2004 overview & outlook for the property/casualty insurance industry

2004 Overview & Outlook for the Property/Casualty

Insurance Industry

Casualty Actuaries of Greater New YorkNew York, NY

December 6, 2004

Robert P. Hartwig, Ph.D., CPCU, Senior 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

• Profitability• Presidential Party Affiliation & P/C Profitability• Underwriting• Investment Overview• Ratings, Solvency & Financial Strength• Impact of Spitzer Investigation• Capacity• Pricing Trends• Tort Environment • The Challenge of Terrorism• Q & A

THE INSURANCE INFORMATION

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INSURANCE INFORMATION

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Web Traffic onWWW.III.ORG

Millions of Hits

8

20

40

60

90

6.5

0

10

20

30

40

50

60

70

80

90

100

1999 2000 2001 2002 2003 2004E*

*2004 estimate based on average of 7.5 million hits per month through October.

Visits to I.I.I.’s public web site increased by 50% in 2003/4.

The average number of web

hits on I.I.I.’s site rose from 5 million per month in 2003 to 7.5

million in 2004 (est.)

P/C FINANACIAL UPDATE:

Profitability: Good but Not Good EnoughUnderwriting: Need to Stay Disciplined

Investments: Keep Expectations Low

P/C FINANCIAL OVERVIEW:

PROFIT PRESSURE

Highlights: Property/Casualty 1st Half 2004 vs. 1st Half 2003

2004 2003 Change

Net Written Prem. 212,117 202,828 +4.6%

Loss & LAE 140,057 142,129 -1.5%

Net UW Gain (Loss) 9,563 (2,070) N/A

Net Inv. Income 19,015 18,268 +4.1%

Net Income (a.t.) 23,520 22,813 +3.1%

Surplus* 370,433 346,987 +6.8%

Combined Ratio 94.4 99.8** -5.4 pts.*2003 surplus figure is as of 12/31/03**The combined ratio for full-year 2003 was 100.1

-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

F2

00

5

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

Strength of Recent Hard Markets by NWP Growth*

Real NWP Growth During Past 3 Hard Markets

1975-78: 8.6%

1984-87: 11.2%

2001-04F: 6.9%

1975-78 1984-87 2001-04

*2004 based on 1st half results from ISO.2005 figure is III forecast.

Premium growth is faltering. Real growth in 2005 will approach ZERO.

P/C Net Income After Taxes1991-2004E* ($ Millions)

$14,178

$5,840

$19,316

$10,870

$20,598

$24,404

$36,819

$30,773

$21,865

-$6,970

$3,046

$29,877

$20,559

$23,

520

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04E*First half results; ** After adjusting for 2004 hurricanesSources: A.M. Best, ISO, Insurance Information Institute.

2001 was first-ever full year net loss

2002 ROE = 1.0%

2003 ROE = 9.4%

2004 ROE = 10% (est.)**

-5%

0%

5%

10%

15%

20%

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

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2004E

Source: Insurance Information Institute; Fortune

-5%

0%

5%

10%

15%

20%

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

ROE Cost of Capital

ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2004F

Source: The Geneva Association, Ins. Information Inst.

The p/c insurance industry likely achieved its costs of capital in 2004 for the first time in many years

-14.

6 p

ts -10.

2 p

ts

US P/C insurers missed their cost of capital by an average 6.5 points from 1991 to 2003

-1.2

p

ts

+1.

1 p

ts

-5%

0%

5%

10%

15%

20%

25%

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

US P/C Insurers All US Industries LifeDiversified Finl. Comm. Banks

ROE: Financial Services Industry Segments, 1987–2004F

Source: Insurance Information Institute, Fortune, Value Line.

P/C insurance was finally holding its own against other financial services segments until hurricanes

PRESIDENTIAL POLITICS & P/C PROFITABILITY

Political Quiz

• Does the P/C insurance industry perform better (as measured by ROE) under Republican or Democratic administrations?

• Under which President did the industry realize its highest ROE (average over 4 years)?

• Under which President did the industry realize its lowest ROE (average over 4 years)?

Sectors Thought to be Favored, by Winner of 2004 Presidential Election

BUSH

•P/C Insurance•Asset Managers•Energy/Oil/Coal•HMOs/Drug Cos./ Benefit Managers•Dividend Paying Stocks•Defense

KERRY

•Life Insurers•Fannie Mae/Freddie Mac•Alternative Energy•Hospitals/Med Devices•Medicaid HMOs•Bonds/Municipal Bonds•Home Builders

Source: Wall Street Journal, October 7, 2004, D4, from survey of major brokerage firms.

Insurance Industry Contributions, Election Cycles 1990-2004*

$8.7

$11.7

$14.4

$9.2$10.5 $9.7 $10.0

$9.0

$25.9$27.3

$20.9$22.3

$11.7

$18.8$18.0

$12.0

$0

$5

$10

$15

$20

$25

$30

1990 1992 1994 1996 1998 2000 2002 2004*

$ M

illi

ons

Democrats

Republicans

*Data for current cycle released by Federal Election Commission as of October 4, 2004Source: Federal Election Commission via Center for Responsive Politics at www.opensecrets.org.

Insurance industry contributions are overwhelmingly

Republican: $157 million, 89% more

than the $83 million contributed to

Democrats since 1990

65% of insurance industry contributions since 1990 have gone to Republicans

-5%

0%

5%

10%

15%

20%

25%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02

04E

P/C Insurance Industry ROE by Presidential Party Affiliation,

1950–2004EBLUE = Democratic President RED = Republican President

Source: Insurance Information Institute

Tru

man

Nixon/FordKennedy/ Johnson

Eisenhower Carter Reagan/Bush Clinton Bush

P/C Insurance Industry ROE byPresidential Administration,1950-2004*

15.10%8.93%

8.65%8.35%

7.98%7.68%

6.98%6.97%

5.43%

5.30%5.03%

4.43%3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Carter

Reagan II

Nixon

Clinton I

G.H.W. Bush

Clinton II

Reagan I

Nixon/Ford

Truman

Eisenhower I

G.W. Bush

Eisenhower II

Johnson

Kennedy/Johnson

*ROE for 2004 estimated by III. Truman administration ROE of 6.97% based on 3 years only, 1950-52.Source: Insurance Information Institute

OVERALL RECORD: 1950-2004

Democrats 8.00%

Republicans 7.85%

Party of President has little bearing on

profitability of P/C insurance industry

WALL STREET:

HIGH EXPECTATIONS

Insurer Stocks: Outperforming the S&P 500

6.44%

2.20%

3.04%

7.40%

16.10%

0.92%

0% 5% 10% 15% 20%

S&P 500

Life/Health

All Insurers

Multiline

P/C

Brokers

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

Total Return 2004 YTD Through October 8, 2004

If 2004 represents the cyclical peak for this industry, why aren’t p/c

stocks soaring?

