trends & challenges in p/c insurance business today focus on iowa markets

Trends & Challenges in P/C Insurance Business Today

Focus on Iowa Markets

Independent Insurance Agents of Iowa98th Annual Convention

Des Moines, IA

September 23, 2004

Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

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

About theInsurance Information Institute

The mission of the Insurance Information Institute (I.I.I.) is to improve public understanding of

insurance -- what it does and how it works. The I.I.I. enjoys broad membership throughout the insurance industry, including most of the major p/c insurers and reinsurers operating in the United States, as well as companies operating on a regional basis and internationally.

For more than 40 years, the I.I.I. has provided definitive insurance information. Today, the I.I.I. is recognized throughout the insurance industry as well as by the media, governments, regulatory organizations, universities and the public as a primary source of information, analysis and referral concerning insurance.

Each year, the I.I.I. works on more than 3,700 news stories, handles more than 6,000 requests for information from its members, the media, and other parties and answers nearly 50,000 questions from consumers.

In addition to direct contact with the media, individuals and organizations, the I.I.I. publishes a host of helpful brochures and books on a wide variety of insurance topics, ranging in subjects from 12 Ways to Lower Your Auto Insurance Costs to the I.I.I. Fact Book series. I.I.I.’s members benefit from direct access to all information, I.I.I. staff and its members-only web site. The Institute does not lobby. Its central function is to provide accurate and timely information on insurance subjects. Questions concerning I.I.I. membership should be directed to Cary Schneider at (212) 346-5566 or by email at [email protected].

Presentation Outline

• Profitability US & Iowa Wall Street Perspective

• Underwriting US & Iowa

• Ratings, Solvency & Financial Strength• Investment Overview• Pricing• Tort Environment• Insurance Scoring• The Challenge of Terrorism• Q & A

P/C INSURANCE FINANCIAL

UPDATE

Highlights: Property/Casualty Full-Year 2003 vs. 2002

2003 2002 Change

Net Written Prem. 405,855 369,673 +9.8%

Loss & LAE 289,800 283,640 +2.2%

Net UW Gain (Loss) (4,635) (30,840) -85.0%

Net Inv. Income 38,686 37,225 +3.9%

Net Income (a.t.) 29,877 3,046 +880.9%

Surplus* 346,987 285,386 +21.6%

Combined Ratio 100.1 107.3 -7.2 pts.

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

($ Billions) 2004 2003 Change

Net Written Prem. 105,982 101,446 +4.5%

Loss & LAE 68,387 70,067 -2.4%

Net UW Gain (Loss) 5,647 (1,192) N/A

Net Inv. Income 9,414 9,220 +2.1%

Net Income (a.t.) 13,310 6,528 +103.9%

Surplus* 361,177 346,987 +4.1%

Combined Ratio** 93.3 99.6** -6.3 pts.*2003 surplus figure is as of 12/31/03**The combined ratio for full-year 2003 was 100.1

-10%

-5%

0%

5%

10%

15%

20%

25%

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

F

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

Strength of Recent Hard Markets by NWP Growth*

Real NWP Growth During Past 3 Hard Markets

1975-78: 8.6%

1985-87: 14.5%

2001-04F: 7.0%

1975-78 1985-87 2001-04

2004 based on 1st quarter results from ISO.

Insurers need to be able to ride out the industry’s extreme cycles

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

Iowa US

Growth in Direct Written Premiums: Iowa and US

*2003 IA figure is III estimate.**2004 US data based on first half results. IA figure is III estimate.Source: A.M. Best, Insurance Information Institute

Premium growth in IA has generally trended along

with the US, but growth is decelerating rapidly

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

$14,178

$5,840

$19,316

$10,870

$20,598

$24,404

$36,819

$30,773

$21,865

-$6,970

$3,046

$29,877

$20,559

$13,

310

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04E*First quarter resultsSources: A.M. Best, ISO, Insurance Information Institute.

2001 was first-ever full year net loss

2002 ROE = 1.0%

2003 ROE = 9.4%

2004 ROE = 15.0% (est.)

-5%

0%

5%

10%

15%

20%

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

US P/C Insurers All US Industries

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

Source: Insurance Information Institute; Fortune

-5%

0%

5%

10%

15%

20%

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

ROE Cost of Capital

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

Source: The Geneva Association, Ins. Information Inst.

