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The Financial Crisis, No-Fault Insurance and the Future of the P/C I Id t Insurance Industry New York Insurance Association Albany, NY November 5, 2009 Download at: www.iii.org/Presentations/NYIA-110509/ Rb tPH t i Ph D CPCU P id t&E it Robert P . Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org

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Page 1: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

The Financial Crisis, ,No-Fault Insurance and the

Future of the P/CI I d tInsurance Industry

New York Insurance AssociationAlbany, NY

November 5, 2009

Download at: www.iii.org/Presentations/NYIA-110509/

R b t P H t i Ph D CPCU P id t & E i tRobert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ [email protected] ♦ www.iii.org

Page 2: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Presentation Outline• The Economic Storm: Financial Crisis & Recession

E G th & P fit bilitExposure, Growth & Profitability• New York No-Fault Update: The Crisis Returns• Key Threats and Issues Facing P/C Insurers Through 2015

R l t R f• Regulatory Reform• Financial Strength & Ratings

Key Differences Between Insurer and Bank Performance During Crisisi i O i & O• Insurance Industry Financial Overview & Outlook

ProfitabilityPremium GrowthUnderwriting Performance: Commercial & Personal LinesFinancial Market ImpactsMerger & Acquisition Activity

C i l & C i

2

• Capital & Capacity• Catastrophe Loss Trends

Q&A

Page 3: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

THE ECONOMIC STORM

What the Financial Crisis and Recession Mean for theRecession Mean for the

Industry’s Exposure Base,G h P fi bili dGrowth, Profitability and

Investments

Page 4: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Real GDP Growth*

% %

The Q1:2009 decline was the steepest since the

Q1 1982 d f 6 4%

3.7%

% 2.5%

3.6%

3.1%

2.9%

4.8%

4.8%

%

3.5%

2.4% 2.6% 2.7% 2.8% 2.9%4%

6% Q1:1982 drop of 6.4%

0.8% 1.

6% 2

0.1%

%

1.5% 2 2

0 2%0%

2%

P l d

-0.7

%

-2.7

%

-0.7

%

-0.2%

-4%

-2% Recession began in December 2007. Economic toll of credit crunch, housing slump, labor

Personal and commercial lines

exposure base have been hit -

-6.4%

-5.4%

-8%

-6%

, g p,market contraction has been severe but recovery is in sight

hard and will be slow to come

back

4

8%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/09; Insurance Information Institute.

Page 5: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Length of U.S. Business Cycles, 1929-Present*1929 Present

120120

Contraction Expansion FollowingDuration (Months)

A erage D ration**

80

106

9290

100110120 Average Duration**

Recession = 10.4 MonthsExpansion = 60.5 Months

Length of expansions

greatly

50

80

58

73

60708090 g y

exceeds contractions

43

19

50

3745

39

2436

30405060

138 11 10 8 10 11

166

168 8

1912

01020

Month

5

Aug.1929

May1937

Feb.1945

Nov.1948

July1953

Aug.1957

Apr.1960

Dec.1969

Nov.1973

Jan.1980

Jul.1981

Jul.1990

Mar.2001

Dec.2007

* Through June 2009 (likely the “official end” of recession) **Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.

Month Recession Started

Page 6: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Real GDP Growth vs. Real P/C Premium Growth: Modest Association

3%

25% 8%

Premium Growth: Modest AssociationP/C insurance industry’s growth i i fl d d tl b th

18.6

% 20. 3

.7%

15%

20% 6%

is influenced modestly by growth in the overall economy

% % %13

7.7%10%

15%

Gro

wth

2%

4%

Gro

wth

5.2%

1.8%

4.3% 5.

8 %0.

3%

3.1%

1.1%

0.8%

0.4%

0.6% 1.

6%5.

6 %

1.2%

0%

5%

Real

NW

P

0%

2%

Rea

l GD

P G

-0.9

%

-1.5

%

-1.6

%-1

.0%

-1.8

%-1

.0%

-0.4

%-0

.3%

-2.9

% -0.5

%3.

8% 4% 5%

-5%

0%

-2%

6

-7.4

%-6

.5%

- -3 -4.

-4.

-10%

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

-4%Real NWP Growth Real GDP

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/09; Insurance Information Inst.

Page 7: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

NY Direct Written Premiums (DWP) 1999 2008(DWP), 1999-2008

$32.

0

$33.

4

$34.

8

$35.

2

$34.

7

$33.

4

29.7$35

$40

B)

$

$22.

7

$25.

4 $2

$21.

8

$25$30

rem

ium

($ B

$10$15$20

t Writ

ten

Pr

Premium volume in NY state is shrinking due to the soft

commercial insurance market

$0$5

$10

Dire

ct commercial insurance market and weak economy

$099 00 01 02 03 04 05 06 07 08

Source: NAIC Annual Statement Database, via Highline Data LLC.

Page 8: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

New York PIPI U dInsurance Update:

Is New York’s No-Fault Crisis Returning?

Page 9: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Summary of Findings: New York State’s No-Fault Auto Insurance ProblemNo-Fault Auto Insurance Problem No-Fault (PIP) Costs Are Surging

• New York’s no-fault (PIP) average claims costs—at $8,748 per claim—are the second highest in the US (as$8,748 per claim are the second highest in the US (as of the 2nd quarter of 2009)

• The average cost per no-fault claim in New York is more than double (111%) that of the US medianmore than double (111%) that of the US median ($4,152)

• The average cost of a no-fault claim has soared $3,133 gor 56% from $5,615 at the end of 2004 to $8,748 in the second quarter of 2009

• No-Fault claim costs as of Q2 of 2009 are the second

9

No Fault claim costs as of Q2 of 2009 are the second highest in NY history, just 5% short of their all-time high of $9,235 in the 1st quarter of 2002

Page 10: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

NY’s Private Passenger AutoPassenger Auto

Insurance MarketInsurance MarketSi d M k t hSize and Marketshare

Page 11: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

New York State Direct Pvt. Passenger Auto Premiums Written: 1999-2008

$10 558$10.710$11.0

uto emiums W itten: 999 008

$9.914

$10.558$10.262

$9.994$9.794 $9.789$10.0

$10.5

$9.018$9.0

$9.5Auto insurance premiums paid by NY drivers dropped by nearly 9%

$8.166 $8.175

$8.0

$8.5NY drivers dropped by nearly 9% or $921 million since the end of last

no-fault crisis in 2004, but the system is once again under siege

$7.0

$7.5system is once again under siege

from fraud and abuse

11

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Highline Data; Insurance Information Institute.

Page 12: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Private Passenger Auto Insurers in New York State, 2008 (1-25)New York State, 2008 (1 25)

Rank Company Group Direct Premiums Written Mkt. Share (%)

1. Geico BERKSHIRE HATHAWAY GRP 2,250,603,467 23.0

2. Allstate Insurance Co Group ALLSTATE INSURANCE GROUP 1,844,794,441 18.83. State Farm Mutual Group STATE FARM GRP 1,060,333,783 10.84. Progressive Casualty Group PROGRESSIVE GRP 641,957,648 6.65 Liberty Mutual Group LIBERTY MUTUAL INSURANCE GROUP 559,129,362 5.7.6. Travelers Cos & Affil TRAVELERS GRP 538,882,826 5.57 N i id G NATIONWIDE CORP GRP 286 052 407 2 97. Nationwide Group NATIONWIDE CORP GRP 286,052,407 2.98. New York Central Mut Fire Ins Co CENTRAL SERV GRP 269,489,658 2.89. Metropolitan P&C Ins Co & Affiliates METROPOLITAN GROUP 253,168,898 2.610. Hartford Fire Group HARTFORD FIRE & CASUALTY GROUP 222,681,116 2.311. American International Group AMERICAN INTL GRP 208,727,125 2.112 United Services Automobile ASN Group UNITED SERV AUTOMOBILE ASSN GRP 191 513 078 2 012. United Services Automobile ASN Group UNITED SERV AUTOMOBILE ASSN GRP 191,513,078 2.013. Unitrin Prop & Cas Ins Grp UNITRIN GRP 134,559,311 1.414. Motors Insurance Corp Group GMAC INS HOLDING GRP 104,591,800 1.115. Adirondack Ins Exch N/A 98,818,395 1.016. Onebeacon Ins Grp WHITE MOUNTAIN GROUP 91,412,435 0.9

17 Amica Mutual Group AMICA MUTUAL GRP 86 573 149 0 917. Amica Mutual Group AMICA MUTUAL GRP 86,573,149 0.918. Combined Federal Ins Co & Affiliates CHUBB & SON INC GRP 81,495,932 0.819. Hanover Insurance Co Group THE HANOVER INS GRP 81,413,362 0.820. Countrywide Insurance Co N/A 77,264,817 0.821. Erie Insurance Exchange Group ERIE INS GRP 61,404,626 0.622. Esurance Ins Co and Affiliate WHITE MOUNTAIN GROUP 60,874,361 0.6

12Source: Highline Data; Insurance Information Institute.

23. Ngm Ins Co MAIN STREET AMER GRP 56,858,636 0.624. Farmers Insurance Group ZURICH INS GRP 55,162,750 0.625. Preferred Mutual Insurance Co N/A 50,892,503 0.5

Page 13: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Top Private Passenger Auto Insurers in New York State, 2008 (26-50)in New York State, 2008 (26 50)

Rank Company Group Direct Written Premiums Mkt. Share (%)

26. Preferred Mutual Insurance Co N/A 50,892,503 0.5

26 Lincoln General Insurance Co KINGSWAY GRP 48 762 542 0 526. Lincoln General Insurance Co KINGSWAY GRP 48,762,542 0.5

27. Response Ins Grp RESPONSE INSURANCE GROUP 39,068,213 0.4

28. Commerce Group Inc COMMERCE INC GRP 33,329,594 0.3

29. Utica National Insurance Group UTICA GRP 29,739,636 0.3

30. Mercury Casualty Group MERCURY GENERAL GRP 28,114,418 0.3

31 QBE The Americas QBE INS GRP 26 518 443 0 331. QBE The Americas QBE INS GRP 26,518,443 0.3

32. Amer Natl Prop & Cas Co & Affiliates AMERICAN NATL FIN GRP 24,434,340 0.2

33. IDS Property Casualty Group AMERIPRISE FIN GRP 22,034,901 0.2

34. Firemans Fund Insurance Group ALLIANZ INSURANCE GROUP 17,792,523 0.2

35. Tri-State Consumer Insurance Co N/A 17,755,332 0.2

36 Electric Insurance Company ELECTRIC INS GRP 12 395 453 0 136. Electric Insurance Company ELECTRIC INS GRP 12,395,453 0.1

37. American Modern Home Group INC MUNICH RE GRP 12,310,466 0.1

38. Balboa Casualty Grp BANKAMERICA CORP GRP 12,275,118 0.1

39. Eveready Insurance Co N/A 12,002,501 0.1

40. Merchants Mutual Group MERCHANTS MUT GRP 11,354,814 0.1

41. Long Island Ins Co N/A 8,412,317 0.141. Long Island Ins Co N/A 8,412,317 0.1

42. Interboro Mutual Indemnity Ins Co N/A 7,793,341 0.1

43. California State Automobile Assoc CALIFORNIA STATE AUTO GRP 5,796,218 0.1

44. Harleysville Mutual Insurance Co Grp HARLEYSVILLE GRP 5,655,744 0.1

45. Assurant Group ASSURANT INC GRP 5,588,944 0.1

46. Ocean Harbor Casualty Insurance Co OCEAN HARBOR GRP 4,943,255 0.1

13Source: Highline Data; Insurance Information Institute.

47. Infinity Prop & Cas Cos INFINITY PROP & CAS INS GRP 4,553,098 0

48. Central Mutual of OH Group CENTRAL MUT INS CO GRP 4,516,397 0

49. United Farm Family Mut Ins Co & Affi INDIANA FARM BUREAU GRP 4,061,793 0

50. Sentry Insurance A Mutual Co Group SENTRY INSURANCE GROUP 3,950,514 0

Page 14: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

NY PIP UPDATENY PIP UPDATE

I N Y k’ N F lIs New York’s No-Fault S t O t f C t lSystem Out of Control—

A i ?Again?