Insurer Stocks: Hammered by the Spitzer Suit

-20.29%

0.41%

-9.33%

2.20%

11.08%

-0.32%

-25% -20% -15% -10% -5% 0% 5% 10% 15%

S&P 500

Life/Health

All Insurers

Multiline

P/C

Brokers



Spitzer suit announced Oct. 14 produced huge hit on all insurance sectors,

especially brokers

Insurer Stocks: Spitzer Effect Will Linger

-21.91%

2.49%

-4.92%

4.74%

14.54%

1.64%

-30% -20% -10% 0% 10% 20%

S&P 500

Life/Health

All Insurers

Multiline

P/C

Brokers



P/C insurer stocks have bounced back


-21.6%

-1.87%

1.04%

5.60%

10.07%

18.91%

5.50%

-30% -20% -10% 0% 10% 20% 30%

S&P 500

Life/Health

All Insurers

P/C

Reinsurance

Multiline

Brokers


Total Return 2004 YTD Through November 19, 2004



-19.2%

1.05%

0.54%

6.39%

11.97%

20.59%

6.20%

-30% -20% -10% 0% 10% 20% 30%

S&P 500

Life/Health

All Insurers

P/C

Reinsurance

Multiline

Brokers


Total Return 2004 YTD Through November 26, 2004


P/C FINANCIAL OVERVIEW:

UNDERWRITING PRESSURE

90

100

110

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

04E

04*

P/C Industry Combined Ratio

2001 = 115.7

2002 = 107.2

2003 = 100.1

2004: 1H = 94.4*

2004** = 100

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000-04: 104.6**

Sources: A.M. Best; ISO, III *2004 figures based on first half estimate. **After impact of hurricanes.

($55)

($45)

($35)

($25)

($15)

($5)

$5

$15

$25

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

04*

04**

Underwriting Gain (Loss)1975-2004F

*Based on first half result. **Estimate for full-year 2004 is $0 assuming a combined ratio . Source: A.M. Best, Insurance Information Institute

$ B

illi

ons

2004 was likely to produce the largest underwriting profit in history =

$18.1B based on annualized first half result, but hurricanes changed that…

110

.3

110

.2

10

7.6

10

3.9

10

9.7 11

2.3

111

.5

12

2.2

110

.2

103.

9

104.

5

103.

5

104.

9

99.8 10

2.7

104.

5

109.

9

110.

9

105.

3

98.4

112

.5

10

1.9

90

95

100

105

110

115

120

125

93 94 95 96 97 98 99 00 01 02 03

Commercial--Net Basis Personal--Net Basis

Commercial vs. Personal Lines Combined Ratios

Source: A.M. Best; Insurance Information Institute

10-Year Average Combined Ratios

Commercial: 109.9 Personal: 104.4

Combined Ratios:Selected Major Lines, 2003E—2004F

99.1 10

3.1 10

9.5

101.

9

94.4 10

0.1

96.6 10

0.2 10

8.3

99.7

92.7

81.6

98.1

120.

9

82.3

112.

0

70

80

90

100

110

120

130

PPAuto

Home GL &PL

WC CMP CommAuto

InlandMarine

AllLines

2003E 2004F


U/W performance improving, but variation in

results is enormous.

Personal

Commercial

110

.5

10

5.0 11

3.6 11

9.2

10

4.8

10

0.8

10

0.5

114

.3

10

6.5

12

1.3

10

0.3

96

.3

10

8.8 11

5.8

10

6.9

10

8.5

10

6.5

10

5.8

10

1.6

10

5.6

10

7.7

110

.0 115

.7

10

7.2

10

0.1

94

.4

16

2.5

12

6.5

90

100

110

120

130

140

150

160

170

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

Reinsurance All Lines Combined Ratio

Combined Ratio: Reinsurance vs. P/C Industry

*1st Half 2004

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

2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well.

2003: Big improvement in primary and reinsurer segments

97.5

100.6 100.1

94.3 94.4

9.4%

13.1%

14.3%

15.9%15.0%

80

85

90

95

100

105

110

1978 1979 2003 Actual 2003 for 15%ROE

2004F

Co

mb

ined

Ratio

6%

8%

10%

12%

14%

16%

18%

Retr

un

on

Eq

uity*

Combined Ratio ROE*

* 2004 figure is return on average statutory surplus based in first half dataSource: 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

PRICING:

DOWNWARD PRESSURE?

How the Risk Dollar is Spent (2003)

Source: RIMS (2003); Insurance Information Institute

Firms w/Revenues < $1 Billion

Total Mgmt. Liab.8%

Other2%

Total Prof. Liab10%

WC Premiums8%

Retained Liability

11%

Admin Costs5% Property

Premiums16%

Retained Property

6%

Liabilty Premiums

14%

Retained WC21%

Firms w/Revenues > $1 Billion

Total Mgmt. Liab.7%

Other4%

Total Prof. Liab13%

WC Premiums14%

Retained Liability

4%

Admin Costs9%

Property Premiums

20% Retained Property

3%

Liabilty Premiums

18%

Retained WC10%

$6.10$6.40

$8.30$7.70

$7.30

$6.49

$5.70$5.25

$5.71

$6.46

$8.91

$11.96

$4.83$5.20

$4

$5

$6

$7

$8

$9

$10

$11

$12

$13

90 91 92 93 94 95 96 97 98 99 00 01 02 03* Cost of risk includes insurance premiums, retained losses and administrative expenses

Source: 2003 RIMS Benchmark Survey; Insurance Information Institute

Cost of Risk: 1990-2003*

1992-2000 = -41.8%

2000

-03

= +1

47.6

%

$2.92$2.72

$2.55

$1.43

$3.63 $3.54 $3.57

$2.07

$1.26 $1.15

$2.49

$1.86$1.67

$1.00

$0.46$0.87 $0.82

$0.96

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

Total WCCosts

Total LiabilityCosts

TotalProperty

Costs

Other Costs Total Admin.Costs

Total Mgmt.LiabilityCosts

2001 2002 2003

Components of Cost of Risk Per $1,000 of Revenue*

* Cost of risk includes insurance premiums, retained losses and administrative expensesSource: 2003 RIMS Benchmark Survey; Insurance Information Institute

