Mega-Trends in the World of Insurance: Impacts on Captive & Alternative Risk Transfer Markets

Mega-Trends in the Worldof Insurance:

Impacts on Captive & Alternative Risk Transfer

Markets17th Annual World Captive Forum

Scottsdale, AZ

November 6, 2007

Robert P. Hartwig, Ph.D., CPCU, Executive Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org

Presentation Outline

• Captive & ART Overview• Pricing Under Pressure

Traditional Insurers Starved for Growth• Capacity: New Record Highs• Profitability: Flush Times Breed Competition• Underwriting: Strong Results—Discipline is Tested? • Investment Income: Flat GainsMore Discipline?• Key Lines: Back from the Brink—But Heading South?• Catastrophic Loss: Welcome Respite• Financial Strength & Ratings• State-Run Markets: A Traditional & ART Competitor?• Terrorism: No ART Solution Here• Torts: Legal Environment Getting Better• Q & A

CAPTIVE & ART OVERVIEW

Drivers of Growth: Slowdown Ahead?

Total Commercial Risk Protection Market (US, 2004)

Commercial Insurance, $229,

70%

Alternatives, $98, 30%

Source: Conning; MarketStance analysis; Insurance Information Institute.

Alternative market mechanisms cover about 30 percent

($98 billion) of the total commercial risk

protection market ($326.9 billion)

$ Billions

Size of Alternative Risk Transfer Market (2001 Direct Written Premiums)

Other Alternative

Carriers (US), $5 , 1.1%

Captives, $38 , 8.3%

Traditional Carriers, $370 ,

81.0%

Self-Insurance, $44 , 9.6%

Source: Swiss Re; Insurance Information Institute.

Captives accounted for about 8.3% of

global commercial insurance

premiums in 2001, likely at

least 10% today

$ Billions

Alternative Risk Transfer Marketby Line

Automobile, 12%

Property, 10%Workers Comp,

43%

Liability (excl. Auto), 35%

Source: MarketStance.

Workers Comp account for the

largest share of the alternative market

$ Billions

Alternative Market Share by Industry Group, All Lines

45.0%

42.8%

42.3%

34.6%

32.4%

28.3%

21.9%

21.8%

45.4%

0% 10% 20% 30% 40% 50%

Mining

Transport., Public Util.

Manufacturing

Services

Finance, Insurance

Retail Trade

Wholesale Trade

Construction

Agriculture

Source: MarketStance

The Mining industry makes the greatest use of alternative markets,

agriculture the least

Workers Compensation: Large Deductible Market Share

1%

33%

43%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1990 2000 2003Sources: National Council on Compensation Insurance; Insurance Information Institute.

Employers have become very

accustomed to accepting a greater share of risk and claim frequency has decreased

Alternative Market byRevenue Size

17.8%

58.2% 62.6%

0%

10%

20%

30%

40%

50%

60%

70%

Small (<$100 millionrevenue)

Medium ($100million to $1 billion

revenue)

Large (more than $1billion revenue)

Sources: MarketStance

Large companies are far more likely to retain risk via

alternative vehicles than are small

companies

ME

NH

MA

CT

PA

WVVA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJ

RI

MDDE

AL

VT

NY

DC

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

Alternative Market By State Concentration

Above Average

Below Average PR

AK

Source: MarketStance; Conning 2006

U.S. Domiciled Captives – Top Lines

10.9%

10.2%

8.3%

6.3%

5.0%

37.6%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Medical Malpractice

Auto Phy. Damage

Priv. Pass. AutoLiab.

Other Liability

Commercial M.P.

Workers Comp.

Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review

Medical malpractice remains the dominant product line for

U.S. domiciled captives in 2006, followed by various

auto coverages, commercial M-P and workers comp.

U.S. Risk Retention Groups: Distribution by Line

Figures do not total 100% due to rounding.Source: A.M. Best, 2007 Special Report: U.S. Risk Retention Groups – 2006 Market Review

Med Mal Occur2.0%

Other Liab Cl Made23.0%

Med Mal Cl Made43.0%

Comm Auto Liab2.0%

Other Liab Occur29.0%

Medical Malpractice

(claims made)

remained a significant portion of

RRG business in

2006 at 43%, while

other liability (per occurrence)

remained virtually

unchanged at 29%.

U.S. Domiciled Captives- Net Premiums Written ($ Millions)

$8.4

$9.0

$9.3

$9.9

$10.2

$8.0

$8.5

$9.0

$9.5

$10.0

$10.5

2002 2003 2004 2005 2006

$ M

illi

ons

Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review

Following a five-year period of rapid growth, U.S. captive insurers saw net premiums written increase by just 2.7 percent in 2006, after 6.2 percent growth in 2005.