Page 15: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Average PIP (No-Fault) Claim Cost as of 2009:Q2as of 2009:Q2

7 Average No-Fault (PIP) claim$1

7,75

$16 000$18,000$20,000

Average No-Fault (PIP) claim costs in NY are the second

highest in the US and are more (111%) i

748$12,000

$14,000$16,000

Sev

erity

than double (111%) higher than the median cost of $4,152

74 3 9 45,13

7

$6,9

91

6352,599

4,95

5

$5,9

16$8, 7

$7,2

40$7

,193

$6 000$8,000

$10,000

g. P

IP C

laim

$3,3

7$2

,913

$2,8

49$2

,834

$2,3

30$1

,869

$1,7

36$1

,552

$668

$649

$604

$544

$539

$539

$ 5

$3,8

$4,1$4

,$4

$2,000$4,000$6,000

Avg

15

$ $ $ $ $ $

$0NJ NY FL MN DE DC KY HI ND PA WA OR TX MD KS SC UT MA MI MN AZ AL SC CO LA

Sources: Insurance Information Institute based on ISO Fast Track data.

Page 16: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

NY PIP Claim Frequency & Severity (2000:04 – 2009:02)Severity, (2000:04 2009:02)

35$9 500 2 4%NY PIP Fraud is Back

Average cost per PIP claim

8,27

1$8

,327

8,23

4$9

,23

$8,7

27$8

,577

$8,4

43,1

77 $8,5

0725

$8,5

62 $8,7

48

$8,500

$9,000

$9,500

2.2%

2.3%

2.4%Average cost per PIP claim (severity) fell 39% between

02:Q1 and 04:Q4 but has since soared by 56% through 09:Q2Freq. down 32% since 2000:04$8 $

$7,8

88$7

,507

$ 8

$7,7

73$7

,311

58 063

$7,3

23$7

,378

$7,2

97 $7,6

70$7

,740

$8,

$8,0

2

70$7,500

$8,000

$ ,

im C

ost

2.0%

2.1% Claim

F

Freq. down 32% since 2000:04$

$6,9

5

6,15

6

0 991

,094

14 $6,2

50$6

,269 $6

,530

$6,6

06$7

, 0 $

052

$6,8

7

$6,500

$7,000

Avg

. Cla

i

1 7%

1.8%

1.9%

Frequency

PIP severity is now at its second highest

level in history: $8 748 l i$6

$5,8

20$5

,9$5

,615

$6,

$5,9

1 $

$6,

$5,500

$6,000

1.5%

1.6%

1.7%

y

Avg. Claim SeverityFrequency

$8,748 per claim

16

$5,000

0:04

1:01

1:02

1:03

1:04

2:01

2:02

2:03

2:04

3:01

3:02

3:03

3:04

4:01

4:02

4:03

4:04

5:01

5:02

5:03

5:04

6:01

6:02

6:03

6:04

7:01

7:02

7:03

7:04

8:01

8:02

8:03

8:04

9:01

9:02

1.4%

Sources: Insurance Information Institute based on ISO Fast Track data.

Page 17: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

NY PIP Claim Frequency & Severity (1997 – 2009:02)Severity, (1997 2009:02)

5$9 500 2 4%

NY PIP Fraud is BackAverage cost per PIP claim

8,34

78,

327

,234

$9,2

3$8

,727

$8,5

77

$8,4

4317

7 $8,5

075

$8,5

62$8

,748

$8 500

$9,000

$9,500

2.2%

2.3%

2.4%Average cost per PIP claim (severity) fell 39% between

02:Q1 and 04:Q4 but has since soared by 56% through 09:Q2Freq. down 32% since 2000:04

$8 $8$7

,888

$7,5

07$8

,

$7,3

11

63 $7,3

23$7

,378

7,29

7 $7,6

70$7

,740

$8, 1

$8,0

25

8

$7,7

73

$7,500

$8,000

$8,500

m C

ost

2.0%

2.1% Claim

F

063

$6,6

99

$

$6,8

706,

156

052

91 094

4 $6,2

50$6

,269 $6

,530

$6,6

06$7

,06 $ $

$6,9

5 8

$6,500

$7,000

$ ,

Avg

. Cla

im

1 7%

1.8%

1.9%

FrequencyAvg Claim Severity

Second highest level in history: $8,748 per claim

$5,6

75 $6,0 $6 $6,0

$5,8

20$5

,99

$5,6

15$6

,$5

,91 4 $ $

$5,500

$6,000

A

1.5%

1.6%

1.7% y Avg. Claim SeverityFrequency

Claim severity rose 63% in the 5

years after the 1997 Presbyterian

decision

17

$5,000

1997

1998

1999

2000

1:01

1:02

1:03

1:04

2:01

2:02

2:03

2:04

3:01

3:02

3:03

3:04

4:01

4:02

4:03

4:04

5:01

5:02

5:03

5:04

6:01

6:02

6:03

6:04

7:01

7:02

7:03

7:04

8:01

8:02

8:03

8:04

9:01

9:02

1.4%

Sources: Insurance Information Institute based on ISO Fast Track data.

decision

Page 18: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

New York Insurance Fraud Reports 1995 2008Reports, 1995 – 2008

20,000A t C lli i

No-fault fraud reports fell 35%

16,000

18,000Auto CollisionDamageAuto Theft

reports fell 35% between 2003 and 2006, but are now rising (up 22% in 2008 over 2006)

10,000

12,000

14,000

No-Fault Auto

)

6,000

8,000

,

Number of No-Fault related fraud reports remains high

d i b i i t i i

0

2,000

4,000 and is beginning to rise again

18

01995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*

Source: New York Department of Insurance, Insurance Frauds Bureau Annual Report; Insurance Info. Institute.

Page 19: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

No-Fault/Auto Unit Arrests by NY Insurance Fraud BureauNY Insurance Fraud Bureau

600 No fault/auto unit arrests

479

391500

fell 30.3% from 2004 to 2006 but are beginning to

rise (up 5.4% in 2007)

332391

334 352

300

400

107182200

50

0

100

19

2000 2001 2002 2003* 2004 2005 2006 2007*In August 2003 the no-fault unit was merged with auto unit Data beginning in 2003 include no-fault autounit arrests.Source: New York Department of Insurance, Insurance Frauds Bureau Annual Report; Insurance Info. Institute.

Page 20: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

No-Fault Auto Unit Investigations by NY Insurance Fraud Bureau

600No fault fraud investigations

by NY Insurance Fraud Bureau

479500No-fault fraud investigations have more than doubled since 2004—up 140% through 2007

278 250 268

349

300

400p g

200200

0

100

20

2002 2003 2004 2005 2006 2007

Source: New York Insurance Department http://www.ins.state.ny.us/acrobat/fd07ar2g.pdf; Ins. Info. Institute.

Page 21: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

No-Fault Auto Unit Cases Opened by NY Insurance Fraud Bureau

160180

by NY Insurance Fraud Bureau

113122

142160

140

160

113

887380

100

120

No-fault cases 73

40

60

80opened have more than doubled since

2004 up 119%

0

20

40 2004—up 119% through 2007

21

2002 2003 2004 2005 2006 2007

Source: New York Insurance Department http://www.ins.state.ny.us/acrobat/fd07ar2g.pdf; Ins. Info. Institute.

Page 22: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

What Needs to be Done?

Solutions to Reduce Costs in NY’s No-Fault SystemI tit t M di l P t l /Utili ti R i• Institute Medical Protocols/Utilization Reviews

Guidelines for medical care for specific auto accident-related injuries to reduce cost of over-treatment and unnecessary treatmentNote: NY’s no-fault system may be the last major payor for medical treatments that does not mandate protocols or

tili ti i Thi i t l “bl k h k” d iutilization reviews. This virtual “blank check” drives up system costs dramatically.

• Require Disputes Be Resolved via ArbitrationAvoids costs and uncertainty of trial for all partiesExpedites resolution of claimUnclogs overburdened court system

22

Unclogs overburdened court system• Increase Penalties for Runners

Upgrading to felony from misdemeanor as deterrent

Page 23: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

What Needs to be Done? (cont’d)

Solutions to Reduce Costs in NY’s No-Fault System• Streamline Process for Adjudicating No Fault Claims• Streamline Process for Adjudicating No-Fault Claims

For small no-fault disputes (under $5,000), permit parties to submit proof based on sworn affidavit from their doctor rather requiring that the doctor appear in personNote: New York City courts are inundated with no-fault cases (approx. 1/3 of cases are no-fault and in 2009 courts were setting 2011 dates to hear cases)

• Implement Fair Burden of Proof RequirementsPresently, health service providers are required only to submit proof that a bill was received by the insurer to establish entitlement to receive amounts billed (irrespective of suspicions of fraud/abuse)Insurers burden is much higher—required to produce both a witness to testify under oath that the claim was handled in accordance with regulations and a medical expert to testify on the “lack of medical necessity”Solution: Require that in order to establish the right to no-fault benefits, the plaintiff be required to produce a witness with personal knowledge of the facts

23

galleged in a complaint. Furthermore, there should be no presumption medical necessity based on documents submitted by non-medical plaintiffs and/or witnesses who do not have personal knowledge of such necessity

Page 24: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Regional DifferencesRegional Differences Will SignificantlyWill Significantly

Impact P/C MarketsImpact P/C Markets Recovery in Some Areas Will Begin Y Ah d f Oth & S d fYears Ahead of Others & Speed of Recovery Will Differ By Orders of

iMagnitude

Page 25: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

State Economic Growth Varied Tremendously in 2008Tremendously in 2008

E US i

25

Eastern US growing more slowly than Plains,

Mountains

Page 26: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Fastest Growing States in 2008: Plains, Mountain States LeadPlains, Mountain States Lead

PercentReal State GDP Growth

7.3%7.0%

8.0% Natural resource and agricultural states have done

b tt th t th

Percent

4.4%5.0%

6.0%

7.0% better than most others recently, helping insurance

exposure in those areas3.5%

2.9%2.0%2.1%2.5%

2.7%

2 0%

3.0%

4.0%

0.0%

1.0%

2.0%

26

0.0%ND WY SD CO OK WV IA TX, MN,

NM, WA

Source: US Bureau of Economic Analysis; Insurance Information Institute.

Page 27: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Slowest Growing States in 2008: Diversity of States SufferingDiversity of States Suffering

PercentReal State GDP Growth

-0 1%0.0%

KY CT AZ GA IN NV RI MI DE FL OH AKPercent

0.1%

-0.4%-0.6%-0.6% -0.6%-0.6%

1 0%

-0.5%

1 5%

-0.9%

-1.5%

-1.0%

States in the North, South, East and West -1.5%-1.6%-1.6%-1.7%

-2.0%-2.0%

South, East and West all represented among

hardest hit but for differing reasons

27

-2.5%g

Source: US Bureau of Economic Analysis; Insurance Information Institute.

Page 28: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Labor MarketLabor Market TrendsTrends

Fast & Furious: Massive Job LossesSap the Economy and Personal &Sap the Economy and Personal &

Commercial Lines Exposure

Page 29: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Unemployment Rate:On the Rise

January 2000 through September 2009*

On the Rise

9.0

10.0Sept. 2009 unemployment was 9.8%, up 0.3% from July but still near its

highest level since August 1983Previous Peak: 6 3% in

6 0

7.0

8.0 highest level since August 1983Previous Peak: 6.3% in June 2003

Trough: 4.4% in March 2007

4.0

5.0

6.0

U l t ill lik l k 10 %

2.0

3.0

00 01 02 03 04 05 06 07 08 09

Unemployment will likely peak near 10 % during this cycle, impacting payroll

sensitive p/c and l/h exposuresAverage unemployment rate 2000-07 was 5.0%

09

29

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Source: US Bureau of Labor Statistics; Insurance Information Institute.