+45.8% +90.3% +113.8%

+107.0%

+44.8%+150.0%

% Change

2001 -03

14

%11

% 13

%1

6%

19

%2

2%

28

%3

1%

31

%2

8% 3

0% 3

2%

33

%2

8% 29

%3

0% 3

2%

30

%2

7%

25

%2

8%

22

%1

8%

18

%1

7%

16

%1

2%

12

%1

0% 1

2%

11%

9%

7%

7%

5%

4%

4%

2%

2%

9%

9%

0%

5%

10%

15%

20%

25%

30%

35%

Ju

l-0

1A

ug

-01

Sep

-01

Oct

-01

No

v-0

1D

ec-0

1J

an

-02

Feb

-02

Ma

r-0

2A

pr-

02

Ma

y-0

2J

un

-02

Ju

l-0

2A

ug

-02

Sep

-02

Oct

-02

No

v-0

2D

ec-0

2J

an

-03

Feb

-03

Ma

r-0

3A

pr-

03

Ma

y-0

3J

un

-03

Ju

l-0

3A

ug

-03

Sep

-03

Oct

-03

No

v-0

3D

ec-0

3J

an

-04

Feb

-04

Ma

r-0

4A

pr-

04

Ma

y-0

4J

un

-04

Ju

l-0

4A

ug

-04

Sep

-04

Oct

-04

No

v-0

4

Source: MarketScout.com

Commercial Premium Rate Changes Are Sharply Lower

Is moderation due to realization of performance and profit goals, increasing capacity/ capital, or market- share strategies?

Proportion of Workers Comp Accounts Renewing With Increase of

20% or More

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

54%

38% 38%

32%

20%

12% 12%

3%1% 1%

02:II 02:III 02:IV 03:I 03:II 03:III 03:IV 04:I 04:II 04:III

More than half of all WC accounts

renewed up at least 20% in mid-2002,

two years later virtually none did.

World Rate-On-Line Index(1990 = 100)

100116

283

372

337

288

248

193

160138 142

194

239260

230

0

50

100

150

200

250

300

350

400

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

Source: Guy Carpenter

Reinsurance prices rising, limits falling: ROL up significantly, though not as much as after Hurricane Andrew in 1992

P/C Soft Spots: % Accounts With Negative Price Change(3rd Qtr. 2004)

85%

59%

46%41%

62%

53%

25%

37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Comm Prop BizInterruption

Terror Comm Auto WC GL EPL Umbrella

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

More moderation is evident in the commercial casualty

segments, but softening quickly

Property

Casualty/Liability/Terrorism

P/C Soft Spots: % Accounts With Negative Price Change(4th Qtr. 2003)

42%

18%

5%

13% 12% 11%13%

2%0%5%

10%15%20%25%30%35%40%45%50%55%60%




Property



2% 0% 1% 0% 0% 1%

7%

0%0%5%

10%15%20%25%30%35%40%45%50%55%60%




Property



0% 0% 1% 0% 0% 0%0%5%

10%15%20%25%30%35%40%45%50%55%60%




Property


FATAL ATTRACTION?

A LOSS OF PRICING & UNDERWRITING

DISCIPLINE

RATINGS, SOLVENCY, FINANCIAL STRENGTH

95.9 96.0

101.5

94.2

91.390.0 90.7

84.5

89.3

101.1

94.4

87.0

91.3 90.6

$8.30

$7.30$6.49

$8.91

$6.10$6.40

$7.70

$5.70

$5.25

$5.71$5.20

$4.83

$6.46

$11.96

80

85

90

95

100

105

110

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

Co

mm

erc

ial L

ine

s O

pe

rati

ng

Ra

tio

$0

$2

$4

$6

$8

$10

$12

Co

st

of

Ris

k/$

10

00

Re

ve

nu

e

Commercial Operating Ratio

Cost of Risk

Source: RIMS, A.M. Best; Insurance Information Institute * 2003 operating ratio is III estimate.

Cost of Risk vs. Commercial Lines Operating Ratio*

99

.5 10

1.1

10

9.5

10

7.9

10

4.2

99

.1

96

.6

10

3.5

10

1.3 10

1

$706 $704$683 $687

$781

$842

$871

$718$691

$668

90

95

100

105

110

115

95 96 97 98 99 00 01 02 03E 04F

Co

mb

ine

d R

ati

o

$500

$600

$700

$800

$900

Av

g. A

uto

Ins

ura

nc

e E

xp

en

dit

ure

PP Auto Combined Ratio

Average Auto InsuranceExpenditure

Private Passenger Auto Combined & Operating Ratios, 1993-2004F

Rating actions contributed to dramatic improvement in PP

Auto U/W performance

Sources: Insurance Information Institute from A.M. Best and NAIC data; 2003/4 expenditure estimates from III.

Number of P/C Failures vs. Combined Ratio, 1991-2003

35

25 24

10 10 8 10

2428

31

20

27

58

108

117

108107

106107

110

115

107

100

108

102

109

0

10

20

30

40

50

60

70

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

Nu

mb

er o

f F

ailu

res

90

95

100

105

110

115

120

Com

bin

ed R

atio

Number of P/C Failures Combined Ratio

Source: Standard & Poor’s; Insurance Information Institute

2003 failures fell to a 5-year low

0.4

5

0.4

1

0.4

3

0.4

2 0.6

8

1.2

2

1.7

1

1.1

2

0.4

4

0.5

8 0.8

2

0.9

9

1.0

5

1.7

8

1.1

0.8

3

1.5

6

1.0

8

0.8

0.5

1

0.4

1 0.7

4

1.9

8

3.7

8

3.5

4.93

0

1

2

3

4

5

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

E

Ra

tio

of

Do

wn

gra

des

to

Up

gra

des

Downgrade/Upgrade Ratio*

Sources: Impairment Rate and Rating Transition Study—1977 to 2002, A.M. Best & Co.; 2003E from S&P. *U.S. property/casualty and life/health insurers

74 4

96

12

18

32

2622

25

40

33

56

40

35

22

7

14

35

1923

29

3431

0

10

20

30

40

50

60

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

Impairment Count by Year

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

Impairment rates rose dramatically as the most

recent soft market deepened and continued as

the market hardened

Impairment rates rose sharply during the poor market conditions of the mid-1980s and continued

well into the 1990s

*A.M. Best defines a financial impaired company as one where the insurance department in the state of domicile takes an “official action.”

