property/casualty insurance financial & hurricane update insurance information institute april...

Property/Casualty Insurance Financial &

Hurricane Update

Insurance Information Institute

April 25, 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 [email protected] www.iii.org

Presentation Outline

• P/C Profit Overview• Wall Street Perspective• The Six Key Issues Impacting P/C Profitability

UnderwritingPricing InvestmentsExpensesLeverage (Capacity)P/C Operating Environment: Tort Focus

• Catastrophe Loss Management• Commercial & Personal Lines: A Quick Overview• Flood Insurance Penetration Rates• Q & A

P/C PROFIT OVERVIEW

2006 Outlook is Good

Highlights: Property/Casualty,2005 vs. 2004

Item 2005 2004 Change

Net Written Prem. 425,653 424,089 +0.4%

Loss & LAE 311,395 300,948 +0.9%

Net UW Gain (Loss) (5,928) 4,263 N/A

Net Inv. Income 49,456 39,966 +23.7%

Net Income (a.t.) 43,013 38,501 +12.3%

Surplus* 427,138 391,294 +9.2%

Combined Ratio* 100.9 98.3 +2.6 pts.

Source: ISO, Insurance Information Institute *Comparison is with year-end 2004 value.

Growth rate lowest since late 1990s

Investment Income Rebound?

P/C Net Income After Taxes1991-2005 ($ 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

$43,013

$20,559

$38,501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05*ROE figures are GAAP; **Return on avg. surplus. ROAS = 9.8% after adj. for one-time special dividend paid by the investment subsidiary of one company. 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 ROAS** = 10.5%

2005 Net Income only now exceeding levels of mid-1990s

-10%

-5%

0%

5%

10%

15%

20%

25%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

E2

00

6F

20

07

F2

00

8F

20

09

F2

01

0F

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

Strength of Recent Hard Markets by NWP Growth*

1975-78 1984-87 2001-04

*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.

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

(post-Andrew)

2005: biggest real drop in premium since early 1980s

Advertising Expenditures by P/C Insurance Industry, 1999-2004

$ Billions

$1.736 $1.737$1.803

$1.708

$2.111

$1.882

$1.5

$1.6

$1.7

$1.8

$1.9

$2.0

$2.1

$2.2

99 00 01 02 03 04Source: Insurance Information Institute from consolidated P/C Annual Statement data.

Ad spending by P/C insurers is at a record high, signaling

increased competition

-5%

0%

5%

10%

15%

20%

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

05H

1

05E

06E

US P/C Insurers All US Industries

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

*GAAP ROEs except 2005 P/C figure = return on average surplus. 2005 figure falls to 9.8% after adjustment for special dividend paid by investment subsidiary of 1 company. 2006E figure is III estimate.Source: Insurance Information Institute; Fortune for all industry figures.

2005 P/C ROAS = 10.5% reflecting record catastrophe losses

2005:H1 P/C ROAS = 15.3%2006 Estimate = 13%

-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

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

ROE: P/C vs. All Industries 1987–2005

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

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

*Fortune 1,000 group.

Source: Fortune Magazine, Insurance Information Institute.

13%

10%

13.4%14.6%

10.4% 10.0%

14.9%14%

13%

7%6%

11%12%

9%

-2%

8%7%

2%

10%

13.9%12.6%

-4%-2%

0%2%4%

6%8%

10%12%

14%16%

1998 2000 2001 2002 2003 2004 2005

StockMutualAll Companies*

Stock insurer ROEs consistently above mutuals

The gap between stock and mutual profitability

has been narrowing

RNW for Major P/C Lines,1995-2004 Average

16.5%

8.5% 7.9% 7.7%

5.5% 5.4% 4.6%3.4%

-2.5%

21.4%

15.7%

5.9%

-5%

0%

5%

10%

15%

20%

25%

InlandMarine

AllOther

Fire PPAuto

WC AllLines

CommAuto

CMP MedMal

OtherLiab

Home Allied

Source: NAIC; Insurance Information Institute

10-Year returns for some major p/c lines surprisingly good, but

HO is a major laggard

WALL STREET:

MAINTAINING THE CONFIDENCE OF WALL

STREET IS CRITICAL FOR MANY INSURERS

P/C Insurers Stocks Up in 2005, Brokers Up Too, Reinsurers Down

-0.52%

9.31%

9.40%

13.29%

17.14%

22.09%

3.00%

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

S&P 500

Life/Health

All Insurers

Brokers

Multiline

P/C

Reinsurers

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

Total 2005 ReturnsP/C insurer stocks outperforming

the market despite hurricanes

Reinsurers lagging on record CAT losses

Brokers up on tight market hopes

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

Insurance Stocks Off to a Slow Start in 2006

2.00%

-0.88%

-3.52%

4.50%

-2.08%

4.74%

5.05%

-4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

S&P 500

Life/Health

All Insurers

Brokers

Multiline

P/C

Reinsurers

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

Total YTD Returns Through April 21, 2006

Issue #1UNDERWRITING

Surprisingly Strong in 2005, Stage is Set for a

Good 2006

115.8

107.4

100.198.3

92.7

100.9

97.7

90

100

110

120

01 02 03 04 05H1 05 06F IIIForecast*

P/C Industry Combined Ratio

Sources: A.M. Best; ISO, III. *III forecast for 2006

2005 figure reflects heavy use of reinsurance which

lowered net losses, but still a substantial deterioration

from first half 2005

Expectation is for an underwriting

profit in 2006

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

101.