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

-14.

6 p

ts -10.

2 p

ts

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

-1.2

p

ts

+1.

1 p

ts

-10%

-5%

0%

5%

10%

15%

20%

25%

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

US P/C Insurers All US Industries Iowa

ROE: P/C (US & IA) vs. All Industries, 1991–2003*

Source: Insurance Information Institute; NAIC, Fortune

Iowa’s p/c insurance market is a slightly above-average performer

RNW for Personal Lines in Iowa1991 - 2002

8.0%

8.6%

-15.

0%

-24.

6%

-4.6

%

-78.

0%

-1.8

%

-2.3

%

3.3%7.1%16

.7%

8.0% 11

.7%

14.1

%

5.8% 7.5%

4.5%17

.1%

0.7%

-0.6

%

-2.7

%

-21.

8%

20.4

%

9.4%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

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

Personal Auto Homeowners

Source: NAIC

10-Year Average:Auto: 6.6% Home: -10.7%

(93-02)

Homeowners experience has been very bad and volatile in Iowa,

reflecting national trends.

RNW for Major Commercial Lines in Iowa, 1991 - 2002

14.1

%

-15.

6%

11.1

%

-24.

3%

8.7%

8.5% 14

.5%

-46.

5%

11.4

%

6.7%

1.0% 2.9%

24.3

%

20.5

%

-2.6

%

-20.

0%

0.7%

12.0

%

19.2

%

12.5

%

8.6% 13

.9%

5.2%

-4.2

%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

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

Commercial Multi-Peril Commercial AutoSource: NAIC

CMP business has been volatile in Iowa

Rates of Return on Net Worth for Homeowners Ins: US vs. IA

Source: NAIC, Insurance Information Institute

* US Average is 1.35% if excluding 1992 (year of Hurricanes Andrew and Iniki.

-6.6%

-54.3%

2.5%-1.7%

3.6%12.4%

-7.2%1.4%

-15.0%

20.4%

9.4%17.1%

-2.7% -0.6%

-24.6%

0.7%-4.6%

-78.0%

-1.8%

5.4% 3.8%5.4%-4.2%

-21.8%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

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

US

Iowa

Averages: 1991 to 2002

US HO Insurance = -3.29%*

Iowa HO Insurance = -8.46%

Rates of Return on Net Worth for Pvt. Passenger Auto: US vs. IA


10.6%

14.3% 14.2%

11.6%

2.0%

4.1%

8.00%

16.70%

14.1%

11.7%

7.1%

4.5%

7.5%

3.3%

-2.3%

8.6%12.4%

11.4%

7.7%

2.2%

10.1%

12.1%

8.0%

5.8%

-5%

0%

5%

10%

15%

20%

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

US

Iowa

Averages: 1991 to 2002

US PPA Insurance = +9.4%*

Iowa PPA Insurance = +7.8%

-5%

0%

5%

10%

15%

20%

25%

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

US Iowa

Source: Insurance Information Institute; NAIC, ISO; 2003 WC figure is NCCI ROS estimate.

WC went from profit juggernaut to balance sheet

black hole within just 4-5 years

Rates of Return on Net Worth for Workers Comp Auto: US vs. IA

2002 Return on Equity:Iowa & Nearby States PP Auto

4.1%

6.6%

8.0%

8.6%

9.4%

11.5%

0% 5% 10% 15%

Minnesota

Missouri

Iowa

Wisconsin

Illinois

US


2002

2002 Return on Equity:Iowa & Nearby States HO

-18.0%

-5.2%

-1.8%

1.4%

2.0%

6.6%

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

Wisconsin

Illinois

US

Iowa

Minnesota

Missouri


2002

WALL STREET:

HIGH EXPECTATIONS

Insurer Stocks: Outperforming the S&P 500

6.21%

2.94%

8.73%

9.15%

14.96%

1.50%

0% 5% 10% 15% 20%

S&P 500

Life/Health

Multiline

All Insurers

P/C

Brokers

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

Total Return 2004 YTD Through September 17, 2004

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

stocks soaring?