P/C Company Insolvency Rates,1993 to 2002


1.20%

0.58%

0.21%0.28%

0.79%

0.60%

0.23%

1.02% 1.03%

1.33%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

•Insurer insolvencies are increasing•10-yr industry failure rate: 0.72%

•Failure rating for B+ or better rating: 0.49%•Failure rate for D through B rating: 1.29%

383030

10-yr Failure Rate

= 0.72%

Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)

Unidentified17%

Impaired Affiliate3%

Overstated Assets2%

Change in Business3%

CAT Losses3%

Reinsurer Failure0%

Rapid Growth10%

Discounted Ops8%

Alleged Fraud3%

Deficient Loss Reserves

51%

Source: A.M. Best, Insurance Information Institute

Reserve deficiencies account for

more than half of all p/c insurers

insolvencies

$ Billions, Calendar Year Basis

$2.3 $2.2 $1.2

($8.5)

($1.5)

($7.5)($6.7)($10.0)

$22.7

$13.7

$0.3

($3.7)

$0.4

$11.0

($15)

($10)

($5)

$0

$5

$10

$15

$20

$25

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

P/C Insurance Industry Prior Year Reserve Development*

*Negative numbers indicate favorable development; positive figures represent adverse development.Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities, Prudential Securities, Ins. Info. Inst.

Adverse reserve development totaled $47.8 billion from 2000 through 2003

Adverse reserve development is the #1 killer of p/c insurance companies: Strength Matters

Actuaries partially to blame

for this—not random

fluctuation

Points (Reduced)/Increased

0.5

(2.4)

5.2

6.3

3.5

(0.4)

-3

-2

-10

1

2

3

45

6

7

1998 1999 2000 2001 2002 2003

Combined Ratio:Impact of Reserve Changes (Points)

Source: ISO, A.M. Best, MorganStanley, Prudential Securities.

Prior-year adverse reserve development totaling nearly $14 billion in 2003 added 3.5 points to the p/c combined

ratio in 2002

IS THERE CAUSE FOR CONCERN?

Strength Matters

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

Cumulative Avg. Implied Impairment Ratesby Holding Co. Senior Unsecured Debt

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

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

c

b

bb

bbb

a

aa

aaa

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

Insurers with strong credit 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

INVESTMENTS:

NO SUBSTITUTE FOR SOUND UNDERWRITING

$0

$9

$18

$27

$36

$45

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

Net Investment Income

History

1997 Peak = $41.5B

2000= $40.7B

2001 = $37.7B

2002 = $37.2B

2003 = $38.7B

2004E = $38.0

$ B

illi

ons

Growth History

2002: -1.3%

2003: +3.9%

Source: A.M. Best, ISO, Insurance Information Institute

0%

2%

4%

6%

8%

10%

12%

14%

16%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Mar

04

Jun

04Se

p 04

3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note

Interest Rates: Lower Than They’ve Been in Decades, But…

Source: Board of Governors, Federal Reserve System; Insurance Information Institute

Lower bond yields were the primary driver behind declining investment income in recent years, with the 10-year note reaching a 45-year low in 2003

Higher ST rates as Fed tightens. In long run immense & growing deficit will force rates higher

LT rates actually falling again since econ not as strong as presumed

About 2/3 of invested assets are in the form of bonds

-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

Source: Ibbotson Associates, Insurance Information Institute. *Through December 3, 2004

Total Returns for Large Company Stocks: 1970-2004*

2003 ended a streak of 3 consecutive years of declines for stocks

Will the bull market run out of steam in 2004?

S&P 500 was up 28.7% in 2003 but up 7% early Dec. as falling oil prices and a certain election outcome bolstered stocks; Iraq, terrorism, resurgent

oil prices and fear of higher interest rates remain concerns

US P/C Net Realized Capital Gains1990-2004:Q1 ($ 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

$6,917$4,984

$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*

*First half 2004 resultSources: A.M. Best, ISO, Insurance Information Institute.

Realized capital gains rebounded

strongly in 2003/4

Property/Casualty Insurance Industry Investment Gain*

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.6$48.0

$57.9

$51.9

$56.9

$0

$10

$20

$30

$40

$50

$60

94 95 96 97 98 99 00 01 02 03 04E*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.2004 estimate is annualized figure based on first half result.Source: Insurance Services Office; Insurance Information Institute.

Investment gains are rising but remain well below the peak of

$57.9 billion in 1998

Significant Risks to Investment Portfolio in 2005 & Beyond?

• Out-of-Control US Fiscal PolicyVirtually no domestic savings so US govt. (and corporations)

borrowing heavily from abroadForeign appetite for US securities starting to wane Interest rates will rise, bond prices fall

• Loose Monetary Policy Has Accommodated DeficitGives inflation a change to take root & accelerate (& contribute

reserve deficiency)Forces Fed to raise rates (next hike expected Dec. 14)

• Budget (& Current Acct.) Deficits Will Lead to Higher Interest Rates as Foreign Appetite for US Debt WanesTo attract more foreign capital interest rates must rise

• US Dollar Continues to DepreciateRepatriation of profits difficult for foreign insurersTheoretically makes acquisition of US insurers more feasible

• Stocks Market Performance Will Be RockyRising interest rates are bad news for stocks

HURRICANE SEASON OF 2004

One for the Record Books

U.S. InsuredCatastrophe Losses ($ Billions)

$7.5

$2.7$4.7

$22.9

$5.5

$16.9

$8.3 $7.3

$2.6

$10.1$8.3$4.3

$28.1

$5.9

$12.9

$24.7

$0

$5

$10

$15

$20

$25

$30

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

04E

*

*2004 figure is as of September 30, 2004.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.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions2004 could become the second worst year ever for natural

disaster losses in the US

Top 10 Insured Losses Worldwide,1970-2004 ($2003)

$4.8 $6.0 $6.2 $6.4 $6.4 $6.8 $7.6

$17.3

$20.9

$30.6

$0

$5

$10

$15

$20

$25

$30

$35

$ B

illi

ons

*Hurricanes Ivan and Charley in 2004 dollars.Sources: ISO/PCS; Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no. 1, 2004; except Sept. 11 estimate from Hartwig, Robert P., 2004 Mid-Year Property/Casualty Insurance Update, Insurance Information Institute. Figure is stated in 2001 dollars.

