Insurance, Texas and the Economic Storm

Transcription

1 How Long Can the Good Times Last in Texas? Insurance, Texas and the Economic Storm Mid-Year Property & Casualty Insurance Symposium Insurance Council of Texas Austin, TX July 17, 2008 Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute 110 William Street New York, NY Tel: (212) Fax: (212)

2 Presentation Outline The Weakening Economy: Insurance Impacts P/C Insurance Industry Financial Overview Texas Profitability: Comparative Analysis Underwriting Performance Reinsurance Markets Premium Growth & Its Drivers Capacity/Policyholder Surplus Merger & Acquisition Activity Financial Strength & Ratings Catastrophe Risk in Texas Regulatory, Legislative and Political Environment Q & A

3 A STORMY ECONOMIC FORECAST What a Weakening Economy & The Threat of Inflation Mean for the Insurance Industry

4 Real GDP Growth* 6% 0.8% 0.6% 0.6% 0.4% 0.9% 1.6% 1.5% 1.2% 1.9% 2.5% 3.1% 2.9% 2.5% 2.7% 2.9% 3.7% 3.6% 3.8% 4.9% 5% 4% 3% 2% 1% Economic growth has slowed dramatically in recent quarters, though no official recession has occurred 0% :1Q 07:2Q 07:3Q 07:4Q 08:1Q 08:2Q 08:3Q 08:4Q 09:1Q 09:2Q 09:3Q 09:4Q *Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 6/08; Insurance Information Institute.

5 Real GDP Growth vs. Real P/C Premium Growth: Modest Association 25% -7.4% -6.5% -0.9% -1.5% -1.6% -1.0% -1.8% -1.0% -0.4% -0.3% -2.9% -0.5% -3.4% -4.9% 5.2% 1.8% 4.3% 0.3% 3.1% 1.1% 0.8% 0.4% 0.6% 1.6% 1.2% 5.8% 5.6% 7.7% 13.7% 18.6% 20.3% 20% 15% 10% 5% 0% -5% -10% P/C insurance industry s growth is influenced modestly by growth in the overall economy 8% 6% 4% 2% F Real NWP Growth Real GDP Growth Real NWP Growth Real GDP 0% -2% -4% Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 6/08; Insurance Information Inst.

6 New Private Housing Starts, F (Millions of Units) Exposure growth forecast for HO insurers is dim for 2008/09 Impacts also for comml. insurers with construction risk exposure 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 2008 vs is estimated at $971 million New home starts plunged 34% from ; Drop through 2008 trough is 54% (est.) a net annual decline of 1.11 million units F08F 09F 10F11F 12F 13F 14F Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 6/08 edition of BCEF; Insurance Info. Institute

7 Unemployment Rate: On the Rise January 2000 through May Previous Peak: 6.3% in June 2003 Trough: 4.4% in March 2007 May 2008 unemployment jumped to 5.5%, its highest level since October Jan-00 Average unemployment rate since 2000 is 5.0% Jan-01 Jan-02 Jan-03 Unemployment will likely continue to approach 6% during this cycle, impacting payroll sensitive p/c and non-life exposures Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 May-08 Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators

8 Workplace Injury Incidence Rates Declined in Last 4 Economic Downturns Incidence Rates per 100 FTE Worker (BLS) Recessions Manufacturing Industry Injuries and Illnesses per 100 Full-Time Workers Private Industry Injuries and Illnesses per 100 Full-Time Workers NCCI Lost-Time Claims per 100,000 Workers p Preliminary Source: US Department of Labor, Bureau of Labor Statistics (BLS), National Bureau of Economic Research; NCCI Frequency and Severity Analysis p Claims per 100,000 Workers (NCCI)

9 Summary of Economic Risks and Implications for (Re) Insurers Economic Concern Subprime Meltdown/ Credit Crunch Lower Interest Rates Stock Market Slump General Economic Slowdown/Recession Risks to Insurers Some insurers have some asset risk D&O/E&O exposure for some insurers Client asset management liability for some Bond insurer problems; Muni credit quality Mortgage insurers face losses; Also tightening standards and slowing real estate market Banks less able to lend, slowing construction Lower investment income Decreased capital gains (which are usually relied upon more heavily as a source of earnings as underwriting results deteriorate) Reduced commercial lines exposure growth Surety slump Decreased workers comp frequency due to drop in high hazard class employment