UNDERWRITING PERFORMANCE

90

100

110

120

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

E*

P/C Industry Combined Ratio

2001 = 115.7

2002 = 107.2

2003 = 100.1

2004E = 93*

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000-04: 105.3

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

($55)

($45)

($35)

($25)

($15)

($5)

$5

$15

$25

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

Underwriting Gain (Loss)1975-2004F*

*2004 underwriting gain is annualized figure based on first quarter result. Source: A.M. Best, Insurance Information Institute

$ B

illi

ons

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

$21.5B based on annualized Q1 result

110

.3

110

.2

10

7.6

10

3.9

10

9.7 11

2.3

111

.5

12

2.2

110

.2

103.

9

104.

5

103.

5

104.

9

99.8 10

2.7

104.

5

109.

9

110.

9

105.

3

112

.5

90

95

100

105

110

115

120

125

Commercial--Net Basis Personal--Net Basis

Commercial vs. Personal Lines Combined Ratios

Source: A.M. Best; Insurance Information Institute

10-Year Average Combined Ratios

Commercial: 111.1 Personal: 105.2

1991-2002

40%

60%

80%

100%

120%

140%

160%

180%

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

Personal Auto Homeowners Commercial Auto

Iowa Direct Loss Ratios

Source: NAIC; Insurance Information Institute

Iowa’s homeowners business is extremely volatile.

Key Auto Insurance Stats: IA vs. US2003 vs. 2004*

$10,052

$2,095

$9,321

$2,442

$10,234

$2,156

$9,635

$2,489

$0

$2,000

$4,000

$6,000

$8,000

$10,000

IA Bodily Injury IA PD Liability US Bodily Injury US PD Liability

20032004*

* Average for 4 quarters ending with the 1st quarter of 2004 vs. 4 Qtrs ending Q1:03.Source: Insurance Services Office, Insurance Information Institute

+1.8%

+2.9%

+3.4%

+1.9%

110

.5

10

5.0 11

3.6 11

9.2

10

4.8

10

0.8

10

0.5

114

.3

10

6.5

12

1.3

10

0.31

08

.8 115

.8

10

6.9

10

8.5

10

6.5

10

5.8

10

1.6

10

5.6

10

7.7

110

.0 115

.7

10

7.2

10

0.1

16

2.5

12

6.5

90

100

110

120

130

140

150

160

170

Reinsurance All Lines Combined Ratio

Combined Ratio: Reinsurance vs. P/C Industry

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

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

2003: Big improvement in primary and reinsurer segments

U.S. InsuredCatastrophe Losses ($ Billions)

$7.5

$2.7$4.7

$22.9

$5.5

$16.9

$8.3 $7.3

$2.6

$10.1$8.3$4.3

$28.1

$5.9

$12.9$17.0

$0

$5

$10

$15

$20

$25

$30

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

04E

*

*2004 figure is 2004 estimate as of September 20, 2004.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions2004 could become the second worst year ever for natural

disaster losses in the US

WHY UNDERWRITING DISCIPLINE MATTERS

97.5

100.6 100.1

94.3 93.3

9.4%

15.0%14.3%

15.9%15.0%

80

85

90

95

100

105

110

1978 1979 2003 Actual 2003 for 15%ROE

2004F

Co

mb

ine

d R

ati

o

6%

8%

10%

12%

14%

16%

18%

Re

tru

n o

n E

qu

ity

*

Combined Ratio ROE*

* 2004 figure is return on average statutory surplus based in first quarter dataSource: Insurance Information Institute from A.M. Best and ISO data.