Sep-

0

Page 30: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Unemployment Rates by State, September 2009: Highest 25 States*September 2009: Highest 25 States

5.3

16NY’s unemployment

8 9% i S t b

5 51.41.6

7.8.9.01.5

13.3

13.0

12.2

1 5

12

14

16

%)

was 8.9% in September, 0.9 pts. below the US

rate of 9.8%

10.5

9.8

9.610

.110

.110

.5

9.3

9.1

9.2

8.89.

3

8.9

8.99.

5

11

10.

10.

10111

8

10

12

ent R

ate

(%

4

6

8

empl

oym

e

The unemployment rate has been rising across the country, b t t t d i h

0

2

4

Un but some states are doing much

better than others. 0

MI NV RI CA SC OR DC FL KY NC AL IL TN OH GA NJ IN MO WA MA MS AZ NY WV ID

*Provisional figures for September 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Page 31: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Unemployment Rates By State, September 2009: Lowest 25 States*September 2009: Lowest 25 States

22 01

8.2

8.3

2.37.47.

78.38.

58.

48.

48.8

8

10

%)

6.8

6.7

6.7

6.7

6.76.97.7.

.84.9

6.27.

07.1

6.77.77

6

8

ent R

ate

(%

44

4.2

4

empl

oym

e

The unemployment rate has been rising across the country,

0

2Une but some states are doing much

better than others.0

PA ME AK CT WI DE TX NM LA MN HI MD NH AR CO KS WY IA OK VT MT VA UT NE SD ND*Provisional figures for September 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Page 32: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*(2007:Q1 to 2010:Q4F)

% % %11.0% Rising unemployment

9.3% 9.

6% 10.0

%

10.1

%

10.0

%

9.8%

9.6%

9.5%10.0%10.5%11.0% g p y

is eroding payrolls and workers comp’s exposure base.

%

8.1%

7 5%8.0%8.5%9.0% Unemployment is

expected to peak above 10% in early 2010.

4%

6.1%

6.9%

6.0%6.5%7.0%7.5% y

4.5%

4.5% 4.6% 4.

8% 4.9%

5.4

4.5%5.0%5.5%

32

4.0%07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4

* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/09); Insurance Info. Inst.

Page 33: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Monthly Change Employment*(Thousands)(Thousands)

0January 2008 through September 2009

-72-144-122

-160-137-161-128-175 201

-200

-100

175

-321-380

-303 -304

-201-263

-400

-300 Job losses since the recession began in Dec. 2007 total 7.2 mill; 15.1

-597-519

-463-600

-500;

million people are now defined as unemployed.

Monthly losses in Dec May were-681

-741-681-652

-800

-700

Jan-08

Feb-08

Mar-08

Apr-08

M Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

M Jun-09

Jul-09

Aug-09

Sep-09

Monthly losses in Dec. – May were the largest in the post-WW II period

but pace of loss is diminishing

33

08 08 08 08 ay-08

08 08 08 08 08 08 08 09 09 09 09 ay-09

09 09 09 09

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute

Page 34: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Labor Underutilization: Broader than Just UnemploymentBroader than Just Unemployment

Percent % of Labor Force

16.4% 16.5% 16.3%17.0%16.8%

16%

17%

18%

14%15%

16%

Marginally attached and unemployed persons account for 17% of the labor

11.2%12%

13%

pforce in Sept. 2009 (1 out 6 people).

Unemployment rate alone was 9.8%. Underutilization shows a broader impact

WC d th i l10%

11%

Sep-08 May-09 Jun-09 Jul-09 Aug-09 Sep-09

on WC and other commercial exposures.

34

NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are availableFor a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-marketrelated reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available forfull-time work but have had to settle for a part-time schedule.Source: US Bureau of Labor Statistics; Insurance Information Institute.

Page 35: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

U.S. Nonfarm Private Employment, Monthly Nov 2007 – August 2009Monthly, Nov 2007 August 2009

0 1 0 9 8 8 7 6138 5

Millions The U.S. economy lost about 6 million

Employment peak; recession starts

138.

0

138.

1

138.

0

137.

9

137.

8

137.

8

137.

7

137.

6

137.

6

137.

4

137.

0

136.

7

36.2

136 5137.0137.5138.0138.5 lost about 6 million

jobs in 12 months

13

135.

1

134.

3

.7134 5135.0135.5136.0136.5

1

133.

133.

0

132.

5

132.

2

1.7 4132.5

133.0133.5134.0134.5

1

131

131.

4

131.

2

130.5131.0131.5132.0

130.0Nov07

Dec07

Jan08

Feb08

Mar08

Apr08

May08

June08

Jul08

Aug08

Sep08

Oct08

Nov08

Dec08

Jan09

Feb09

Mar09

Apr09

May09

Jun09

Jul09

Aug09

Seasonally adjusted. Source: US Bureau of Labor Statistics

Page 36: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Unemployment and UnderemploymentRates: Rocketing Up in 2008-09

18Traditional Unemployment Rate U-3Unemployment + Underemployment Rate U-6

January 2000 through September 2009, seasonally adjusted

Percent

14

1618 Unemployment + Underemployment Rate U-6

U-6 went from 9.2% in April 2008 to

17 0% in Sep 20099.8% Aug. 2009 unemployment rate (U-3) was the highest monthly rate since 1983.

1012

17.0% in Sep. 2009g yPeak rate in the last 30 years: 10.8% in

Nov-Dec 1982.

68

24

00 01 02 03 04 05 06 07 08 09

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Source: US Bureau of Labor Statistics; Insurance Information Institute.

Page 37: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

U.S. Unemployment Rate ForecastsQuarterly 2009:Q4 to 2010:Q4Quarterly, 2009:Q4 to 2010:Q4

11.0%Unemployment is expected to

peak in early 2010:Q1.

10 3% 10.4% 10 3%10 1%10.5%

11.0% p y Q

10.3% 10.3%10.2%

10.0%10.1%

10.0%9.8%

9 6%9.8%

9 6%

10.1%

9.9%

10.0%

9.6%9.6%

9.2%

8 9%9.0%

9.5%

Rising unemployment will erode payrolls d k ’ b 8.9%

8.5%09:Q4 10:Q1 10:Q2 10:Q3 10:Q4

and workers comp’s exposure base.

10 most pessimistic consensus/midpoint 10 most optimistic

Sources: Blue Chip Economic Indicators (10/09); Insurance Info. Inst.

Page 38: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Will the Recession End Soon?Feb -Oct 2009 Initial Jobless Claims*Feb. Oct. 2009 Initial Jobless Claims

7 50 50 658

659

51 48660 Continued drop in

620

640 643 64 65 65 6 64

638

625 63

263

062

7 632

623

617

618

616

07620

640

660 Continued drop in initial unemployment claims is a good news.

6058

567 66 57

167 57

357

04580

600

620

5656

055

7 565 565 5

564

554

549

541

532

540

560

580

5

500

520

8 4 1 8 5 6 3 0 7 8 5 1 8 5 2 9

4-week moving avg (000)

Feb

14Fe

b 21

Feb

28M

ar 7

Mar

14

Mar

21

Mar

28

Apr

4A

pr 1

1A

pr 1

8A

pr 2

5M

ay 2

May

9M

ay 1

6M

ay 2

3M

ay 3

0Ju

n 6

Jun

13Ju

n 20

Jun

27Ju

l 4Ju

l 11

Jul 1

8Ju

l 25

Aug

1A

ug 8

Aug

15

Aug

22

Aug

29

Sep

5Se

p 12

Sep

19Se

p 26

Oct

3O

ct 1

0

*seasonally adjusted; state programs only Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm

Page 39: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Wage & Salary Disbursements (Payroll Base) vs. Workers Comp

N t W itt P iNet Written Premiums7/90 3/91 3/01 11/01

Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions

12/07 ?

$6,000

$7,000

$35

$40

$45Wage & SalaryDisbursementsWC NPW

7/90-3/91 3/01-11/01 12/07-?

$4,000

$5,000

$25

$30

$35

$2,000

$3,000

$10

$15

$20Weakening

payrolls have eroded $2B+ in

$0

$1,000

$0

$5

$10Shaded areas indicate recessions eroded $2B+ in workers comp

premiums

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09**Average Wage and Salary data as of 7/1/2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books

Page 40: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Frequency: 1926-2008A Long Term Drift DownwardA Long-Term Drift Downward

Manufacturing—Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers

25

30

20

25

10

15

0

5

'26

'28

'30

'32

'34

'36

'39

'41

'43

'45

'47

'49

'52

'54

'56

'58

'60

'62

'65

'67

'69

'71

'73

'75

'78

'80

'82

'84

'86

'88

'91

'93

'95

'97

'99

'01

'04

'06

Note: Recessions indicated by gray bar

Note: Recessions indicated by gray bar.

Sources: NCCI from U.S. Bureau of Labor Statistics; National Bureau of Economic Research

Page 41: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Crisis-DrivenCrisis Driven ExposureExposure DriversDrivers

Economic Obstaclesto Growth in P/C

IInsurance

Page 42: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

New Private Housing Starts,1990-2010F (Millions of Units)1990 2010F (Millions of Units)

Exposure growth due to home construction forecast for HO insurers is dim for 2009

New home starts plunged 34%

from 2005 2007;

2.07

801.85 1.

96

1 92.02.1

forecast for HO insurers is dim for 2009 with some improvement in 2010.

Impacts also for comml. insurers with construction risk exposure

from 2005-2007; Drop through 2009 is 72% (est.)—a net

annual decline of 1 49 million1.

361.48

351.46 1.47

1.62 1.64

1.57 1.60 1.

71

1

1.51.61.71.81.9 p 1.49 million

units, lowest since record

began in 1959

1.3

0

1.3

1.29

1.20

1.01

1.19

1.11.21.31.41.5

0.90

0.58

0.81

1

0 60.70.80.91.0 I.I.I. estimates that each incremental

100,000 decline in housing starts costs home insurers $87.5 million in new exposure (gross premium). The net

exposure loss in 2009 vs. 2005 is

42

0

0.50.6

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F

pestimated at about $1.3 billion.

Source: US Department of Commerce; Blue Chip Economic Indicators (10/09); Insurance Information Inst.

Page 43: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Auto/Light Truck Sales,1999-2010F (Millions of Units)

Weak economy, credit crunch are h ti t l G i

New auto/light truck sales are expected to experience a

1999 2010F (Millions of Units)

17 117.517.8

17.41819

hurting auto sales; Gas prices have been a factor too.

are expected to experience a net drop of 6.5 million units annually by 2009 compared with 2005, a decline of 37%

and the lowest level since the l t 196016.916.916.6

17.116.5

16.1

1516

17late 1960s

“Cash for Clunkers” should

13.1

11 8131415

I t f f lli t l ill

generate $225M - $375M in net new personal auto premiums

10.4

11.8

1011

12 Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth

than problems in the housing market will on home insurers

43

910

99 00 01 02 03 04 05 06 07 08 09F 10F

market will on home insurers

Source: US Department of Commerce; Blue Chip Economic Indicators (10/09); Insurance Information Inst.

Page 44: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

High Ratio of Unsold-Homes Inventory to Sales Will Likely Keep Prices Falling

Inventory of unsold homes number of homes sold

to Sales Will Likely Keep Prices FallingMillions of Homes, Annual Rate

7.1

6.56

7

8Inventory of unsold homes number of homes sold

# of house sales fell;inventory wasn’t the problem

# of house sales is rising but so is inventory

0 7 8 9 9 8 .1 .1

6

5.7

4.9

4.49 4.71

4.55 4.66

4.72 4.89 5.

24

5.10

4

5

6

2.8 3.