10 Source: Insurance Information Institute Toward a New World Economic Order 1. Credit Crunch (incl. Subprime) Issue Will Ultimately Cost Hundreds of Billions Globally (est. up to $600B) Problem exacerbated by leveraged bets taken by some financial institutions therefore its reach extends beyond simple defaults 2. Heavy Toll on Capital Base of Some Large Financial Institutions Worldwide (e.g., Bear Stearns) Cash infusions necessary; Sovereign Wealth Funds important source Federal Reserve forced into playing a larger role; must improvise 3. Most Significant Economic Event in a Generation US economy will recover, but will take months 4. Shuffling of Global Economic Deck; Economic Pecking Order Shifting China, oil producing countries hold the upper hand 5. IOUs are Being Redeemed Stakes in hard assets/institutions demanded 6. Good News: No Shortage of Available Capital Central banks are (generally) making right decisions; Dollar sinks

11 Post-Crunch: Fundamental Issues To Be Examined Globally Adequacy of Risk Management, Control & Supervision at Financial Institutions Worldwide Failure of risk management (and regulation) Implications for ERM? Includes review of incentives Effectiveness and Nature of Regulation What sort of oversite is optimal given recent experience? Credit problems arose under US and European (Basel II) regulatory regimes Will new regulations be globally consistent? Can overreactions be avoided? Capital adequacy & liquidity Accounting Rules Problems arose under FAS, IAS Asset Valuation, including Mark-to-Market Structured Finance & Complex Derivatives Ratings on Financial Instruments New approaches to reflect type of asset, nature of risk Source: Insurance Information Institute

12 Summary of Treasury Blueprint for Financial Services Modernization Impacts on Insurers

13 Treasury Regulatory Recommendations Affecting Insurers Establishment of an Optional Federal Charter (OFC) Would provide system for federal chartering, licensing, regulation and supervision of insurers, reinsurer and producers (agents & brokers) OFC Would Incorporate Several Regulatory Concepts Ensure safety and soundness Enhance competition in national and international markets Increase efficiency through elimination of price controls, promote more rapid technological change, encourage product innovation, reduce regulatory costs and provide consumer protection Establishment of Office of National Insurance (ONI) Department within Treasury to regulate insurance pursuant to OFC Headed by Commissioner of National Insurance Commissioner has regulatory, supervisory, enforcement and rehabilitative powers to oversee organization, incorporation, operation, regulation of national insurers and national agencies UPDATE: HR 5840 Introduced April 17 Would Establish Office of Insurance Information (OII) Would create industry voice within Treasury Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.

14 Inflation Overview Pressures Claim Costs, Expands Probable & Possible Max Losses

15 Inflation Rate (CPI-U, %), F Inflation was just 2.8% in 2007 but is accelerating. Medical cost inflation, important in WC, auto liability and other casualty covers is running far ahead of inflation. Rising inflation can also lead to adverse reserve development and inadequate reinsurance Inflation on year-over-year basis was 3.9% in April, well above the recent historical average * 08F 09F *12-month change May 2008 vs. May 2007; Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, June 10, 2008; Ins. Info. Institute. 2.6

16 Inflation: Important Economic Risks and Implications for Insurers (cont d) Effects of Inflation Claim Severity Increase Rate Inadequacy Business Interruption & Contingent BI Cost Escalation Risks to Insurers & Buyers Claims (property and liability) costs may rise as the price of goods and services increase PMLs could be (much) higher Accelerating inflation historically contributed to rate inadequacy because ratemaking is largely a retrospective process Many types of loss trends are sensitive to the pace of inflation: medical cost, tort, etc. Historical loss cost trends could be biased predictors of future loss if inflation accelerates Business interruption and contingent business interruption claim costs will rise because the nominal value of interrupted business and expense costs will grow more rapidly Especially pronounced in energy, commodity and natural resource intensive industries

17 Inflation: Important Economic Risks and Implications for Insurers (cont d) Effects of Inflation Reserve Deficiency Inadequate Insurance Limits Inadequate Reinsurance Risks to Insurers Reserves are established using certain assumptions about future development and discounting factors If inflation accelerates, development could be more rapid and/or be more substantial (in dollar terms) than assumed and discount factors may be too low Policyholders could find themselves inadequately insured as claims costs escalate Inflation can lead to a more rapid and unexpected exhaustion of reinsurance because losses are higher than expected

18 Comparative 2007 Inflation Statistics Important to Insurers ( %) Inflation Rate (%) CPI and Core CPI are not representative of many of the costs insurers face CPI-U Core CPI* Total Medical Care Medical/Legal costs typically run well ahead of inflation 3.9 Physician Services 6.7 Hospital Services 4.1 Legal Services *Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs. Source: US Bureau of Labor Statistics; Insurance Information Institute.