Risk Retention Group Premiums,1988 – 2006*

$1,7

37.7 $2

,197

.8

$2,4

49.1

$2,7

73.7

$585

.8

$527

.2

$493

.7

$493

.6

$419

.3

$358

.4

$250

.2 $575

.5

$707

.6

$751

.9

$790

.5

$875

.3

$775

.5

$944

.0 $1,2

65.1

0

500

1,000

1,500

2,000

2,500

3,000

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

*2006 ProjectedSource: Risk Retention Reporter, Insurance Info. Institute

Millions of Dollars

Risk retention (& self-insurance) group premiums have risen rapidly in recent years and represent a form

of competition to traditional insurers and captives

U.S. Risk Retention Groups:Domicile Distribution 2006

12%

8%

4%

4%

4%

4%

4%

4%

4%

4%

4%

46%

0% 10% 20% 30% 40% 50%

Vermont

Hawaii

South Carolina

Colorado

D.C.

Delaware

Iowa

Illinois

Missouri

Montana

Tennessee

Texas

Source: A.M. Best, 2007 Special Report: U.S. Risk Retention Groups – 2006 Market Review

The majority of RRGs are domiciled in Vermont, with

12. Hawaii has 3 RRGs while South Carolina has 2 RRGs. The remaining groups are distributed equally among

various domiciles.

Food, Drink and Tobacco Company Captives by Domicile

Source: Captive Review, October 2007

27.6%

19.0%17.0%

13.7%

1.0% 1.0% 1.0%3.0%

5.0%5.0%

0%

5%

10%

15%

20%

25%

30%

Berm

uda

Verm

ont

Guern

sey

Irela

nd

Switzer

land

Luxem

bourg

Barbad

osBVI

Isle

of M

an

Baham

as

Captive solutions can be extremely helpful to food, drink and tobacco (FDT) companies.

Captives with parent companies in the FDT sector exist in only

10 domiciles. Nearly half (46.6%) were spread between Bermuda

and Vermont.

733

542

380

382

242

208

165

158

989

740

563

381

235

208

161

160

166*

*

987*

169*

*

383*

0

200

400

600

800

1,000

2005 2006

Leading Captive Domiciles Worldwide, 2005 vs. 2006

Mixed growth rates in captive domiciles worldwide in 2006 as competition intensifies in

traditional market.

*BI estimate. **Excludes credit life insurers.

Sources: Business Insurance, March 12, 2007, III

542

158

122

58 53 59

33 15 13 15 6

563

160

146

97

74 70

39 30 21 17 10

0

100

200

300

400

500

600

VT HI SC NV AZ DC NY UT MT GA KY

2005 2006

Leading US Captive Domiciles, 2005 vs. 2006

U.S. captive domiciles experienced dramatic

growth in 2006.

Sources: Business Insurance, March 12, 2007; III

100%

67%

67%

62%

40%

20%

19%

18%

13%

4% 1.3%

0

0

0

1

1

1

1

UT NV KY MT AZ SC DC NY GA VT HI

Fastest Growing US Captive Domiciles, 2006 over 2005

Newer U.S. captive domiciles led the way in growth rates in 2006,

but from small bases in 2005 (e.g., UT increased from 15 domiciles in

2005 to 30 in 2006)


564

39

243

118

84 24

1500

325

2 34 93 34 2

705

0

200

400

600

800

1,000

1,200

1,400

1,600

Companies in G1500 Companies with a captive

G1500 Companies and Captives: Room for Growth

The captive market remains underdeveloped, with over half (53%) of the world’s top G1500 companies not currently owning a captive.

Source: Aon, Global 1500: A Captive Insight 2007

Markets such as Asia have considerable potential for growth.

For example, only 14% of Japanese G1500 companies have a captive.

Captive Formations & Liquidations, 1993–2002

0

50

100

150

200

250

300

350

400

450

500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Captive Liquidations New Captive Formations

Source: A.M. Best; Insurance Information Institute

Why Do Captives Liquidate?•Collapse of parent (cyclical)

•Collapse of parent (e.g., Enron)•Consolidation

•Escalating loss costs/claim severity (e.g., med mal)

Captive formation and liquidation are highly correlated

Top 5 Captive Managers by Premium Volume, 2006 ($Mill)

$8,900

$5,000$4,200 $4,100

$3,486

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

Marsh(Bermuda)

Marsh(Vermont)

Aon(Vermont)

Aon(Bermuda)

InternationalAdvisoryServices


Top 10 Largest Captive Managers Worldwide, by Captives Managed 2006

1,120

247

209

194

168

94

92

91

88

1,352

1,103

240

177

183

146

93

80

98

76

1,386

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

Aon

Marsh

Willis

USA Risk

IAS

HSBC Insurance

Beecher Carlson

Quest

AIG

AMS

2006 2005

The number of captives managed by the top firms increased in 2006, though

not in all domiciles


Top Bermuda Captive Managers,by Premium Volume, 2006

4,100

3,486

1,103

1,078

1,000

941

579

490

7,150

5,200

2,824

1,056

1,130

1,000

1,800

447

450

8,900

$0 $2,000 $4,000 $6,000 $8,000 $10,000

Marsh

Aon

IAS

Cedar Mgmt

JLT

Liberty Mutual

Beecher Carlson

USA Risk

Quest

2006 2005

Premium volume grew for some managers, but

shrank for others


Annual Catastrophe Bond Transactions Volume, 1997-2007*

$966.9

$1,729.8

$4,8

30

$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

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

Ris

k C

apita

l Iss

ues

($ M

ill)