0

95.9

85

90

95

100

105

110

115

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

Personal LinesCombined Ratio, 1993-2006E

Source: A.M. Best; Insurance Information Institute. 2006 forecast from Fitch Ratings as of 12/7/05.

A very strong 2006 is expected in personal lines assuming “normal”

catastrophe loss activity

110.

3

110.

2

107.

6

103.

9

109.

7

112.

3

111.

1

122.

3

110.

1

102.

3

101

99

101.

9

112.

5

85

90

95

100

105

110

115

120

125

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

Commercial Lines Combined Ratio, 1993-2006E*

Source: A.M. Best; Insurance Information Institute *Fitch estimate for 2005. Actual 1H05 combined ratio all lines was 92.7.

Outside CAT-affected lines, commercial

insurance is doing fairly well. Caution is

required in underwriting long-

tail commercial lines.

2006 results dependent on a return to “normal” catastrophe loss levels

$10

.8

$22

.7

$13

.9

$9.

9

$8.

0

$5.

0

$2.0$0.4

2.41.9

1.1

0.4

6.5

3.63.5

0.1

$0

$5

$10

$15

$20

$25

2000 2001 2002 2003 2004 2005E 2006E 2007E

Rese

rve

Dev

elo

pm

ent

($B

)

0

1

2

3

4

5

6

7

Co

mb

ined

Rat

io P

oin

ts

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

iab

ilit

y

Rei

nsu

ran

ce

Wo

rk.

Co

mp

Pro

d.

Lia

b.

Co

mm

l. M

P

Fid

elit

y/S

ure

ty

Co

mm

l. A

uto

Med

Mal

Inte

rnat

ion

al

Fin

l. G

uar

anty

Sp

ecia

l L

iab

.

Oth

er

Sp

ecia

l P

rop

.

Ho

meo

wn

ers

PP

Au

to

Au

to P

D

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

($55)

($50)

($45)

($40)

($35)

($30)

($25)

($20)

($15)

($10)

($5)

$0

$5

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

Underwriting Gain (Loss)1975-2005

Source: A.M. Best, Insurance Information Institute

$ B

illi

ons

Insurers sustained a $5.9 billion underwriting loss in 2005. Before

Katrina, p/c insurers were on track for only the second

underwriting profit in 27 years; U/W profit in 2006 is likely.

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

5.8

111

.0

12

4.6

12

9

10

8.8 11

5.8

10

6.9

10

8.5

10

6.7

10

6.0

10

1.9

10

5.9

10

8.0

110

.1 115

.8

10

7.4

10

0.1

98

.3

10

0.9

16

2.4

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 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

2004/5 Hurricanes

97.5

100.6 100.198.3

92.7

100.9

9.4%

10.5%

15.3%14.3%

15.9%

9.4%

80

85

90

95

100

105

110

1978 1979 2003Actual

2004 2005:H1 2005

Co

mb

ine

d R

ati

o

6%

8%

10%

12%

14%

16%

18%

Re

tru

n o

n E

qu

ity

*

Combined Ratio ROE*

* 2005 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

UNDERWRITING AFFECTS FINANCIAL

STRENGTH

Is There Causefor Concern?

P/C Company Insolvency Rates,1993 to 2004

Source: A.M. Best; Insurance Information Institute *1993-2003

1.20%

0.58%

0.21%0.28%

0.79%

0.60%

0.23%

1.02% 1.03%

1.33%

0.85%

0.42%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E 2004

•Insurer insolvencies are increasing•12-yr industry failure rate: 0.71%

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

383030

12-yr Failure Rate

= 0.71%

21

10

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

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

eventsrequire more capital

CATASTROPHE LOSS

MANAGEMENT

Failure to Adequately Manage this Risk Has Been Devastating

Percentage of California Homeowners with Earthquake

Insurance, 1994E-2004

30.0%31.4%

19.5%17.4%

14.6%15.6%13.8%

15.8%15.7%16.8%

0%

5%

10%

15%

20%

25%

30%

35%

94E 96 97 98 99 00 01 02 03 04

Source: California Department of Insurance; Insurance Information Institute for 1994 figure.

The vast majority of California homeowners forego earthquake

coverage & play Russian Roulette with their most valuable asset.

Number of Tornados & Associated Deaths, 1985-2005p

68

4

65

6

70

2

85

6

1,1

33 1,2

97

1,1

73

1,2

34

1,1

73

1,4

24

1,3

45

1,0

71 1,2

16

94

1

1,3

76

1,8

19

1,2

00

76

5

1,1

32

1,1

48

1,0

82

94

5950

3930

130

40 40

54

36 3953

15

69 67

94

5532 3933

25

500

700

900

1,100

1,300

1,500

1,700

1,900

85

87

89

91

93

95

97

99

01

03

05

E

Nu

mb

er o

f T

orn

ados

0

20

40

60

80

100

120

140

Tor

nad

o D

eath

s

Number of Tornados Tornado DeathsSource: III from National Weather Service data.