Seven of the 10 most expensive disasters is world history

occurred in the US: Two were this year’s hurricanes

Losses from Hurricanes of 2004

Source: ISO/PCS; Insurance Information Institute

$ Billions

$3.2

$4.4

$6.0$6.8

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

Jeanne Frances Ivan Charley

Estimated insured losses from the hurricanes of 2004 = $20.485B exceed the $15.5B in losses from Hurricane Andrew ($20.3B in $2003)

Four of the Top 10 hurricanes in US

history occurred in 2004

Claims Payouts for 4 Hurricanes Unparalleled

$2.8

$4.1 $3.8

$6.8$0.5

$0.3

$2.2

$0.1

$0

$1

$2

$3

$4

$5

$6

$7

$8


Florida All Other States

Bil

lion

s

Total = $3.2 Billion

Source: PCS/ISO




Total Insured Losses = $20.485B

Florida Only = 17.5B (85%)

Claims Handling Represented Herculean Effort by Insurers

297

505

285

60588

47

315

35

0

100

200

300

400

500

600

700


($ T

hous

ands

)

Florida All Other States

Total = 385,000

Source: PCS/ISO

Total = 552,000

Total = 600,000 Total = 640,000

Total Claims = 2.177 million

Florida Only = 1.692 Mill (78%)

Personal Property Losses Accounted for Largest Share Damage from

2004 Hurricanes*

56%

4%

40%

Source: ISO/PCS.

Charley

63%

4%

33%

Ivan

66%

4%

30%

Frances

73%

4%

23%

Jeanne

Personal Property

63%

Vehicle

4%

Comm. Property

33%

TOTAL

*Breakdowns based on FL losses, which accounted for 85% of losses for all affected states.

($10.60)

($0.21)

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

($9.31)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

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

Underwriting Gain (Loss) in Florida Homeowners Insurance,

1992-2004E*

$ B

illi

ons

Florida’s homeowners insurance market produces

small profits in most years and enormous losses in others

*2004 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2004 residential windstorm losses of $11.2B; 2003 figure is also from IIIestimates of loss and expense. Excludes Citizens Property Insurance Corp. results.

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

-$8.8-$7.7

-$6.5

-$5.2

-$3.8

-$2.7

-$1.2

$0.7

-$8.6

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

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

Cumulative Underwriting Gain (Loss) in Florida Homeowners

Insurance, 1992-2004E*


$ B

illi

ons

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

associated with Andrew, but the 4 hurricanes of 2004 erased

the past 7 years of profits

-$0.2

$0.5 $0.9$1.8

$2.9

$4.1

$5.4

$6.8

$7.9

$9.4

$11.3

$2.0

($2)

$0

$2

$4

$6

$8

$10

$12

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

Cumulative Underwriting Gain (Loss) in Florida Homeowners

Insurance, 1993-2004E*

$ B

illi

ons

Hurricanes Charley, Frances, Ivan and

Jeanne erased 82% of the underwriting profit homeowners insurers in FL earned between

1993 and 2003


Average Annual WindstormInsured Losses*

(Top 10 States, $ Millions)

$1,423

$615

$196$109 $77 $64 $62 $61 $61 $51

$154

$0

$250

$500

$750

$1,000

$1,250

$1,500

FL TX LA NC MS MA SC AL NY CT AllOther

*Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period 1900-1999.Source: Tillinghast-Towers Perrin

Louisiana6.8%

N. Carolina

3.8%

Mississippi2.7%

All Other15.7%

Texas 21.4%

Florida49.5%

Distribution of Annual Losses

% of Comml. Property Accounts Renewing Negative (3rd Quarter 2004)

Source: Council of Insurance Agents and Brokers

93%90% 89%

85%

75%

60%

65%

70%

75%

80%

85%

90%

95%

Northwest Southwest Midwest Northeast Southeast

Commercial property is “less soft” in the Southeast

What’s Going to Happen in Florida?

• Special Legislative Session in December 2004• Elimination of Occurrence-Based Wind Deductible

Likely a “Seasonal” wind deductible will at least be an optionMay be able to choose a fixed dollar deductible or from a range of

percentage deductibles “Actuarial Integrity” of the rates likely to be preserved (i.e., if choose

seasonal deductible rate should be higher)• Florida Hurricane Catastrophe Fund

Industry’s retention likely to be lowered from current $4.5B per occurrence

Reduces demand for private reinsurance• Building Code Reform/Modification

Structures built to more recent code held-up betterManufactured housing still a big problemPoor land use policies remains; Builder political clout

• Expect Florida to Tap Federal Treasury Regularly

SPITZER INVESTIGATION

Has the Industry’s Reputation Been

Shattered?

Headlines from Hell

• INSURERS REEL FROM SPITZER’S STRIKE-Wall Street Journal, October 18, 2004, Page A1

• BROKER ACCUSED OF RIGGING BIDS FOR INSURANCE-New York Times, October 15, 2004, Page A1

• CLASS ACTION THREAT ADDED TO CHALLENGES FACING INSURERS-Wall Street Journal, October 20, 2004, Page C1

• STATE BASED INSURANCE REGULATION GETS SCRUTINY-Wall Street Journal, October 18, 2004, Page A15

• INSURERS POST STEEP LOSSES IN DAY OF WIDESPREAD DECLINES-New York Times, October 15, 2004, Page C4

3 Main Areas of Investigation• PROBE 1: Anti-Competitive Acts

Big-rigging, fraud is the only actual illegal act Contingent commissions not illegal but painted as root of problem Accusation: Broker contractual responsibility to buyer breached Likely Outcome: Fines, penalties, disclosure; E&O/D&O, sharehldr. suits New Economic Model Needed to replace lost broker (agent?) income Independent Agents: Distinction that agent works for insurer not as helpful as commonly

believed• PROBE 2: Tying

Alleges brokers steered business to certain insurers who would then utilize their reinsurance broker affiliate

Likely Outcome: Fines, penalties, disclosure; divestiture (worse case)• PROBE 3: Finite (Re) Insurance/”Non-Traditional” Products

Issue 1: Was there “significant” transfer of risk or merely a loan disguised as insurance? Issue 2: Was there proper accounting treatment Issue 3: Misrepresentation of policy details Likely Outcome: Fines, Penalties, revamped accounting definitions; stds.

Impact of Spitzer Investigation• Impact on insurer & broker reputations has been devastating• Worst PR disaster in the history of the insurance industry• Will take years to repair damage• Negative spillover on other issues (TRIA, class action reform?)• Whole industry (p/c, life, health) painted with same brush

Impact most severe on commercial p/c companies Stock price of personal lines companies impacted (even those with exclusive agents, e.g. Allstate) Least impacted are mutuals with captive agents (e.g., State Farm)

• Spitzer cast into doubt on all producer compensation arrangements except straight commissions.