A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At

Combined ratios today must be below

95 to generate Fortune 500 ROEs

95.9 96.0

101.5

94.2

91.390.0 90.7

84.5

89.3

101.1

94.4

87.0

91.3 90.6

$8.30

$7.30$6.49

$8.91

$6.10$6.40

$7.70

$5.70

$5.25

$5.71$5.20

$4.83

$6.46

$11.96

80

85

90

95

100

105

110

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

Co

mm

erc

ial L

ine

s O

pe

rati

ng

Ra

tio

$0

$2

$4

$6

$8

$10

$12

Co

st

of

Ris

k/$

10

00

Re

ve

nu

e

Commercial Operating Ratio

Cost of Risk

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

Cost of Risk vs. Commercial Lines Operating Ratio*

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

35

25 24

10 10 8 10

2428

31

20

27

58

108

117

108107

106107

110

115

107

100

108

102

109

0

10

20

30

40

50

60

70

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

Nu

mb

er o

f F

ailu

res

90

95

100

105

110

115

120

Com

bin

ed R

atio

Number of P/C Failures Combined Ratio

Source: Standard & Poor’s; Insurance Information Institute

2003 failures fell to a 5-year low

RATINGS, SOLVENCY, FINANCIAL STRENGTH

0.4

5

0.4

1

0.4

3

0.4

2 0.6

8

1.2

2

1.7

1

1.1

2

0.4

4

0.5

8 0.8

2

0.9

9

1.0

5

1.7

8

1.1

0.8

3

1.5

6

1.0

8

0.8

0.5

1

0.4

1 0.7

4

1.9

8

3.7

8

3.5

4.93

0

1

2

3

4

5

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

E

Ra

tio

of

Do

wn

gra

des

to

Up

gra

des

Downgrade/Upgrade Ratio*

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

It is in everyone’s best interest to have a

financial strong and stable insurance industry

Cumulative Average Impairment Ratesby Best Financial Strength Rating

0%

5%

10%

15%

20%

25%

30%

35%

40%

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

Vulnerable

All

Secure

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

Secure: A++, A+, A, A-, B++, B+

Vulnerable: B and Below

*US P/C and L/H companies, 1977-2002

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

Unidentified17%

Impaired Affiliate3%

Overstated Assets2%

Change in Business3%

CAT Losses3%

Reinsurer Failure0%

Rapid Growth10%

Discounted Ops8%

Alleged Fraud3%

Deficient Loss Reserves

51%

Source: A.M. Best, Insurance Information Institute

Reserve deficiencies account for

more than half of all p/c insurers

insolvencies

$ Billions, Calendar Year Basis

$2.3 $2.2 $1.2

($8.5)

($1.5)

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

$22.7

$13.7

$0.3

($3.7)

$0.4

$11.0

($15)

($10)

($5)

$0

$5

$10

$15

$20

$25

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

P/C Insurance Industry Prior Year Reserve Development*

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

Adverse reserve development totaled $47.8 billion from 2000 through 2003

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

Points (Reduced)/Increased

0.5

(2.4)

5.2

6.3

3.5

(0.4)

-3

-2

-10

1

2

3

45

6

7

1998 1999 2000 2001 2002 2003

Combined Ratio:Impact of Reserve Changes (Points)

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

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

ratio in 2002

Guarantee Fund Net Assessments*(1979-2002)

$ Millions

$46.

2

$17.

8

$49.

8

$41.

1

$509

.4

$903

.2

$464

.8

$713

.9

$433

.6

$434

.8

$360

.5 $545

.4

$524

.9

$94.

8

$124

.2 $263

.7

$263

.6

$201

.3

$328

.6

$734

.7

$1,2

09.0

$30.

6$9

7.4

$292

.4

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

*Excludes NY and workers comp security funds in NJ and PA.Source: National Conference of Insurance Guarantee Funds; Insurance Information Institute

Assessments rose dramatically during the last hard market, setting

a new record now.

INVESTMENTS:

NO SUBSTITUTE FOR SOUND UNDERWRITING

$0

$9

$18

$27

$36

$45

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

Net Investment Income

History

1997 Peak = $41.5B

2000= $40.7B

2001 = $37.7B

2002 = $37.2B

2003 = $38.7B

2004E = $37.7

$ B

illi

ons

Growth History

2002: -1.3%

2003: +3.9%

2004E: -2.7%

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

0%

2%

4%

6%

8%

10%

12%

14%

16%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Mar

04

Jun

04Se

p 04

*

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

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

*Week of September 3.Source: Board of Governors, Federal Reserve System; Insurance Information Institute

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

Only short-term yields are rising consistently as the Fed hikes rates

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

-30%

-20%

-10%

0%

10%

20%

30%

40%

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

*Through September 17, 2004.Source: Ibbotson Associates, Insurance Information Institute

Total Returns for Large Company Stocks: 1970-2004*

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

Has the bull market run out of steam in 2004?