02468101214161820

Nu

mb

er o

f Iss

uan

ces

Risk Capital Issued Number of Issuances

Source: MMC Securities and Guy Carpenter; Insurance Information Institute. *Through 10/31/07

Catastrophe bond issuance has soared in the wake of Hurricanes

Katrina and the hurricane seasons of 2004/2005

COMPETITIVE PRICE PRESSURETraditional Insurance Prices Falling Sharply

-10%

-5%

0%

5%

10%

15%

20%

25%

19

70

19

71

19

72

19

73

19

74

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

F2

00

8F

20

09

F2

01

0F

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

*2007-10 figures are III forecasts/estimates.

2006-2010 (post-Katrina) period could resemble 1993-97

(post-Andrew)

2005: biggest real drop in premium since early 1980s

Growth in Net Written Premium, 2000-2008F

*2007 figure base on 2007 actual first half result of 0.1%.Source: A.M. Best; Forecasts from the Insurance Information Institute.

5.0%

8.4%

15.3%

10.0%

3.9%

0.5%

2.7%

0.1% 0.3%

2000 2001 2002 2003 2004 2005 2006 2007F* 2008F

P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are

expected to remain healthy

Most Layers of Coverage are Being Challenged/Leaking

Retention$1 Million$2 Million

Primary

Excess

Reinsurance

Retro

$10 Million

$50 Million

$100 Million

Risks are comfortable taking larger retentions

Lg. deductibles, self insurance, RRGs, captives erode primary

Excess squeezed by higher primary

retentions, lower reins. attachments

Reinsurers losing to higher retentions,

securitization

Source: Insurance Information Institute from Aon schematic.

Average Commercial Rate Change,All Lines, (1Q:2004 – 3Q:2007)

-0.1%

-3.2%

-7.0%

-9.4%

-4.6%

-2.7%

-5.3%

-9.6%

-13.3%-11.8%

-3.0%

-9.7%-11.3%

-5.9%

-8.2%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%1Q

04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

Magnitude of rate decreases diminished greatly after Katrina but have grown again

KRW Effect

Cumulative Commercial Rate Change by Line: 4Q99 – 3Q07

Source: Council of Insurance Agents & Brokers

Commercial account pricing has been trending down for 3 years and is now on par with prices in late 2001, early 2002

D&O Premium Index(1974 Average = 100)

682746 704 720 720

771 806 793726

619539 503

560

720

931

1,237

1,113

827

1,010

0

200

400

600

800

1000

1200

1400

86 88 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

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

Average D&O pricing is off 18% since 2003, after rising

146% from 1999-2003

UNDERWRITING CAPACITY

Does Expanding Capacity Bode Ill for ART, Including

Captives?

$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 June 30, 2007

$ B

illi

ons

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

Capacity as of 6/30/07 was $512.8B, 5.3% above year-end

2006, 80% above its 2002 trough and 54% above its 1999 peak.

Foreign reinsurance and residual market

mechanisms absorbed 45% of 2005 CAT

losses of $62.1B

Capacity exceeded a half trillion dollars for the first time during

the 2nd quarter of 2007

Capital Raising by Class Within 15 Months of KRW

Existing Cos., $12.145 , 36%

New Cos., $8.898 , 26%

Sidecars, $6.359 , 19%Insurance Linked

Securities, $6.253 , 19%

Insurers & Reinsurers raised $33.7 billion in the wake of Katrina,

Rita, Wilma

Source: Lane Financial Trade Notes, January 31, 2007.

$ Billions

Annual Catastrophe Bond Transactions Volume, 1997-2007*

$966.9

$1,729.8

$4,8

30

$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

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

Ris

k C

apita

l Iss

ues

($ M

ill)

02468101214161820

Nu

mb

er o

f Iss

uan

ces

Risk Capital Issued Number of Issuances

Source: MMC Securities and Guy Carpenter; Insurance Information Institute. *Through 10/31/07

Catastrophe bond issuance has soared in the wake of Hurricanes

Katrina and the hurricane seasons of 2004/2005

($30)

($20)

($10)

$0

$10

$20

$30

$40

$50

$60

$70

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

Change in US PolicyholderSurplus, 1976-2007F*

*2007 forecast based on actual 07:H1 increase of $25.6BSource: A.M. Best, ISO, Insurance Information Inst.

$ B

illi

ons

US insurers have recorded large increases in net capacity since 2003

despite record CAT losses. Net income (less dividends) is the

largest source of net new capacity.

New Capital Paid-In: US P/C Insurers, 2003-2006 ($Bill)

$11.3

$8.8

$14.4

$3.6

$0

$2

$4

$6

$8

$10

$12

$14

$16

2003 2004 2005 2006

Sources: A.M. Best, ISO, Insurance Information Inst.

New capital entering US markets was

down significantly in

2006. Much more raised

offshore.