5 4. 3.7

3.6 3.8

3.6 3. 3.9

3.8 4 44 4

2

3

0

1

05 06 07 08

n-09

b 09 r 09

r 09

y 09

n 09 l 0

9

g 09

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Source: http://www.realtor.org/research/research/ehsdata

Page 45: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Private Sector Business Starts,1993:Q2 2008:Q4*1993:Q2-2008:Q4

Thousands189 000 business starts

1 2 2 216 22

0 223

220

220

221

221

8

220

230189,000 business starts

were recorded 2008:Q4, the lowest

level since 1995

192

8 9 90 194

9119

9 204

202

195

196

196

206

206

201

192 19

820

620

620

321

120

521

220

0 205

204

204

197 20

3 209

203

192

192

193

201 20

420

221

0 212

209

210 212

204 21

020

919

59

201

200

210level since 1995

175

186

174 18

0 186 1

188

187 18

918

6 1 9 19 1 1 1

187 18

9

170

180

190Business starts are down 15% in the current downturn, holding

150

160

170 the current downturn, holding back most types of commercial

insurance exposure

45

15093 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

*Latest available as of Oct. 2009.Source: Bureau of Labor Statistics: http://www.bls.gov/news.release/cewbd.t07.htm

Page 46: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Business Bankruptcy Filings,1980 2009*1980-2009

% Change SurroundingRecessionsSignificant

i li ti f b d30

0

4 ,277 81

,235

82,4

463 5 3 ,5

4964

3

80,00090,000

Recessions1980-82: 58.6%1980-87: 88.7%1990-91: 10.3%

implications for bond & surety lines

694

8,12

569

,362

,436

64,0

04 71,

63,8

5363

,235

64,8

53 71 70,

62,3

0452

,374

51,9

5953

,549

54,0

2736

74 99 0 1 54

660

,000

60,00070,00080,000

2000-01: 13.0%2006-09: 204.6%*

43,6 48

44,3

37,8

8435

,472

40,0

938

,540

35,0

3734

,317

39,2

0,6

95 28,3

2243

, 5

30,00040,00050,000

There were 30,333 business bankruptcies d i th fi t h lf f 2009 64% f 19

,

010,00020,000

,during the first half of 2009, up 64% from 2008: H1 and on track for about 60,000 for all of 2009, the most since 1993. Current

recession will generate 200%+ surge.

46

0

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

*Based estimate of 60,000 business bankruptcies in 2009; actual first half total was 30,333.Source: American Bankruptcy Institute; Insurance Information Institute

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Percent Change in Business Bankruptcy Filings 1980-2009*Bankruptcy Filings,1980 2009

%S i b k i d i h

44.0

%

43.8

% 53.8

%37

.8%

40%

60%Surge in bankruptcies during the

“Great Recession” is the most severe in more than 30 years

10.1

%

2.5% 11

.4%

14.0

%1.

5% 2.6% 10

.3%

3.1%

0.9%

13.0

%

14.2

%

20%

40%

-9.9

%

16%

-1.0

%

-1.3

%11

.8%

5.9%

-0.8

%

0.9

%4.

6% -6.4

%

-3.9

%-9

.1% -2.1

%

-20%

0%

-22.

6 -1 -15

-17 -14

-49.8%-60%

-40%

2 3 4 5 6 7 8 9 0 2 3 4 5 6 7 8 9 0 2 3 4 5 6 7 8 *

Significant implications for bond & surety lines

47

81 82 83 84 85 86 87 88 89 90 91 9 2 93 94 95 96 97 98 99 00 01 0 2 03 04 05 06 07 08 09*

*Based estimate of 60,000 business bankruptcies in 2009. All figures are percent change from previous year.Source: Insurance Information Institute from American Bankruptcy Institute data.

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Total Industrial Production,(2007:Q1 to 2010:Q4F)(2007:Q1 to 2010:Q4F)

End of recession in late 2009, Obama stimulus program t d t b fit i d t i l d ti d

1 5%3.2% 3.6% 4.4%3.8%4.0%4.3%3.5%

4.9%5.0%

10.0%are expected to benefit industrial production and

therefore insurance exposure both directly and indirectly

1.5%0.3% 0.2%

-5 0%

0.0%

-4.6%

-9.0%

13 0%-10.5%

15 0%

-10.0%

5.0%

Industrial production began

to contracted

Figures for H2 2009 and 2010 revised upwards to reflect expected impact

-13.0%

-19.0%-20.0%

-15.0% to contracted sharply in late

2008 and plunged in Q1 2009

of Obama stimulus program and a gradual

economic recovery

48

-25.0%

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/09); Insurance Info. Inst.

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State & Local Government Finances

i i S iin Dire StraightsLarge, Long-Term Cuts Necessary to g , g y

Align Spending with ShrinkingTax Revenues

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Year-Over-Year Change in Quarterly U.S. State Tax Revenues Inflation AdjustedState Tax Revenues, Inflation Adjusted

20%States revenues were down 17.8% in Q2 2009, the second consecutive quarter of

record revenue decline. This will impact public infrastructure spending significantly.%

9.9%

9.5%

% .2%

% 0%12

.4%

% %10%

15%

p p p g g y

2.4% 4.

7% 5.6 %

4.4%

1.8%

0.4%

0.0% 1.

6%

0.1%

4.0% 4.7% 5.

7 % 83.

4%6.

0 % 7.0

6.6%

4.2%

3.7%

6.3%

2.6%

1.3% 1.9% 2.3%

0.4% 0.8%

0.4%

3.0%

0.2%2.

4%

0%

5%

10%-1

.3%

-1.7

%-3

.0%

%

-0.6

%

.8%

10%

-5%

0%Nationwide, state-tax collections for fiscal year 2009 declined by a record $63 billion, or 8.2 percent from the previous year That loss

-7.6

%-1

0.7%

-5.

8%-1

3.4%-15%

-10% from the previous year. That loss is roughly twice the amount

states gained in fiscal relief from the federal stimulus package.

-17.

8

-20%

1Q99

2Q99

3Q99

4Q99

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

Source: U.S. Census Bureau; Nelson A. Rockefeller Institute of Government:http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf

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Year-Over-Year Change in Quarterly State and Local Tax Revenues (Inflation Adjusted)and Local Tax Revenues (Inflation Adjusted)

State tax receipts are plunging far

more rapidly than

States spending on infrastructure will have to

decline even more, especially when stimulus funds dry up local taxeswhen stimulus funds dry up

after 2010.

Source: U.S. Census Bureau; Nelson A. Rockefeller Institute of Government:http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf

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State Tax Revenue GrowthAdjusted for Legislative ChangesAdjusted for Legislative Changes

State tax receiptsState tax receipts are plunging in NY

Source: U.S. Census Bureau and Bureau of Economic Analysis; Nelson A. Rockefeller Institute of Government:http://www.rockinst.org/pdf/government_finance/state_revenue_report/2009-10-15-SRR_77.pdf

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States with Fastest Decline in Real Per-Capita Tax RevenuesReal Per Capita Tax Revenues

Period Ending April-June 2009 vs. Recent Peak*

5%

0%AK FL SC GA VA UT ID NC NV DE

Percent

Real per capital ta receipts in Fl declined

-15%

-10%

-5% Real per capital tax receipts in Fl declined 27.5% from $2406 to $1,744 in the 4

quarters ending June 2009 vs. June 2006

-20.4% -20.0%-16.5% -16.3% -16.3%-17.1%-18.2%-18.2%

-25%

-20%

15%

M t t ’-27.5%

-35%

-30%Many states’ revenues are down substantially since their highs early

i h d d53

-36.8%-40% in the decade*Peak defined as July – June period between 2006-2009 with highest peak per capita revenues.Source: US Bureau of Economic Analysis; Nelson A. Rockefeller Institute of Govt.; Insurance Info. Inst.

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States with Slowest Decline in Real Per-Capita Tax RevenuesReal Per Capita Tax Revenues

Period Ending April-June 2009 vs. Recent Peak*

0.0%0.0%1%

0%MD AR MT VT WV IN IA SD ND WY

Percent

-2.1%2 4%

-2%

-1%

-2.4%

-3.9%4 1%

-4%

-3%

6 2%

-5.1% -4.9%-4.5% -4.1%

-6%

-5%

Some states are doing much better than others

54

-6.2%-7% better than others

*Peak defined as July – June period between 2006-2009 with highest peak per capita revenues.Source: US Bureau of Economic Analysis; Nelson A. Rockefeller Institute of Govt.; Insurance Info. Inst.

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State-by-StateState by State Infrastructure

Spending & Job GainsBigger States Get More Should BenefitBigger States Get More, Should Benefit

Commercial Insurers Exposure

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Distribution of $787 B in Stimulus Funds*Stimulus Funds

$ BillionsUnused $173.2B or 22% or the $787B in stimulus$ Billions

$300

$350Paid Out

$787B in stimulus money has been spent

as of Oct. 10, 2009.$288$275

$225 5$200

$250 $224

$225.5 $228.0 $160.3$100

$150

$62.5 $47.0 $63.7$0

$50

Tax Benefits Contracts Grants Entitlements

56

Tax Benefits Contracts, Grants,Loans

Entitlements

*As of 10/10/09Source: www.recovery.gov accessed 10/17/09; Insurance Information Institute.

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Infrastructure Stimulus Spending by State (Total = $38 1B)by State (Total = $38.1B)

State Allocation State Allocation State AllocationAL $603,871,807 LA $538,575,876 OK $535,407,908, , , , , ,

AK $240,495,117 ME $174,285,111 OR $453,788,475

AZ $648,928,995 MD $704,863,248 PA $1,525,011,979

AR $405,531,459 MA $890,333,825 RI $192,902,023

CA $3 917 656 769 MI $1 150 282 308 SC $544 291 398CA $3,917,656,769 MI $1,150,282,308 SC $544,291,398

CO $538,669,174 MN $668,242,481 SD $213,511,174

CT $487,480,166 MS $415,257,720 TN $701,516,776

DE $158,666,838 MO $830,647,063 TX $2,803,249,599

DC $267 617 455 MT $246 599 815 UT $292 231 904DC $267,617,455 MT $246,599,815 UT $292,231,904

FL $1,794,913,566 NE $278,897,762 VT $150,666,577

GA $1,141,255,941 NV $270,010,945 VA $890,584,959

HI $199,866,172 NH $181,678,856 WA $739,283,923

ID $219,528,313 NJ $1,335,785,100 WV $290,479,108

IL $1,579,965,373 NM $299,589,086 WI $716,457,120

IN $836,483,568 NY $2,774,508,711 WY $186,111,170

IA $447,563,924 NC $909,397,136 U.S. T it i

$238,045,760Territories

KS $413,837,382 ND $200,318,301

KY $521,153,404 OH $1,335,600,553 Total $38,101,898,173

Sources: USA Today, 2/17/09; House Transportation and Infrastructure Committee; the Associated Press.

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Infrastructure Stimulus Spending By State: Top 25 States ($ Millions)State: Top 25 States ($ Millions)

7 Infrastructure spending is3.

2 5

$3,9

17.7

$4,000$4,500

Infrastructure spending is in the stimulus package total $38.1B, allocated

i i0 0

$2,8

03$2

,774

.4.

9

$2 500$3,000$3,500

rs ($

Mill

) largely by population size.

0.6

0.3

6.5

0.6 .3 5 9 5 2 9 9$1

,335

.8

$1,5

80.

9.4

,141

.31,

150.

3$1

,335

.6

$1,5

25.

$1,7

9

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

ulus

Dol

la

$890

$890

$836

$830

$739

.$7

16.

$704

.$7

01.

$668

.2$6

48.9

$603

.9$5

44.3

$538

.7$5

38.6

$90$1$ 1

$

$500$1,000$1,500

Stim

u

$0CA TX NY FL IL PA NJ OH MI GA NC VA MA IN MO WA WI MD TN MN AZ AL SC CO LA

Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.

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Infrastructure Stimulus Spending By State: Bottom 25 States ($ Millions)State: Bottom 25 States ($ Millions)

Infrastructure spending is in

847.6

5.3$521

.248

7.5

53.8$5

35.4

$600the stimulus package total

$38.1B, allocated largely by population size

78.9

0.0

7.6

.6 .5 .0 5

$413

.