S&P 500 was up 28.7% in 2003 but is up just 1.5% through mid-Sept. as fears of higher interest rates, a sluggish economy, Iraq & high oil prices hurt the market

CAPACITY CRUNCH?

$0

$50

$100

$150

$200

$250

$300

$350

$400

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

U.S. Policyholder Surplus: 1975-2004*

Source: A.M. Best, ISO, Insurance Information Institute *As of 3/31/04.

$ B

illi

ons

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

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

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

$53.9 Billion

Capacity TODAY is just 6.5% above its mid-1999 peak

US Reinsurers: Change in Policyholder Surplus ($ Billions)

$60.9$58.9

$56.4

$45.2

$48.8

$64.6

$40

$45

$50

$55

$60

$65

$70

1998 1999 2000 2001 2002 2003E

$ B

illi

ons

Source: A.M. Best; Insurance Information Institute

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

globally.

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

"Target" Commercial*$114 billion

33%

Commercial Reserve

Deficiency$30 billion (est.)

9%

Other Commercial$58 billion

17%

Personal$146 billion

42%

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

= $291.1 B as of 12/31/02

= $347.0 B as of 12/31/03

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

Only 33% of surplus backs

“target” lines net of reserve deficiency

PRICING TRENDS

Top Concerns US Businessesin 2004

23.2%

26.1%

30.1%

32.8%

65.6%

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

Health Ins.Costs

WorkersComp Costs

Cost/Avail-ability ofLiability Ins.

Energy Costs

US BusinessIncome Taxes

Source: National Federation of Independent Business; Insurance Information Institute

% of Firms in 2004 That Consider Problem Critical

Customers focus on costs, not security, but the two issues

are linked

$6.10$6.40

$8.30$7.70

$7.30

$6.49

$5.70$5.25

$5.71

$6.46

$8.91

$11.96

$4.83$5.20

$4

$5

$6

$7

$8

$9

$10

$11

$12

$13

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

Source: 2003 RIMS Benchmark Survey; Insurance Information Institute

Cost of Risk: 1990-2003*

1992-2000 = -41.8%

2000

-03

= +1

47.6

%

$2.92$2.72

$2.55

$1.43

$3.63 $3.54 $3.57

$2.07

$1.26 $1.15

$2.49

$1.86$1.67

$1.00

$0.46$0.87 $0.82

$0.96

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

Total WCCosts

Total LiabilityCosts

TotalProperty

Costs

Other Costs Total Admin.Costs

Total Mgmt.LiabilityCosts

2001 2002 2003

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

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

+45.8% +90.3% +113.8%

+107.0%

+44.8%+150.0%

% Change

2001 -03

14

%11

% 13

%1

6%

19

%2

2%

28

%3

1%

31

%2

8% 3

0% 3

2%

33

%2

8% 29

%3

0% 3

2%

30

%2

7%

25

%2

8%

22

%1

8%

18

%1

7%

16

%1

2%

12

%1

0% 1

2%

11%

9%

7%

7%

5%

4%

9%

9%

0%

5%

10%

15%

20%

25%

30%

35%

Ju

l-0

1A

ug

-01

Sep

-01

Oct

-01

No

v-0

1D

ec-0

1J

an

-02

Feb

-02

Ma

r-0

2A

pr-

02

Ma

y-0

2J

un

-02

Ju

l-0

2A

ug

-02

Sep

-02

Oct

-02

No

v-0

2D

ec-0

2J

an

-03

Feb

-03

Ma

r-0

3A

pr-

03

Ma

y-0

3J

un

-03

Ju

l-0

3A

ug

-03

Sep

-03

Oct

-03

No

v-0

3D

ec-0

3J

an

-04

Feb

-04

Ma

r-0

4A

pr-

04

Ma

y-0

4J

un

-04

Ju

l-0

4A

ug

-04

Source: MarketScout.com

Commercial Premium Rate Changes Are Sharply Lower

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

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

100116

283

372

337

288

248

193

160138 142

194

239260

230

0

50

100

150

200

250

300

350

400

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

Source: Guy Carpenter

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

P/C Soft Spots: % Accounts With Negative Price Change(2nd Qtr. 2004)

81%

47%

31%25%

41% 39%

20% 19%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Comm Prop BizInterruption