• Issue of “bid rigging” and contingent fees (PSAs, MSAs) were (inappropriately) linked by Spitzer (hence media & regulators)

• LOST in DEBATE: 2 Distinct Issues: Contingent fees are legal and useful when properly structured Illegal anti-competitive & fraudulent acts are a separate issue and should be treated as such &

Don’t represent how industry does business

Impact of Spitzer Investigation• Brokers lose substantial income in short-run• Brokers will look to replace revenue, reduce expense• In the end does not fundamentally change distribution system• Look for:

More heads to roleCivil/criminal indictments (brokers & insurers)Shareholder (D&O) suits; E&O suitsMassive fines, penalties and disgorgement of profitsMischief by state insurance commissioners & AGs

• Contingent commissions gone for now, but need some form of incentive compensationCan balance with disclosure

• Does not create greater impetus for federal regulation

Risk Managers: Concerned About Contingent Commission Issue

I am concerned that my company’s brokerage firm(s) may have participated in anti-competitive practices related to contingent commissions.

1) Strongly Agree 22.51%

2) Somewhat Agree 30.12%3) Neither Agree nor Disagree 11.11%

4) Somewhat Disagree 13.74%

5) Strongly Disagree 20.47%

6) Don't Know/NA 2.05%

Grand Total 100.00%

Source: Advisen Risk Manager Contingent Commission Survey, November 2004.

Risk Managers Concerned About Extent of Disclosure

I am concerned that my company’s insurance brokerage firm(s) does not fully disclose to my company all sources of income related to my insurance.


2) Somewhat Agree 28.07%

3) Neither Agree nor Disagree 10.38%




Grand Total 100.00%


Risk Managers Concerned Contingent Commissions are Conflict

I believe that contingent commissions are a conflict of interest.


2) Somewhat Agree 25.58%

3) Neither Agree nor Disagree 13.74%




Grand Total 100.00%


Most Risk Managers Believe Elimination of Contingencies Will Raise Their Costs

Elimination of contingent commissions will have the following result on the Total Cost of Risk for my company:

1) Increase 33.77%

2) No Impact 46.64%

3) Decrease 19.59%

Grand Total 100.00%


Most Risk Managers Favor Standardized Transparency

Should the transaction process to buy commercial insurance be standardized and transparent to your company?

1) Yes 74.12%

3) No 16.81%

2) Don't Know 9.06%

Grand Total 100.00%


Relatively Few Risk Managers Plan to Replace Their Broker(s)

1) Yes 14.33%

2) No 63.89%

3) Don't Know 21.78%

Grand Total 100.00%

Are you considering replacing your current insurance brokerage firm (s)?

Class Actions: You Can Sign Up to Sue Insurers & Brokers Online

Source: Yahoo! Search, 10/22/04

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

19

68

19

72

19

78

19

81

19

83

19

85

19

86

19

88

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

BanksElectric Power CompanyConsumer Finance CompaniesAuto & Home Insurance

Source: Insurance Information Institute Annual Pulse Survey

Percent of Public Rating Industry as Very or Mostly Favorable, 1968-2004

Source: Insurance Information Institute, 2004 Pulse Survey

5%

9%8%

9%

15%

13%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1999 2000 2001 2002 2003 2004

53%51% 51%

48%

39%

44%

30%

35%

40%

45%

50%

55%

1999 2000 2001 2002 2003 2004

Very/Mostly Favorable Very/Mostly Unfavorable

MUTUAL FUNDS: Ratings Took Hit—Shades of Things to Come?

Favorability ratings have declined

Unfavorable ratings TRIPLED in 5 years

AN ECONOMIC THEORY OF WHAT

WENT WRONG

Contingent CommissionsAre Not to Blame

Economic & Insurance Market Factorsare at the Root of the Problem, Not Contingent Commissions

• Increasing Market Concentration Among BrokersE.g., Market share of Top 3 out largest 10 brokers rose from 62% in

1989 to 79% in 2003• Declining Capacity in P/C Insurance Industry

“Supply” of capital (as measured by policyholder surplus) fell by 16% or $54 billion from mid-1999 to year-end 2002

• Severe Drop in Capacity in Excess Casualty MarketCapacity plunged 30% from 2000 to 2003Created acute supply shortage as demand increased

• Tort Environment Deterioration Increased Demand for Excess Casualty Coverage as Capacity FellCommercial tort costs rose 53% from 2000 to 2002Average jury award rose 186% from 1994 to 2002

• Combination of Decreased Supply, Increased Demand Gave Producers Securing Coverage More Leverage In a few instances, some stepped over a VERY BRIGHT line

Relative Market Share of Top Brokers Increased Significantly in the 1990s

41%

70%

79%

48%

62%

72%

84%

32%30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10Broker Rank by Revenue

Cum

ulat

ive

Mar

ket

Shar

e

2003 1989

Sources: Business Insurance, Dowling & Partners; Insurance Information Institute

Relative market share of top

brokers much higher than in

2003 than in 1989

Relative market share of top 3 brokers (out of top 10) rose from

62% in 1989 to 79% in 2003.

$0

$50

$100

$150

$200

$250

$300

$350

$400

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

U.S. Insurer Capacity Decreased Significantly from 1999-2002

Source: A.M. Best, ISO, Insurance Information Institute

$ B

illi

ons

Surplus (capacity) peaked at $339.3 Billion in mid-1999 and fell by a record 15.9% ($53.9 billion) to $285.4 billion at year-end 2002

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

$53.9 Billion

Excess Casualty Market: Problem AreaCapacity Fell Even More Sharply at a

Time When Demand Was Soaring

Source: Marsh, 2003 Limits of Liability Report

$1.432$1.334

$1.405

$1.721

$2.011$1.941

$2.045

$1.710$1.575

$1.425

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Bil

lio

ns Capacity dropped 30% from 2000 to 2003

Supply (Capacity) fell in excess casualty markets as capacity overall fell, the tort environment deteriorated and downgrades for insurers to become more conservative with capital allocation

Extreme Pressure on Excess Casualty Markets as Commercial Tort Costs Skyrocketed

Commercial Tort Costs$87.4

$57.2

$49.1

$17.0

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

1980 1990 2000 2002

Bil

lion

s

*Excludes medical malpracticeSource: Tillinghast-Towers Perrin

Commercial tort costs rose 53%

from 2000 to 2002!

Demand rose as capacity crashed, increasing the

importance of the broker’s role in securing coverage

Skyrocketing Jury Awards Pressured Casualty/Liability Markets

419

187

333

1,18

5

1,14

0 1,74

4

1,19

9

221 76

7

4,42

1

6,24

6

5,60

1

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

Overall VehicularLiability

PremisesLiability

Wrongful Death MedicalMalpractice

ProductsLiability

($00

0)

1994 2002

Source: Jury Verdict Research; Insurance Information Institute.