$44

90.5

92.2

299.

6$405

. 5

$415$4 $4

5

$400

$500

rs ($

Mill

) population size

$27

$27

$26

$246

$240

.$2

38.

$219

.5$2

13.5

$200

.3$1

99.9

$192

.9$1

86.1

$181

.7$1

74.3

$158

.7$1

50.7

$2$2$ 2

$200

$300

ulus

Dol

la

$

$0

$100Stim

u

$

OK KY CT OR IA MS KS AR NM UT WV NE NV DC MT

AK

U.S.

Ter

r. ID SD ND HI RI WY NH ME DE VT

Sources: USA Today 2/19/09; House Transportation and Infrastructure Committee; the Associated Press.

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Expected Number pof Jobs Gained or

Preserved by yStimulus Spendingp g

Larger States = More JobsWorkers Comp BenefitsWorkers Comp Benefits

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Estimated Job Effect of Stimulus: Jobs Created/Saved By State = 3 5 Mill TotalCreated/Saved By State 3.5 Mill Total

State Jobs Created State Jobs Created State Jobs CreatedAL 52 000 LA 50 000 OK 40 000AL 52,000 LA 50,000 OK 40,000

AK 8,000 ME 15,000 OR 44,000

AZ 70,000 MD 66,000 PA 143,000

AR 32,000 MA 79,000 RI 12,000

CA 396,000 MI 109,000 SC 50,000

CO 60,000 MN 66,000 SD 10,000

CT 41,000 MS 30,000 TN 71,000

DE 11,000 MO 69,000 TX 269,000

DC 12,000 MT 11,000 UT 32,000

FL 207,000 NE 23,000 VT 8,000

GA 107,000 NV 34,000 VA 93,000

HI 16,000 NH 16,000 WA 75,000

ID 17,000 NJ 100,000 WV 20,000

IL 148,000 NM 22,000 WI 70,000

IN 75,000 NY 215,000 WY 8,000

IA 37 000 NC 105 000IA 37,000 NC 105,000

KS 33,000 ND 9,000

KY 48,000 OH 133,000 Total 3,467,000

Sources: http://www.recovery.gov/; Council of Economic Advisers; Insurance Information Institute.

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Estimated Job Effect of Stimulus Spending By State: Top 25 StatesSpending By State: Top 25 States

6 (Thousands)39

6

400

timul

us

The economic stimulus plan calls f th ti ti f

( )26

921

520

7

300

aved

by

S for the creation or preservation of 3.5 million jobs, allocated roughly

in proportion to the size of the

13314

8

00050709

143

2 2

200

Cre

ated

/Sa p p

state’s labor force.93 79 75 75 71 70 70 69 66 66 60 52 50 50

1010101

100

. of J

obs

C

0CA TX NY FL IL PA OH MI GA NC NJ VA MA IN WA TN AZ WI MO MD MN CO AL LA SC

No.

Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.

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Estimated Job Effect of Stimulus Spending By State: Bottom 25 StatesSpending By State: Bottom 25 States

(Thousands)7

4441 40

48

40

50

timul

us

( )

The economic stimulus plan calls for the creation or

33

37

303232

34

30

40

aved

by

S preservation of 3.5 million jobs, allocated roughly in

proportion to the size of the

2220

17 16 16 15

23

20

Cre

ated

/Sa p p

state’s labor force

12 12 11 11 10 9 8 8 810

. of J

obs

C

0KY OR CT OK IA NV KS AR UT MS NE NM WV ID HI NH ME DC RI DE MT SD ND AK VT WY

No.

Sources: http://www.recovery.gov/; Council of Economic Advisers Insurance Information Institute.

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GREEN SHOOTSGREEN SHOOTS

Is the RecessionIs the RecessionNearing an End?g

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Hopeful Signs that theEconomic Recovery Is UnderwayEconomic Recovery Is Underway

• Recession Appears to be Bottoming Out, Freefall Has EndedGDP h i k h d d E i di• GDP shrinkage has ended; Economy is expanding

• Pace of job losses is slowing• Major stock market indices well off record lows, anticipating recovery• Some signs of retail sales stabilization are evident

• Financial Sector is Stabilizing• Banks are reporting quarterly profits• Banks are reporting quarterly profits• Many banks expanding lending to very credit worthy people & businesses

• Housing Sector Seems To Be Bottoming Out• Home are much more affordable (attracting buyers)• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)• Freefall in housing starts and existing home sales is ending in many areas

65

Freefall in housing starts and existing home sales is ending in many areas

• Inflation & Energy Prices Are Under Control• Consumer & Business Debt Loads Are Shrinking Source: Ins. Info. Inst.

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11 Industries for the Next 10 Years: Insurance Solutions NeededInsurance Solutions Needed

GovernmentEducation

Health CareEnergy (Traditional)Alternative Energy

A i lAgricultureNatural Resources

E i t lEnvironmentalTechnology

Li ht M f t i66

Light ManufacturingExport Oriented Industries

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Inflation Trends: Concerns Over

Stimulus Spending and Monetary Policy

Mounting Pressure on C i C S i i ?Claim Cost Severities?

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Annual Inflation Rates(CPI U %) 1990 2010F(CPI-U, %), 1990-2010F

6.0Inflation peaked at 5.6% in August 2008 on

high energy and commodity crisis The4.9 5.1

3 8 3 84 0

5.0

6.0 high energy and commodity crisis. The recession and the collapse of the commodity bubble have produced temporary deflation.

3.0 3.22.6

1 9

3.3 3.4

2.5 2.3

3.0

3.8

2.8

3.8

1 9

2.82.92.43.0

4.0

1.51.9

1.31.9

1.0

2.0

There is so much slack in the US economy that

(0.5)(1.0)

0.0

yinflation should not be a concern through 2010, but depreciation of dollar is concern longer run.

68

( )(1.0)90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Oct. 10, 2009 (forecasts).

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US Budget Deficit, 1969-2019F

$500 4%Federal Deficit ($ Bill) % GDP

$0 0%

2%

-$500

al D

efic

it

-4%

-2%

s %

of G

DP

-$1,000Fede

ra

-8%

-6%

Defic

it as

Concerns that deficit spending will drive up inflation. This would

harmful to insurance claim severity.-$1,500

-12%

-10%Deficit expected to hit record $1.8 trillion in 2009 or 13% or GDP a post WW II high

y

-$2,000

1969

1975

1980

1985

1990

1995

2000

2005

2010

2015

2019

-14%or GDP, a post-WW II high

Sources: Congressional Budget Office analysis of President’s budget, March 2009; Insurance Information Institute.

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Balance Sheet of theFederal Reserve Dec 2006 Sept 2009*

70.4

5 9.0

Federal Reserve, Dec. 2006- Sept. 2009*

$ Billions

$2,2

7

$2,1

06.5

$2,1

79

$2,0

52.2

$2,000

$2,500 The size of the Fed’s balance sheet has more than doubled since the crisis began in 2007 from about

$900 billion to $2 2 trillion fueling

.7 .6 .4 .6 2.9 .3 6.4 $1

,186

.2

$1,500

$900 billion to $2.2 trillion, fueling inflation concerns.

$903

.

$903

.

$899

.

$911

$922

$921

$926

$

$

$1,000

$0

$500

70

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

*As of final Friday in each quarter.Source: Federal Reserve: http://www.federalreserve.gov/releases/h41/hist/h41hist1.htm

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Top Concerns/Risks for Insurers if Inflation is ReignitedInflation is Reignited

CONCERNS: The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Govt. Has Approved a $787B ( g ), pp $Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary.

What are the potential impacts for insurers?Wh t / h ld i d t t t th l f th i k f i fl ti ?What can/should insurers do to protect themselves from the risks of inflation?

KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION• Rising Claim Severities

Cost of claims settlement rises across the board (property and liability)Cost of claims settlement rises across the board (property and liability)• Rate Inadequacy

Rates inadequate due to low trend assumptions arising from use of historical data • Reserve InadequacyReserve Inadequacy

Reserves may develop adversely and become inadequate (deficient)• Burn Through on Retentions

Retentions, deductibles burned through more quickly

71

• Reinsurance Penetration/ExhaustionHigher costs risks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly

Source: Ins. Info. Inst.

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Key Threats Facing y gInsurers Amid

Financial CrisisChallenges for the

Next 5-8 YearsNext 5-8 Years

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Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015

1. Erosion of CapitalL l d d idl th i lLosses were larger and occurred more rapidly than is commonly understood or presumedMax surplus loss at 3/31/09 was 16%=$85B from 9/30/07 peakP/C policyholder surplus loss could have been much largerP/C policyholder surplus loss could have been much largerDecline in PHS of 1999-2002 was 15% over 3 years and was entirely made up and them some in 2003. Current decline was ~16% in 5 qtrs.During the opening years of the Great Depression (1929-1933) PHS fell 37%, Assets fell 28% and Net Written Premiums fell by 35%. It took until 1939-40 before these key measures returned to their 1929 peaks.their 1929 peaks.BOTTOM LINE: Capital and assets fell farther and faster than many believed possible. It will take years to return to the 2007 peaks—likely 2011 (without market relapse).

73Source: Insurance Information Inst.

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Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015

2. Reloading Capital After “Capital Event”Continued asset price erosion coupled with major “capital event” would have led to shortage of capital among somecompaniesP ibl C I l i f d llPossible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirementsP/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after majorcapital can be raised quickly and cheaply after major events (post-9/11, Katrina).

This assumption may be incorrect in the current environmentCost of capital is much higher today (relative “risk-free”Cost of capital is much higher today (relative risk free rates), reflecting both scarcity & riskImplications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh

74Source: Insurance Information Inst.

y p g y pcapital & generate internally. Already a reality for some life insurers.

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Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015

3. Long-Term Reduction in Investment EarningsL i t t t i k i t d iti dLow interest rates, risk aversion toward equities and many categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gainsFed actions in Treasury markets keep yields lowFed actions in Treasury markets keep yields lowMany insurers have not adjusted to this new investment paradigm of a sustained period of low investment gainsRegulators will not readily accept it; Many will reject itRegulators will not readily accept it; Many will reject itImplication 1: Industry must be prepared to operate in environment with investment earnings accounting for a smaller fraction of profitssmaller fraction of profitsImplication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.

75Source: Insurance Information Inst.

yLessons from the period 1920-1975 need to be relearned

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Important Issues & Threats Facing Insurers: 2009 – 2???

4. Regulatory Overreach Facing Insurers: 2009 – 2???

Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)Strong arguments for Optional Federal Charter, but…Pushing for major change is not without risk in the g j gcurrent highly charged political environmentDangers exist if feds get their nose under the tentStatus Quo is viewed as unacceptable by allStatus Quo is viewed as unacceptable by allDisunity within the insurance industryInsurance & systemic risk—Who is important?Impact of regulatory changes will be felt for decades

76Source: Insurance Information Inst.

Impact of regulatory changes will be felt for decadesBottom Line: Regulatory outcome is uncertain and risk of adverse outcome exists

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Health Insurance Reform Debate—Potential Spillover Impacts on P/C Insurersp p

• 24-Hour Coverage ProposalWould roll WC and med components of auto into natl. health care plan

• Rollback of McCarran-Ferguson ActWould repeal or restrict for health and medical malpractice insurersSlippery slope—Med Mal is a p/c line; Congress will not hesitate to breach M-F for other p/c lines in the future to show its ire over an issue (e.g., after major cat)

• Exclusion of Med Mal Reform from Health Care BillShows powerful influence of trial bar with Congress/Administration

• FTC granted authority to conduct studies “related to insurance” All Lines!• FTC granted authority to conduct studies “related to insurance” –All Lines!• Reporting of Claims• Adjustments to Medicare Fee Schedules• Patient “Bill of Rights” or Vague Standards of Care• Patient Bill of Rights or Vague Standards of Care• Cost Shifting into WC, Auto from Health System

WC/Auto Medical: more lucrative from provider perspective• “Windfall” Profit Taxes? Additional Premium Taxes?