P/C Insurer Share Repurchases,1987- First Half 2007 ($ Millions)*

$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

$7,0

94.1

$6,1

73.0

$4,4

97.5

$1,5

39.9$2

,764

.2

$2,3

85.6

$4,2

97.3

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

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

07H

1

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

First half 2007 share buybacks are already 86%

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

MERGER & ACQUISITION

Few Catalysts for Major P/C Consolidation

P/C Insurance-Related M&A Activity, 1988-2006

$2,4

35

$5,1

00

$19,

118

$40,

032

$1,2

49

$486

$20,

353

$425

$9,2

64

$35,

221

$55,825

$30,

873

$8,0

59

$11,

534

$1,8

82

$3,4

50

$2,7

80

$5,1

37

$5,6

38

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

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

Tran

sact

ion

Val

ue ($

Mill

)

0

20

40

60

80

100

120

140

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

*Announced May 7, 2007.

Source: Conning Research & Consulting.

2006 surge due mostly to 2 deals. No

trend started.

Liberty Mutual acquired Ohio

Casualty for $2.7B*

No model for successful

consolidation has emerged

PROFITABILITY OVERVIEW

Rising Profits Breeds Competition

P/C Net Income After Taxes1991-2007F ($ 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

$65,

192

-$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

07F

*ROE figures are GAAP; 1Return on avg. surplus. 2007F figure is annualized actual first half net income of $32.596B **Actual first half 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= 9.4%2006 ROAS1 = 14.0%2007F ROAS = 13.1%**

Insurer profits peaked in 2006/7. “Normal” CAT year,

average investment gain imply flattening

-5%

0%

5%

10%

15%

20%

US P/C Insurers All US Industries

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

*2007 is actual first half 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

RETURN ON EQUITY (Fortune):Stock & Mutual vs. All Companies*

*Fortune 1,000 group.

Source: Fortune Magazine, Insurance Information Institute.

13%

13.4%14.6%

10.0%

14.9%13.0%

11%

13%15%14%13%

7%6%

11%12%

8%

11%12%10%

9%

-2%

8%7%

2%

10%

10.4%

15.4%14.0%

13.9%12.6%

-4%-2%0%2%4%6%8%

10%12%14%16%18%

1998 2000 2001 2002 2003 2004 2005 2006E 2007F 2008F

StockMutualAll Cos.*

Mutual insurer ROEs are typically lower than for stock

companies, but gap has narrowed. All are cyclical.

-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

F08

F

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

1975: 2.4%

1977:19.0% 1987:17.3%

1997:11.6%

2006:14.0%

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

10 Years

10 Years 9 Years

*2007 is actual first half 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 p

ts

+0.

2 p

ts

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

+3.

5 p

ts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

+3.

1 p

ts

L/H Insurance IndustryNet Income ($ Bill), 1997-2006

$21.72$17.98

$20.88$22.20

$9.81

$4.14

$26.55

$32.18$35.9

$34.0

$0

$5

$10

$15

$20

$25

$30

$35

$40

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Bill

ions

Source: NAIC data, from Highline National Underwriter.

Return on Equity: L/H Insurancevs. Fortune 500, 1995-2005

0%

2%

4%

6%

8%

10%

12%

14%

16%

1995 1996 1997 1998 1999 2000 2001 2002 2003 20004 2005

L/H Fortune 500

Source: NAIC, from Highline National Underwriter.

WALL STREET:

INSURERS LAGGING BEHIND IN 2007

Insurance & Reinsurance Stocks:Strong Finish in 2006

0.61%

9.53%

10.33%

16.57%

19.95%

16.24%

13.62%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

S&P 500

Life/Health

Reinsurers

P/C

All Insurers

Multiine

Brokers

Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

Total Returns for 2006

P/C insurer & reinsurer stocks rallied in late 2006

as hurricane fears dissipated and insurers turned in strong resultsBroker stocks held back

by weak earnings

Insurance & Reinsurance Stocks: Finally Gaining in 2007

5.15%

-9.99%

-1.93%

3.25%

-1.10%

7.58%

6.44%

-15.0% -10.0% -5.0% 0.0% 5.0% 10.0%

S&P 500

Life/Health

Reinsurers

P/C

All Insurers

Multiline

Brokers

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

Total YTD Returns Through November 2, 2007

P/C insurance, reinsurance stocks lagging on soft market

concerns, and subprime selloff. Some relief due to very low hurricane losses

Mortgage insurers are down 66%, Title insurers down 35% on subprime &

real estate woes

UNDERWRITING

Insurer Underwriting Has Improved Dramatically

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

*0

8F

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000s: 102.2**

Sources: A.M. Best; ISO, III *Actual figure of 92.7 through first half 2007. **Through 2007:H1.

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

115.8

107.4

100.198.3

100.7

92.5

97.0

93.592.7

90

100

110

120

01 02 03 04 05 06 07:H1 07F 08F

P/C Insurance Combined Ratio, 2001-2008F

Sources: A.M. Best; ISO, III. *III estimates for 2007/8.