Terror Comm Auto WC GL EPL Umbrella

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

More moderation is evident in the commercial

casualty segments

Property

Casualty/Liability/Terrorism

P/C Soft Spots: % Accounts With Negative Price Change(1st Qtr. 2004)

58%

30%

16%12%

26% 23%

11% 11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%




More moderation is evident in the commercial

casualty segments

Property


P/C Soft Spots: % Accounts With Negative Price Change(2nd Qtr. 2002)

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

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




Property


Average Expenditures on Auto Insurance: US vs. Iowa

$668 $6

91 $706

$704

$683

$687 $7

18

$781

$842 $8

71

$429

$445

$456

$459

$466 $4

79 $513

$400

$450

$500

$550

$600

$650

$700

$750

$800

$850

$900

95 96 97 98 99 00 01 02* 03* 04*

US IowaCountrywide auto insurance

expenditures are expected to rise 3.5% in 2004

*III Estimates; Estimates for 2002-2004 based on BLS CPI data for motor vehicle insurance.Source: NAIC, Insurance Information Institute

Average Expenditures on Homeowners Ins.: US vs. Iowa

$418$440 $455

$481 $488$508

$536$558

$598 $615

$382$358$347

$323$312$300

$200

$300

$400

$500

$600

$700

95 96 97 98 99 00 01 02* 03* 04*

*III Estimates; Estimates for 2002-2003 based on BLS CPI data for tenants and household insurance 2002/3 .Source: NAIC, Insurance Information Institute.

Average US HO expenditures are expected to rise by just 2.8% in 2004

Homeowners Insurance Expenditureas a % of Median Home Price

$1

07

,20

0

$1

15

,80

0

$1

21

,80

0

$1

28

,40

0

$1

33

,30

0

$1

39

,00

0

$1

47

,80

0

$1

58

,10

0

$1

70

,00

0

$1

10

,50

00.39%

0.38%

0.37%

0.34%

0.33%

0.35%

0.36%

0.37%0.37%

0.38%

$100,000

$125,000

$150,000

$175,000

$200,000

94 95 96 97 98 99 00 01 02 03

0.30%

0.33%

0.35%

0.38%

0.40%Median Sales Price of Existing HomesHO Insurance Expenditure as a % of Sales Price

Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC.

HO

Exp

end

iture as %

of Sales P

riceMed

ian

Hom

e S

ales

Pri

ce

The cost of homeowners

insurance relative to the

price of a typical home has fallen

LEGAL LIABILITY & TORT

ENVIRONMENT

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

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

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

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

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

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

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

Source: Tillinghast-Towers Perrin.

$129 $130$141 $144 $148

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

$205

$233

$298

$0

$50

$100

$150

$200

$250

$300

$350

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

Tort costs consumed 2.23% of GDP in 2002

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

from $809 in 2002

Where the Tort Dollar Goes(2002)

Source: Tillinghast-Towers Perrin

Awards for Non-Economic

Loss24%

Claimants' Attorney Fees

19%Awards for

Economic Loss22%

Defense Costs14%

Administration21%

Tort System is extremely inefficient:

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

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

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

$17.0$49.1 $57.2

$87.4$17.1

$51.0$70.9

$78.5

$5.4

$20.1

$29.6

$42.9

$0

$50

$100

$150

$200

$250

1980 1990 2000 2002

Commercial Lines Personal Lines Self (Un)Insured

Bil

lion

s

Total = $39.5 Billion

*Excludes medical malpracticeSource: Tillinghast-Towers Perrin




Average Jury Awards1994 vs. 2001and 2002

419

187

333

1,18

5

1,14

0 1,74

4

1,21

0

309 75

0

3,09

9 3,91

3

1,19

9

221 76

7

4,42

1

6,24

6

5,60

1

7,795

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

Overall VehicularLiability

PremisesLiability

Wrongful Death MedicalMalpractice

ProductsLiability

($00

0)

1994 2001 2002

Source: Jury Verdict Research; Insurance Information Institute.