77

W d a o t a es? dd t o a e u a es?• Executive Compensation Restrictions?• Public “Option” in P/C Lines—Nat Cat/Wind?• Perception that Feds Regulate Insurance Industry Taking Root

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Important Issues & Threats Facing Insurers: 2009 2015

5. Emerging Tort ThreatN t t f ( t ti f t f ) i

Facing Insurers: 2009 -2015

No tort reform (or protection of recent reforms) is forthcoming from the current Congress or AdministrationE i f t f i t i t ( l dErosion of recent reforms is a certainty (already happening)Innumerable legislative initiatives will create

t iti t d i i ti f dopportunities to undermine existing reforms and develop new theories and channels of liabilityTorts twice the overall rate of inflationInfluence personal and commercial lines, esp. auto liab.Historically extremely costly to p/c insurance industryLeads to reserve deficiency, rate pressure

78Source: Insurance Information Inst.

y, pBottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012-2014

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Shifting LegalShifting Legal Liability & TortLiability & Tort

EnvironmentIs the Tort Pendulum

Swinging Against Insurers?Swi gi g gai st su e s?

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Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclicalas a % of GDP Appear Somewhat Cyclical

$300 2.50%Tort Sytem Costs Tort Costs as % of GDPBillions

$250

sts 2.25% GD

P

$150

$200

yste

m C

os

2.00% s as %

of

$50

$100

Tor

t Sy

1.75%

Tor

t Cos

ts

2009 2010 G th i T t C t % f

$0

$50

80 82 84 86 88 90 92 94 96 98 00 02 04 06 8E 0E

1.50%

T2009-2010 Growth in Tort Costs as % of GDP is due in part to shrinking GDP

198

198

198

198

198

199

199

199

199

199

200

200

200

200

2008

2010

Sources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010

*Excludes the tobacco settlement, medical malpractice

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The Nation’s Judicial Hellholes (2008/2009)Hellholes (2008/2009)

Watch List

ILLINOIS

Rio Grande Valley & Gulf

Coast, TXMadison County,

IL NEVADA

NEW JERSEYAtlantic County (Atlantic City)

ALABAMA

ILLINOISCook County West VirginiaBaltimore, MD

St Louis (the city of), St Louis and

Jackson Counties, MO

Clark County (Las Vegas)

ALABAMAMacon and

Montgomery Counties

Counties, MODishonorable

MentionsMA Supreme

Judicial Court

CALIFORNIALos Angeles

County

South Florida

Judicial CourtMO Supreme

Court

Source: American Tort Reform Association; Insurance Information Institute

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FINANCIAL STRENGTH &

RATINGSIndustry Has Weathered dust y as Weat e ed

the Storms Well

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P/C Insurer Impairments,1969 20081969-2008

The number of impairments varies i ifi tl th / i l

60 860

70

significantly over the p/c insurance cycle, with peaks occurring well into hard markets

649 50 48

556 58

41

49 5047

40

50

60

34

19

36

3134

29 318 19

35820

30

40

815

127

11 9 913 12

19

16 14 13

1612

1 1 114 15

75

0

10

20

83

0

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Source: A.M. Best; Insurance Information Institute

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P/C Insurer Impairment Frequency vs Combined Ratio 1969 2008vs. Combined Ratio, 1969-2008

Combined Ratio after DivP/C I i t F

Impairment rates are highly

115

1201.82.0

P/C Impairment Frequencye g ycorrelated with underwriting

performance and reached record lows in 2007/08

110

115

Rat

io

1.21.41.6

t Rat

e

lows in 2007/08

100

105

Com

bine

d

0 60.81.0

mpa

irmen

t

95

C

0.20.40.6 I

2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and

84

90

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

0.0

Source: A.M. Best; Insurance Information Institute

barely one-fourth the 0.82% average since 1969

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P/C Impairment Frequency vs. Catastrophe Points in Combined Ratio, 1977-2008Points in Combined Ratio, 1977 2008

Catastrophe Points in Combined RatioImpairment rates

are highly

14

16

Rat

io

1.82.0

pP/C Impairment Frequency

e g ycorrelated with underwriting

performance and reached record lows in 2007/08

10

12

Com

bine

d

1 21.41.6

Rat

e

lows in 2007/08

6

8

Poin

ts o

n C

0.81.01.2

mpa

irmen

t

2

4

atas

troph

e

0.20.40.6 Im

2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and

0

77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Ca

0.0

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

barely one-fourth the 0.82% average since 1969

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Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*Ratings Actions in 2008

P/C insurance is by design a resilient in

Upgraded, 59 , 4.0%

Initial, 41 , 2.8%Downgraded, 55 , 3 8%

design a resilient in business. The dual threat of financial

disasters and catastrophic losses are Under Review, 63 ,

4.3%

O h 59 4 0%

3.8%catastrophic losses are anticipated in the

industry’s risk management strategy.

Other, 59 , 4.0%

Despite financial market turmoil, high cat losses

and a soft market inand a soft market in 2008, 81% of ratings actions by A.M. Best

were affirmations; just 3.8% were downgrades

86

Affirm, 1,183 , 81.0%*Through December 19.Source: A.M. Best.

86

3.8% were downgrades and 4.0% upgrades

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Historical Ratings Distribution,US P/C Insurers 2008 vs 2005 and 2000US P/C Insurers, 2008 vs. 2005 and 2000

2008 2005 2000A++/A+ and

D0.2%C++/C+

1.9%

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

11 5%

C/C-0.6%

A++/A+9.2%

Vulnerable*

A++/A+10.8%Vulnerable*

A++/A+ and A/A- gains

.9% 11.5%B/B-6.9%

Vulnerable12.1%

B++/B+21.3%

7.9%

A/A-

B++/B+28.3%

A/A-52 3%

B++/B+26.4%

A/A48.4%

P/C insurer financial strength has improved since 2005

52.3%A/A-

60.0%

87Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.

has improved since 2005 despite financial crisis

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Reasons for US P/C Insurer Impairments 1969 2008Impairments, 1969-2008

Reinsurance Sig. Change Deficient

Deficient loss reserves and inadequate i i th

Failure3.7%

Misc.9.1%

Sig. Change in Business

4.2%

Loss Reserves/In-

adequate Pricing38 1% pricing are the

leading cause of insurer

impairments

38.1%

Investment Problems

7 0% impairments, underscoring the

importance of discipline. Affiliate

Impairment

7.0%

pInvestment

catastrophe losses play a much

ll lRapid

Impairment7.9%

All d F d

Catastrophe Losses

88Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008

smaller role.Growth14.3%

Alleged Fraud8.1%

Losses7.6%

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Critical Differences Between P/C

Insurers and BanksSuperior Risk Management ModelSuperior Risk Management Model

& Low Leverage MakeBi Diffa Big Difference

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How Insurance Industry Stability Has Benefitted ConsumersHas Benefitted Consumers

BOTTOM LINE:• Insurance Markets—Unlike Banking—Are Operating

NormallyTh B i F ti f I th O d l T f• The Basic Function of Insurance—the Orderly Transfer of Risk from Client to Insurer—Continues Uninterrupted

• This Means that Insurers Continue to:This Means that Insurers Continue to:Pay claims (whereas 123 banks have gone under as of 10/2/09)

The Promise is Being FulfilledRenew existing policies (banks are reducing and eliminating lines of credit)Renew existing policies (banks are reducing and eliminating lines of credit)Write new policies (banks are turning away people and businesses who want or need to borrow)Develop new products (banks are scaling back the products they offer)

90

Develop new products (banks are scaling back the products they offer)Compete Intensively (banks are consolidating, reducing consumer choice)

Source: Insurance Information Institute90

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Reasons Why P/C Insurers Have Fewer Problems Than Banks:

A Superior Risk Management Model• Emphasis on Underwriting

Matching of risk to price (via experience and modeling)

A Superior Risk Management Model

g p ( p g)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk

• Strong Relationship Between Underwriting and Risk BearingInsurers always maintain a stake in the business they underwrite keeping “skin in the game”Insurers always maintain a stake in the business they underwrite, keeping skin in the game at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101

• Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry

• Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid

• Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge

91

y g y p g g ( g gfunds, private equity, complex securitized instruments, credit derivatives—CDS’s)

• Greater TransparencyInsurance companies are an open book to regulators and the public

Source: Insurance Information Institute91

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Regulatory ReformRegulatory Reform Obama Administration’s Plan

for Reforming Financialfor Reforming Financial Services Industry Regulation

Will Impact InsurersWill Impact InsurersStatus: Stalled in Congress

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Obama Regulatory Reform Proposal:Plan ComponentsPlan Components

I. Office of National Insurance (ONI) Duties( )1. Monitor “all aspects of the insurance industry”2. Gather information3. Identify the emergence of any problems or gaps in

regulation that could contribute to a future crisis4. Recommend to the Federal Reserve insurance companies

it believes should be supervised as Tier 1 FHCs5 Administer the Terrorism Risk Insurance Program5. Administer the Terrorism Risk Insurance Program6. Authority to enter into international agreements and

increase international cooperation on insurance regulation

93

p g

Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.

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Obama Regulatory Reform Proposal:Plan Components (cont’d)

II. Systemic Risk Oversight & Resolution Authority

Plan Components (cont d)

Federal Reserve given authority to oversee systemic risk of large financial holding companies (Tier 1 FHCs)

Insurers are explicitly included among the types of entities that could be found to be p y g ypa Tier 1 FHC

ONI given authority to “recommend to the Federal Reserve any insurance companies that the ONI believes should be supervised as Tier 1 FHC.”

Proposal also recommends “creation of a resolution regime to avoid disorderly resolution of failing bank holding companies, including Tier 1 FHCs “…in situations where the stability of the financial system is at i k ” Di l ff i i 2risk.” Directly affects insurers in 2 ways:

Resolution authority may extend to an insurer within the BHC structure if the BHC is failing

94

If systemically important insurer is failing (as identified by ONI as Tier 1 FHC) resolution authority may apply

Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.

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P/C INSURANCE FINANCIAL

PERFORMANCE

A R ili I d iA Resilient Industry in Challenging TimesChallenging Times

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ProfitabilityProfitability

Hi t i ll V l tilHistorically Volatile

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P/C Net Income After Taxes1991 2009:H1 ($ Millions)*1991-2009:H1 ($ Millions)

677$80 0002005 ROE= 9.4%2006 ROE = 12 2%

Insurer profits peaked in 2006 and

9

$62,

496

$65,

77

,155

1

$60,000

$70,000

$80,000 2006 ROE = 12.2%2007 ROAS1 = 12.4%2008 ROAS = 0.5%*2009:H1 ROAS = 2.5%*

peaked in 2006 and 2007, but fell 96.2% during the economic

crisis in 2008

78 ,316

0,59

8

24,4

04 $36,

819

$30,

773

1,86

5

$30,

029 $4

4 ,

,559

$38,

501

$30 000

$40,000

$50,000

$14,

17

$5,8

40

$19,

$10,

870

$20 $2 $21

$3,0

46

$2,3

79

$5,7

57

$20,

$10,000

$20,000

$30,000

$

-$6,970-$10,000

$0

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 H1

97

09:H

*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 4.5% ROAS for 2008 and 2.2%. 2009:Q1 net income was $10.0 billion excl. M&FG.Sources: A.M. Best, ISO, Insurance Information Inst.

97

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ROE: P/C vs. All Industries 1987–2009: H1*

20%

1987–2009: H1P/C profitability is Financial Crisis*

15%cyclical and volatile

5%

10%Sept. 11

0%

%

A d

Hugo Lowest CAT losses in 15 years

Katrina, Rita, Wilma

-5%87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809:H1

Andrew Northridge 4 Hurricanes

98

US P/C Insurers All US Industries

*Excludes Mortgage & Financial Guarantee in 2008 and 2009Sources: ISO, Fortune; Insurance Information Institute.