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

91.2

92.1 92.3 92.4 92.593.0 93.1 93.1 93.3

92.7

85

86

87

88

89

90

91

92

93

94

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

Ten Lowest P/C Insurance Combined Ratios Since 1920 (& 2007:H1)

Sources: Insurance Information Institute research from A.M. Best data. *2007 first half actual.

2007 is looking very strong

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

110.

3

110.

2

107.

6

103.

9

109.

7

112.

3

111.

1

122.

3

110.

2

102.

5

105.

4

90.5

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

Commercial Lines Combined Ratio, 1993-2006

Source: A.M. Best; Insurance Information Institute .

Outside CAT-affected lines, commercial

insurance is doing fairly well. Caution is

required in underwriting long-

tail commercial lines.

2006 results benefited from relatively disciplined underwriting, low CAT

losses and reserve releases

Commercial coverages have exhibited extreme variability. Are current

results anomalous?

-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

06

07

F

Underwriting Gain (Loss)1975-2007F*

Source: A.M. Best, Insurance Information Institute *Actual 2007:H1 underwriting profit = $14.402B annualized to $28.8B.

$ B

illi

ons

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

second since 1978. Expect figure near $28 billion in 2007 assuming “normal” CAT losses. Cumulative

underwriting deficit since 1975 is $412 billion.

$1

0.8 $

22

.8 $3

3.4

$3

6.9

$1

8.9

($5.0)($6.0)($5.3)

$0.4

($7.0)

8.9

-1.1-1.3-1.6

4.5

-1.20.1

3.5

8.6

6.5

($10)

($5)

$0

$5

$10

$15

$20

$25

$30

$35

$40

00 01 02 03 04 05 06 07F 08F 09F

Re

se

rve

De

ve

lop

me

nt

($B

)

(3)(2)(1)012345678910

Co

mb

ine

d R

ati

o P

oin

ts

PY Reserve DevelopmentCombined Ratio Points

Impact of Reserve Changes on Combined Ratio

Source: A.M. Best, Lehman Brothers estimates for years 2007-2009

Reserve adequacy has

improved substantially

Cumulative Prior Year Reserve Development by Line (As of 12/31/06)

-$1,

886 -$

1,17

4

-$1,

116

-$77

9

-$47

5

-$41

3

-$25

4

-$10

0

-$10

0

-$96

-$53

-$48

$366

$1,176$1,172

-$3,006-$3,500

-$3,000

-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

$500

$1,000

$1,500

PPA Liab

ility

PPA PD

Home

Med

Mal

Special

ty P

rop

Comm

. Auto

Prod. L

iabili

ty

Finl.

Guaran

ty

Inte

rnat

ional

Other

Special

ty L

iab.

Wor

ker's

Comp

Fideli

ty/S

urety

Comm

ercia

l Mul

ti

Other

Liab

ility

Reinsu

rance

$ B

illi

ons

Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2.

Reserve redundancies in most lines have resulted

in releases in recent years

Release

Strengthening

REINSURANCE MARKETS

Reinsurance Markets Have Stabilized, Prices Falling

Announced Katrina, Rita, Wilma Losses by Segment

U.S. Primary, $14.2 , 39%

U.S. Reinsurer, $3.4 , 9%

Other, $0.3 , 1%

Lloyd's, $3.5 , 9%

Bermuda, $10.9 , 29%

Europe, $4.9 , 13%

Catastrophes are global events. Only 39% of

KRW losses were borne by US

primary insurers

*As of 2/21/06Source: Dowling & Partners, RAA.

$ Billions

Share of Losses Paid by Reinsurers, by Disaster*

30%25%

60%

20%

45%

0%

10%

20%

30%

40%

50%

60%

70%

Hurricane Hugo(1989)

Hurricane Andrew(1992)

Sept. 11 TerrorAttack (2001)

2004 HurricaneLosses

2005 HurricaneLosses

*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.

Reinsurance is playing an increasingly

important role in the financing of mega-CATs; Reins. Costs

are skyrocketing

Ratio of Reinsurer Loss & Underwriting Expense to Premiums Written, 1985-2006

1.1

0

1.0

8

1.1

0

1.0

3

1.0

2 1.0

6 1.1

4

1.1

3 1.1

7

1.0

1 1.0

6

1.2

6

0.9

5

1.3

9

1.2

1

1.0

6

1.0

7

1.0

7

1.0

9

1.1

8

1.0

7 1.0

8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Lo

ss &

LA

E R

atio

Source: Reinsurance Association of America.

Despite the respite in 2006, reinsurers paid an average of $1.11 in loss and expense

for every $1 in written premium since 1985

Hurricane Andrew

Sept. 11

Katrina, Rita, Wilma

Liability Crisis

US Reinsurer Net Income& ROE, 1985-2006

$1.9

4

$2.0

3

$1.9

5 $3.7

1

$4.5

3

$5.4

3

$1.4

7

$1.9

9

$1.3

1 $3.1

7

$3.4

1

$2.5

1

$9.6

8

($2.98)

$0.1

2

$1.9

5

$1.3

8

$1.2

2

$1.8

7

$1.1

7 $2.5

2

$1.7

9

($4)

($2)

$0

$2

$4

$6

$8

$10

$12

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Net

Inco

me

($ B

ill)

-10%

-5%

0%

5%

10%

15%

20%

RO

E

Net Income ROE

Source: Reinsurance Association of America.

