challenges & opportunities in the p/c insurance industry ...€¦ · massachusetts association...

Challenges & Opportunitiesin the P/C Insurance Industry

Focus on Massachusetts Markets

Massachusetts Association of Insurance Agents2006 Annual Convention

Boston, MANovember 3, 2006

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

• P/C Profit Overview: US vs. MA & Nearby States• Underwriting Trends

Primary & Reinsurance• Pricing/Availability Trends• Financial Strength & Ratings• Investments• Capital & Capacity• Catastrophe Loss Management

Residual Property Markets: US and MA• Key Line Results• Post-Katrina Litigation Update• Optional Federal Chart (OFC)• Terrorism: Are TRIA’s Days Numbered?

P/C PROFIT OVERVIEW

Awash in Profits, Starved for Growth

P/C Net Income After Taxes1991-2006E ($ Millions)*

$14,178

$5,840

$19,316

$10,870

$20,598$24,404

$36,819$30,773

$21,865

-$6,970

$3,046

$30,029

$56,668

$43,013

$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 06F

*ROE figures are GAAP; 1Return on avg. surplus. 2005 ROAS = 9.8% after adj. for one-time special dividend paid by the investment subsidiary of one company. 2Based on H1 results; 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= 10.5%2006 ROAS1,2 = 13.0%

2006 Net Income may shatter

previous records

-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*

US P/C Insurers All US Industries P/C excl. Hurricanes

ROE: P/C vs. All Industries 1987–2006:H1

*2006 P/C insurer ROE based on annualized H1 results.Source: Insurance Information Institute; Fortune

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

2004/5 ROEs excl. hurricanes

4 Hurricanes

Katrina, Rita, Wilma

Insurers will outperform only if CAT losses are “normal”

The Importance of Profits• Profits compensate shareholders for the assets they put at risk• Profitable companies can access capital markets under

favorable terms after mega-CATs or if market conditions are poor (e.g., post-9/11); Others will fail, are dissolved or acquired

• Preferred treatment by reinsurers• Profits lead directly to increased capacity• Profits build contingent capacity for mega-CATs• Profits enable investments in the future of the enterprise (tech,

people, etc.) and to seize upon new opportunities (new states, M&A, etc.)

• Profitable companies have higher financial strength and credit ratings

• Profitable companies have more political and public policy cloutCan lobby effective at state and federal levelCan help support research and

WALL STREET:

MAINTAINING THE CONFIDENCE OF WALL

STREET IS CRITICAL FOR MANY INSURERS

4.2%

4.0% 4.5%

3.8%

2.2% 2.5% 3.

3%

2.7% 3.

9%

2.6% 3.2%

2.9%

4.9%

8.7% 9.3%

-4.0

%

-3.5

%

-2.7

%

-4.1

%

-5.3

%

-4.5

%

-5.7

%

-5.8

%

-6.0

%

-6.2

%

-5.3

%

-5.6

%

-5.6

%

-1.3

%

-0.5

%

-5.5

%

-6.4

% -4.8

%

-5.5

%

-0.6

%

1.9%

2.1% 3.

6% 4.8%

3.4%

2.2% 2.

8%

5.0% 7.

0%

13.3

%

-10%

-5%

0%

5%

10%

15%

5-Aug

12-Aug

19-Aug

26-Aug

2-Sep

9-Sep

16-Sep

23-Sep

30-Sep

7-Oct

14-Oct

21-Oct

28-Oct

04-Nov

31-Dec

P/C Reinsurers Brokers

Source: SNL Securities; Insurance Information Institute

Change in YTD Stock Performance by Sector Pre- & Post-Katrina/Rita/Wilma

P/C & reinsurer stocks hurt but now fully recovered. Brokers rose on expectation of tighter conditions and demand for broker

services; closure of Spitzer issues.Katrina: Aug. 29

Rita comes ashore Sept. 24

Wilma landfall Oct. 24

P/C Insurance Stocks: Slow Start, Strong Finish in 2006

-2.54%

2.76%

4.71%

10.90%

13.46%

11.28%

10.34%

-5.0% 0.0% 5.0% 10.0% 15.0%

S&P 500

Life/Health

Reinsurers

P/C

All Insurers

Multiline

Brokers

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

Total YTD Returns Through October 27, 2006

P/C & reinsurer

stocks now up in 2006

on low CAT losses, strong

earningsBroker stocks hurt by weak

earnings

MASSACHUSETTS PROFITABILITY

KEY LINES &NEARBY STATES

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

10%12%14%16%18%

95 96 97 98 99 00 01 02 03 04

US MA

All P/C Lines ROE:US vs. MA, 1995–2004

Source: NAIC

Profitability in MA insurance markets is on average better than the US (PP Auto is the exception)

US = 7.7% MA = 11.1%

-5%

0%

5%

10%

15%

20%

95 96 97 98 99 00 01 02 03 04

US MA

Private Passenger Auto ROE:US vs. MA, 1995–2004

Source: NAIC

Profitability in the MA auto market lags behind the US

US = 8.5% MA = 5.9%

-10%

-5%

0%

5%

10%

15%

20%

25%

95 96 97 98 99 00 01 02 03 04

US MA

Homeowners Insurance ROE:US vs. MA, 1995–2004

Source: NAIC

Profitability in the MA homeowners market exceeds that of the US due to relatively low CAT losses

1995-2004 Avg.

US = 2.4%

MA = 13.3%

PP Auto: Average Return on Equity: US & MA, RI, CT, NH, VT, NY, NJ

1995-2004

5.9%8.5%

8.7%

9.2%11.0%

11.7%12.1%

13.2%

0% 5% 10% 15%

Connecticut

Rhode Island

New Hampshire

Vermont

New York

New Jersey

US

Massachusetts

Source: NAIC

1995-2004MA offers the lowest PP auto profitability of any state in the

Northeast

Average Return on Equity: US & MA, RI, CT, NH, VT, NY, NJ, Homeowners

1995-2004

3.4%8.5%

9.2%

12.1%13.3%

13.4%15.9%

18.5%

0% 5% 10% 15% 20%

Rhode Island

New York

Connecticut

Massachusetts

New Jersey

New Hampshire

Vermont

US

Source: NAIC

1995-2004

MA homeowners insurance has been relatively

profitable

$539 $552$585

$668 $671 $673$714 $721

$400

$450

$500

$550

$600

$650

$700

$750

NH VT NJ US MA RI CT NY

Average Expenditure for HO Ins.:US & Northeast States (2003)*

*Latest available.Source: NAIC, Insurance Information Institute (III)

MA homeowners insurance expenditures are about average

$683

$776$821

$983 $992$1,052

$1,161 $1,188

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

VT NH US CT RI MA NY NJ

Average Premiums for Auto Insurance US & Northeast States (2003)*


MA PP auto insurance expenditures are well above the US average

UNDERWRITING

Surprisingly Strong in 2005, Stage is Set for a

Good 2006!

115.8

107.4

100.198.3

92.7

100.7

9492.0

90

100

110

120

01 02 03 04 05H1 05 06H1 06F IIIForecast*

P/C Industry Combined Ratio

Sources: A.M. Best; ISO, III. *III forecasts/estimates for 2006 full year.

2005 figure reflects heavy use of reinsurance which

lowered net losses, but still a substantial deterioration

from first half 2005

2006 is could produce the best

underwriting result since the 94.9 combined ratio in 1955

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

94.0

85

90

95

100

105

110

115

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

Personal LinesCombined Ratio, 1993-2006E

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

A very strong 2006 is order due underwriting innovations

and low CAT activity

110.