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Rates of Return on Net Worth for All Li US NY 1998 2007*

14.4%15%

20%

All Lines: US vs. NY, 1998–2007*

6.6%3 3%

9.5% 10.0%

5.3%8.6% 8.3%

12.5% 12.5%

6.5%8.8%

8.8%9.2%

13.2%

8.9%

10.9%

4.1%5%

10%

15%

3.3%

-0.5%-5%

0%

Excluding 2001, returns

-22.3%20%

-15%

-10%g ,

in NY’s p/c insurance markets have been

about average%

-25%

-20%

98 99 00 01 02 03 04 05 06 07

about average

US NYSource: NAIC. *Latest available.

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ROE vs. Equity Cost of Capital:US P/C Insurance:1991 2009:H1*

18%

US P/C Insurance:1991-2009:H1The p/c insurance industry fell well

h f i f i l i 2008

12%

14%

16% short of is cost of capital in 2008

2.3

pts

8%

10%

pts -1.7

pts

+2

-9.0

pts

1 pt

s

0 pt

s

2%

4%

6%

-13.

2 p

US P/C insurers missed their cost of capital by an

-

The cost of capitalis the rate of ret rn

-7.

-6.0

-2%

0%

% their cost of capital by an average 6.7 points from

1991 to 2002, but on target or better 2003-07, but

falling well short in 2008/09

is the rate of return insurers need to

attract and retain capital to the

business-4%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09Q1*

ROE Cost of Capital*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.

falling well short in 2008/09 business

100

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A 100 Combined Ratio Isn’t What it U d t B 95 i Wh It’ At

110 18%

Used to Be: 95 is Where It s At

100 6 100 7 101 0

14.3% 15.9%105

110

14%

16%

18%Combined Ratio ROE*

97.5

100.6 100.1 100.799.5

101.0

12.7%9.6%

95

100

ned

Rat

io

10%

12%

on E

quity

*

92.68.9%

4.2%

4 5%90

95

Com

bin

6%

8%

Ret

run

o

Combined ratios must me must lower in today’s depressed

i t t 4.5%

80

85

0%

2%

4%investment environment to generate risk

appropriate ROEs

101

801978 1979 2003 2005 2006 2008* 2009:H1*

0%

* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.

Page 102: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

P/C PremiumP/C Premium GrowthGrowth

Primarily Driven by thePrimarily Driven by the Industry’s UnderwritingIndustry s Underwriting Cycle, Not the Economy

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Strength of Recent Hard Marketsby NWP Growth

22%24%

y NW G1975-78 1984-87 2000-03

Sh d d

16%18%20%22%

Net written premiums fell 1.0%

in 2007 (first decline since 1943)

Shaded areas denote “hard

market” periods

8%10%12%14%

decline since 1943) by 1.4% in 2008, and 4.2% in H1 2009, the first 3-

year decline since

2%4%6%8%

y1930-33

6%-4%-2%0%

103

-6%

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

09:H

1

Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute103

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Average Expenditures on Auto InsuranceAuto Insurance

Countrywide auto insurance

$875

0 41042 1

$900

$950Countrywide auto insurance expenditures increased 2.6% in 2008 and are rising at a

4% pace in 2009

6

$786 $8

30 $84

$817

$82 0$8

4

$83

$800

$8504% pace in 2009

651

$668 $6

91 $705

$703

$685

$690 $7

2 6$700

$750

$6 $

$600

$650

104

94 95 96 97 98 99 00 01 02 03 04 05 05 07* 08* 09**Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.

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Monthly Change in Auto Insurance Prices*

% % % %

6%

Insurance PricesAuto insurance

% 4% 3.7% 4.

0%4.

0% 4.3% 4.4% 4.

7%4.

4% 4.7 %

4.6% 4.7%

4.5%

4%

5% price increases seem to have leveled off

in recent months at

%2.

6%2.

6% 2.7% 3.

0% 3.1% 3.

4 3

3%

in recent months at about +4.5%

0.8%

0.8%

5% % % % 5% .6%

5%%

5% 0.9% 1.

1% 1.3% 1.

7%

%1%

2%

0 00.

50.

40.

3 %0.

3% 0.5 0. 0.5

0.1% 0.

50.

2%

0%

%

-07

-07

-07

-07

-07

-07

-07

ug-

-07

-07

-07

-07

-08

-08

-08

-08

-08

-08

-08

ug-

-08

-08

-08

-08

-09

-09

-09

-09

-09

-09

-09

ug-

-09

105

Jan-

Feb-

Mar

-A

pr-

May

-Ju

n-Ju

l- Au

Sep-

Oct

-N

ov-

Dec

-Ja

n-Fe

b-M

ar-

Apr

-M

ay-

Jun-

Jul- Au

Sep-

Oct

-N

ov-

Dec

-Ja

n-Fe

b-M

ar-

Apr

-M

ay-

Jun-

Jul- Au

Sep-

*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics

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Average Premium forHome Insurance Policies**Home Insurance Policies

Countrywide auto insurance

04 07 820

$841

$850$900$950

yexpenditures increased 1.6% in 2008 and are increasing at 2.6% annual rate in 2009

8 $729 $7

64 $80

$80 $8 $

$750$800$850

6 $593

$66

$600$650$700

$508 $5

36

$500$550$600

106

00 01 02 03 04 05 06 07* 08* 09**Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.

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Average Commercial Rate Change,All Lines (1Q:2004 3Q:2009)All Lines, (1Q:2004 – 3Q:2009)

0%% Magnitude of price

.2%

%2.

7%3.

0%-4%

-2%

-0.1

% Magnitude of price declines is now

shrinking. Reflects shrinking capital,

reduced investment i d t i ti-3

-5.9

%7.

0%

%-4

.6% - - 3

-5.3

%

-6.4

% -5.1

%-4

.9%

-5.8

%

-8%

-6%gains, deteriorating

underwriting performance, higher cat losses and costlier

reinsurance-7-9

.4%

-9.7

% -8.2

%

-9.6

%.3

%8% % 1.

0%-

-12%

-10%reinsurance

-11.

-11.

8-1

3.3% -1

2.0 %

-13.

5%-1

2.9% -1

1

-16%

-14%

4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 9 9

KRW Effect

107

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

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

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Merger & gAcquisitionq

Barriers to Consolidation i i i i i 2010Will Diminish in 2010

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P/C Insurance-Related M&A Activity 1988 2008M&A Activity, 1988-2008

Transaction Values Number of Transactions

32

$55,825

$50 000

$60,000

120

1402009 off to a stronger start with AIG unit sales and

$ Value of deal up 20% in 2009,

volume down 12%

$40,

03

$35,

221

30,8

73$40,000

$50,000

ue ($

Mill

)

80

100

nsac

tions

AIG unit sales and Bermuda

consolidation

$19,

118

$20,

353

4 ,615

16,2

94

$ 3

4$20 000

$30,000

actio

n Va

l

60

80

ber o

f Tra

n

2,43

5

$5,1

00

1,24

986 25

$9,2

64 $13 $1

$8,0

59$1

1,53

,882

$3,4

50$2

,780

$5,1

37

$5,6

38

$10,000

$20,000

Tran

sa

20

40

Num

b

109

$ $1 $4 $4$1,$ $

$088 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

0.Source: Conning Research & Consulting.

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Capital/i

pPolicyholder S l (US)Surplus (US)

Shrinkage butShrinkage, but Not Enough to g

Trigger Hard Market

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U.S. Policyholder Surplus: 1975 2009:H1*

$550

1975-2009:H1*Actual capacity as of 6/30/09 was $463.0B, up from

$400

$450

$500 $437.1B as of 3/31/09 Recent peak was $521.8 as of 9/30/07. Surplus as of 6/30/09 is 11.2% below 2007 peak; Crisis trough was as of 3/31/09 16.2% below 2007 peak

$300

$350

$400

$ B

illio

ns The premium-to-surplus ratio stood at $0.92:$1 as of

6/30/09 f

$150

$200

$250

$

“Surplus” is a measure of underwriting capacity It is

6/30/09, up from near record low of $0.85:$1 at

year-end 2007

$50

$100

$150 underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

y

111

$075 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809*

Source: A.M. Best, ISO, Insurance Information Institute. *As of 6/30/09111

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Global Reinsurance Capacity Shrank in 2008 Mostly Due to Investmentsin 2008, Mostly Due to Investments

Global Reinsurance Capacity Source of Decline

$360

$350$360$370

Global

Change in Unrealized

Capital Losses

Realized Capital Losses31%

$$330$340$350 Global

reinsurance capacity fell by

an estimated 17% in 2008

Losses55%

$300$300$310$320 17% in 2008

H i

$270$280$290

Hurricanes14%

$2702007 2008

112Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.

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Policyholder Surplus, 2006:Q4 – 2009:H12006:Q4 2009:H1

$ BillionsCapacity peaked at $ Billions

$512.8$521.8

$505 0$515.6

$517.9$520

$540$521.8 as of 9/30/07

$487.1$496.6

$478.5$463 0

$505.0

$480

$500

D li Si 2007 Q3 P k $455.6

$437.1

$463.0

$440

$460 Declines Since 2007:Q3 Peak08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%)

$380

$400

$420Q ( )

08:Q4: -$66.2B (-12.9%) 09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)

113

$38006:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2

Source: ISO, AM Best.113

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Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*Largest Capital Events Since 1989

The financial crisis now ranks as the largest

10 9%

16.2%13.8%

14%16%18%

ranks as the largest “capital event” over the

past 20+ years

9.6%6.9%

10.9%

6.2%8%10%12%

3.3%

0%2%4%6%

0%

/30/

1989

Hur

rican

eH

ugo

/30/

1992

Hur

rican

eA

ndre

w

2/31

/93

rthr

idge

rthq

uake

6/30

/01

Sept

. 11

Atta

cks

6/30

/04

Flor

ida

urric

anes

6/30

/05

Hur

rican

eK

atrin

a

nanc

ial

sis

as o

f/3

1/09

**

114

6/ H 6/ H A 12 No

Ear 6 F

Hu H Fi Cri 3 /

*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Date of maximum capital erosion; As of 6/30/09 (latest available) ratio = 11.2%.Source: PCS; Insurance Information Institute.

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Historically, Hard Markets Follow When Surplus “Growth” is Negative*

30%

NWP % changeSurplus % change

When Surplus Growth is NegativeSharp decline in capacity is a necessary but not sufficient

20%

25%

30% Surplus % change necessary but not sufficient condition for a true hard market

10%

15%

5%

0%

5%

-15%

-10%

-5%

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

*2009 NWP and Surplus figures are % changes for H1:09 vs H1:08Sources: A.M. Best, ISO, Insurance Information Institute

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Investment Performance

Investments are a PrincipleInvestments are a Principle Source of Declining

fi bilif g

Profitability

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Property/Casualty Insurance Industry Investment Gain:1994- 2009:H11

$ Billions$64 0

$42 8$47.2

$52.3

$44.4 $45.3$48.9

$59.4$55.7

$64.0$56.9

$51.9

$57.9

$50

$60

$35.4$42.8 $44.4

$36.0

$

$31.4$30

$40

$12.4$10

$20 Investment gains fell by 51% in 2008 due to lower yields, poor equity market

conditions. Falling again in 2009.$0

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08

09:H

1

conditions. Falling again in 2009.

117

09

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

117

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P/C Insurer Net Realized Capital Gains 1990-2009:H1Capital Gains, 1990 2009:H1

$16.21$18.02

$16$18$20 $ Billions

$9.89

$6 00

$9.24$10.81

$13.02

$6.63 $6.61$8.92$9.70$9.13$9.82

$8$10$12$14$16

$2.88$4.81

$1.66

$6.00$3.52

$2$0$2$4$6$8

-$1.21

-$10-$8-$6-$4-$2

Realized capital losses hit a record $19.8 billion in 2008 due to financial market turmoil, a $27.7

-$11.17

-$19 80$20-$18-$16-$14-$12$ ,

billion swing from 2007, followed by an $11.2B drop in H1 2009. This is a primary cause of 2008/2009’s large drop in profits and ROE.