The average jury award appears to be leveling out

Business Leaders Ranking of Liability Systems for 2004

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

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

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

The Nation’s Judicial Hellholes

Source: American Tort Reform Association; Insurance Information Institute

City of St. Louis, MO

CALIFORNIA

Alameda County

Los Angeles County

San Francisco County

Orleans Parish, LA

I

Madison County, IL

TEXAS

Jefferson County

Hidalgo County

Starr County

Mississippi’s 22nd Judicial

District

INSURANCE SCORING (CREDIT)

Importance of Rating Factors by Coverage Type

Coverage Factor 1 Factor 2 Factor 3

BI Liability Age/Gender Ins. Score Geography

PD Liability Age/Gender Ins. Score Geography

PIP Ins. Score Geography Yrs. Insured

Med Pay Ins. Score Limit Age/Gender

Comprehensive Model Year Age/Gender Ins. Score

Collision Model Year Age/Gender Ins. Score

Source: The Relationship of Credit-Based Insurance Scores to Private Passenger Automobile Insurance Loss Propensity Michael Miller, FCAS and Richard Smith, FCAS (EPIC Actuaries), June 2003 (Presented at June 2003 NAIC meeting).

1.07

1.53

1.35

1.14

0.990.94

0.99

0.83 0.810.74 0.75

0.4

0.6

0.8

1.0

1.2

1.4

1.6

NoScore

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Score Range

Avg

. Rel

ativ

e L

oss

Rat

ioTexas Auto: Relative Loss Ratio (by Credit Score Decile, Total Market)*

*Each decile contains approximately 15,300 policies.

Includes standard and non-standard policyholders.

Interpretation:

Those with poorest credit scores generated losses more than double that of those with the best scores

Source: University of Texas, Bureau of Business Research, March 2003.

1st Decile = Lowest Credit Scores

10th Decile = Highest Credit Scores.

Extremely strong statistical evidence linking credit score with loss/claim outcomes:•Credit score & likelihood of positive claim (p<.0001)•Size of loss related to credit score (p<.0001)•Correlation between relative loss ratio and credit score (r = .95)

Average Loss = $695

$668

$918

$846

$791

$707 $703$681

$631

$584$568 $558

$500

$600

$700

$800

$900

$1,000

NoScore

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th

Score Range

Avg

. In

curr

ed L

oss

per

Pol

icy

Texas Auto: Average Loss per Policy (by Credit Score Decile, Total Market)

Interpretation:

Those with poorest credit scores generated incurred losses 65% higher

those with the best scores

Source: University of Texas, Bureau of Business Research, March 2003.

1st Decile = Lowest Credit Scores

10th Decile = Highest Credit Scores.

9%

33%

18%

10%

3%0%

-7%-11%

-14% -15%-19%

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

NoHit/Thin

File

607 659 693 722 748 774 802 837 894 997

Score Range

Rel

ativ

e P

ure

Pre

miu

mIndicated Relative Pure Premium by Insurance Score (PD Liability)*

Interpretation:

Those with poorest credit scores had loss experience 33% above average while

those with the best scores had loss experience that was 19% below average

Source: EPIC Actuaries, June 2003

Example: Credit Discount Can Save $100s per Year*

Good Driver Discount

24%

Credit-Related

Discount36%

Safety/Anti-Theft

Discount19%

Multipolicy Discount

21%

$296

$174

$196

$154

*Annualized savings based on semi-annual data from example

Source: Insurance Information Institute

•Credit discount lowered annual premium by 14.7%

•Policyholder saved nearly $300

•Credit was single largest discount

•Opponents of credit will force people to pay more for coverage

Total Annual Savings from Discounts: $820

Adverse Impact: No Evidence

New Private Housing Starts(Millions of Units)

1.19

1.01

1.20

1.29

1.461.35

1.48 1.47

1.62 1.64 1.57 1.60

1.71

1.851.90

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

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

Source: US Department of Commerce; National Association of Realtors; Insurance Info. Institute

*Annualized January 2004 figure

New Private Housing Starts

•Housing market remains strong.

U.S. Homeownership Rate,1990 to 2003

Source: U.S. Census Bureau

63.9% 64.1%64.5%

64.0%

64.7%

65.4%65.7%

66.3%66.8%

67.4%67.8% 67.9%

68.3%

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

Homeownership is at a record high. Because you can’t buy a home without

insurance, insurance is clearly available and affordable, including to

millions of Americans of modest means and all ethnic groups.