3

110.

2

107.

6

103.

9 109.

7

112.

3

111.

1

122.

3

110.

2

102.

5

105.

1

96

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 06F

Commercial Lines Combined Ratio, 1993-2006E*

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 will benefit from relatively disciplined underwriting

and low CAT losses

($55)($50)($45)($40)($35)($30)($25)($20)($15)($10)($5)$0$5

$10$15$20$25$30

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

Underwriting Gain (Loss)1975-2006F*

Source: A.M. Best, Insurance Information Institute *2006F of $30.2B is annualized H1 gain of $15.1B

$ B

illio

ns

Insurers sustained a $5.9 billion underwriting loss in 2005. First half 2006 underwriting gain was $15.1B implying a record gain of about $30B for full-year

97.5

100.6 100.198.3

92.7 92.0

100.7

9.4% 10.4%

15.3%14.3%

15.9%

9.4%

13.0%

80

85

90

95

100

105

110

1978 1979 2003 2004 2005:H1 2005 2006:H1

Com

bine

d R

atio

6%

8%

10%

12%

14%

16%

18%

Ret

run

on E

quity

*

Combined Ratio ROE*

* 2006 figure is return on average statutory surplus.Source: Insurance Information Institute from A.M. Best and ISO data.

A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At

Combined ratios today must be below

95 to generate Fortune 500 ROEs

$10.

8

$22.

7

$13.

9

$9.9

$8.0

$5.0

$2.0$0.4

2.41.9

1.10.4

6.5

3.63.5

0.1

$0

$5

$10

$15

$20

$25

2000 2001 2002 2003 2004 2005E 2006E 2007E

Res

erve

Dev

elop

men

t ($B

)

0

1

2

3

4

5

6

7

Com

bine

d R

atio

Poi

nts

PY Reserve Development Combined Ratio Points

Impact of Reserve Changes on Combined Ratio

Source: A.M. Best, Lehman Brothers for years 2005E-2007F

Reserve adequacy is improving substantially

$6,3

20

$2,1

18

$1,7

29

$1,1

09

$850

$241

$148

$27

($1,

779)

($1,

686)

($1,

156)

($79

9)

($61

7)

($10

3)

($27

)

$3,5

13

($3,000)($2,000)($1,000)

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000

Oth

er L

iabi

lity

Rei

nsur

ance

Wor

k. C

omp

Prod

. Lia

b.

Com

ml.

MP

Fide

lity/

Sure

ty

Com

ml.

Aut

o

Med

Mal

Inte

rnat

iona

l

Finl

. Gua

rant

y

Spec

ial L

iab.

Oth

er

Spec

ial P

rop.

Hom

eow

ners

PP A

uto

Aut

o PD

2004 Prior Year Reserve Development by Line ($ Millions)

Source: A.M. Best, Lehman Brothers.

Longer-tail casualty coverages have been the source of most

reserve problems in recent years

Reserve Strengthening

Reserve Releases

EXPENSES

Will Expense Ratio Rise as Premium Growth Slows?

Personal Lines Underwriting Expense Ratio,* 1994-2005

21.8% 22.0% 21.8%

23.5%

29.8%

24.3%24.4%

23.6%

23.4%

22.7%23.2% 23.6%

23.5%

28.4%

27.7%

28.5%28.5%

30.8%31.1%

30.8%

30.6% 30.3%

30.6%

29.4%

20%

22%

24%

26%

28%

30%

32%

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

Auto Home

*Ratio of expenses incurred to net premiums written.Source: A.M. Best; Insurance Information Institute

Expenses ratios will likely rise as premium

growth slows

Personal vs. Commercial Lines Underwriting Expense Ratio*

23.4%24.3%

25.0%

30.8%

24.4%

24.5%24.8%25.6%

24.6%

25.6%24.7%

26.6%25.6%

30.0%

31.1%

29.4%29.9%

29.1%

26.6%

25.0%

20%

22%

24%

26%

28%

30%

32%

96 97 98 99 00 01 02 03 04 05

Personal Commercial

*Ratio of expenses incurred to net premiums written.Source: A.M. Best; Insurance Information Institute

Expenses ratios will likely rise as premium

growth slows

REINSURANCE MARKETS

Higher Reinsurance Costs Squeezing Insurers, Pushing Property CAT Prices Upward

Global Number of Catastrophic Events, 1970–2005

0

50

100

150

200

250

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

Natural catastrophes Man-made disasters

Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.

The number of natural and man-made

catastrophes has been increasing on a global

scale for 20 years

Record 248 man-made CATs &

record 149 natural CATs in 2005

110.

5

105.

0

113.

6

119.

2

104.

8

100.

8

100.

5 114.

3

106.

5 125.

8

111.

0 123.

3

108.

8

115.

8

106.

9

106.

7

106.

0

101.

9

105.

9

110.

1

115.

8

107.

4

100.

1

98.3

100.

725

9.0

162.

4

126.

5

108.

0

108.

5

90

110

130

150

170

190

210

230

250

270

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

Reinsurance All Lines Combined Ratio

Combined Ratio:Reinsurance vs. P/C Industry

Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

HurricaneAndrew

Sept. 11

Katrina, Rita, Wilma

4 Florida Hurricanes

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

-5%

-11%-9% -8%

-4%

2%

16%

21%

11%

-4%-6%

25%

-20%

-10%

0%

10%

20%

30%

40%

94 95 96 97 98 99 '00 '01 '02 '03 '04 05E 06F0

25

50

75

100

125

rate changes [left] index level [right]Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for 2006.

Reinsurance Prices Surged in 2006 Following Record CATs in 2005

US cat reinsurance price index: 1994 = 100

In hurricane-prone areas, property CAT

reinsurance prices are up 100-300%+

A Look Ahead to Reinsurance Markets for 2007

• Despite lack of major hurricane in 2006, reinsurance pricing strong in US for 2007

New capital entry not sufficient to fully meet demandReinsurance prices flat at best outside peak CAT zones

• Retrocessional market still tight• Softening in European p/c reinsurance markets• Softening in US casualty reinsurance markets

More pronounced if property cat reinsurers shift emphasis• Capital market role expanding

Hedge funds, private equitySecuritization: Insurance Linked SecuritiesSome concern over staying power, (lack of) regulationComplement or competitor to traditional reinsurance?

Sources: Insurance Information Institute.

UNDERWRITING AFFECTS FINANCIAL

STRENGTH

Is There Causefor Concern?

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 Growth8.6%

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%

Historical Ratings Distribution,US P/C Insurers, 2000 vs. 2005

A/A-52.3%

A++/A+9.2%

B++/B+26.4%

Vulnerable*12.1%

Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings ‘B’ and lower.

A/A-48.4%

D0.2%C++/C+

1.9%

E/F2.3% A++/A+

11.5%

C/C-0.6%

B++/B+28.3%

B/B-6.9%

2000 2005 A++/A+ shrinkage

Ratings agencies increasing emphasis on multiple

events require more capital

Ratings Agencies Tightening Requirements for CATs

2006 SRQ CAT Model Reqs.*•All Property Exposure•Auto Physical Damage•Reinsurance Assumed•Pools & Assessments•All Flood Exposure•WC Losses from Quake•Fire Following•Storm Surge•Demand Surge•Secondary Uncertainty

ALSO “A.M. Best will perform additional “stress-tested” risk-adjusted capital analysis for a second event in order to determine the potential financial condition of an entity post a severe event.”IMPLICATION: Some insurers may be required to carry more capital to maintain the same rating.