There appears to be an upward trend in the number of tornados, though not deaths. Detection Increase?

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

$100

.0

$57.

7

$1.4

$0

$20

$40

$60

$80

$100

$120

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

06:Q

1

20??

*Excludes $4B-$6b 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 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

Global Number of Catastrophic Events, 1970–2005

0

50

100

150

200

250

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

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%

Global Insured CAT Losses, 1970–2005(Property and Business Interruption)

$0

$10

$20

$30

$40

$50

$60

$70

$80

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

Natural catastrophesMan-made disasters

Source: Swiss Re, sigma No. 1/2005 & 2/2006.

Billion USD, at 2004 prices

There has been a huge increase in the insured

value of global CAT losses in recent years

Record $78 billion in insured natural CAT

losses in 2005, compared to $5B in man-made disasters

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

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

$9.4

$21.6

$40.0

$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

illi

ons

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

Insured Loss & Claim Count for Major Storms of 2005*

$1.1

$38.1

$9.4$5.0

104

381

1,025

1,752

$0.000$5.000

$10.000$15.000

$20.000$25.000

$30.000$35.000

$40.000$45.000

Dennis Rita Wilma Katrina

Size of Industry Loss ($ Billions)

Ins

ure

d L

os

s ($

Bill

ion

s)

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

Cla

ims

(th

ou

sa

nd

s)

Insured Loss Claims

*Property and business interruption losses only. Excludes offshore energy & marine losses.

Source: ISO/PCS as of February 8, 2006 for Dennis, Rita, Katrina and March 27, 2006 for Wilma; Insurance Information Institute.

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

million claims

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

1985-2004¹

Utility Disruption0.1%

Terrorism9.7% All Tropical

Cyclones3

34.6%

Tornadoes2

30.4%

Water Damage0.2%

Civil Disorders0.5%

Fire6

2.9%

Wind/Hail/Flood5

3.4%

Earthquakes4

8.4%

Winter Storms9.7%

Source: Insurance Information Institute estimates based on ISO data.

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2004 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 $221.3 billion from

1984-2004 (in 2004 dollars). After 2005 season, tropical

cyclones will account for about 45% of the total.

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

$1,901.6$740.0

$662.4$505.8

$404.9$209.3

$148.8$129.7$117.2$105.3

$75.9$73.0

$46.4$45.6$44.7$43.8

$12.1

$1,937.3

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

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide

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

New JerseyConnecticut

LouisianaS. Carolina

MaineVirginia

North CarolinaAlabamaGeorgia

DelawareRhode Island

NewMississippiMaryland

Source: AIR

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

Source: AIR Worldwide

The 2006 Hurricane Season:

Preview to Disaster?

Outlook for 2006 Hurricane Season

Average* 2005 2006F

Named Storms 9.6 26 17

Named Storm Days 49.1 115.5 85

Hurricanes 5.9 14 9

Hurricane Days 24.5 47.5 45

Intense Hurricanes 2.3 7 5

Intense Hurricane Days 13 7 13

Net Tropical Cyclone Activity 100% 275% 195%

*Average over the period 1950-2000.Source: Dr. William Gray, Colorado State University, April 4, 2006.

Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2006

Average* 2006F

Entire US Coast 52% 81%

US East Coast Including Florida Peninsula

31% 64%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 47%

ALSO…Above-Average Major Hurricane

Landfall Risk in Caribbean for 2006

*Average over past century.

Source: Dr. William Gray, Colorado State University, April 4, 2006.

Hurricanes Katrina, Rita & Wilma:

Their Place in History

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

Mississippi, $12,105 , 31.8%

Louisiana, $24,275 , 63.7%

Tennessee, $59.0 , 0.2%Florida, $543.0 , 1.4%

Georgia, $27.0 , 0.1%Alabama, $1,102 ,

2.9%

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

Louisiana accounted for

64% of the insured losses

paid and 56% of the claims filed

Total Insured Losses =

$38.111 Billion

Hurricane Katrina Claim Count Distribution by State*

Mississippi, 515,000 , 29.4%

Tennessee, 15,000 , 0.9%

Louisiana, 975,000 , 55.7%

Florida, 115,000 , 6.6%

Georgia, 7,800 , 0.4%

Alabama, 124,000 , 7.1%


Louisiana accounted for 64%of insured

losses paid and 56% of claims filed

Total # Claims = 1,751,800

Hurricane Katrina Loss Distribution by Line ($ Billions)*

Homeowners, $17,694.0 , 46%

Commercial Property & BI, $18,278.0 , 48%

Vehicle, $2,139.0 , 6%

Total insured losses are

estimated at $38.1 billion from 1.7518

million claims. Excludes $2-

$3B in offshore energy losses


Hurricane Katrina Insured Loss and Claim Distribution by State*

State Losses ($Mill) # Claims % Losses % Claims

LA $ 24,275.0 975,000 63.7% 55.7%

MS $ 12,105.0 515,000 31.8% 29.4%

AL $ 1,102.0 124,000 2.9% 7.1%

FL $ 543.0 115,000 1.4% 6.6%

TN $ 59.0 15,000 0.2% 0.9%

GA $ 27.0 7,800 0.1% 0.4%

Totals $ 38,111.0 1,751,800 100.0% 100.0%

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

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

Texas, $1,970.0 , 39.6%

Tennessee, $10.0 , 0.2%

Louisiana, $2,912.5 , 58.5%

Arkansas, $13.7 , 0.3%Florida, $23.0 , 0.5%

Alabama, $13.0 , 0.3%

Mississippi, $34.0 , 0.7%


Louisiana accounted for

59% of the insured losses, Texas 40%.