19 Dollar Depreciation Driver of Higher Energy, Commodities Prices and Overall Inflation

20 Depreciation of Dollar is Partly Responsible for Rising Inflation $1.7 $1.6 $1.5 $1.4 $1.3 $1.2 $1.1 $1.0 $0.9 $0.8 US Dollars per Euro Weakening dollar spurs oil and commodity producers to try to maintain purchasing power by keeping oil prices high. Dollar has dropped 58% relative to Euro since $1.065 $0.923 $0.895 $0.945 $1.244 $1.245 $1.132 $1.256 $1.371 $1.571 US rate cuts and European rate hikes keeping downward pressure on the dollar * *As of July 8, Source: Board of Governors of the Federal Reserve Bank; Insurance Information Institute.

21 Medical & Tort Cost Inflation Amplifiers of Inflation, Major Insurance Cost Driver

22 Consumer Price Index for Medical Care vs. All Items, (Base: =100) Index Value ( = Soaring medical inflation is among the most serious long-term challenges facing casualty, disability and LTC insurers Inflation for Medical Care has been surging ahead of general inflation (CPI) for 25 years. Since , the cost of medical care has more than tripled All Items Medical Care Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.

23 Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), * 14% 12% 10% 8% Tort costs move with inflation but at twice the rate Tort System is an Inflation Amplifier Avg. Ann. Change: * Torts Costs: +8.4% Med Costs: +6.0% Overall Inflation: +4.2% 6% 4% 2% 0% Tort Costs Medical Costs CPI E *Medical cost and CPI-U through April 2008 from BLS. Tort figure is for full-year 2008 from Tillinghast. Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.

24 WC Medical Severity Rising Far Faster than Medical CPI 16% 14% 12% 10% 8% 6% 4% 2% 0% 5.1% 7.4% 10.1% 8.3% 10.6% 7.3% 13.6% 7.6% WC medical severity rose more than twice as fast as the medical CPI (8.3% vs. 4.0%) from 1995 through 2007p 7.2% 6.2% 9.2% 8.6% 6.0% 4.5% 3.5% 2.8% 3.2% 3.5% 4.1% 4.6% 4.7% 4.0% 4.4% 4.2% 4.0% 4.4% Change in Medical CPI Change Med Cost per Lost Time Claim p Sources: NCCI; Med CPI from Economy.com; WC med severity from NCCI based on NCCI states. 1.6 pts

25 PROFITABILITY In the Midst of a Cyclical Decline

26 P/C Net Income After Taxes ($ Millions)* $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10, ROE = -1.2% 2002 ROE = 2.2% 2003 ROE = 8.9% 2004 ROE = 9.4% 2005 ROE= 9.6% 2006 ROE = 12.2% 2007 ROAS 1 = 12.3%** 2008 ROAS = 6.4%*** $14,178 $5,840 $19,316 $10,870 $20,598 $24,404 $36,819 $30,773 Insurer profits peaked in 2006 $21,865 $20,559 $3,046 $30,029 $38,501 $44,155 $65,777 $61,940 $32,936 $0 -$10, $6,970 *ROE figures are GAAP; 2008 figure is annualized Q1 net income of $8.234B; 1 Return on avg. surplus. Sources: A.M. Best, ISO, Insurance Information Inst. ***9.5% excl. mortgage and finl. guarantee insurers *

27 ROE: P/C vs. All Industries :Q1 20% 15% P/C profitability is cyclical and volatile Mortgage & Financial Guarantee Impact 10% Sept. 11 5% 0% -5% Hugo Andrew Northridge Q1 US P/C Insurers Lowest CAT losses in 15 years All US Industries Katrina, Rita, Wilma 4 Hurricanes 2008 P/C insurer figure is annualized Q1 return on average surplus. Excluding mortgage and financial guarantee insurers = 9.5%. Source: ISO, Fortune; Insurance Information Institute.