*SRQ = Supplemental Rating QuestionnaireSource: A.M. Best Review & Preview, January 2006.

Best currently estimates PML for

100-yr. wind & 250-yr. quake to determine capital

adequacy

PRICE & AVAILABILITY

Pricing Pictureis Mixed

-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

F20

07F

2008

F20

09F

2010

F

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

*2006-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006 figure of 2.9% is based on 2006:H1 data.

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

(post-Andrew)

2005: biggest real drop in premium since early 1980s

Property Catastrophe Price Index*1994 - 2006

0

20

40

60

80

100

120

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

WorldwideUSEuropean StormRest of the World

*Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B. Includes primary and reinsurance coverage.Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.

US CAT prices are continue to rise faster than anywhere else in

the world

$651 $668$691 $705 $703

$685 $689$723

$777$821

$867$844

$863

$600

$650

$700

$750

$800

$850

$900

$950

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

Average Expenditures on Auto Insurance

*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute

Countrywide auto insurance expenditures are expected to

rise just 0.5% in 2006

Will the “big guys”stay disciplined? So far, so good. Tiering

adopted to avoid adverse selection

$539 $552$585

$668 $671 $673$714 $721

$400$450$500$550$600$650$700$750

New H

amps

hire

Vermon

tNew

Jerse

y USMas

sach

usetts

Rhode Isla

ndConnec

ticut

New York

Average Premiums for HO Insurance US & New England States (2003)*


$418$440 $455

$481 $488$508

$536

$593

$668 $693 $711$739

$400$450$500$550$600$650$700$750$800

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

Average Expenditures on Homeowners Insurance

*Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute

Countrywide home insurance expenditures are expected to rise 4% in 2006, but much more

in hurricane zones

Hurricane zone residents can expect increases in the

20%-100% range, especially if insured by a state entity

$683$776

$821

$983 $992$1,052

$1,161 $1,188

$500$600$700$800$900

$1,000$1,100$1,200

Vermon

tNew

Ham

pshire US

Connectic

utRhode I

sland

Massa

chuse

tts

New York

New Je

rsey

Average Premiums for Auto Insurance US & New England States (2003)*


New Private Housing StartsWill Slow Through 2009

2.07

1.92

1.82

1.75

1.70 1.73

1.72 1.

771.75

1.48

1.351.

461.

291.

201.

011.

19

1.47

1.62

1.64

1.57

1.60 1.

711.

85 1.96

1.01.11.21.31.41.51.61.71.81.92.02.12.2

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

07F

08F

09F

10F

11F

12F

13-1

7F

Source: US Department of Commerce; Blue Chip Economic Indicators (3/06), Insurance Info. Institute

New home construction is expected to fall by 18% from

2005-2009 as interest rates rise. Exposure growth

forecast for HO insurers will slow as a result.

Millions of Units Homeowners accounts for 12% of Direct Premiums Written

Average Commercial Rate Change,All Lines, (1Q:2004 – 3Q:2006)

-0.1%

-3.2%

-7.0%

-9.4%-9.7%

-4.6%

-2.7%-3.0%

-5.3%-5.9%

-8.2%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06

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

Magnitude of rate decreases has diminished

greatly since mid-2005 but is growing again

Average Commercial Rate Change by Line

Source: Council of Insurance Agents & Brokers

Commercial accounts trended downward from early 2004 to mid-2005

though that trend moderated post-Katrina

Average Commercial Rate Change by Account Size

Source: Council of Insurance Agents & Brokers

Accounts of all sizes are renewing

downward and more quickly than in 06Q2

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2nd Qtr. 2006

71%

48%

28%21%

63%

32%

21%12% 10%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Southeast Southwest Pacific NW Northeast Midwest

Commercial Property Business Interruption

Source: Council of Insurance Agents and Brokers

Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest

Commercial Accounts Rate Changes,2nd Qtr. 2005 vs. 2nd Qtr. 2006

-6.0%

-9.1%-6.6%

-8.4%

-4.5%

9.3%

-5.6%-3.6%

-2.3%

-7.3%

-13.3%

-6.9%

-15%

-10%

-5%

0%

5%

10%

CommercialAuto

WorkersComp

CommercialProperty

GeneralLiability

Umbrella Average

2Q05 2Q06


Only commercial property is

renewing up in 2006

Commercial Accounts Rate Changes,2nd Qtr. 2006 vs. 3rd Qtr. 2006

-4.5%-5.6%

-3.6%-2.3%

-6.5%

-1.4%

-6.9%-5.5% -5.4%

-6.9%

9.3%

-6.8%-8%-6%-4%-2%0%2%4%6%8%

10%

CommercialAuto

WorkersComp

CommercialProperty

GeneralLiability

Umbrella Average

2Q06 3Q06


Even commercial property is now

renewing down in 2006

Average Rate Increase/Decreaseby Industry Class

5%

0%

-1%-2%

-4%

5%

-4%

0% 0%1%

-5%

0%

-5%

-7%-8%-6%-4%-2%0%2%4%6%

Energy Contracting Public Entity Transport. Habitational Service Manufacturing

September 2005 September 2006

Source: MarketScout.com

Largest increases are in the energy sector

INVESTMENTS

Does Investment Performance Affect

Discipline?

$0

$10

$20

$30

$40

$50

7576777879808182 83848586878889909192939495969798 9900010203040506

Net Investment Income$

Bill

ions

Growth History

2002: -1.3%

2003: +3.9%

2004: +3.4%

2005: +23.7%**

2006H1***: - 3.5%

Source: A.M. Best, ISO, Insurance Information Institute;**Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. ***Annualized H1:06 figure.

US P/C Net Realized Capital Gains,1990-2006:H1 ($ Millions)

$2,880$4,806

$9,893

$1,664

$5,997

$9,244$10,808

$18,019

$13,016

$16,205

$6,631

-$1,214

$6,610

$869

$9,696$9,125

$9,818

-$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 06Sources: A.M. Best, ISO, Insurance Information Institute.

Realized capital gains rebounded strongly in 2004/5 but are trailing

through the first half of 2006 due to weak markets. 3rd qtr. rebound will help.

-30%

-20%

-10%

0%

10%

20%

30%

40%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Source: Ibbotson Associates, Insurance Information Institute. *Through November 3, 2006.

Total Returns for Large Company Stocks: 1970-2006*

S&P 500 is up 9.54% so far in 2006*

Markets moving up as energy prices and LT interest

rates fall & earnings rise

Property/Casualty Insurance Industry Investment Gain*

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.2

$50.8$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** 06E*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 estimate based on actual annualized 2006:H1 result of $25.375B.**2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.

Investment gains are up but are only now comparable to gains seen in the late 1990s

UNDERWRITING CAPACITY

Can the Industry Efficiently Employ Its Increasing Capital?

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

7576777879808182838485868788899091929394959697989900010203040506

U.S. Policyholder Surplus: 1975-2006*

Source: A.M. Best, ISO, Insurance Information Institute *As of 3/31/06.

$ B

illio

ns

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

Capacity TODAY is $445.5B, 4.3% above year-end 2005, 56% above its 2002 trough and 33%

above its 1999 peak.