Average jury awards skyrocketed between the

mid-1990s and 2002. From 1994 through 2002, the

average award rose 186%

The Rest is History…

Eliot Spitzer, New York State Attorney General

Download III’s Broker/Agent Compensation background paper at: http://www.iii.org/media/hottopics/insurance/brokercompensation/

CAPACITY CRUNCH?

$0

$50

$100

$150

$200

$250

$300

$350

$400

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

U.S. Policyholder Surplus: 1975-2004*

Source: A.M. Best, ISO, Insurance Information Institute *As of 6/30/04.

$ B

illi

ons

Surplus (capacity) peaked at $339.3 Billion in mid-1999 and fell by 15.9% ($53.9 billion) to $285.4 billion at year-end 2002

Surplus increased by $61.6B or 21.6% to $347.0B in 2003 and 4.9% in the 1st qtr. of 2004 to $361.2 billion

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

$53.9 Billion

Capacity TODAY is just 9.2% above its mid-1999 peak

Capacity of Lloyd’s Market

£8.9

£10.9£10.2£10.0£10.3£10.2 £9.9 £10.1

£11.1

£12.2

£14.9£14.9

£8

£9

£10

£11

£12

£13

£14

£15

£16

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

After remaining stable at around GBP10bn, Lloyd’s capacity has increased by over 40% in the last three years.

2004 capacity is GBP14.9bn, unchanged from 2003.

Source: Lloyd’s

Number of Captive Formations & Liquidations 1993 to 2003E

294

305

250

245

316

462 51

0

238 28

9

243 29

0

0

100

200

300

400

500

600

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E

New CaptivesSource: AM Best, Advisen

Hard market fueling captive formation

Corporate collapses and captive consolidations fueled the upward trend in captive liquidations in 2002.

WORKERS COMPENSATION

[full presentation available to III member companies]

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

10197

100 101

108

115118

122

111108

97101

106

119

129

138133

125

106101

90

100

110

120

130

140

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p

Calendar Year Accident Year

Percent

p PreliminaryAccident Year data is evaluated as of 12/31/2003 and developed to ultimateSource: Calendar Years 1994-2002, A.M. Best Aggregates & Averages; Calendar Year 2003p and Accident Years 1994-2003p, NCCIIncludes dividends to policyholders

Workers Comp Combined Ratios, 1994-2003p

WC Combined Ratios:Problems are National in Scope

Source: A.M. Best, NCCI

*Includes dividends to policyholdersAccident year is developed to ultimate as 12/31/02;Note: CY figures from AM Best; AY figures from NCCI, 2003E is III estimate.

Calendar Year vs. Ultimate Accident Year Countrywide—Private Carrier*

123 122

109

10197

100

122

111108

101

108

115117 118

90

100

110

120

130

140

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

Calendar Year

2.9 pts due to 9/11

$10.0

$14.5

$18.3$20.0

$21.0

$18.0

$15.2

$0.5$2.0

$4.6

0

5

10

15

20

25

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p

$ Billions

p PreliminaryDifference between NCCI estimated ultimate losses and LAE as of 12/31/2003 and reported in Schedule PSource: NCCI

Loss and LAE Reserve Deficiency Through Year End

Workers Comp Reserves,1993-2003p

IndemnityClaim Cost (000s)

Lost-Time Claims

$9.7 $9.4 $9.1 $9.6 $9.7$10.3

$11.0$11.8

$12.8$14.2

$15.2$16.1

$16.8

$5

$7

$9

$11

$13

$15

$17

$19

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p

Annual Change 1991–1995: +0.3%Annual Change 1996–2002: +7.4%

2003p: Preliminary based on data valued as of 12/31/20031991-2002: Based on data through 12/31/2002, 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, 1993-2003p

Indemnity severity 2003p: Preliminary based on data valued as of 12/31/2003Indemnity severity 1995-2002: Based on data through 12/31/2002, developed to ultimateBased on the states where NCCI provides ratemaking services, excludes the effects of deductible policiesSource: Calendar Year Current Population Survey, Economy.com; Accident Year indemnity severity, NCCI

2.8 2.84.0

4.7 4.24.9

4.2

2.2 2.0

1.7

5.96.9 7.3

8.3

10.5

7.3

6.0

4.5

0

2

4

6

8

10

12

1995 1996 1997 1998 1999 2000 2001 2002 2003p

(% C

han

ge)

Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim

Year

Workers Compensation Indemnity Severity Is Outpacing Wage Inflation

% Change, Lost–Time Claims

$7.9 $8.0 $7.8$8.5 $8.9

$9.6$10.3

$11.1$12.0

$13.1

$14.7

$16.3

$17.8

$5

$7

$9

$11

$13

$15

$17

$19

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003p

Annual Change 1991–1995: +3.9%Annual Change 1996–2002: +9.0%

Accident Year

MedicalClaim Cost ($000s)

2003p: Preliminary based on data valued as of 12/31/20031991-2002: Based on data through 12/31/2002, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies

Workers Comp Medical Claims Continue to Climb

4.5%3.6%

2.8% 3.2% 3.5%4.1%

4.6% 4.7%4.0%

5.1%

7.4% 7.7% 7.3%

8.7% 9.0%

12.0%11.0%

9.0%

0%

2%

4%

6%

8%

10%

12%

14%

1995 1996 1997 1998 1999 2000 2001 2002 2003

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Rising Far Faster than Medical CPI

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

5.0

pts

WC medical severity is rising 2.3 times faster than the

medical CPI

Workers Compensation Residual Market Shares Continue to Rise

Workers Compensation Insurance Plan States* Premium as a Percent of Direct Written Premium

9

1618 17 17

2122

2426

23

16

118

4 3 3

1210

6

0

5

10

15

20

25

30

Percent

p Preliminary•NCCI Plan states plus DE, IN, MA, MI, NJ, NC•Source: NCCI

Calendar Year

Residual market share quadrupled from 3% to 12% from 1999 to 2003

LEGAL LIABILITY & TORT

ENVIRONMENT

TORT-AGEDDON

INSURERS HAVE BEEN BATTLING THE TORT SYSTEM FOR DECADES, BUT LAWYERS ARE BETTER ORGANIZED, BETTER FUNDED AND

POLTICALLY BETTER CONNECTED

There is Was is Was a Glimmer of Hope for Tort Reform

Best Chance for Tort Reform in Years is Gone• Medical Malpractice

States—already happening: 20+ states have capsFederal reform discussed in Congress but bill failed in SenateAttempt to get caps for specialties failed February 2004

• Class Action ReformClass Action Fairness ActFailed by 1 Vote 10/22/03; Failed Again in 2004

• Asbestos ReformFairness in Asbestos Injury Resolution of 2003; Failed Apr. 2004

• Punitive Damages—What’s ReasonableSupreme Court ruled favorably in Campbell v. State Farm

Insurance Industry Has Been Doing Battle With Trial Lawyers for More

Than a Half Century

Insurance industry ads from the Saturday Evening Post in 1953!