28 Profitability Peaks & Troughs in the P/C Insurance Industry, :Q1 25% 1977:19.0% 1987:17.3% 2006:12.2% 20% 15% 10% 10 Years 1997:11.6% 10 Years 9 Years 5% 0% -5% 1975: 2.4% 2008Q1: 6.4% (9.5% excl. M&FG) 1984: 1.8% 1992: 4.5% 2001: -1.2% *GAAP ROE for all years except 2007 which is ROAS of 12.3%. All figures include mortgage an d financial guarantee insurers. Excluding M&FG insurers 2008:Q1 ROAS is 9.5%.. Source: Insurance Information Institute, ISO; Fortune

29 ROE vs. Equity Cost of Capital: US P/C Insurance: :Q1 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target or better * *Excludes mortgage and financial guarantee insurers. Source: The Geneva Association, Ins. Information Inst pts -9.0 pts ROE -1.7 pts +2.3 pts -1.3 pts The cost of capital is the rate of return insurers need to attract and retain capital to the business Cost of Capital

30 Factors that Will Influence the Length and Depth of the Cycle Capacity: Rapid surplus growth in recent years has left the industry with between $85 billion and $100 billion in excess capital, according to analysts, at end of 2007 All else equal, rising capital leads to greater price competition and a liberalization of terms and conditions Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which could extend the depth and length of the cycle Investment Gains: With sharp declines in stock prices and falling interest rates, portfolio yields are certain to fall Contributes to discipline and shallower cycle Sarbanes-Oxley: Presumably SOX will lead to better and more conservative management of company finances, including rapid recognition of deficient or redundant reserves With more eyes on the industry, the theory is that cyclical swings should shrink Ratings Agencies: Focus on Cycle Management; Quicker to downgrade Information Systems: Management has more and better tools that allow faster adjustments to price, underwriting and changing market conditions than it had during previous soft markets Analysts/Investors: Less fixated on growth, more on ROE through soft mkt. Management has backing of investors of Wall Street to remain disciplined M&A Activity: More consolidatio would imply greater discipline Source: Insurance Information Institute.

31 P/C Stocks: Mirroring the S&P 500 Index in 2008 Total YTD Returns Through July 11, 2008 P/C, Life insurance stocks caught in financial services downdraft Mortgage & Financial Guarantee insurers were down 69% in % % % % % % % -4.43% S&P 500 All Insurers P/C Life/Health Multiline Reinsurance Mortgage* Brokers % -80.0% -60.0% -40.0% -20.0% 0.0% *Includes Financial Guarantee. Source: SNL Securities, Standard & Poor s, Insurance Information Institute.

32 Top Industries by ROE: P/C Insurers Still Underperformed in 2007* Household & Pers. Products Petroleum Refining Hotels, Casinos, Resorts Oil and Gas Equip., Services Food Services Metals Food Consumer Prod. Network & Other Comms. Aerospace & Defense Medical Prod. & Equip. Electronics, Electrical Equip. Pharmaceuticals Industrial & Farm Equip. Wholesalers: Diversified Packaging, Containers P/C Insurers (Stock) All Industries: 500 Median 14.0% 15.2% 26.3% 26.1% 24.9% 23.9% 23.0% 22.0% 21.8% 20.6% 20.4% 20.4% 20.3% 20.0% 19.4% 19.2% 56.0% P/C insurer profitability in 2007 ranked 31 st out of 51 industry groups despite renewed profitability, underperforming the All Industry median for the 20 th consecutive year 0% 10% 20% 30% 40% 50% 60% Source: Fortune, May 5, 2008 edition; Insurance Information Institute

33 UNDERWRITING TRENDS Extremely Strong 2006/07; Relying on Momentum & Discipline for 2008

34 P/C Insurance Combined Ratio, :Q As recently as 2001, insurers paid out nearly $1.16 for every $1 in earned premiums Best underwriting result since the 87.6 combined ratio in 1949 Including Mortgage & Fin. Guarantee insurers ratio benefited from heavy use of reinsurance which lowered net losses Relatively low CAT losses, reserve releases Excluding Mortgage & Fin. Guarantee insurers :Q1 08:Q1* Sources: A.M. Best, ISO; III. *Excluding Mortgage & Financial Guarantee insurers.

35 Commercial Lines Combined Ratio, F Commercial coverages have exhibited significant variability over time Outside CAT-affected lines, commercial insurance is doing fairly well. Caution is required in underwriting long-tail commercial lines Recent results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases E 08F Sources: A.M. Best (historical and forecasts)

36 Underwriting Gain (Loss) :Q1* $ Billions Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the second since Cumulative underwriting deficit from 1975 through 2007 is $422 billion. $561 mill underwriting loss in 08:Q1 incl. mort. & FG insurers Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers.