Foreign reinsurance and residual market

mechanisms absorbed 45% of 2005 CAT

losses of $62.1B

Announced Insurer Capital Raising*($ Millions, as of December 1, 2005)

$1,500

$38

$400$450$600$710

$300$100$140

$600

$129$297

$620

$124$202$150$299

$490

$3,200

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Ace Ltd.

Argonau

tAspen

AxisEndu

rance

Everest

ReFair

fax Finl.

Glacier

Re

HCC Insuran

ceIP

C Hldgs

Kiln PLC

Max R

eMon

tpelier

ReNav

igator

sOdyss

ey Re

Partner

RePlat

inumPXRE

XL Cap

ital

$ M

illio

ns

*Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.

As of Dec. 1, 19 insurers announced plans to raise $10.35 billion in new capital. Twelve start-ups plan to

raise as much as $8.75 billion more for a total of $19.1 billion. Actual total higher as Lloyd’s syndicates

have added capacity for 2006.

Announced Capital Raising by Insurance Start-Ups($ Millions, as of April 15, 2006)

$1,500

$1,000$1,000$1,000$1,000$1,000$1,000

$500 $500 $500 $500

$220 $180$100

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Harbo

r Poin

t*Amlin

Bermuda

Flagsto

ne Re

Validus H

oldings

Lanca

shire

Re*

*Aug

sbur

g Re

Ariel R

eHisc

ox B

ermud

aNew

Cast

le Re

Arrow C

apita

lXL/H

ighfie

ldsGre

enlig

ht Re

Omega S

pecialt

yAsce

ndent R

e$

Mill

ions

*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.Sources: Investment Bank Reports; Insurance Information Institute.

As of April 15, 14 start-ups plan to raise as much as $10 billion.

CATASTROPHE LOSS

MANAGEMENT

Insurers Have Done a Fairly Good Job at Managing CAT Risk

U.S. InsuredCatastrophe Losses ($ Billions)*

$7.5

$2.7

$4.7

$22.

9$5

.5 $16.

9$8

.3$7

.4$2

.6 $10.

1$8

.3$4

.6$2

6.5

$5.9 $1

2.9 $2

7.5

$100

.0

$61.

8

$6.2

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 0506

**20

??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. ** As of Sept. 30, 2006.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

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

$20.0 $24.0 $26.0$33.0 $33.0 $34.0 $35.0

$41.0 $42.0

$80.0

$0$10$20$30$40$50$60$70$80$90

Homest

ead H

urr (19

45, F

L)

Ft. Lau

derdale

Hurr

(1947

, FL)

Donna (

1960

, FL)

Okeech

obee

Hurr

(1928

, FL)

Galvest

on (1

900,

TX)Best

sy (1

965,

LA)LI E

xpres

s (19

38, N

Y)Katr

ina (20

05, L

A)*And

rew (1

992,

FL)*

Miam

i Hurr

(1926

, FL)

$ B

illio

ns

With rapid coastal development,

$40B+ storms will be more common

Source: AIR Worldwide **ISO/PCS estimate as of June 8, 2006

(Billions of 2005 Dollars) Northeast storms make

the Top 10 list

Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels

$9 $11 $11 $12 $16$25 $27

$38

$88

$108

$0

$20

$40

$60

$80

$100

$120

San Jo

se, C

A (7-1-

1911

; 6.6)

Portla

nd, OR (8

-12-18

77; 6

.3)

San Fra

ncisco

(6-1-

1838

; 7.2)

Mar

ked T

ree, A

R (1-5-

1843

; 6.5)

Northrid

ge, C

A (1-17

-1994

; 6.7)

Haywar

d, CA (1

0-21-1

868;

6.8)

Ft. Tejo

n, CA (1

-9-18

57; 7

.9)

Charle

ston, S

C (8-3-

1886

; 7.3)

*

New M

adrid

, MO (2

-7-18

12; 7

.7)*

San Fra

ncisco

(4-18

-1906

; 7.9)

$ B

illio

ns

With development along major fault lines, the threat of

$25B+ quakes looms large

Source: AIR Worldwide

(Billions of 2005 Dollars)

3 of the Top 10 are not West Coast events

Insured Losses from Top 10 Earthquakes Adjusted to 2005 Exposure Levels

Insured Loss & Claim Count for Major Storms of 2005*

$1.1

$40.6

$10.3$5.0

104383

1,047

1,744

$0$5

$10$15$20$25$30$35$40$45

Dennis Rita Wilma KatrinaSize of Industry Loss ($ Billions)

Insu

red

Loss

($ B

illio

ns)

02004006008001,0001,2001,4001,6001,8002,000

Cla

ims

(thou

sand

s)

Insured Loss Claims

*Property and business interruption losses only. Excludes offshore energy & marine losses.Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.

Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3

million claims

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)

$3.5 $3.8 $4.8 $5.0 $6.6 $7.4 $7.7$10.3

$21.6

$40.6

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Georges(1998)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Andrew(1992)

Katrina(2005)

$ B

illio

ns

Sources: ISO/PCS; Insurance Information Institute.

Seven of the 10 most expensive hurricanes in US history

occurred in the 14 months from Aug. 2004 – Oct. 2005:

Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne

2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season

Source: WeatherUnderground.com, January 18, 2006.

All 21 names were used for the first time ever, so

Greek letters were used for the

final storms

2005 set a new record for the number of hurricanes &

tropical storms at 28, breaking the old record set in 1933.

2006 Hurricane Season: Much Less Active Than Expected

Source: WeatherUnderground.com, October 20, 2006.

What a difference a year makes! Just 9

named storms through Oct. 20, 2006 vs. 22 as of

same date in 2005!

2006 Hurricane Season:Forecasts Repeatedly Scaled Back

13101517

26100%

275%

140%195%

90%

0

5

10

15

20

25

30

50-YearAverage*

2005 Actual May 31Forecast

August 3Forecast

September 1Forecast

Nam

ed S

torm

s

0%

50%

100%

150%

200%

250%

300%

Net

Tro

pica

l Cyc

lone

Act

ivity

Named Storms Net Tropical Cyclone Activity

2006 hurricane seasons has turned out to be far less severe than anticipated

*Average over the period 1950-2000.Source: Insurance Information Institute compilation of forecasts by Dr. William Gray, Colorado State University.

Global Number of Catastrophic Events, 1970–2005

0

50

100

150

200

250

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Natural catastrophes Man-made disasters

Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.

The number of natural and man-made

catastrophes has been increasing on a global

scale for 20 years

Record 248 man-made CATs &

record 149 natural CATs in 2005

Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E

0%

2%

4%

6%

8%

10%

12%

14%

16%

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05E

USWorldwideUS average: 1984-2004

*Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B.

Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.

US CAT losses were a record 13.8% of

net premiums earned in 2005 and were 4.2 times the 1984-2004 average

of 3.3%

Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade

4

6

65

4

6

88

5

8

6

9

1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) &Katrina, Rita, Wilma (2005)).

Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.

10

1930s – mid-1960s:Period of Intense Tropical

Cyclone Activity

Mid-1990s – 2030s?New Period of Intense

Tropical Cyclone Activity

Tropical cyclone activity in the mid-1990s entered the active

phase of the “multi-decadal signal” that could last into the 2030s

Already as many major storms in

2000-2005 as in all of the 1990s


Insured Losses: $110BEconomic Losses: $200B+

$70

$30

$5 $4 $1$0

$20

$40

$60

$80

NY NJ PA CT Other

Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm

Total Insured Property Losses =

$110B, nearly 3 times that of

Hurricane Katrina

Distribution of Insured Property Losses,

by State, ($ Billions)

$147.2

$42.1

$75.6

$0

$20

$40

$60

$80

$100

$120

$140

$160

US RI MA

$ B

illio

ns

Surplus backing Top 10 home insurers in US (and in most states) is much larger than that of MA. This issue is related to peculiarities in the

state’s auto market.