Total claims = 381,000.

Excludes offshore energy losses of $2-3B

Total Insured Losses =

$4.9762 Billion

Hurricane Rita Claim Count Distribution by State*

Texas, 169,000 , 44.4%

Tennessee, 3,500 , 0.9%

Louisiana, 185,000 , 48.6%

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

Alabama, 5,000 , 1.3%

Mississippi, 7,000 , 1.8%


Louisiana accounted for 48.6% of the

insured losses, Texas 44.4%.

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

= 381,000

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

Homeowners, $2,944.0 , 59%

Commercial Property & BI, $1,846.2 , 37%

Vehicles, $186.0 , 4%Total insured

losses are estimated at $5.0

billion (excl. offshore energy of $2-$3B) from 381,000 claims.


Hurricane Rita Insured Loss and Claim Distribution by State*

State Losses ($Mill) # Claims % Losses % Claims

LA $ 2,912.5 185,000 58.5% 48.6%

TX $ 1,970.0 169,000 39.6% 44.4%

MS $ 34.0 7,000 0.7% 1.8%

FL $ 23.0 6,000 0.5% 1.6%

AR $ 13.7 5,500 0.3% 1.4%

AL $ 13.0 5,000 0.3% 1.3%

TN $ 10.0 3,500 0.2% 0.9%

Totals $ 4,976.2 381,000 100.0% 100.0%

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

Hurricane Wilma Loss Distribution by Line ($ Millions)*

Homeowners, $6,600 , 71%

Commercial Property & BI, $2,000 , 21%

Vehicle, $750 , 8%Total insured

losses are estimated at $9.35 billion from 1.025

million claims

*As of March 27, 2006. All losses are in FL.Source: PCS division of ISO.

Hurricane Wilma Claim Count Distribution by Line ($ Millions)*

Homeowners, 680,000 , 66% Commercial

Property & BI, 80,000 , 8%

Vehicle, 265,000 , 26%

Total insured losses are

estimated at $9.35 billion from 1.025

million claims

*As of March 27, 2006. All losses are in FL.Source: PCS division of ISO.

Government Aid After Major Disasters (Billions)*

$104.4

$43.9

$17.7 $15.5 $15.0

$0

$20

$40

$60

$80

$100

$120

Hurricane Katrina(2005)

Sept. 11 TerroristAttack (2001)

Hurricane Andrew(1992)

NorthridgeEarthquake (1994)

Hurricanes Charley,Frances, Ivan &Jeanne (2004)

$ B

illi

ons

*In 2005 dollars.Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05.

Hurricane Katrina aid will dwarf aid following

all other disasters. Congress may authorize

$150-$200 billion ultimately (about

$400,000 for each of the 500,000 displaced

families). Is the incentive to buy insurance and

insure to value diminished?

Within 3 weeks of Katrina’s LA landfall, the federal government

had authorized $75B in aid—more than all the federal aid for the 9/11 terrorist attacks, 2004’s

4 hurricanes and Hurricane Andrew combined! $29B more

was authorized in Dec. 2005. At least $80B more is sought.

TRIA EXTENSION

The Burden Grows

Insurance Industry Retention Under TRIA ($ Billions)

$10.0$12.5

$15.0

$25.0$27.5

$0

$5

$10

$15

$20

$25

$30

$35

Year 1(2003)

Year 2(2004)

Year 3(2005)

Year 4(2006)

Year 5(2007)

$ B

illi

ons

Source: Insurance Information Institute

•Individual company retentions rise to 17.5%

in 2006, 20% in 2007

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

2006, 85% in 2007

Extension

Congress & Administration

want TRIA dead

TRIA Extension: Major Features

• Term: 2-Year Extension—Sunsets December 31, 2007 Extension for 3rd year possible if progress made toward long-term solution

• Trigger Increased: Up from $5MM now to $50MM in 2006 and $100MM in 2007

• Lines Dropped Commercial Auto, Prof. Liability, Surety, Burglary & Theft, FMP

• Deductibles Increase for Individual Companies: 15% Now 17.5% in 2006 20% in 2007 for all lines

• Retentions Increase for Industry Aggregate: $15B Now $25B in 2006 $27.5B in 2007

• Co-Pays Increase for Amount Above Industry Aggregate 10% Now 10% in 2006 15% in 2007

• Federal Recoupment Remains conditional

• Study to Develop Long-Term Solutions Must produce report to Congress by September 30

• Nuclear, Biological, Chemical & Radiological Risk Maintains exclusion

Terrorism Coverage Take-Up Rate Rising

Source: Marsh, Inc.; Insurance Information Institute

23.5% 26.0%

32.7%

44.2% 46.2% 44.0%48.0%

55.0%

2003:II 2003:III 2003:IV 2004:I 2004:II 2004:III 2004:IV 2005August

Terrorism take-up rate for non-WC risk rose through

2003, 2004 and 2005

TAKE UP RATE FOR WC COMP TERROR

COVERAGE IS 100%!!

