now approaching all-time record premium-to-surplus ratio of

0.84:1 in 1998

P/C Insurer Share Repurchases,1987- Through Q3:2007 ($ Mill)

$564

.0

$646

.9

$311

.0

$952

.4

$418

.1

$566

.8

$310

.1

$658

.8

$769

.2

$4,5

86.5

$5,2

66.0

$763

.7

$5,2

42.3

$4,3

70.0 $7

,094

.1

$17,412.7

$4,4

97.5

$1,5

39.9

$2,7

64.2

$2,3

85.6

$4,2

97.3

$0$2,000$4,000$6,000$8,000

$10,000$12,000$14,000$16,000$18,000$20,000

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

07Q

3

Sources: Credit Suisse, Company Reports; Insurance Information Inst.

First 9-months 2007 share buybacks are already

133% of the 2006 record

Reasons Behind Capital Build-Up & Repurchase Surge

•Strong underwriting results•Moderate catastrophe losses

•Reasonable investment performance

•Lack of strategic alternatives (M&A, large-scale expansion)

Returning capital owners (shareholders) is one of the

few options available

2007 repurchases to date equate to 4.4% of industry surplus, the highest in 20 years

INVESTMENT OVERVIEW

More Pain, Little Gain

$0

$10

$20

$30

$40

$50

$60

757677787980818283848586878889909192939495969798990001020304050607*

Net Investment Income$

Bill

ions

Growth History2002: -1.3%2003: +3.9%2004: +3.4%

2005: +24.4%*2006: +5.2%2007: 0.1%**

Source: A.M. Best, ISO, Insurance Information Institute;*Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. **Based on annualized 9M result of $39.515B.

Investment income posted modest

gains in 2006, but ran flat in 2007

-30%

-20%

-10%

0%

10%

20%

30%

40%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

*

Source: Ibbotson Associates, Insurance Information Institute. *Through March 3, 2008.

Total Returns for Large Company Stocks: 1970-2008*

S&P 500 was up 3.53% in 2007, but down -9.38% so far in 2008*

Markets were up in 2007 for the 5th consecutive

year; 2008 off to a rough start

Property/Casualty Insurance Industry Investment Gain1

$ Billions

$35.4$42.8

$47.2$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$61.9$56.9

$51.9

$57.9

$0

$10

$20

$30

$40

$50

$60

94 95 96 97 98 99 00 01 02 03 04 05* 06 07**

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B. **A.M. Best estimate

Sources: ISO; Insurance Information Institute.

Investment rose in 2007 but are marginally higher than what they

were nearly a decade earlier in 1998

Investment Gain on Funds & Other Income, 1997-2006

10.9% 10.6%

9.4%10.3%

8.9%

6.4% 6.3% 6.4%7.1% 7.1%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

97 98 99 00 01 02 03 04 05 06

Sources: A.M. Best; Insurance Info. Inst.

Invest gains have been trending

generally downward over the past decade

US P/C Net Realized Capital Gains,1990-2007:9 Months ($ Millions)

$2,8

80 $4,8

06

$9,8

93

$1,6

64

$5,9

97

$9,2

44 $10,

808

$13,

016 $1

6,20

5

$6,6

31

-$1,

214

$6,6

10 $8,2

04

$18,019

$3,3

59

$9,7

01

$9,1

25

$9,8

18

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*Sources: A.M. Best, ISO, Insurance Information Institute. *As of September 30, 2007.

Realized capital gains rebounded strongly in 2004/5

but fell sharply in 2006 despite strong stock market as insurers “banked” their

gains. Rising again in 2007.

Realized capital gains rose during the last soft

market as they are now, as underwriting

results deteriorate

0%

1%

2%

3%

4%

5%

6%

11/0

412

/04

1/05

2/05

3/05

4/05

5/05

6/05

7/05

8/05

9/05

10/0

511

/05

12/0

51/

062/

063/

064/

065/

066/

067/

068/

069/

0610

/06

11/0

612

/06

01/0

702

/07

03/0

704

/07

5/07

6/07

7/07

8/07

9/07

10/0

711

/07

12/0

71/

082/

08

The “Fed” is Now Aggressively Pushing the “Fed Funds” Rate Down

Source: Federal Reserve Bank of New York.

Cuts in the “Fed Funds” rate—for very short-term loans—has so far not brought down longer-term yields as

inflationary expectations build

The Fed has cut rates by 2.25 points since Aug. 2007. More cuts likely by end of March

Yield Curves for Last Week of February 2008, 2007, 1978*

0%1%2%3%4%5%6%7%8%9%

1m 3m 6m 1y 2y 3y 5y 7y 10y 20y 30y

Feb. 1978 Feb. 2007 Feb. 2008

*Constant maturities for last week of February each year. No data for 1m, 3m or 6m available for 1978. 20-yr 1978 figures is III interpolated value.Sources: Federal Reserve; Insurance Information Institute.