Source: HighlineData LLC; Insurance Information Institute.

(Billions of Dollars)

Surplus Backing Top 10 Homeowners in US vs. MA, 2005

Homeowner insurer surplus in

tiny RI is 80% larger than MA

Hurricane Katrina Claim Status on Storm’s 1st Anniversary*

In Process, 3%

Mediation/ Litigation, 2%

Settled, 95%

95% of the 1.2 million

homeowners insurance claims in Louisiana & Mississippi are

settled, with just 2% m dispute

*Hurricane Katrina made its north Gulf coast landfall August 29, 2005.Source: Insurance Information Institute survey, August 2006.

Hurricane Katrina Insured Loss Distribution by State ($ Millions)*

Mississippi, $13,605 , 33.5%

Louisiana, $25,275 , 62.3%

Tennessee, $59.0 , 0.1%Florida, $572.0 , 1.4%

Georgia, $36.0 , 0.1%Alabama, $1,032 ,

2.5%

*As of June 8, 2006Source: PCS division of ISO.

Louisiana accounted for

62% of the insured losses

paid and 56% of the claims filedTotal Insured

Losses = $40.579 Billion

Hurricane Katrina Loss Distribution by Line ($ Billions)*

Homeowners, $17,564.0 , 43%

Commercial Property & BI, $20,847.0 , 52%

Vehicle, $2,168.0 , 5%

Total insured losses are

estimated at $40.579 billion

from 1.7438 million claims. Excludes $2-

$3B in offshore energy losses


Hurricane Katrina Claim Count Distribution by State*

Mississippi, 515,000 , 29.5%

Tennessee, 15,000 , 0.9%

Louisiana, 975,000 , 55.9%

Florida, 122,000 , 7.0%

Georgia, 7,800 , 0.4%

Alabama, 109,000 , 6.3%


Louisiana accounted for 62%of insured

losses paid and 56% of claims filed

Total # Claims = 1,743,800

Hurricane Rita Claim Count Distribution by State*

Texas, 171,000 , 44.6%

Tennessee, 3,500 , 0.9%

Louisiana, 185,000 , 48.3%

Arkansas, 5,500 , 1.4%Florida, 6,000 , 1.6%

Alabama, 5,000 , 1.3%

Mississippi, 7,000 , 1.8%


Louisiana accounted for 48.3% of the

insured losses, Texas 44.6%.

Excludes offshore energy losses of $2-3BTotal # Claims

= 383,000

Hurricane Rita Loss Distribution, by Line ($ Millions)*

Homeowners, $2,974.2 , 59%

Commercial Property & BI, $1,861.2 , 37%

Vehicles, $211.0 , 4%Total insured

losses are estimated at $5.0

billion (excl. offshore energy of $2-$3B) from 383,000 claims.


Hurricane Wilma Loss Distribution by Line ($ Millions)*

Homeowners, $7,350 , 72%

Commercial Property & BI, $2,200 , 21%

Vehicle, $750 , 7%Total insured

losses are estimated at $10.3 billion from 1.047

million claims

*As of June 8, 2006. All losses are in FL.Source: PCS division of ISO.

Hurricane Wilma Claim Count Distribution by Line*

Homeowners, 700,000 , 67% Commercial

Property & BI, 82,000 , 8%

Vehicle, 265,000 , 25%


estimated at $10.3 billion from 1.047

million claims

*As of June 8, 2006. All losses are in FL.Source: PCS division of ISO.

Hurricane Ophelia Loss Distribution by Line ($ Millions)*

Homeowners, $27.0 , 77%

Commercial Property & BI, $5.0

, 14%

Vehicle, $3.0 , 9%Total insured

losses are estimated at $35.0

million from 10,600 claims

*As of June 8, 2006. All losses are in NC.Source: PCS division of ISO.

Hurricane Ophelia Claim Count Distribution by Line*

Homeowners, 8,000 , 76%

Commercial Property & BI,

1,000 , 9%

Vehicle, 1,600 , 15%

*As of June 8, 2006. All losses are in NC.Source: PCS division of ISO.


estimated at $35.0 million from 10,600

claims

2005 Storms Have Developed Adversely

$34.4

$6.1 $4.7$8.4 $9.4

$5.0$10.3

$5.0

$38.1$40.6

$0$5

$10$15$20$25$30$35$40$45

Katrina Wilma RitaSource: Insurance Information Institute from PCS survey data.

Are the models

inaccurate?

Wilma is the storm with the most

extraordinary adverse development

+18.0%

+54.0%+6.3%

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

1986-2005¹

Utility Disruption0.1%

Terrorism7.7%

All Tropical Cyclones3

47.5%

Tornadoes2

24.5%

Water Damage0.1%

Civil Disorders0.4%

Fire6

2.3%

Wind/Hail/Flood5

2.8%

Earthquakes4

6.7%

Winter Storms7.8%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 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 $289.1 billion from

1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up

from 27.1% from 1984-2003.

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


Massachusetts has the 4th highest amount of coastal exposure at

more than $662 Billion.

Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions)

63.1%60.9%

57.9%54.2%

37.9%33.6%33.2%

28.0%25.6%25.6%

23.3%13.5%

12.0%11.4%

8.9%5.9%

1.4%

79.3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

FloridaConnecticut

New YorkMaine

MassachusettsLouisiana

New JerseyDelaware

Rhode IslandS. Carolina

TexasNH

MississippiAlabamaVirginia

NCGeorgia

Maryland


More than half (54.2%) of all

insured exposure in MA is coastal

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

$512.1$306.6$302.2

$247.4$205.5

$88.0$65.1$64.5$60.0$60.0

$36.5$29.7$26.6$25.9$24.8$20.9

$5.4

$942.5

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

FloridaNew York

MassachusettsTexas



MaineVirginia

North CarolinaAlabamaGeorgia

DelawareRhode Island

NewMississippiMaryland

Source: AIR

Massachusetts has more than $300 billion in insured

residential exposure—3rd

highest in the US!

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



VirginiaMaine

North CarolinaGeorgia

AlabamaMississippi

New HampshireDelaware

Rhode IslandMaryland

Source: AIR

Commercial property exposure in MA is 4th

highest in the US at $356 billion

Percentage of California Homeowners with Earthquake

Insurance, 1994-2004*

32.9% 33.2%

19.5%17.4%

14.6% 13.3% 13.8%15.8%15.7%

16.8%

0%

5%

10%

15%

20%

25%

30%

35%

94 96 97 98 99 00 01 02 03 04*Includes CEA policies beginning in 1996.Source: California Department of Insurance; Insurance Information Institute.

The vast majority of California homeowners forego earthquake

coverage & play Russian Roulette with their most valuable asset.

Property Residual Markets

Explosive Growth Due toRapid Coastal Exposure

Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars)

* MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid.Source: Insurance Information Institute

-$516

-$1,425

-$1,770

-$954

-$595 *

-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000

-$800-$600-$400-$200

$0

Florida HurricaneCatastrophe Fund

(FHCF) Florida Citizens Louisiana Citizens

Mississippi WindstormUnderwriting

Association (MWUA)

2004 2005

Hurricane Katrina pushed all of the residual market property plans in

affected states into deficits for 2005, following an already record hurricane loss year in 2004

US FAIR Plans Exposure to Loss* (Billions of Dollars)

Source: PIPSO; Insurance Information Institute *Hurricane exposed states only.