Reinsurer profitability has rebounded

INVESTMENTS

Investment Gains Are Flat

$0

$10

$20

$30

$40

$50

$60

757677787980818283848586878889909192939495969798990001020304050607*

Net Investment Income$

Bil

lion

s

Growth History

2002: -1.3%

2003: +3.9%

2004: +3.4%

2005: +24.4%*

2006: +5.2%

2007: 0.0%**

Source: A.M. Best, ISO, Insurance Information Institute;*Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. **Based on annualized H1 result of $26.128B.

Investment income posted modest gains

in 2006, but is running flat in 2007

-30%

-20%

-10%

0%

10%

20%

30%

40%

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Source: Ibbotson Associates, Insurance Information Institute. *Through November 2, 2007.

Total Returns for Large Company Stocks: 1970-2007*

S&P 500 was up 13.62% in 2006, Up 9.82% YTD 2007*

Markets are up in 2007 for the 5th consecutive

year (so far)

US P/C Net Realized Capital Gains,1990-2007:H1 ($ 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

$4,1

73

$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 June 30, 2007.

Realized capital gains rebounded strongly in 2004/5

but fell sharply in 2006 despite strong stock market

as insurers “bank” their gains. Rising again in 2007.

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

$60.6$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. **Annualized H1 result of $30.301B.Sources: ISO; Insurance Information Institute.

Investment gains fell in 2006 and even now are only marginally larger

than in the late 1990s

KEY LINE IMPROVEMENTS:

WILL INSURERS SWEETEN THE DEAL FOR RISKS?

112.

1

112

113 11

5.9 12

0.5

120.

1

106.

6

99.4

96.6

93.4

94

96.7

102.

2 105.

6 108.

9 112.

1

105.

9

101.

6

93.8

84.5

82.8

88.3

87.7

122.5

80

85

90

95

100

105

110

115

120

125

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

Comm Auto Liab Comm Auto PD

Commercial Auto Liability& PD Combined Ratios

Average Combined: Liability = 108.8

PD = 97.5

Sources: A.M. Best; III

Commercial Auto has improved dramatically

119.0

119.8

10

8.5

12

5.0

113.1

115.0

12

1.0

116.2

116.1

10

4.9

10

1.9 10

5.5

100.7

116.8

113.6

115.3

12

2.4

115.0

117.0

97

.3

89

.0

97

.7

93

.8

83

.6

80

85

90

95

100

105

110

115

120

125

130

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

CMP-Liability

CMP-Non-Liability

Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion)

Liab. Combined 1995 to 2004 = 113.8

Non-Liab. Combined = 105.2


CMP- has improved recently

Workers Comp Calendar Year – Private Carriers

101

97

111

110

107

103

95

100

101

107

115 11

8 122

80

90

100

110

120

130

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p

Calendar Year

Percent

p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2006 and developed to ultimateSource: Calendar Years 1994-2005, A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years 1994-2006pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders

Workers Comp Combined Ratios, 1994-2006P

99.8

106.

6

107.

9 115.

7

129.

7

133.

7 142.

5

137.

6

111.

0

101.

0

91.2

154.7

80

90

100

110

120

130

140

150

160

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

Medical MalpracticeCombined Ratios

Average Med Mal Combined Ratio

1995-2006

119.3


Reforms/Award Caps and higher rates have helped to improve

med mal dramatically

138.6

117.6

108.5112.3

104.5

110.5

122.6 124.4

111.8114.4

112.1

96.3

80

90

100

110

120

130

140

150

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

Other LiabilityCombined Ratios*

Average Combined Ratio 1995-2006

114.5

Sources: A.M. Best; III *Includes Officers’ & Directors’ coverage.

Improvements in tort and D&O environment have

contributed to performance

CATASTROPHIC LOSS

Is the Worst Over orYet to Come?

Most of US Population & Property Has Major CAT Exposure

Is Anyplace

Safe?

U.S. Insured Catastrophe Losses*$7

.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$4.7

$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

07**

20??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Through 9/30/07. 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 was a welcome respite. 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

Total Value of Insured Coastal Exposure (2004, $ Billions)

$1,901.6$740.0

$662.4$505.8

$404.9$209.3

$148.8$129.7$117.2$105.3

$75.9$73.0

$46.4$45.6$44.7$43.8

$12.1

$1,937.3

$0 $500 $1,000 $1,500 $2,000 $2,500

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide

Florida & New York lead the way for insured coastal property at more than $1.9 trillion each.

Northeast state insured coastal exposure totals

$3.73 trillion.