Terrorism Coverage: Take-Up Rates by Industry

72.5%

71.0%

66.3%

65.1%

63.3%

54.3%

53.4%

47.8%

38.6%

37.5%

28.6%

65.3%

60.1%

48.4%

42.5%

53.7%

41.7%

41.5%

40.5%

37.8%

48.0%

23.1%

39.0%

30.2%

26.8%

31.0%

31.5%

22.1%

21.6%

35.3%

27.1%

25.9%

29.5%

18.2%

20.0%

12.2%

40.5%36.4%

41.2%

57.9%

58.1%

35.5%

58.3%

60.2%

34.7%

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

Real estate

Financial Institutions

Health care

Hospitality

Tech/Telecom

Education

Media

Utility

Public Entity

Transportation

Manufacturing

Retail

Construction

Energy

Food & beverage

2005*

2004

2003

Source: Marsh, Inc. *As of August 2005.

If TRIA sunsets at the end of 2007,

additional reinsurance

capacity will be badly needed (now estimated at just

$4-$6 billion)

Overview of Plans for a National

Catastrophe Insurance Plan

NAIC’s Comprehensive National Catastrophe Plan

• Proposes Layered Approach to Risk• Layer 1: Maximize resources of private

insurance & reinsurance industry Includes “All Perils” Residential Policy Encourage Mitigation Create Meaningful, Forward-Looking Reserves

• Layer 2: Establishes system of state catastrophe funds (like FHCF)

• Layer 3: Federal Catastrophe Reinsurance Mechanism

Source: Insurance Information Institute

Comprehensive National Catastrophe Plan Schematic

Personal Disaster Account

Private Insurance

State Regional Catastrophe Fund

National Catastrophe 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

REINSURANCE

Catastrophes, Consolidation & New Competitors

Global Number of Catastrophic Events, 1970–2005

0

50

100

150

200

250

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

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

Distribution of Katrina Losses by Market ($Billions)

Market Percentage Amount

Insurers 47% - 53% $18.8 - $28.9

Reinsurers 52% - 44% $20.7 - $24.0

Capital Markets 1% - 3% $0.4 - $1.6

TOTAL 100% $39.9 - $54.6

Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005.

FY2005 Loss as a Percentage ofFirst Half 2005 Shareholder Equity*

22%32%

31%13%

32%26%

32%30%

15%76%

36%31%

10%106%

22%19%

9%21%

24%

49%

-10% 10% 30% 50% 70% 90% 110%

IPCPartnerRe

RenaissanceReCLASS OF 1993

ArchAspen

AWACAxis

EnduranceMax Re

MontpelierPlatinum

CLASS OF 2001Ace

PXREXL

CLASS OF 1985-86White Mountains

QuantaTOTAL

Many smaller reinsurers lost 30%+ of their equity

(surplus) as a result of record CAT losses in 2005

*As of 12/31/05.Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.

US Reinsurers: Change in Policyholder Surplus ($ Billions)

$60.9$58.9 $57.9

$46.8$48.8

$73.0

$68.0

$64.8

$40

$45

$50

$55

$60

$65

$70

$75

1998 1999 2000 2001 2002 2003 2004 2005E

$ B

illi

ons

Source: A.M. Best; Insurance Information Institute

Reinsurer PHS fell 20% from 1998-2002. Capacity today similar to 1998. Same story

globally.

Analysts predict a modest decline in

reinsurer PHS

115.1 115.4

122.8

100.6

124.6 124.1

141.4

90

100

110

120

130

140

150

160

99 00 01 02 03 04 05E

US

Re

ins

ure

r C

om

bin

ed

Ra

tio

Reinsurer Combined Ratio

Rating-Large (PHS>$250M)

US Reinsurer Combined Ratio vs. Median Rating, 1999-2005E*

*Combined ratio is for all US reinsurers. Rating is for large reinsurers (policyholder surplus exceeding $250 million). The median rating for small reinsurers (PHS<$250M) was A- throughout the 1999-2003 period.

Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004 and 2006 Review & Preview.

A+A++A+AA-B++B+B

A A A A

Are ratings related to

performance?

A A

-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 06F

0

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

Changes in the 2006 Reinsurance Markets

• Property CAT reins. rates up 20% - 30% nationally

• Property CAT coverage in hurricane exposed areas up 100%-300%

• Aggregate reinsurer exposure is down 20-30%

• Cedants retaining more risk, often by 50-100% or more (higher attachment pts.)

• Increased demand for Excess of Loss coverXoL is potentially more volatile for reinsurers

• Some supply issues as a few small players enter run-off

• Marine/Energy reinsurance most challenging

• Start-ups becoming more active

Sources: Morgan Stanley, Lehman Brothers

Long-Term Issues for Reinsurers

• Managing Record Global CAT Losses• Underwriting/Pricing Discipline of Primary Insurers• Competition & Low Barriers to Entry• Alternative Risk Transfer & Securitization• Consolidation• Reinsurance Collectibles • Collateralization Debate/Feud• Global Glut of Capital• Persistently Low Long-Term Interest Rates• Political Risk in Developing/Emerging Markets

Issue #2PRICING

Can Discipline be Maintained?