$387.8$400.4

$345.9

$269.6

$140.7$113.3

$170.1

$96.5

$40.2

$0$50

$100$150$200$250$300$350$400$450

1990 1995 1999 2000 2001 2002 2003 2004 2005

In the 15-year period between 1990 and 2005, total exposure to loss in the FAIR plans has

surged by a massive 965 percent, from $40.2bn in 1990

to $387.8bn in 2005!

Total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $419.5 billion in 2005.

US Beach and Windstorm Plans Exposure to Loss (Bill. of Dollars)

Source: PIPSO; Insurance Information Institute. *Hurricane exposed states only.

$31.7$30.0$26.4$22.4

$103.5$108.0$111.8

$53.5

$14.5

$0

$20

$40

$60

$80

$100

$120

1990 1995 1999 2000 2001 2002 2003 2004 2005

In the 15-year period between 1990 and 2005, total exposure

to loss in the Beach and Windstorm plans has more

than doubled, from $14.5bn in 1990 to $31.7bn in 2005.

In 2002 Florida combined its Windstorm and Joint Underwriting Association to create Florida Citizens, so Florida data shifted to the FAIR plans from this date.

Massachusetts FAIR Plan Exposure to Loss ($ Billions)

Source: PIPSO; Insurance Information Institute

$54.0

$39.2

$26.7$20.5

$16.7$15.3$10.3$8.3

$4.1

$0

$10

$20

$30

$40

$50

$60

1990 1995 1999 2000 2001 2002 2003 2004 2005

In the 15-year period between 1990 and 2005, total exposure to loss in the MA FAIR Plan has surged by 1317 percent, from $4.1bn in 1990 to $54bn in 2005.

Mass. FAIR Plan HabitationalPolicy Count (1990-2005)


45,480

75,06087,026 84,287 87,033 97,700

115,185

154,438

191,828

0

50,000

100,000

150,000

200,000

250,000

1990 1995 1999 2000 2001 2002 2003 2004 2005

In the 15-year period between 1990 and 2005, the MA FAIR

plan habitational policy count has shown rapid growth, going from 45,480 policies in 1990 to

191,828 policies in 2005, an increase of 322%

MA FAIR Plan Operating Gain or Loss 2000-2005 ($ Millions)


$32.94

$9.46

-$14.27

-$3.38

$1.96

-$6.20

-$20

-$10

$0

$10

$20

$30

$40

2000 2001 2002 2003 2004 2005

In three of the last six years the MA FAIR Plan has

incurred an operating deficit.

KEY LINE RESULTS:

A SUCCESSFUL SHIFT TO THE UNDERWRITING

CULTURE?

Private Passenger Auto

Private Passenger Auto is Enormous Part of P/C Industry

Total 2004 Direct Personal + Commercial Premiums Written = $467.0 Billion

All Commercial Lines

53.9%

PPA Coll/Comp14.2%

Homeowners11.4%

PPA Liability20.5%

Source: A.M. Best; Insurance Information Institute

Private passenger auto accounted for 34.7% or $162.2B in DPW in 2004

$251.6B $53.2B

$95.8B

$66.4B

101.7101.3101.3101.099.5

101.1

103.5

109.5107.9

104.2

98.4

94.395.1

93.0

90

95

100

105

110

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

Private Passenger Auto Combined Ratio

Average Combined 1993 to 2005= 101.4

Most auto insurers have shown sig-nificant improvements in underwriting

performance since mid-2002

Sources: A.M. Best; III

PPA is the profit juggernaut of the p/c

insurance industry today

9%

14%13%

15%

12%14%14%

11% 12%12%

10%

8%

2% 2%

4%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

RNW: Private Passenger Auto, United States, 1992-2006F

Source: NAIC; Insurance Information Institute

Private passenger auto profitability deteriorated throughout the 1990s but

has improved dramatically

Segmentation should help profitability

-4%

-2%

0%

2%

4%

6%

8%

10%

00:Q

1

00:Q

3

01:Q

1

01:Q

3

02:Q

1

02:Q

3

03:Q

1

03:Q

3

04:Q

1

04:Q

3

05:Q

1

05:Q

3

06:Q

1

Auto Insurance Component of CPI Personal Auto-PD Pure Premium

Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.

Pure Premium Spread: Personal Auto PD Liability, 2000-2006:Q1

Margin necessary to maintain PPA

profitability

2000 PPA Combined=110

2004 PPA Combined=94

Inversion of pure premium spread is a warning sign but now in synch

-2.2%

-5.3%-4.0%

-3.3%

-0.9%

-2.6%

-5.4% -5.6%

3.0%3.6% 3.8% 3.4%

2.8% 2.4%

-0.3%

4.7%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06*

Frequency Severity

Bodily Injury: Severity & Frequency Trends Offset Severity

*2nd quarter 2006 vs. 2nd quarter 2005.Source: ISO Fast Track data.

Medical inflation

is a powerful

cost driver

0.8%

-1.5%

0.3%

-1.8%-2.6% -2.1% -1.9%

-5.7%

3.9% 3.3% 2.8%

0.5%

2.8%4.0%4.3%

6.2%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05 06*

Frequency Severity

PD Liability: Frequency Trend Roughly Offsets Severity

Fewer accidents, but more damage when they occur:

Higher Deductibles?


-1.6%

1.1%

-1.1%

0.0%

-0.6%

-7.2%-5.4%

-2.5%

3.2%

6.5%

-4.0%

0.5%

4.8%

-3.0%

6.3%

16.1%

-10%

-5%

0%

5%

10%

15%

20%

99 00 01 02 03 04 05 06*

Frequency Severity

PIP: Frequency Trend Now Offsets Rising Claim Severity

Fraud caused problems from

1999-2001

Is No-Fault living on borrowed time?


2.6%

-0.4%

1.9%

-3.8%-5.1% -4.6%

-1.7%

-4.5%

3.7% 3.7%

1.6%

3.9% 3.7%3.0%

4.1%

6.8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05 06*

Frequency Severity

Collision: Frequency Trend Offsetting Rising Claim Severity


-1.7% -2.6%

3.3%

-5.7%

-2.1%

-8.3%

-3.1% -3.6%-6.9%

15.1%

19.3%

-4.1%-2.4%

3.3%

-4.7%

8.9%

-10%

-5%

0%

5%

10%

15%

20%

25%

99 00 01 02 03 04 05 06*

Frequency Severity

Comprehensive: Favorable Frequency and Severity Trends

Comprehensive severity is up

substantially due to weather losses


Homeowners

Private Passenger Auto is Enormous Part of P/C Industry

Total 2004 Direct Personal + Commercial Premiums Written = $467.0 Billion

All Commercial Lines

53.9%

PPA Coll/Comp14.2%

Homeowners11.4%

PPA Liability20.5%

Source: A.M. Best; Insurance Information Institute

Private passenger auto accounted for 34.7% or $162.2B in DPW in 2004

$251.6B$53.2B

$95.8B

$66.4B

117.7

158.4

113.6118.4

112.7

121.7

101.0

108.2111.4

121.7

109.3

98.294.4

100.3

92

113.0109.4

90

100

110

120

130

140

150

160

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

Homeowners Insurance Combined Ratio

Average 1990 to 2005= 113.1

Insurers have paid out an average of $1.13 in losses for every dollar earned

in premiums over the past 16 years


Rates of Return on Net Worth for Homeowners Ins: US

*Net of reinsurance; Excludes losses to state residual markets (FAIR, Beach & Wind Plans).Source: NAIC; 2004/5 figures are Insurance Information Institute estimates.

