october 4, 2007 proprietary & confidential overview of professional liability plus – southwest...

October 4, 2007

Proprietary & Confidential

Overview of Professional Liability

PLUS – Southwest Chapter Meeting

Agenda

Section 1 Key drivers of market changes

Section 2 Softening reinsurance market

Section 3 Summary

Section 1

Key Drivers of Market Changes

Proprietary & Confidential 4

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

Year / event

Insu

red

loss

es in

US

D b

illio

ns

0

20

40

60

80

100

120

140

Com

bine

d R

atio

%

Sources:Swiss Re Sigma / III / Aon

Man-made losses

Nat Cat lossesGlobal P&C Combined Ratio

WTC property loss (per III)

Katrina loss

Legend

Rita lossWilma loss

North Atlantic Hurricane frequency trend line ‘70 to ‘06

Historical factors that have influenced dramatic changes in the market

An

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ails

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Ch

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ran

ces,

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n,

Jean

ne,

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ng

da

Isab

el

Den

nis

, Kat

rin

a, R

ita,

Wilm

a

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n M

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ro f

loo

ds,

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be

EQ

No

rth

rid

ge

EQ

Pip

er A

lph

a

100


Lack of Significant Catastrophe Losses

$0

$10

$20

$30

$40

$50

$60

$70

01

02

03

04

05

06

07

Q2

Source: Property Claims Service/ISO; Insurance Information Institute


Industry Combined Ratio and Premium Growth

10

3.1

10

6.0

10

9.6

11

2.0

11

8.0

10

8.0

10

5.4

10

9.2

10

9.6

10

8.8

11

5.7

10

7.0 10

8.3

10

6.7

10

6.0

10

1.9

10

5.9 1

08

.0

11

0.3

11

5.7

98

.7

10

0.7

96

.8

98

.7

93

.2

10

0.1

11

6.3

10

4.6

10

7.5

90.0

95.0

100.0

105.0

110.0

115.0

120.0

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

07F

08F

0%

5%

10%

15%

20%

25%

Source: www.iii.org

Co

mb

ine

d R

ati

oP

rem

ium

Gro

wth


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

F0

8F

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000s: 102.4*

Sources: A.M. Best; ISO, III *Through 2008E; 103.6 through 2006 actual.

P/C Insurance Combined Ratio, 1970-2008F


87.6

91.2

91.792.1

92.3 92.4

93.0 93.1 93.193.3

92.4

85

86

87

88

89

90

91

92

93

94

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

Ten Lowest P/C Insurance Combined Ratios Since 1920 (& 2007:Q1)

Sources: Insurance Information Institute research from A.M. Best data. *2007:Q1 actual.

2007 off to a great start

The industry’s best underwriting years are

associated with periods of low interest

ratesThe 2006 combined ratio of 92.4 was the best since the

87.6 combined in 1949


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

101520253035

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

F

Underwriting Gain (Loss) 1975-2007F*

Source: A.M. Best, Insurance Information Institute *Actual 2007:Q1 underwriting profit = $8.281B .

$ B

illi

ons

Insurers earned a record underwriting profit of $31.2 billion in 2006, the largest ever but only the second since 1978. Expect figure near $30 billion in 2007 assuming “normal” CAT losses. Cumulative underwriting deficit since

1975 is $390 billion.

Section 2

Softening Reinsurance Market


Significant Capital Inflows

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


US Reinsurer Net Income & ROE1985-2006

($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

Ne

t In

co

me

($

Bill

)

-10%

-5%

0%

5%

10%

15%

20%

RO

E

Net Income ROE

Source: Reinsurance Association of America.


Softening Reinsurance Market

Significant capital inflows:

Over $30b since Katrina, Rita & Wilma in 2005

In several forms:

• Insurance Linked Securities

• Sidecars

• New & existing companies

Loss trends:

Frequency – continues to decrease

Severity – single digit increases


Impact to Industry

Better capitalized insurance companies

More upgrades than downgrades from the rating agencies

Softening market: Primary pricing softening Reinsurers attempting to maintain discipline – softening as well

Insurance companies buying less reinsurance: Increasing attachment points – i.e., higher retentions Larger co-participations

Risk management: Better understanding Implementation of tools to measure Risk accumulations


Reinsurers’ Perspective

D&O: Public Cos:

• Reinsurers more selective• Aggregation issues important

Non-Public Cos:• More reinsurers willing to write – more capacity available

E&O: Reinsurers looking to write small misc. E&O

Lawyers: Reinsurers seeking to increase writings Reinsurance pricing aggressive

Medical Malpractice: Reinsurers’ appetite for this line has returned

London long-time supporter


Reinsurance Placements

Movement to more detail data continues

Driven more by actuarial and financial analysis

Better and more transparency viewed as yielding pricing that is reflective of actual exposure/risk

Emphasis on company specific data rather than industry data

Reinsurers trying to identify niches or certain clients to ride soft market

Section 3

Summary


Summary

Well capitalized market

Trying to maintain discipline –lower margins vs business with high loss potential

Insurance companies more comfortable with higher retentions – not buying down as in past

Challenge will be deployment of capital over next couple of years Hedge funds money treteching Stock buy backs Dividends higher Consolidation

october 4, 2007 proprietary & confidential overview of professional liability plus – southwest...

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