$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/Forecasts**Excludes cost of flood and earthquake coverage.Source: NAIC, Insurance Information Institute

Countrywide home insurance expenditures are expected to rise at

least 4% in 2006

Homeowners in CAT zones will see much larger

increases

$651$668

$691$705 $703

$685 $689

$723

$777

$821

$867$844

$863

$600

$650

$700

$750

$800

$850

$900

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 0.5% in 2006

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

adopted to avoid adverse selection

14

%11

% 13

%1

6%

19

%2

2%

28

%3

1%

31

%2

8% 3

0% 3

2% 33

%2

8% 29

% 30

% 32

%3

0%

27

%2

5%

28

%2

2%

18

%1

8%

17

%1

6%

12

%1

2%

10

% 12

%11

%9

%

7%

7%

5%

4%

4%

2%

2%

2%

1%

0%

-1%

-2%

-2%

-3%

-5%

-6% -5

% -4%

-4%

-6%

-6% -5

%-6

%

9%

9%

-10%

-5%

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

4D

ec-0

4J

an

-05

Feb

-05

Ma

r-0

5A

pr-

05

Ma

y-0

5J

un

-05

Ju

l-0

5A

ug

-05

Sep

-05

Oct

-05

No

v-0

5D

ec-0

5J

an

-06

Feb

-06

Ma

r-0

6

Source: MarketScout.com

Commercial Premium Rate Changes Are Sharply Lower

The magnitude of rate decreases is leveling off, but no

reversal is evident post- Katrina/Rita/Wilma

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

-0.1%

-3.2%

-7.0%

-9.4% -9.7%

-4.6%

-2.7%

-5.9%

-8.2%

-12%

-10%

-8%

-6%

-4%

-2%

0%

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

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

Magnitude of rate decreases has diminished

greatly since mid-2005

Average Commercial Rate Change by Account Size

Commercial accounts trended downward from

early 2004 to mid-2005 but are now that trend is

shrinking post-Katrina

Source: Council of Insurance Agents & Brokers

Average Commercial Rate Change by Line

Source: Council of Insurance Agents & Brokers

Commercial accounts trended downward from

early 2004 to mid-2005 but now trend is shrinking post-Katrina & Property is up.

Percent of Commercial Accounts Renewing w/Positive Rate Changes, 1st Qtr. 2006

54%

26%20%

15%

50%

26%23%

16% 15%

23%

0%

10%

20%

30%

40%

50%

60%

Southeast Northeast Pacific NW Southwest 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

Percent of Commercial Property Accounts Renewing Negative, 1st Qtr. 2006

40%

89%

100%

95%

91%

63%

80%

61%

90%

91%

89%

91%

88%

86%

53%

47%

65% 75

%

77%

94%

94%

91%

81%

40% 48

%

89%

79%

0%

20%

40%

60%

80%

100%

120%

04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4 06Q1

Midwest Northwest Southwest

Source:; Insurance Information Institute from Council of Insurance Agents and Broker data.

Little evidence suggesting that insurers fleeing CATs are leading to

a non-hurricane state softening

Average Rate Increase/Decreaseby Industry Class

5%

0%

-1% -2%-4%

10%

-3%

3%

0%2%

-8%

0%

-5%-6%

-10%

-5%

0%

5%

10%

15%

Energy Contracting Public Entity Transport. Habitational Service Manufacturing

September 2005 March 2006

Source: MarketScout.com

Largest increases are in the energy sector

-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 06F

0

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%+

Issue #3INVESTMENTS

Does Investment Performance Affect

Discipline?

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$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***Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.**2005 figure includes special one-time dividend of $3.2B.Source: Insurance Services Office; Insurance Information Institute.

Investment gains are rising but are only now

comparable to gains seen in the late 1990s

Issue #4EXPENSES

Will Expense Ratio Rise as Premium Growth Slows?

Personal Lines Underwriting Expense Ratio,* 1994-2005E

21.8% 22.0% 21.8%

23.5%

29.8%

24.3%24.4%

23.6%

23.4%

22.7%23.2% 23.3%

23.4%

28.4%

28.4%

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 05E

Auto Home

*Ratio of expenses incurred to net premiums written. 2005 figures are III estimates.Source: A.M. Best; Insurance Information Institute

Can the downward trend in PPA and HO expenses

ratios be sustained as premium growth slows?

Issue #5LEVERAGE

Can the Industry Efficiently Employ Its Increasing Capital?

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

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 0405*

U.S. Policyholder Surplus: 1975-2005*

Source: A.M. Best, ISO, Insurance Information Institute *As of 12/31/05.

$ B

illi

ons

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

Capacity TODAY is $427.1B, 9.2% above year-end 2004, 47% above its 2002 trough and

22% above its mid-1999 peak. Sufficient capacity exists to pay all hurricane claims.