Value of Insured Commercial Coastal Exposure (2004, $ Billions)

$994.8$437.8

$355.8$258.4

$199.4$121.3

$83.7$69.7

$52.6$45.3$43.3$39.4

$23.8$20.9$19.9$17.9$6.7

$1,389.6

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

New YorkFlorida

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaGeorgia

AlabamaMississippi

New HampshireDelaware

Rhode IslandMaryland

Source: AIR

58% or all insured coastal exposure is

commercial, totaling some $4.2 trillion in 2004

FINANCIAL STRENGTH &

RATINGS Industry Has Weathered

the Storms Well

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%

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006

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

Co

mb

ined

Rat

io

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Imp

airm

ent R

ate

Combined Ratio after DivP/C Impairment Frequency

Impairment rates are highly

correlated underwriting performance

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

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

Legal Liability & Tort Environment

Definitely Improving ButNot Out of the Woods

Cost of U.S. Tort System($ Billions)

$129

$130 $1

41

$144

$148 $1

59

$156

$156 $1

67

$169 $1

80 $205 $2

33 $246 $2

60

$261 $270 $2

82 $295

$0

$50

$100

$150

$200

$250

$300

$350

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

06E

07E

08E

Tort costs consumed 2.09% of GDP in 2005, down from 2.24% in 2003

Per capita “tort tax” was $880 in 2005, up from $680 in 2000

Reducing tort costs relative to GDP by just 0.25% (to 1.84%) would produce an

economic stimulus of $31.1B

Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.

Inflation Adjusted Tort CostsPer Capita, 1950-2005

$96

$199

$340

$444

$780$722

$878 $897 $914 $880

$0$100$200$300$400$500

$600$700$800$900

$1,000

50 60 70 80 90 00 02 03 04 05

Tort costs per capita have

increased 817% since 1950 even

after adjusting for inflation


Tort Costs Relative to GDP,1950-2005

0.62%

1.03%

1.34%1.53%

2.24%

1.82%2.03%

2.22%2.24%2.22%2.09%

$0

$0

$0

$0

$0

$0

50 60 70 80 90 00 01 02 03 04 05

Tort costs relative to GDP have increased more than

3 fold since 1950


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

$17.0$49.6 $58.7

$95.2

$17.1

$51.0$70.9

$86.7

$5.2

$20.4

$30.0

$49.4

$0

$50

$100

$150

$200

$250

1980 1990 2000 2005

Commercial Lines Personal Lines Self (Un)Insured

Bil

lion

s

Total = $39.3 Billion

*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.




Tort System Costs,2000-2008F

$179

$233$246

$270

$295

$260

$261

$261

$205

1.82%2.03%

2.22% 2.22%

2.04%2.09% 2.03%2.05%

2.24%

$100

$120

$140

$160

$180

$200

$220

$240

$260

$280

$300

00 01 02 03 04 05 06E 07F 08F

Tor

t S

yste

m C

osts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t C

osts

as

% o

f G

DP

Tort Sytem Costs Tort Costs as % of GDP

After a period of rapid escalation, tort system costs as % of GDP are now falling

Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.

Preventing/Limiting Erosionof Recent Tort Reform

• Tort Pendulum Likely to Swing Against Insurers as Political Environment Changes (WA referendum, FL No-Fault?)

• Insurers Must Remain Active Members of Tort Reform Coalitions at State and Federal Level

May have more success at the state level• Pursuing Good Cases Can Set Precedent & Bring About Quantum

Shifts in Judicial Philosophy Campbell v. State Farm (limited punitives) Safeco v. Burr, Geico v. Edo (FCRA reporting violations) Asbestos: Class actions limited; no pre-pack bankruptcies Products Liability: Merck’s successful Vioxx defense

• Educate Policyholders About Link Between Tort Environment and Cost/Availability of Insurance

Businesses understand; Need facts to support local efforts Personal lines customers understand relationship, agents do

• Tighten Contract Language From 9/11 to Katrina, alleged “ambiguities” cost big bucks

REGULATORY UPDATE

Busy Year for Insurersin Washington

Proposed IRS Rule Change: Domestic Captive Concerns?

• October 2007: IRS proposes rule change that would end deductible status of discounted loss reserves kept by captive insurers. Proposed regulation would:Defer the tax deduction for an incurred loss arising from

related party business until it is actually paid.Essentially result in treating the transaction as non-insurance

for tax purposes.Affect domestic captives (including foreign captives which have

elected to be treated as domestic for U.S. tax purposes) and all coverages.

Overrides the insurance tax treatment afforded to captive insurance transactions for decades by the courts and the IRS.

Source: Business Insurance article 10/18/07; Vermont Captive Insurance Association

Federal Legislative UpdateFederal Terrorism Reinsurance (TRIA)• TRIA expires 12/31/07. The current federal program offers $100 billion of coverage

subject to a $27.5B industry aggregate retention.