118

-$19.80-$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

09H

1

Sources: A.M. Best, ISO, Insurance Information Institute. 118

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Treasury Yield Curves: Pre-Crisis (July 2007) vs Sept 2009

4 96% 5 04% 4 96% 5 00% 5 00% 5.19%6%

Pre Crisis (July 2007) vs. Sept. 2009

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%

4.19%4.14%4%

5%

Treasury Yield Curve is at its

2 37%

3.02%3.40%

3%

4% most depressed level in at least 45 years. Investment

income is falling as a result.

0 96%1.48%

2.37%

2% Stock dividend cuts will further pressure

investment income

0.06% 0.12% 0.21% 0.40%

0.96%

0%

1%September 2009 Yield CurvePre-Crisis (July 2007)

investment income

119

0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

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Distribution of P/C Insurance Industry’s Investment PortfolioIndustry s Investment Portfolio

P tf li F tAs of December 31, 2007

Common Stock

Bonds66.7%

Portfolio Facts•Invested assets totaled $1.3 trillion as of 12/31/07

Common Stock17.9%•Insurers are generally

conservatively invested, with 2/3 of assets invested in bonds as of

Cash & Short-Term Investments

7.2%

12/31/07•Only about 18% of assets were invested in common stock as of

P f d St k

Real Estate0.8%

Other

common stock as of 12/31/07•Even the most conservative of portfolios was hit hard in 2008 Preferred Stock

1.5%Other5.9%

was hit hard in 2008

Source: NAIC; Insurance Information Institute research;.120

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Distribution of P/C Insurance Industry’s Investment PortfolioIndustry s Investment Portfolio

P tf li F tAs of December 31, 2008

Common StockBonds68.4%

Portfolio Facts•Invested assets totaled $1.2 trillion as of 12/31/08, down from $1.3

i i f 12/31/0

Cash & Short-

14.8%68.4%trillion as of 12/31/07

•Insurers are generally conservatively invested, with 2/3+ of assets

Term Investments8.0%

R l E t t

invested in bonds as of 12/31/08•Only about 15% of assets were invested in

Preferred Stock

Real Estate0.9%

Other

assets were invested in common stock as of 12/31/08, down from 18% one year earlier•Even the most

1.8%Other6.2%

Even the most conservative of portfolios were hit hard in 2008

Source: NAIC; Insurance Information Institute research;.121

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UnderwritingUnderwriting TrendsTrends

Financial Crisis Does Not DirectlyFinancial Crisis Does Not Directly Impact Underwriting

P f C l C t t hPerformance: Cycle, Catastrophes Were 2008’s Drivers

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P/C Insurance Industry Combined Ratio, 2001-2009:H1*

120

Ratio, 2001 2009:H1As recently as 2001, insurers

paid out nearly $1.16 for every Relatively low CAT

115.8 $1 in earned premiums low CAT losses, reserve releases

Cyclical

2005 ratio benefited from heavy use of reinsurance

hi h l d t l107.5110

Best combined ratio since 1949

(87 6)

Cyclical Deterioration

which lowered net losses

100.198.4

100.899.5

101.0100

(87.6)

92.6

95.7

123

902001 2002 2003 2004 2005 2006 2007 2008 2009:H1*

*Excludes Mortgage & Financial Guaranty insurers in 2008. Including M&FG, 2008=105.1, 2009=100.9 Sources: A.M. Best, ISO.

123

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P/C Reserve Development, 1992 2011E1992-2011E

$30 8Prior Yr Reserve Development ($ Bill) Impact on Combined Ratio (Points)

.7

23.2

$20$25$30

ll)

6

8

nts)

2009 off to a stronger start with AIG unit sales and

Bermuda

$ Value of deal up 20% in 2009,

volume down 12%

139.

97.

3

11.7

$5$10$15

e R

elea

se ($

Bi

2

4

ned

Ratio

(Poi

nconsolidation

5

1

-4.1

-2.1

-2.6

2.3

($5)$0$5

or Y

r. R

eser

ve

(2)

0

act o

n Co

mbi

n

-6.6

-9.8 -6

.7-9

.54.

616 -1

5- 5

-9.9

--8

.3

-

($20)($15)($10)Pr

i

(6)

(4)

( )

Imp

124

-1 - 1 -($20)92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E 11E

(6).Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Source: Barclay’s Capital; A.M. Best.

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Calendar Year vs. Accident Year P/C Combined Ratio:1992- 2010E1P/C Combined Ratio:1992 2010E

Calendar Year Accident YearAccident year results show a more

significant deterioration in

115.

7

1

115.

9

115.

7

0 12.3115

120

Calendar Year Accident Year significant deterioration in underwriting performance.

Calendar year results are helped by reserve releases

106.

9

108.

4

106.

4

107.

8 110.

1

107.

3

0.1

00.9

105.

1

101.

9 105.

9

106.

9

108.

4

106.

4

105.

8

01.6

105.

6 107.

8 110.

0 11

00.8 0.6

105.

5

105.

7 109.

4

105.

6

01.6

105.

8

105

110

100

98.3 10

92.4

95.5

11 1 0

96.6

96.0

10

93.9

97.4

1

95

100

80

85

90

125

8092 93 94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09E 10E

125

.Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Source: Barclay’s Capital; A.M. Best.

Page 126: The Financial Crisis, No-Fault Insurance and the Future of ...¾Merger & Acquisition Activity Cil&C i 2 ... Adirondack Ins Exch N/A 98,818,395 1.0 16. Onebeacon Ins Grp WHITE MOUNTAIN

Underwriting Gain (Loss)1975 2009:H1*

3035 Insurers earned a record underwriting profit of $31.7B in

2006 d $19 3B i 2007 h l b l h 2 d

1975-2009:H1

1015202530 2006 and $19.3B in 2007, the largest ever but only the 2nd

and 3rd since 1978. Cumulative underwriting deficit from 1975 through 2008 is $442B.

15-10-505

10

$ B

illio

ns

-35-30-25-20-15$

$19.8 Bill underwriting loss in 2008

Large underwriting losses are NOT

-55-50-45-4035

5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 1

loss in 2008 incl. mort. & FG insurers, -$2.2B in H1:09

losses are NOT sustainable in current

investment environment

126

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809

:Q1

Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers126

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Number of Years With Underwriting Profits by Decade 1920s –2000sProfits by Decade, 1920s 2000s

Number of Years with Underwriting ProfitsU d i i fi10

88

10Underwriting profits were common before the 1980s (40 of the 60 years

before 1980 had combined ratios below 100)—but then they vanished. N i l d i i fi

67

56

8 Not a single underwriting profit was recorded in the 25 years from 1979

through 2003.

45

34

0 00

2

127

01920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*

Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.

127

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Catastrophic LossCatastrophic Loss Catastrophe Losses Trends

Are Trending AdverselyAre Trending Adversely

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U.S. Insured Catastrophe Losses

0.0

$120$ Billions

2008 CAT losses exceeded$100 Billion CAT

year is coming t ll

$100

.9

$100

$120 2008 CAT losses exceeded 2006/07 combined. 2005 was by

far the worst year ever for insured catastrophe losses in the

eventually

2009 cat losses were down 29%

5 5 0

$61.

$60

$80 insured catastrophe losses in the US, but the worst has yet to come.

down 29% in H1 from $10.6B in H1 2008

$7.5

2.7 4.7

$22.

95.

5 $16.

9$8

.3$7

.42.

6 $10.

1$8

.34.

6$2

6.5

5.9 $12.

9 $27.

5

$6.7

$26.

0$7

.5

$9.2$20

$40

$ $2 $4 $5 $ $ $2$ $ $4 $ $ $$

$0

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

20??

129

2

*Based on PCS data through June 30 = $7.5 billion.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

129

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Top 12 Most Costly Disasters in US History (Insured Losses $2008)US History, (Insured Losses, $2008)

$45 3$50 8 of the 12 most expensive disasters in

$45.3

$35$40$45 US history have occurred since 2004;

8 of the top 12 disasters affected FL

$22.8 $23.8$25$30$35

Bill

ions In 2008, Ike became the 4th most

expensive insurance event and 3rd most expensive hurricane in US history

$7 3 $8.1 $8.5$11.3 $11.3 $12.5

$10$15$20$

B expensive hurricane in US history arising from about 1.35 mill claims

$4.2 $5.2 $6.2 $7.3 $8.1 $

$0$5

$10

Jeanne Frances Rita Hugo Ivan Charley Wilma Northridge Ike 9/11 Andrew KatrinaJeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Northridge(1994)

Ike(2008)*

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

*PCS estimate as of August 1, 2009.Sources: PCS; Insurance Information Institute inflation adjustments.

130

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Distribution of US Insured CAT Losses: TX FL LA vs US 1980 2008*TX, FL, LA vs US, 1980-2008*

$ Billions of Dollars

Rest of US, $176, 60% Texas, $31.2,Texas, $31.2,

10%Florida accounted for 19% of all US

Louisiana, $33.6, 11%

19% of all US insured CAT losses from

Fl id $57 1

1980-2008: $57.1B out of

$297 9B Florida, $57.1,19%

$297.9B

*All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

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States With Highest Insured Catastrophe Losses in 2008Catastrophe Losses in 2008

$ Billions$ Billions

$10.2$10 0

$12.0 In 2008, insurers paid $26 billion to 3.9 million victims of 37 major

$8.0

$10.0 jnatural catastrophes across 40 states. 64% of the payouts (in $ terms) went

to homeowners 27% to business

$2 2$4.0

$6.0 to homeowners, 27% to business owners and 9% to vehicle owners

$2.2 $1.6 $1.3 $1.0

$0.0

$2.0

132

$Texas California Minnesota Ohio Georgia

Source: PCS; Insurance Information Institute.

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Total Value of Insured Coastal Exposure (2007 $ Billions)Coastal Exposure (2007, $ Billions)

$2 378 9$2,458.6Florida

New York $2,378.9$895.1

$772.8$635.5

$479 9

New YorkTexas

MassachusettsNew Jersey

Connecticut

NY has more coastal exposure than any state

other than Florida$479.9

$224.4$191.9

$158.8$146 9

ConnecticutLouisiana

S. CarolinaVirginia

Maine

In 2007, Florida still ranked as the #1 most exposed state to hurricane loss,

with $2 459 trillion exposure an$146.9$132.8

$92.5$85.6

$60 6

MaineNorth Carolina

AlabamaGeorgia

Delaware

with $2.459 trillion exposure, an increase of $522B or 27% from $1.937

trillion in 2004, but NY is a close second at $2.379 trillion.

$60.6$55.7$51.8$54.1

$14 9

DelawareNew Hampshire

MississippiRhode Island

Maryland

The insured value of all coastal property was $8.9 trillion in 2007, up

24% from $7.2 trillion in 2004. $14.9

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

Maryland

Source: AIR Worldwide 133

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U.S. Residual Market Exposure to Loss (Billions of Dollars)to Loss (Billions of Dollars)

$900 In the 19-year period

$771.9$696.4

$656.7$700$800$900 In the 19-year period

between 1990 and 2008, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54 7bn in

Katrina, Rita and Wilma

4 Florida

$372 3$430.5

$656

$419.5$500$600

has surged from $54.7bn in 1990 to $696.4bn in 2008.

4 Florida Hurricanes

H i

$150 0

$281.8$244.2

$292.0$372.3

$221.3

$

$200$300$400 Hurricane

Andrew

$54.7

$150.0

$0$100$200

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: PIPSO; Insurance Information Institute

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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Insurance Information Institute On LineInstitute On-Line

THANK YOU FOR YOUR TIME ANDTHANK YOU FOR YOUR TIME AND

YOUR ATTENTION!

135

Download at: www.iii.org/presentations/NYIA-110509.html135