9.7%11%

7.0%

-1.7%-4.2%

3.6%

12.4%

5.4%2.5% 5.4% 3.8%

1.4%

-7.2%-10%

-5%

0%

5%

10%

15%

93 94 95 96 97 98 99 00 01 02 03 04E 05E

Averages: 1993 to 2005EUS HO Insurance = +3.8%*

($10.60)

($0.21)

$0.69$0.43$0.86$1.08$1.23$1.28$1.43$1.16$1.47$1.88

($10.39)

($3.73)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

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

Underwriting Gain (Loss) in Florida Homeowners Insurance,

1992-2005E*

*2005 estimate by Insurance Information Institute based on historical loss and expense data for FLadjusted for estimated 2005 residential windstorm losses of $7.35B.

$ B

illio

ns

Florida’s homeowners insurance market produces

small profits in most years and enormous losses in others

-$10.6-$10.8-$10.1-$9.7

-$8.8-$7.7

-$6.5-$5.2

-$3.8-$2.7

-$1.2

$0.7

-$9.7

-$13.4($16)

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

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

Cumulative Underwriting Gain (Loss) in Florida Homeowners

Insurance, 1992-2005E*

$ B

illio

ns

It took insurers 11 years (1993-2003) to erase the UW loss associated with

Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits &

2005 deepened the hole.

*2005 estimate by Insurance Information Institute based on historical loss and expense data for FLadjusted for estimated 2005 residential windstorm losses of $7.35B.

COMMERCIAL MULTI-PERIL

COMMERCIAL AUTO

119.

0

119.

8

108.

5

125.

0

113.

1

115.

0 121.

0

116.

2

116.

1

104.

9

101.

9

100.

7

116.

8

113.

6

115.

3

122.

4

115.

0

117.

0

97.3

89.0

97.7

93.8

80

85

90

95

100

105

110

115

120

125

130

95 96 97 98 99 00 01 02 03 04 05

CMP-LiabilityCMP-Non-Liability

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

Liab. Combined 1995 to 2005 = 114.6

Non-Liab. Combined = 107.1


CMP- has improved recently

122.6

107.8

116.0

111.9109.6

113.8

107.6

99.5

92.095.3

80

85

90

95

100

105

110

115

120

125

96 97 98 99 00 01 02 03 04 05

Farmowners Multi-Peril

Average Combined Ratio 1996 to 2005 = 106.1


FMP- has improved

substantially over the past decade

112.

1

112 113 11

5.9 12

0.5

120.

1

106.

6

99.4

96.6

93.396

.7

102.

2

99.0

99.7

99.0

103.

6

102.

3

95.9

92.1

87.1 90

.7

122.5

80

85

90

95

100

105

110

115

120

125

95 96 97 98 99 00 01 02 03 04 05

Commercial Auto Liability& PD Combined Ratios

Average Combined: Liability = 110.2

PD = 97.1


Commercial Auto has improved dramatically

INLAND MARINE

97.3

95.7 97

.1

101.

9

92.8

100.

2

83.8

80.8 82

.5

89.9

106.

0

102.

0 105.

9

108.

0

110.

1

115.

8

107.

5

100.

1

98.4 10

0.7

80

85

90

95

100

105

110

115

120

96 97 98 99 00 01 02 03 04 05

Inland MarineAll Lines

Inland Marine vs. All P/C Lines

Avg. Combined 1996 to 2005Inland Marine = 92.2All P/C Lines = 105.5


Inland Marine has consistently

outperformed the industry overall

WORKERS COMPENSATION

OPERATING ENVIRONMENT

Workers Comp Calendar Year vs. Ultimate Accident Year – Private Carriers

10197

111 110 107102101

106

120

131138 135

124

90 90

100 101107

115118

122

97

105

96

80

90

100

110

120

130

140

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

Calendar Year Accident Year

Percent

p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2005 and developed to ultimateSource: Calendar Years 1994-2004, A.M. Best Aggregates & Averages; Calendar Year 2005p and Accident Years 1994-2005pbased on NCCI Annual Statement Analysis.Includes dividends to policyholders

Workers Comp Combined Ratios, 1994-2005P

Lost-Time Claims

-4.2 -4.4

-9.2

-6.9-5.7

-4.3 -3.9

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5 -4.5

-10

-8

-6

-4

-2

0

2

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

Cumulative Change of –45.8%(1991-2004)

Accident Year

Percent Change

Workers Comp Lost-TimeClaim Frequency (% Change)

2005p: Preliminary based on data valued as of 12/31/20051991-2003: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI

IndemnityClaim Cost (000s)

Lost-Time Claims

$9.9 $9.6 $9.4 $9.8 $10.0 $10.6$11.4

$12.4$13.6

$15.1$16.5 $16.9

$17.7$18.6 $19.1

$5

$7$9

$11

$13$15

$17

$19

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

Annual Change 1992–1996: +1.3%Annual Change 1997–2004: +7.4%

2005p: Preliminary based on data valued as of 12/31/20051991-2004: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI

Accident Year

Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2005p

Cumulative Change = +103.2%(1993-2005p)

$8.3 $8.4 $8.2 $8.9 $9.4 $10.1$11.1

$12.0$13.2

$14.2$16.0

$17.4$19.0

$20.9$22.7

$5$7$9

$11$13$15$17$19$21$23

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

Annual Change 1992–1996: +4.1%Annual Change 1997–2005: +9.5%

Accident Year

MedicalClaim Cost ($000s)

2005p: Preliminary based on data valued as of 12/31/20051991-2004: Based on data through 12/31/2004, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies

Workers Comp Medical Claims Continue to Climb

Cumulative Change = +176.8%(1993-2005p)

Med Costs Share of Total Costs is Increasing Steadily

Indemnity56%

Medical44%

Source: NCCI (based on states where NCCI provides ratemaking services).

Indemnity52%

Medical48%

Indemnity42%

Medical58%1985

1995

2005p

WC Costs Higher Than GeneralHealth Due to Price & Utilization

109%136%

120%

184%

145%

204%

0%

50%

100%

150%

200%

250%

Price Utilization Cost

Acute & Trauma Chronic & ComplexSource: NCCI

Workers Comp vs. Group HealthFirst Three Months Following Injury, GH = 100%

OTHER LIABILITY

138.6

117.6

108.5112.3

104.5110.5

122.6 124.4

111.8114.4 112.1

80

90

100

110

120

130

140

150

95 96 97 98 99 00 01 02 03 04 05

Other LiabilityCombined Ratios*

Average Combined Ratio 1995-2005

116.1

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

Improvements in tort and D&O environment have

contributed to performance

D&O Premium Index(1974 Average = 100)

682746 704 720 720 771 806 793

726619

539 503560

720

931

1,2371,113

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

Source: Tillinghast Towers-Perrin, 2005 Directors and Officers Liability Survey.