• Under S. XXXX: “Terrorism Risk Insurance Program Reauthorization Act of 2007” 7-Yr. Extension, expiring 12/31/14 Maintains 20% Direct Earned Premium Deductible for duration of Extension NBCR risks remain excluded (in contrast to House bill) Eliminates distinction between foreign and domestic acts of terrorism Deletes requirement that terrorist act be on behalf of foreign person or foreign interest Changes in definition of terrorist act require substantial rate and form filings in states Federal government’s cap remains at $100 billion through 2014 Requires Comptroller General to issue report within 1 year on feasibility of NBCR insurance

market; CG must also issue report within 180 days on obstacles in development of private sector market for terror insurance

• Administration has said it will not oppose Senate bill (issued veto threat for House)

Sources: Insurance Information Institute

Federal Legislative Update

Natural Disaster Coverage• Some insurers are pushing for federal catastrophic risk fund coverage in the

wake of billions of dollars of losses suffered by insurers from the 2004-2005 hurricane seasons.

• Legislative relief addressing property/casualty insurers’ exposure to natural catastrophes, such as the creation of state and federal catastrophe funds, has been advocated by insurers include Allstate and State Farm recently. However, there is active opposition many other insurers and all reinsurers.

• There are supporters in Congress, mostly from CAT-prone states. Skeptics in Congress believe such a plan would be a burden on taxpayers like the NFIP and that the private sector can do a better job. Unlike TRIA, the industry is not unified on this issue.

• Allowing insurers to establish tax free reserves for future catastrophe losses has also been proposed, but Congress has not yet indicated much support.

Sources: Lehman Brothers, Insurance Information Institute

Federal Legislative UpdateOptional Federal Charter (OFC)• Large P&C and life insurers are the major supporters of OFC. Supporters

argue that the current patchwork of 50 state regulators reduces competition, redundant, slows new product introductions and adds cost to the system.

• In general, global P/C insurers , reinsurers and large brokers mostly support the concept, while regulators (state insurance commissioners), small single-state and regional insurers, and independent agency groups largely oppose the idea. An optional federal charter is more favorable for global P&C insurers, because an insurer that operates in multiple states could opt to be regulated under federal rules rather than multiple state regulations. As a result, this could increase innovation in the industry.

• Currently appears to be more momentum for OFC for life than for P&C insurers based on the homogeneous nature of many life products. The debate should intensify and although passage may not occur in the current session of Congress, it may lay the groundwork for passage in the 2009-2010 session.

Sources: Lehman Brothers, Insurance Information Institute

Federal Legislative UpdateMcCarran-Ferguson Insurance Antitrust Exemption• Under McCarran-Ferguson Act of 1945, insurers have limited immunity under

federal anti-trust laws allowing insurers to pool past claims information to develop accurate (actuarially credible) rates.

• Very low level of understanding of M-F in Washington

• Certain legislators threaten to revoke McCarran-Ferguson because of alleged collusion in the wake of Hurricane Katrina. However, the view among some Washington insiders is that such a move would hurt small insurers with less resources rather than the large insurers perhaps being targeted. The current bills designed to revoke McCarran-Ferguson are S.618 and H.R. 1081.

• The government appointed Antitrust Modernization Commission in an April 2007 report strongly encouraged Congress to re-examine the McCarran-Ferguson Act. Notably, 4 of the commissions 12 members called for a full repeal of the law.

Sources: Lehman Brothers, Insurance Info. Institute

TRIA EXTENSION

ART/Captives Cannot Fill the Void if TRIA Expires

Terrorism Coverage Take-Up Rate Continues to Rise

Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute

24% 26%33%

44% 46% 44%48% 47%

54%59%

64%

03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4

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%!!

Insurance Industry Retention Under TRIA ($ Billions)

$10.0$12.5

$15.0

$25.0$27.5

$0

$5

$10

$15

$20

$25

$30

$35

Year 1(2003)

Year 2(2004)

Year 3(2005)

Year 4(2006)

Year 5(2007)

$ B

illi

ons

Source: Insurance Information Institute

•Individual company retentions rise to 17.5%

in 2006, 20% in 2007

•Above the retention, federal govt. pays 90% in

2006, 85% in 2007

Extension

Congress & Administration

want TRIA dead

Insured Loss Estimates: Large CNBR Terrorist Attack ($ Bill)

Type of Coverage New York WashingtonSan

FranciscoDes

Moines

Group Life $82.0 $22.5 $21.5 $3.4

General Liability 14.4 2.9 3.2 0.4

Workers Comp 483.7 126.7 87.5 31.4

Residential Prop. 38.7 12.7 22.6 2.6

Commercial Prop. 158.3 31.5 35.5 4.1

Auto 1.0 0.6 0.8 0.4

TOTAL $778.1 $196.8 $171.2 $42.3

Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.

Summary• Global commercial lines results were excellent in 2006 and

2007 with momentum for 2008• Soft pricing, limited growth opportunities, increasing

capacity, falling reinsurance prices suggest traditional insurers will look to recapture some of what has been lost to ART—This may be more difficult than many assume

• Will insurers lose discipline?• Major Challenges:

Slow Growth Environment AheadMaintaining price/underwriting disciplineHow/where to deploy/redeploy capitalManaging variability/volatility of results

Insurance Information Institute On-Line

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Documents

Mega-Trends in the World of Insurance: Impacts on Captive & Alternative Risk Transfer Markets