Foreign reinsurance and residual market mechanisms absorbed $27-$32B (57%-67%) of 2005

CAT losses of $57.7B

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

$ 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

$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 April 15, 14 start-ups plan to raise as

much as $9.75 billion.

COMMERCIAL INSURANCE

BETTER—FOR NOW

119.0

119.8

10

8.5

12

5.0

113.1

115.0 1

21.0

116.2

116.2

10

4.1

10

0.7

10

9.2

98

114.4

12

2.3

10

8.3

13

3.1

94

.6

83

.2

95

.2

80

90

100

110

120

130

140

95 96 97 98 99 00 01 02 03 04

CMP-Liability

CMP-Non-Liability

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

Liab. Combined 1995 to 2004 = 115.4

Non-Liab. Combined = 105.9

Sources: A.M. Best; III

CMP- has improved recently

189.5179.1

131.9 138.8156.4

133.3

215.4

355.2

167.2 159.8

100

150

200

250

300

350

400

95 96 97 98 99 00 01 02 03 04

Products LiabilityCombined Ratio

Average Combined 1995 to 2004 = 180.0


Products Liability has improved dramatically, but

remains very much a problem

112.

1

112

113 11

5.9 12

0.5

120.

1

122.

5

105.

6

99.4

95.8

96.7

102.

7

103.

5 106.

7

109.

2

107.

7

99.7

91.1

82.3

80.9

80

85

90

95

100

105

110

115

120

125

95 96 97 98 99 00 01 02 03 04

Commercial Auto Liability& PD Combined Ratios

Average Combined: Liability = 110.7

PD = 98.1


Commercial Auto has improved dramatically

138.6

117.6

108.5

112.3

104.5

110.9

122.5124.3

111.8114.5

100

105

110

115

120

125

130

135

140

145

95 96 97 98 99 00 01 02 03 04

Other Liability Combined Ratio



Other Liability remains a problematic “catch all” category

99.8

106.6 107.9

115.7

129.7133.8

154.8

142.3138.1

112.3

90

100

110

120

130

140

150

160

95 96 97 98 99 00 01 02 03 04

Medical MalpracticeCombined Ratio



Med Mal is off life support but is still in critical condition

AUTO & HOME:

A SUCCESSFUL SHIFT TO THE UNDERWRITING

CULTURE?

101.7 101.3 101.3 101.0

99.5

101.1

103.5

109.5

107.9

104.2

98.4

94.093.1

90

95

100

105

110

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

Private Passenger Auto Combined Ratio

Average Combined 1993 to 2004= 102.7

Many auto insurers have shown sig-nificant improvements in underwriting

performance since mid-2002


PPA is the profit juggernaut of the p/c

insurance industry today

50%

60%

70%

80%

90%

100%

110%

99

:Q1

99

:Q2

99

:Q3

99

:Q4

00

:Q1

00

:Q2

00

:Q3

00

:Q4

01

:Q1

01

:Q2

01

:Q3

01

:Q4

02

:Q1

02

:Q2

02

:Q3

02

:Q4

03

:Q1

03

:Q2

03

:Q3

03

:Q4

04

:Q1

04

:Q2

04

:Q3

04

:Q4

05

:Q1

05

:Q2

05

:Q3

05

:Q4

Collision Comprehensive Liability (BI & PD)

Source: ISO Fast Track; Insurance Information Institute. *Direct basis

Private Passenger Auto:Incurred Loss Ratios*, 1999-2005:Q4

Loss ratios for all major coverages trending down; Comp is CAT impacted

-4%

-2%

0%

2%

4%

6%

8%

10%

00

:Q1

00

:Q2

00

:Q3

00

:Q4

01

:Q1

01

:Q2

01

:Q3

01

:Q4

02

:Q1

02

:Q2

02

:Q3

02

:Q4

03

:Q1

03

:Q2

03

:Q3

03

:Q4

04

:Q1

04

:Q2

04

:Q3

04

:Q4

05

:Q1

05

:Q2

05

:Q3

05

:Q4

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, 2000-2005:Q4

Margin necessary to maintain PPA

profitability

2000 PPA Combined=110

2004 PPA Combined=94

Inversion of pure premium spread is a warning sign

-2.2%

-5.3%

-4.0%-3.4%

-0.9%

-2.6%

-5.4%

3.0%3.6% 3.8% 3.4%

2.8%

-0.3%

4.7%

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05*

Frequency Severity

Bodily Injury: Severity Trends Now Offset Declining Claim Freq.

*Four quarters ending 2005:Q4.Source: ISO Fast Track data.