2008: Fed action pushed ST yields down, LT little changed

and reflect inflation fears

2007: Pre-credit crunch flat/inverted yield curve

1978: Stagflation yield curve built in

LT inflationary expectations. Are

they building again?

2%

3%

4%

5%

6%

7%

8%

9%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*

P-C Inv Income/Inv Assets 10-Year Treasury Note

P/C Investment Income as a % of Invested Assets Follows 10-Year US T-Note

*As of January 2008 month-end.Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.

Investment yield historically tracks 10-year Treasury note quite closely

Shifting Legal Liability & Tort

EnvironmentWill the Pendulum Swing

Against Insurers?

$17.0$49.6 $58.7

$85.6$17.1

$51.0$70.9

$85.6

$5.2

$20.4

$30.0

$45.5

$0

$50

$100

$150

$200

$250

1980 1990 2000 2006

Commercial Lines Personal Lines Self (Un)Insured

Bill

ions

Total = $39.3 Billion

*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

Total = $121.0 Billion

Total = $159.6 Billion

Total = $216.7 Billion

Personal, Commercial & Self (Un) Insured Tort Costs*

Growth in Cost of U.S. Tort System,1951-2009F

Source: Tillinghast-Towers Perrin.

9.8%11.9%

3.2%

13.8%

5.6% 5.7%

0.4%

-5.4%

2.4%4.7%

11.6% 11.8%13.7%

-10%

-5%

0%

5%

10%

15%

1951-60

1961-70

1971-80

1981-90

1991-2000

2001 2002 2003 2004 2005 2006 2007E 2008E

Tort costs moderated beginning in 2003 as many improvements in the tort system began to bear fruit

Asbestos-related and other costs drove tort growth sharply upward in 2001 and 2002

2001-2005: 7.8%

2006-2009F: 1.6%

Tort System Costs, 1950-2009E

$1.8 $5.4 $7.9$13.9$20.0

$83.7

$130.2

$179.2

$246.0$265

$277

$158.5

$247.0

$42.7

$3.4

0.62%0.82%

1.03%

1.34%1.22%

1.98%2.14%

1.82% 1.83%1.83%1.87%

2.24%2.24%

1.53%

1.11%

$0

$50

$100

$150

$200

$250

$300

50 55 60 65 70 75 80 85 90 95 00 03 06 08E 09E

Tor

t Sys

tem

Cos

ts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t Cos

ts a

s % o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

Source: Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs as % of GDP

After a period of rapid escalation,

tort system costs as a % of GDP are

now falling

The Nation’s Judicial Hellholes (2007)

Source: American Tort Reform Association; Insurance Information Institute

TEXASRio Grande Valley and Gulf Coast

South Florida

ILLINOISCook County West Virginia

Some improvement in “Judicial

Hellholes” in 2007

Watch ListMadison County, ILSt. Clair County, IL

Northern New Mexico

Hillsborough County, FLDelawareCalifornia

Dishonorable MentionsDistrict of Columbia

MO Supreme CourtMI Legislature

GA Supreme CourtOklahoma

NEVADAClark County (Las Vegas)

NEW JERSEYAtlantic County (Atlantic City)

Sum of Top 10 Jury Awards

$ Millions

$615.0$815.0

$2,953.7

$5,158.8

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2004 2005 2006 2007Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007 and 2008.

Total of Top 10 awards in 2007 was 25% lower than in 2006

Excess Liability Market Capacity –North America

Source: Marsh, 2007 Limits of Liability Report

$1.660$1.645

$1.570$1.535$1.425

$1.575$1.710

$2.045$1.941

$2.011

$1.721

$1.405$1.334

$1.432

$1.0

$1.2

$1.4

$1.6

$1.8

$2.0

$2.2

$2.4

$2.6

$2.8

94 95 96 97 98 99 00 01 02 03 04 05 06 07

Bill

ions

Capacity is up 16.5% since its 2003 trough

Summary• Economy will provide muted bumps for insurers• Results were very good in 2006/07; Overall profitability reached

its highest level (est. 12-13%) since 1988• Underwriting results were aided by lack of CATs & favorable

underlying loss trends, including tort system improvements• Property cat reinsurance markets past peak & more competitive• Premium growth rates are slowing to their levels since WW II;

Commercial leads decreases.• Rising investment returns insufficient to support deep soft

market in terms of price, terms & conditions as in 1990s• How/where to deploy/redeploy capital??• Major Challenges:

Slow Growth Environment Ahead; Cyclical & EconomicMaintaining price/underwriting disciplineManaging variability/volatility of resultsManaging regulatory/legislative environment

Insurance Information Institute On-Line

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