37 Losses Paid by Property/Casualty Insurers Have Steadily Increased for Decades $ Billions $350 $300 $250 $200 $150 $100 $50 $147.0 Total losses paid by insurers increased by $152 billion or more than 100% from 1987 through 2007 $156.3 $168.9 $177.5 $180.0 $198.9 $187.2 $198.1 $200.4 $209.2 $201.6 $214.2 Dip in 2006/07 was associated with drop in catastrophe losses, which is unlikely to persist. Losses and loss ratios in 2007 rose and are rising in During 2006/07, the price of many types of insurance fell. $224.7 $242.2 $280.8 $292.6 $299.7 $308.8 $320.6 $288.1 $298.6 $314.4 $ * Sources: A.M. Best; 2007 figure is from ISO. *2008 is annualized Q1 ISO result; Insurance Information Institute.

38 Ten Lowest P/C Insurance Combined Ratios Since 1920 vs The 2006 combined ratio of 92.2 was the best since the 87.6 combined in was the 20 th best since The industry s best underwriting years are associated with periods of low interest rates Sources: Insurance Information Institute research from A.M. Best data. *2007: III Earlybird survey.

39 Impact of Reserve Changes on Combined Ratio Reserve Development ($B $40 $35 $30 $25 $20 $15 $10 $5 $0 ($5) ($10) 0.1 $ $ $ $ $ $18.9 PY Reserve Development Combined Ratio Points Reserve adequacy has improved substantially ($5.3) ($6.0) ($5.0) ($7.0) F 08F 09F (1) (2) (3) Combined Ratio Points Source: A.M. Best, Lehman Brothers estimates for years

40 Cumulative Prior Year Reserve Development by Line (As of 12/31/06) $1,500 $1,000 $1,172 $1,176 -$1,886 -$1,174 -$1,116 -$779 -$475 -$413 -$254 -$100 -$100 -$96 -$53 -$48 $366 $500 $0 -$500 -$1,000 -$1,500 -$2,000 -$2,500 -$3,000 -$3,500 -$3,006 Strengthening $ Billions Release Reserve redundancies in most lines have resulted in releases in recent years PPA Liability PPA PD Home Med Mal Specialty Prop Comm. Auto Prod. Liability Finl. Guaranty International Other Specialty Liab. Worker's Comp Fidelity/Surety Commercial Multi Other Liability Reinsurance Sources: Lehman Brothers; A.M. Best s Aggregates & Averages Schedule P, Part 2.

41 TEXAS: A PROFIT & GROWTH COMPARISON

42 ROE: US & TX P/C vs. All Industries, % 20% 15% 10% 5% 0% -5% -10% -15% -20% Historically, profitability in TX has lagged the p/c insurance industry and Fortune 500 and been more erratic US P/C Insurers All US Industries Texas Source: Insurance Information Institute; NAIC, Fortune

43 ROE for Homeowners Insurance in Texas, % 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -38.8% Texas will need to allow insurers to earn risk appropriate rates of return that reflect huge losses in some years 6.2% -6.0% -23.5% 19.4% 20.7% 14.7% 11.9% Insurers were profitable in 2005, but less so than the Fortune was better. Average ROE in TX 1992 through 2006 was 0.14% -10.9% -42.4%-41.9% 10.2% 38.1% 13.1% 31.3% Source: NAIC

44 Average ROE Comparison Shows Texas is Profit Laggard, % 12% 10% 8% 6% 4% 2% 0% Despite recent and possibly unsustainable improvements, TX is a big-time profit laggard 5.4% Texas P/C 0.3% TX Home Insurance 7.7% US P/C 13.0% Fortune 500 Source: Insurance Information Institute from NAIC, Fortune and Federal Reserve data. TX is below even a risk-free return on Treasury securities. HINT: TX is not a risk free investment for insurers 5.7% 10-Year Treasury

45 Growth in Direct Written Premiums: TX and US 25% 20% 15% Despite all the rhetoric, premiums collected by insurers have actually risen slightly less in TX on an average annual basis than the nation overall between 1985 and 2007: 6.1% in TX vs. 6.3% for the US 10% 5% 0% -5% Source: NAIC, Insurance Information Institute Texas US

46 Homeowners Direct Loss Ratios: TX vs. US % 100% US Texas Loss Ratios in Texas were worse than the US 11 out of past 23 years 80% 60% 40% 20% Averages: TX: 69.9% US: 68.2% Source: NAIC; Insurance Information Institute

