Financial Forecast 2010:

The Future of the Property/Casualty Insurance Industry

Property Casualty Insurers Association of AmericaExecutive Roundtable Seminar

Naples, FL

January 23, 2006

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 bobh@iii.org www.iii.org

Crystal Ball: 2010

Financial Predictions

Slower Growth & Higher Losses = Disappointing Profits

-5%

0%

5%

10%

15%

20%

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

05E

06F

07F

08F

09F

10F

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2010F*

*GAAP ROEs except 2005 P/C figure = return on average surplus. 2005E-10F are III estimates.Source: Insurance Information Institute; Fortune for all industry figures

P/C profits continue to disappoint. ROE stuck at 9-10%

-10%

-5%

0%

5%

10%

15%

20%

25%

19

70

19

71

19

72

19

73

19

74

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99

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00

20

01

20

02

20

03

20

04

20

05

20

06

F2

00

7F

20

08

F2

00

9F

20

10

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

*2005-10 figures are III forecasts/estimates.

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

(post-Andrew)

2010: Leakage of P/C Insurance Premium Continues

• Large DeductiblesEfficient Use of Corporate CapitalMakes Sense for Personal Lines Policyholders

• Alternative Risk TransferEspecially Captives: Popular for Ever-Smaller RisksDedicated Reinsurance FacilitiesContingent Funding: Debt, Post-Event Assessments, Govt.SecuritizationDiversification in Portfolios of Asset-Backed SecuritiesSelf-Insurance Self Insurance Groups Risk-Retention Groups

• Residual MarketsFL; Large Expansion in LA, MS, TX & Elsewhere

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

75 80 85 90 95 00 05E 10F

U.S. Policyholder Surplus: 1975-2005*

Source: A.M. Best, ISO, Insurance Information Institute *As of 9/30/05.

$ B

illi

ons

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

Capacity at year-end 2005 was $420 billion (est.). It will reach $500B by

2009 and $536 billion by year-end 2010

CAGR 1975-2005E = 10.7%

Assume CAGR 2005-2010 = 5%

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

$2,800

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$ M

illi

ons

*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

$9.95 billion in new capital. Twelve start-ups plan to raise as much as $8.65

billion more for a total of $18.65B. Likely at least $20B

raised eventually.

Existing companies

will continue to find it

relatively easy to raise cash…

Announced Capital Raising by Insurance Start-Ups

($ Millions, as of December 11, 2006)

$1,500

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

$750

$500 $500 $500 $500

$220 $180$100

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$ M

illi

ons

*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: Morgan Stanley, Company Reports; Insurance Information Institute.

As of Dec. 11, 13 start-ups plan to raise as

much as $8.75 billion. More likely to come.

…so will start-ups

U.S. InsuredCatastrophe Losses ($ Billions)

$7.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$57.

7

$100

$0

$20

$40

$60

$80

$100

$120

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

20??

*Includes $53.7 billion per ISO/PCS plus $4B offshore energy losses from Hurricanes Katrina & Rita.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions

2005 will be 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

Points (Reduced)/Increased

0.5

(2.4)

5.2

6.3

3.5

2.51.9

1.1

(0.4)

0.4

-3

-2

-10

1

2

3

45

6

7

1998 1999 2000 2001 2002 2003 2004 2005E 2006F 2007F

Combined Ratio:Impact of Reserve Changes (Points)

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

Reserve adequacy is improving

substantially, which bodes well for 2010

Tort System Costs,2000-2010F

$179

$232$245

$262 $269$282 $283

$295$288

$279

$206

1.83%

2.03%2.22% 2.23%2.24% 2.25% 2.20%2.20%2.21%2.27%2.23%

$100

$150

$200

$250

$300

$350

00 01 02 03 04 05E 06F 07F 08F 09F 10F

Tor

t S

yste

m C

osts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t C

osts

as

% o

f G

DP

Tort Sytem Costs Tort Costs as % of GDP

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

Shareholder Class Action Lawsuits*

*Securities fraud suits filed in U.S. federal courts.**Suits of $100 million or more.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute

164202

163

231188

109

172

240203 214

497

272222 235

181

0

100

200

300

400

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600

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

1997-2001 remain problematic from a D&O perspective Sarbanes-Oxley

Impact??

Regulatory Predictions

Congressional Apathy Continues on P/C Issues

Tough Road for Comprehensive National Catastrophe Plan

Personal Disaster Account

Private Insurance

State Regional Catastrophe Fund

Federal Catastrophe Reinsurance Contract

Program

Source: NAIC, Natural Catastrophe Risk: Creating a Comprehensive National Plan, Dec. 1, 2005; Insurance Information. Inst.

State Attachment

1:50 Event

1:500 Event Unlikely National CAT Plan in place

by 2010. Major

obstacles include:

•Divisions within industry

•Opposition in Congress

TRIA’s Days Are Numbered: Congress & Administration Want it Dead

$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

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Source: Insurance Information Institute

Obstacles Include•Opposition in Congress &

Administration•Profitability/Growth in Capital

Base/New Entry•Few examples of econ. disruption

ExtensionIndustry Aggregate Retention ($ Bns)

Status of Other RegulatoryIssues by 2010

• No Optional Federal Charter by 2010

• Little Progress on Regulatory Modernization (e.g., SMART Act)

• Asbestos “Reform” Not to Industry Satisfaction

• Incremental Additional Improvements in Tort Environment

Competitive Predictions

Wave of Consolidation Among Primary P/C Companies is Not

Imminent

M&A Activity AffectingPersonal Lines, 1992-2004 ($ Mill)

$14

$3,073

$6,790

$386

$24,108

$9,182

$2,367

$66$978

$72 $68

$7,860

$798

119

1315

2423

1210

5

12

16

20

11

$0

$5,000

$10,000

$15,000

$20,000

$25,000

92 93 94 95 96 97 98 99 0 1 2 3 4

Val

ue

of D

eals

0

5

10

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25

30

Nu

mb

er o

f D

eals

Value of Deals Number Of Deals

Source: Insurance Information Inst. based on tabulation by Conning report The Emerging Shakeout in Personal Lines, 2005

M&A activity has been in the doldrums, no

obvious reason for surge in

consolidation, at least in personal lines, except via non-renewals

Commercial lines M&A slow due to

fear of “skeletons in the closet”

Class of 2005:Many Will Be Gone by 2010

$1,500

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

$750

$500 $500 $500 $500

$220 $180$100

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$ M

illi

ons

*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: Morgan Stanley, Company Reports; Insurance Information Institute.

As of Dec. 11, 13 start-ups plan to raise as

much as $8.75 billion. More likely to come.

…so will start-ups

Walmarted: Retailers Will Eventually Show Interest in P/C Insurance

• Banks will continue to acquire distribution channels

• Retailers chafing to get into retail banking

• Insurance not far behind, at least on distribution sideWalmart shaking up

warranty business

Retailing & Insurance have a long history.

Remember Sears and Allstate?

Political Predictions

Change is in the Air

2010: Political Order Will Be Shaken Up

• One House of Congress Changes Hands by 2010

• Change of Party in the White House

• Eliot Spitzer is the Next Governor of New York

Insurance Information Institute On-Line

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