Homeownership Ratesin Iowa, 1990 to 2003


70.7%

68.4%

66.3%

68.2%

70.1%

71.4%

72.8%72.7%72.1%

73.9%

75.2%

76.6%

73.9%73.4%

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

Homeownership in Iowa is high by

historical standards but off its 2001 peak

Homeownership Rates in Central Cities, 1990 to 2003


48.7%

49.2%

48.6%48.5%

49.5%49.7%

49.9%50.0%50.4%

51.4%51.9%51.7%

52.3%

48.7%

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

Homeownership rates in central cities is at an all time record high. Because you can’t buy a home

without insurance, insurance is clearly available and affordable, including to millions of Americans of

modest means and all ethnic groups.

Homeownership Rates AmongMinorities is Rising, 1994 to 2003


42.3

%

42.7

% 44.1

%

44.8

%

45.6

%

46.3

% 47.2

%

47.7

%

47.4

%

48.1

%

41.2

% 42.1

%

42.8

%

43.3

% 44.7

% 45.5

% 46.3

% 47.3

%

46.7

%

47.0

%

40%

42%

44%

46%

48%

50%

94 95 96 97 98 99 00 01 02 03

Blacks Hispanics•Homeownership rates for minorities are at or near

record highs•Minorities are using their good credit to buy homes

and get insurance

Percent Change in Homeownership, 1995-2001

*Includes American Indian, Eskimo, Aleut, Asian and Pacific Islander.Source: U.S. Census Bureau

10.7%

23.2%

45.9%

83.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

White Black Hispanic Other*

•Homeownership rates have increased much faster for minority groups than for whites•Minorities are using their good credit to buy homes and get insurance•4.3 million minority net new homeowners were created between 1995 and 2001

THE CHALLENGE OF TERRORISM

Sept. 11 Industry Loss Estimates($ Billions)

Life$2.7 (7%)

Aviation Liability

$3.5 (9%)

Other Liability

$10.0 (25%)

Biz Interruption$11.0 (27%)

Property -WTC 1 & 2$3.5 (9%)

Property - Other

$6.0 (15%)

Aviation Hull$0.5 (1%)

Event Cancellation

$1.0 (2%)

Workers Comp

$2.0 (5%)

Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute

Terrorism Coverage Take-Up Rate Rising

Source: Marsh, Inc.; Insurance Information Institute

23.5%26.0%

32.7%

44.2%46.2%

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

Terrorism take-up rate for non-WC risk rose

through 2003 and continues to rise in 2004

TAKE UP RATE FOR WC COMP TERROR

COVERAGE IS 100%!!

$0.9 $1.1 $1.8$7.4

$15.4

$91.0

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

SearsTower

AirplaneAttack

El PasoEnergyTruckBomb

9/11 Attack RockefellerCtr. Truck

Bomb

NuclearPowerPlant

Sabotage

New YorkCity

AnthraxRelease

WC

Lo

ss

es

($

Bill

ion

s)

Source: Eqecat, NCCI.

Estimated Workers Comp Insured Losses & Deaths for Terrorist Events

1,000

12,300

173,000

1,300

Fatalities

Percent of 2003 Surplus Lost Due to a $25 Billion Terrorism Attack in 2004

With TRIA in Place

Source: The Economic Effects of Federal Participation in Terrorism Risk, Analysis Group, September 14, 2004.

Top 10 US P/C Insurers by Market Share

14.4%

32.5%

11.7% 12.6% 13.3%14.7%

11.7%

7.7%

22.1%

4.7%

1 2 3 4 5 6 7 8 9 10

Even with TRIA in place, some major insurers will lose more

than 10% of their policyholder surplus: Terrorism is a clear

threat to stability.

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

(underwriting/earnings);

• Iowa returns have historically been a better-than-average state for the

industry, but some recent volatility

• Rising investment returns insufficient to support deep soft market in

terms of price, terms & conditions

• Reserve deficiency remains industry’s principal boogieman

• Major Challenges: Maintaining price/underwriting discipline

Managing variability/volatility of results

New/emerging/re-emerging risks

Insurance Information Institute On-Line

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trends & challenges in p/c insurance business today focus on iowa markets

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