47 ROE for Personal Lines in Texas % -3.1% -10.9% -5.0% 5.3% 9.1% 6.2% 6.7% 5.1% 4.8% 14.1% 11.9% 14.4% 20.7% 8.8% 19.4% 5.9% 14.7% 8.2% 10.2% 18.8% 12.7% 13.1% 12.6% 38.1% 50% -23.5% -6.0% 31.3% 40% 30% 20% 10% 0% -10% -20% -30% -40% -42.4%-41.9% -50% Personal Auto Homeowners Despite recent improvements, TX is a very risky longrun proposition 15-Year Average: Auto: +7.9% Home: 0.14% Source: NAIC

48 ROE for Major Commercial Lines in TX, % 30% 20% 10% 0% -10% -20% -30% 8.1% -10.8% 20.0% 24.4% -15.6% -12.7% 32.1% 4.9% 15.4% -18.7% 10.1% 6.1% 8.5% 9.3% Workers Comp 7.7% 11.8% 2.5% Profits in TX are often inadequate and are well below the Fortune 500 historical return of 13% to 14% Commercial Multi-Peril 2.1% 6.2% -6.1% -3.3% -9.8% 3.0% 3.0% 9.8% 6.4% 17.7% 14.4% 12.9% -1.2% 13.0% 16.4% Source: NAIC, Insurance Information Institute.

49 ALL LINES: 10-yr. Avg. Return on Equity, TX & Nearby States % New Mexico -12.2% -13.0% 7.6% 7.3% 5.7% 7.3% 5.8% US Oklahoma Texas Arkansas Florida Mississippi Louisiana -15% -10% -5% 0% 5% 10% 15% Source: NAIC, Insurance Information Institute

50 PP AUTO: 10-yr. Avg. Return on Equity, TX & Nearby States % New Mexico 8.4% US 8.9% Oklahoma 0.8% 4.7% 3.7% 7.8% 7.3% Texas Arkansas Florida Mississippi Louisiana 0% 5% 10% 15% Source: NAIC, Insurance Information Institute

51 HOME: 10-yr. Avg. Return on Equity, TX & Nearby States % New Mexico 5.0% US 1.8% Oklahoma -33.0% -27.6% -1.1% 5.2% 0.3% Texas Arkansas Florida Mississippi Louisiana -40% -30% -20% -10% 0% 10% 20% Source: NAIC, Insurance Information Institute

52 Comm. M-P: 10-yr. Avg. Return on Equity, TX & Nearby States % New Mexico -16.6% -19.6% 6.4% 9.0% 4.6% 8.3% 3.7% US Oklahoma Texas Arkansas Florida Mississippi Louisiana -30% -20% -10% 0% 10% 20% Source: NAIC, Insurance Information Institute

53 WC: 10-yr. Avg. Return on Equity, TX & Nearby States % New Mexico 7.1% US 5.0% Oklahoma 7.8% 10.7% 9.4% 10.5% 13.8% Texas Arkansas Florida Mississippi Louisiana 0% 5% 10% 15% Source: NAIC, Insurance Information Institute

54 PERSONAL LINES

55 Personal Lines Combined Ratio, E Recent strong results attributable favorable frequency trends and low CAT activity E 08F Source: A.M. Best; Insurance Information Institute

56 Private Passenger Auto (PPA) Combined Ratio PPA is the profit juggernaut of the p/c insurance industry today Auto insurers have shown significant improvement in PPA underwriting performance since mid-2002, but results are deteriorating Average Combined Ratio for 1993 to 2006: E 08F Sources: A.M. Best (historical and forecasts)

57 Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data. Pure Premium Spread: Personal Auto PD Liability, :Q4 10% 8% 6% 4% 2% 0% Auto Insurance Component of CPI Margin necessary to maintain PPA profitability Personal Auto-PD Pure Premium An inversion of pure premium spread began in late % -4% 2000 PPA Combined= PPA Combined= :Q1 00:Q2 00:Q3 00:Q4 01:Q1 01:Q2 01:Q3 01:Q4 02:Q1 02:Q2 02:Q3 02:Q4 03:Q1 03:Q2 03:Q3 03:Q4 04:Q1 04:Q2 04:Q3 04:Q4 05:Q1 05:Q2 05:Q3 05:Q4 06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4

58 Bodily Injury: Severity Trend Running Ahead of Frequency 8% 6% 4% Medical inflation is a powerful cost driver 4.7% Frequency Severity 4.8% 3.0% 3.6% 3.8% 3.4% 2.8% 6.0% 6.2% 2% 0% -2% -4% -6% -0.3% -0.9% -2.2% -4.0% -3.3% -2.6% -3.8% -5.3% -5.4% -5.0% -5.0% * Source: ISO Fast Track data. *Result for 4 quarters ending with Q