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

146% from 1999-2003

POST-KATRINA LITIGATION

UPDATE

Insurers Are Ahead

Post-Katrina Litigation Update

• 95% of HO claims settled as of One-Year Anniversary• About 2% in dispute (mediation/litigation) in LA/MS• Insurers have won several major decisions

Leonard v. Nationwide (vindication of agent on allegations of misrepresentation)Class Actions Contained in MS: Each case tried on its meritsMost cases no longer economical to pursue

• A.G. Hood Case Still OutstandingCase substantially weakened, though not bound by Fed court decisions

• Trial Lawyers will Try Find Better Cases, Refine Classes• Agent E&O issues still loom• Misc. commercial litigation: coverage disputes, pollution

(e.g., Murphy Oil settlement)

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

Source: Tillinghast-Towers Perrin.

$129$130$141$144$148$159$156$156$167$169$180$205

$233$246$260

$277$295

$314

$0

$50

$100

$150

$200

$250

$300

$350

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

Tort costs will consume an estimated 2.25% of GDP in 2006

Per capita “tort tax” was $886 in 2004, up from $680 in 2000

Reducing tort costs relative to GDP by just 0.25% (to about 2%) would

produce an economic stimulus of $27.5B

Personal, Commercial & Self (Un) Insured Tort Costs

$78.2$106.8

$161.5 $173.3$52.0

$72.3

$84.2$86.8

$20.4

$30.0

$45.3$49.4

$0

$50

$100

$150

$200

$250

$300

$350

1990 2000 2003 2004

Commercial Lines Personal Lines Self (Un)Insured

Bill

ions

Total = $150.6 Billion

Source: Tillinghast-Towers Perrin

Total = $209.1 Billion

Total = $291.0 BillionTotal = $309.5 Billion

Tort System Costs,2000-2007F

$179

$232$246

$260$277

$314$295

$206

1.83%2.03%

2.22% 2.22% 2.23% 2.27%2.25%2.23%

$100

$150

$200

$250

$300

$350

00 01 02 03 04 05E 06F 07F

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: Insurance Information Institute estimates from Tillinghast-Towers Perrin methodology.

After a period of rapid escalation, tort system costs as % of GDP appear to be stabilizing

Business Leaders Ranking of Liability Systems for 2005

Best States1. Delaware2. Nebraska3. North Dakota4. Virginia5. Iowa6. Indiana7. Minnesota8. South Dakota9. Wyoming10. Idaho

Worst States41. Hawaii42. Florida43. Arkansas44. Texas45. California46. Illinois47.Louisiana48.Alabama49. West Virginia50.Mississippi

Source: US Chamber of Commerce 2005 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2005ND, IN, SD, WY

Drop-OffsID, UT, NH, KS

NewlyNotorious

HI, FL

RisingAbove

MO, MT

LA, AL and MS’s liability systems are

ranked among the worst in the country by the US Chamber of Commerce

The Nation’s Judicial Hellholes(2005)

Source: American Tort Reform Association; Insurance Information Institute

TEXASRio Grande

Valley and Gulf Coast

South Florida

ILLINOISCook County

Madison CountySt. Clair County

West Virginia

There were notably fewer “Judicial

Hellholes” in 2005

Dishonorable Mention

WI Supreme Ct.Watch ListCalifornia

Eastern KentuckyEastern Alabama

PhiladelphiaNew Mexico

DelawareOklahoma

Orleans Parish, LAWashington, DC

Non-Admitted & Reinsurance Reform ActA Step in the

Right Direction

Summary of Nonadmitted & Reinsurance Reform Act (HR 5637)

• NRRA Passed by House 9/28/06 by unanimous 417-0 vote; Senate prospects uncertain.

• Gives exclusive regulatory authority to insured’s home state forplacement of nonadmitted insurance

• Establish uniform system for collection/allocation of premium tax obligations related to nonadmitted insurance

• Establishes uniform standards for surplus lines eligibility• Pre-empts state diligent search requirements for sophisticated

commercial buyers• Makes ceding insurer’s state of domicile the single point of

regulation with respect to credit for reinsurance• Prevents states from applying laws in extra-territorial manner• Creates uniformity in reinsurer solvency regulation based on

NAIC accreditation requirementsSource: LeBoeuf, Lamb, Greene & MacRae LLP, Oct. 4, 2006.

Gross Surplus Lines Premiums Written (Non-Admitted GPW)

$ Billions

$28.8

$33.2$34.9

$25

$27

$29

$31

$33

$35

$37

03 04 05Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute.

The importance of Surplus Lines is demonstrated by much faster growth than for the overall P/C

insurance industry

+$4.4B+21.4%

+$1.7B+5.3%

Optional Federal Charter (OFC)

A Divisive Issue

Optional Federal Charter• Legislation introduced in the House (National

Insurance Act) in Sept. 2006 by Rep. Edward Royce (R-CA); Similar legislation introduced earlier in 2006 Senate by John Sununu (R-NH) and Tim Johnson (D-SD)

• General agreement that current system is inefficient, expensive, duplicative and stifles innovation

• OFC appears to be gaining some traction, but new Congress and change in party in House implies need for a great deal of education as general awareness of industry issues remains low

• OFC still probably 2+ years awaySource: Insurance Information Institute.

TRIA EXTENSION

The Burden Grows, and the Clock is Ticking

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%!!

Terrorism Insurance Take-Up Rates by Region

26% 30%22% 19%

53%

67%

50%

34%

47%53% 53%

58%

0%10%20%30%40%50%60%70%80%

Midwest Northeast South West

The Northeast has the highest take-up rate of any region


Terrorism Premium as a Percent of Property Premium by Region

3.8%4.2% 3.9% 4.1%

5.4%4.7%

3.3%

4.8%4.4%

3.9%4.5%4.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Midwest Northeast South West

Northeast pricing is higher, reflecting risk


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

illio

ns

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)

0.40.80.61.0Auto

$42.3$171.2$196.8$778.1TOTAL

4.135.531.5158.3Commercial Prop.

2.622.612.738.7Residential Prop.

31.487.5126.7483.7Workers Comp

0.43.22.914.4General Liability

$3.4$21.5$22.5$82.0Group Life

Des Moines

San FranciscoWashingtonNew YorkType of Coverage

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

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

0.40.80.60.2Auto

$27.3$92.2$106.2$446.5TOTAL



31.487.5126.7313.2Workers Comp


$3.4$21.5$22.5$37.7Group Life

Des Moines



Insured Loss Estimates: Truck Bomb Terrorist Attack ($ Bill)

0.00.00.00.0Auto

$3.0$8.8$5.5$11.8TOTAL



1.53.92.83.5Workers Comp


$0.1$0.3$0.2$0.3Group Life

Des Moines



$169

$151

$140

$145

$150

$155

$160

$165

$170

$175

2004 2006E

$ B

illio

ns

Shrinkage in 2006 (-11%) surplus is due to elimination

of several lines covered under TRIA though 2005 but

dropped under the Act’s extension effective 1/1/06

*2006 figure uses 2005 estimated year-end surplus and premiums by line as basis for calculations.Source: Insurance Information Institute.

(Billions of Dollars)

Surplus Under TRIA/TRIEA Covered Lines

Summary• Personal & Commercial lines picture is very bright for

2006, assuming “normal” CAT loss activity• Concern about pricing discipline in some some

commercial lines, including casualty segments• Rising investment returns insufficient to support deep

soft market in terms of price, terms & conditions• Clear need to remain underwriting focused• How/where to deploy/redeploy capital??• Major Challenges:

Slow Growth Environment AheadMaintaining price/underwriting disciplineManaging variability/volatility of results

Insurance Information Institute On-Line

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