But It is Attorneys Who Spend Most of the Ad Money Today

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

Source: Tillinghast-Towers Perrin.

$129 $130$141 $144 $148

$159 $156 $156$167 $169 $180

$205

$233

$298

$0

$50

$100

$150

$200

$250

$300

$350

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

Tort costs consumed 2.23% of GDP in 2002

Per capita “tort tax” expected to rise to $1,003 by 2005, up

from $809 in 2002

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

$17.0$49.1 $57.2

$87.4$17.1

$51.0$70.9

$78.5

$5.4

$20.1

$29.6

$42.9

$0

$50

$100

$150

$200

$250

1980 1990 2000 2002

Commercial Lines Personal Lines Self (Un)Insured

Bil

lion

s


*Excludes medical malpracticeSource: Tillinghast-Towers Perrin




How the Risk Dollar is Spent (2003)

Source: RIMS (2003); Insurance Information Institute

Firms w/Revenues < $1 Billion

Other2%

Retained WC21%

Liabilty Premiums

14%Retained Property

6%

Property Premiums

16%

Admin Costs5%

Retained Liability

11%

WC Premiums8%

Total Prof. Liab10%

Total Mgmt. Liab.8%

Firms w/Revenues > $1 Billion

Total Mgmt. Liab.7%

Other4%

Total Prof. Liab13%

WC Premiums14%

Retained Liability

4%

Admin Costs9%

Property Premiums

20% Retained Property

3%

Liabilty Premiums

18%

Retained WC10%

Total liability costs account for about 40% of the risk dollar

Where the Tort Dollar Goes(2002)

Source: Tillinghast-Towers Perrin

Awards for Non-Economic

Loss24%

Claimants' Attorney Fees

19%Awards for

Economic Loss22%

Defense Costs14%

Administration21%

Tort System is extremely inefficient:

Only 22% of the tort dollar compensates victims for economic losses

At least 54% of every tort dollar never reaches the victim

Average Jury Awards1994 vs. 2001and 2002

419

187

333

1,18

5

1,14

0 1,74

4

1,21

0

309 75

0

3,09

9 3,91

3

1,19

9

221 76

7

4,42

1

6,24

6

5,60

1

7,795

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

Overall VehicularLiability

PremisesLiability

Wrongful Death MedicalMalpractice

ProductsLiability

($00

0)

1994 2001 2002

Source: Jury Verdict Research; Insurance Information Institute.

Average jury award appears to be leveling out

Probability of Plaintiff Verdict is Rising

Source: Jury Verdict Research, 2003 Current Award Trends

1994 1997 2002

Premises Liability 43% 45% 49%

Business Negligence NA 57% 62%

Vehicular Liability 58% 59% 63%

Products Liability 39% 39% 61%

Business Leaders Ranking of Liability Systems for 2004

Best States1. Delaware2. Nebraska3. Virginia4. Iowa5. Idaho6. Utah7. New Hampshire8. Minnesota9. Kansas10. Wisconsin

Worst States41. Missouri42. Arkansas43. Montana44. Illinois45. Texas46. California47. Louisiana48. Alabama49. West Virginia50. Mississippi

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

The Nation’s Judicial Hellholes

Source: American Tort Reform Association; Insurance Information Institute

City of St. Louis, MO

CALIFORNIA

Alameda County

Los Angeles County

San Francisco County

Orleans Parish, LA

I

Madison County, IL

TEXAS

Jefferson County

Hidalgo County

Starr County

Mississippi’s 22nd Judicial

District

THE CHALLENGE OF TERRORISM

Sept. 11 Industry Loss Estimates($ Billions)

Life$1.0 (3.1%)

Aviation Liability

$3.5 (10.8%)

Other Liability

$4.0 (12.3%)

Biz Interruption

$11.0 (33.8%)

Property -WTC 1 & 2

$3.6 (11.1%) Property - Other

$6.0 (19.5%)

Aviation Hull$0.5 (1.5%)

Event Cancellation$1.0 (3.1%)

Workers Comp

$1.8 (5.8%)

Current Insured Losses Estimate: $32.5BSource: Insurance Information Institute

Terrorism Coverage Take-Up Rate Rising

Source: Marsh, Inc.; Insurance Information Institute

23.5%26.0%

32.7%

44.2%46.2%

2003:II 2003:III 2003:IV 2004:I 2004:II

Terrorism take-up rate for non-WC risk rose

through 2003 and continues to rise in 2004

TAKE UP RATE FOR WC COMP TERROR

COVERAGE IS 100%!!

Capital Myth: US P/C Insurers Have $350 Billion to Pay Terrorism Claims

"Target" Commercial*$139 billion

40%

Other Commercial$63 billion

18%Personal$146 billion

42%

Total PHS = $298.2 B as of 6/30/01

= $291.1 B as of 12/31/02

= $347.0 B as of 12/31/03

*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute estimates based on A.M. Best Q.A.R Data.

Only 40% of industry surplus backs up “target” lines

Industry emphasizing limited

capital resources against virtually unlimited losses

Capital Myth: US P/C Insurers Have $350 Billion to Pay Terrorism Claims

"Target" Commercial*$114 billion

33%

Commercial Reserve

Deficiency$30 billion (est.)

9%

Other Commercial$58 billion

17%

Personal$146 billion

42%

Total PHS = $298.2 B as of 6/30/01

= $291.1 B as of 12/31/02

= $347.0 B as of 12/31/03

*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute estimates based on A.M. Best Q.A.R Data.

Only 33% of surplus backs

“target” lines net of reserve deficiency

Summary• 2004/5 represent “sweet spot” in the current cycle for p/c insurance

(underwriting/earnings); Hurricanes hurt

• Cyclical concerns quickly becoming significant issue

• Rising investment returns insufficient to support deep soft market in terms of price, terms & conditions

• Tort environment bad, but not getting significantly worse at present time; State efforts (OH, TX, even MS) will help.

• Conclusion: Not obvious it will be different this time

• Major Challenges:

Maintaining price/underwriting disciplineManaging variability/volatility of results

New/emerging/re-emerging risks

Insurance Information Institute On-Line

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