59 PD Liability: Frequency Trend No Longer Offsets Severity 8% 6% 4% 2% 0% 0.8% Frequency 4.3% 6.2% Severity 3.9% 3.3% 2.8% 0.3% Fewer accidents, but more damage when they occur 0.5% 2.8% 3.7% 2.1% 2.0% 0.6% 0.8% -2% -4% -6% -1.5% -2.0% -2.3% -2.1% -1.9% -3.8% * Source: ISO Fast Track data. *Result for 4 quarters ending with Q

60 PIP: Severity Trend Now Offsets Smaller Claim Frequency Decline 20% 15% Frequency 16.1% Severity Fraud caused problems from % 5% 0% -5% -10% 6.3% 6.5% 3.2% 1.1% 0.0% -1.6% -1.1% -0.6% -4.0% 6.1% 4.8% 5.5% 2.3% 0.5% -7.2% -5.4% -5.1% -4.0% -4.1% * Source: ISO Fast Track data. *Result for 4 quarters ending with Q

61 Collision: Frequency and Severity Claim Trend Adverse 8% 6.8% Frequency Severity 6% 4% 2% 0% -2% -4% -6% 4.1% 3.7% 3.7% 3.8% 2.6% 3.0% 3.1% 1.9% 2.3% 1.5% 1.7% -0.4% -1.7% -3.8% -3.7% -5.1% -4.6% * 0.1% 0.8% Source: ISO Fast Track data. *Result for 4 quarters ending with Q

62 Comprehensive: Favorable Frequency and Severity Trends 20% 15% 10% 5% Frequency 8.9% 3.3% 3.3% Severity Weather related claims from Hurricanes Katrina, Rita & Wilma: 681,900 claims valued $3.29 billion 14.9% 0% -5% -10% -15% -1.7% -4.7% -2.6% -5.7% -2.4% -2.1% -6.9% -8.0% -4.1% -3.1% -9.8% -1.3% -6.5% -1.4% -4.3% -0.3% * Source: ISO Fast Track data. *Result for 4 quarters ending with Q

63 Rising Gas Prices and Auto Claim Frequency

64 World Crude Oil Prices: May 2008 $140 Dollars per Barrel* $120 $100 $80 $60 Crude oil prices in May 2008 ($123.35) are up 711% since January 1998 ($15.21) and 137% from Feb ($52.11) As of May 2008 oil prices averaged a record $ per barrel $40 $20 $15.21 $0 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 *All countries spot market price weighted by estimated export volume. May 2008 figure is NYMEX crude. Source: Energy Information Administration;

65 Retail Gas Price* and Percent Change In Miles Driven, :Q1 Retail Gas Price, Inflation adjusted ($/gallo $3.50 $3.00 $2.50 $2.00 $1.50 Inflation adjusted gas prices % change in miles driven There is a strong association between gas prices and miles driven. Until 2007/8 miles driven had not declined since the energy crises of the 1970s 8% 6% 4% 2% 0% % Change Miles Driven -2% $ * retail gas prices based on leaded only adjusted to 2007 dollars. Sources: Energy Highway Administration, Federal Highway Administration %

66 Do Increases in Gas Prices Affect Auto Collision Claim Frequency? Paid Claim Frequency = (No. of paid claims)/(earned Car Years) x 100 Paid Claim Freq $1.27 $ $1.07 $ $1.52 $1.46 $1.39 $1.60 Through Q no observable reduction in collision claim frequency due to high gas prices Collision Claim Frequency $ $ $ $2.84 $ * Gas Prices $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 Sources: Energy Information Administration ( ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: First Quarter 2008, published June 30, 2008 and earlier reports figure is for 4 quarters ending Q Avg Gas Price/Ga

67 Do Changes in Miles Driven Affect Auto Collision Claim Frequency? Paid Claim Frequency = (No. of paid claims)/(earned Car Years) x Collision Claim Frequency Billions of Vehicle Miles 3100 Paid Claim Freq Billions of Miles Driven * 2400 Sources: Federal Highway Administration ( ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: First Quarter 2008, published June 30, 2008 and earlier reports figure is for 4 quarters ending Q

68 Miles Driven vs. Gas Prices in Recent Months Miles Driven 280,000 Miles Driven Gas Prices Gas Price/ Gallon $ ,000 $ ,000 $ ,000 $ ,000 $ , , , ,000 Miles driven in March and April 2008 fell below March/April 2007 as gas prices soared (down 1.8% Apr. 08 vs. Apr. 07) Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr $2.60 $2.40 $2.20 $2.00 Sources: Energy Information Administration ( Federal Highway Administration (