Medical inflation a powerful

cost driver

0.8%

-1.5%

0.3%

-1.8%-2.6% -2.4% -2.3%

3.9%3.3%

2.8%

0.5%

2.4%

4.3%

6.2%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

99 00 01 02 03 04 05*

Frequency Severity

PD Liability: Frequency Trend Swamps Rising Claim 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%

3.2%

6.5%

-3.9%

0.5%

4.9%6.3%

16.1%

-10%

-5%

0%

5%

10%

15%

20%

99 00 01 02 03 04 05*

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%

-1.8%

3.7% 3.7%

1.6%

3.9%3.0%

4.1%

6.8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

99 00 01 02 03 04 05*

Frequency Severity

Collision: Frequency Trend Swamps Rising Claim Severity


-1.7%-2.6%

3.3%

-5.6%

-2.1%

-8.2%

-2.1%

-7.0%

-4.1%

7.0%

-2.7%

3.3%

-4.7%

8.9%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

99 00 01 02 03 04 05*

Frequency Severity

Comprehensive: Favorable Frequency and Severity Trends


Homeowners

117.7

158.4

113.6118.4

112.7

121.7

101.0

108.2111.4

121.7

109.3

98.295.1

110113.0

109.4

90

100

110

120

130

140

150

160

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

Homeowners Insurance Combined Ratio

Average 1990 to 2005E= 114

Insurers have paid out an average of $1.14 in losses for every dollar earned

in premiums over the past 16 years


Insurance-to-Value in HO is a National Problem, Improved Recently

73%

64%61% 59%

22%

25%27%

35%

20%

30%

40%

50%

60%

70%

80%

2002 2003 2004 2005

Proportion of Home Undervalued Average Undervaluation*According MS/B.Source: Marshall & Swift/Boeckh

Less than ITV means homeowners insurers left $8 billion on the table in 2003*

Flood Statistics

Property Damage from Hurricane Katrina Flood & Storm Surge ($ Millions)*

LA Storm Surge Loss, $16,200 , 36.8%

New Orleans Flood Loss, $22,600 , 51.3%

FL Storm Surge Loss, $32 , 0.1%

AL Storm Surge Loss, $793 , 1.8%

MS Storm Surge Loss, $4,400 , 10.0%

*Value of property damage by flood and storm surge whether or not insured.Source: AIR Worldwide, September 29, 2005.

Hurricane Katrina caused $44 billion in flood and storm

surge damage, most of it uninsured, 88.1% of it in

Louisiana

Flood Insurance Penetration Rates:Top 25 Counties/Parishes in US*

81.5%80.0%

78.7%77.1%

74.1%69.6%

68.4%68.1%

66.7%65.9%65.5%

62.4%59.0%

56.2%51.6%

49.6%48.0%

46.3%44.4%

42.8%42.8%

42.0%41.9%

40.1%

84.0%

0% 20% 40% 60% 80% 100%

JEFFERSON/LAWALTON/FL

BROWARD/FLCOLLIER/FL

LEE/FLGALVESTON/TX

GLYNN/GAST. BERNARD/LAMIAMI-DADE/FL

ORLEANS/LACARTERET/NC

ST. CHARLES/LAST. JOHNS/FL

CHARLOTTE/FLST. TAMMANY/LA

HORRY/SCINDIAN RIVER/FL

BAY/FLBRUNSWICK/NC

NASSAU/FLBERKELEY/SC

PINELLAS/FLBRAZORIA/TXCHATHAM/GA

TERREBONNE/LA

Highest flood insurance penetration rates are in

LA and FL, but most are underinsured

No counties in the Northeast

are represented in Top 25


Flood Insurance Penetration Rates:Counties/Parishes Ranked 26-50*

39.7%39.2%39.1%

38.7%37.2%

36.5%36.2%

34.2%33.0%

32.1%30.6%

28.3%27.6%

27.0%26.8%26.4%26.1%

25.4%25.3%25.2%

23.4%23.3%

22.1%21.7%

39.8%

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

BALDWIN/ALSARASOTA/FL

PALM BEACH/FLCHARLESTON/SC

MANATEE/FLMARTIN/FL

ATLANTIC/NJLAFOURCHE/LA

OKALOOSA/FLGEORGETOWN/SC

FLAGLER/FLMAUI/HI

LIVINGSTON/LABREVARD/FL

SUSSEX/DEVOLUSIA/FL

ST. LUCIE/FLJEFFERSON/TX

HAMPTON CITY/VAOCEAN/NJ

HARRIS/TXPASCO/FL

BOSSIER/LANEW HANOVER/NC

BRONX/NY

Mid-Atlantic/Northeast Counties are

underrepresented

People along the eastern

seaboard have not gotten the

message


Flood Insurance Penetration Rates:Counties/Parishes Ranked 51-75*

20.9%20.1%

19.1%18.3%

17.8%17.7%17.5%

16.7%16.3%

15.8%15.6%15.4%

14.5%14.0%

13.3%12.9%

12.6%11.7%11.6%

11.3%10.2%

9.3%9.1%

8.5%

21.6%

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

CAMERON/TXFORT BEND/TX

SANTA ROSA/MSHARRISON/MS

JACKSON/MSNORFOLK CITY/VA

HILLSBOROUGH/FLLAFAYETTE/LA

EAST BATON ROUGE/LAVIRGINIA BEACH

ESCAMBIA/FLHONOLULU/HI

SACRAMENTO/CACALCASIEU/LA

MONTGOMERY/TXCITRUS/FL

MERCED/CACHESAPEAKE,

OSCEOLA/FLHUDSON/NJ

DUVAL/FLBARNSTABLE/MA

MARIN/CATULARE/CA

MONMOUTH/NJ


MS coastal counties

rank abysmally

low

Barnstable is only county in all of New England among Top 75

Insurance Information Institute On-Line

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