69 Auto Insurance: Claim Frequency Impacts of Energy Crisis of 1973/4 Oct. 17, 1973: Arab oil embargo begins Frequency Impacts Collision: -7.7% PD: -9.5% BI: -13.3% Driving Stats Gas prices rose 35-40% Miles driven fell 6.7% in 1974 Source: ISO, US DOT. March 17, 1974: Arab oil states announce end to embargo Frequency began to rebound almost immediately after the embargo ended

70 Auto Insurance: Claim Severity Impacts of Energy Crisis of 1973/4 Oct. 17, 1973: Arab oil embargo begins Severity Impacts Collision: -7.5% PD: +15.9% BI: N/A* Driving Stats Gas prices rose 35-40% Miles driven fell 6.7% in 1974 Source: ISO. March 17, 1974: Arab oil states announce end to embargo Collision severity began to rebound almost immediately after the embargo ended; PD accelerated as inflation rose; No discernable trend change in BI.

71 Source: ISO; Insurance Information Institute Summary of Impacts of Energy Crises of 1970s on Auto Insurance Measure Frequency Severity (Avg. Cost per Claim) Loss Cost (dollars of loss per insured vehicle) Impact on Auto Insurers Falls initially Rebounds almost shortly after shock passes Rises to expected no-crisis levels with 2-3 years Typically accelerates following surges in oil prices Sensitive to inflationary pressures In general, initial slight decrease Typically rebounds within 1 to 2 years

72 Differences & Similarities Between Energy Crises of 1970s and Today Gas is Available In 1973/4 gas supplies were disrupted forcing a reduction in driving, contributing to the declines in frequency Speed Limits Unlikely to be Reduced 55 MPH national speed limit imposed in 1974 Repealed in 1995, returning authority to states Ability to Move to More Fuel Efficient Fuels is Greater Today

73 Homeowners Insurance

74 Homeowners Insurance Combined Ratio Average 1990 to 2006= Insurers have paid out an average of $1.12 in losses for every dollar earned in premiums over the past 17 years Sources: A.M. Best (historical and forecasts) E 08F

75 PREMIUM GROWTH At a Virtual Standstill in 2007/08

76 Strength of Recent Hard Markets by NWP Growth* 25% 20% 15% Post-Katrina period resembles (post- Andrew) 10% 5% 0% -5% -10% 2007: -0.6% premium growth was the first decline since Down 0.9% in Q1 2008* * Note: Shaded areas denote hard market periods. *2008 is Q1 figure = -0.9%. Ex. M&FG insurers = -0.7% Source: A.M. Best, Insurance Information Institute

77 Growth in Net Written Premium, :Q1* 5.0% 8.4% 15.3% 10.0% 3.9% P/C insurers are experiencing their slowest growth rates since 1943 underwriting results are deteriorating 4.3% Including Mortgage & Fin. Guarantee insurers Excluding Mortgage & Fin. Guarantee insurers 0.5% -0.6% -0.9% -0.7% :Q1 08:Q1 *2008:Q1 results shown including and excluding mortgage and financial guarantee insurers. Source: A.M. Best; ISO; Insurance Information Institute.

78 Personal/Commercial Lines & Reinsurance NPW Growth, F 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Net written premium growth is expected to be slower for commercial insurers and reinsurers 2.0% 3.5% -0.1% 1.4% E 2008F -1.5%-2.3% 28.1% -8.5% -5.0% Personal Commercial Reinsurance Sources: A.M. Best Review & Preview (historical and forecast).

79 All P/C Lines Distribution Channels, Direct vs. Independent Agents 70% 60% Direct Independent Agents 50% 40% 30% 20% 10% 0% Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained in recent years. Direct channels include exclusive agency companies, direct marketers and direct sales (e.g., internet) Source: Insurance Information Institute; based on data from Conning and A.M. Best.

80 Personal Lines Distribution Channels, Direct vs. Independent Agents 80% 70% 60% 50% 40% Direct Independent Agents 30% 20% 10% Independent agents have lost significant personal lines market share since the early 1970s, but the trend has slowed or even ended. 0% Source: Insurance Information Institute; based on data from Conning and A.M. Best.

81 Commercial P/C Distribution Channels, Direct vs. Independent Agents 90% 80% 70% Direct Independent Agents 60% 50% 40% Independent agents have seen only modest erosion in commercial lines market share in recent decades 30% 20% 10% 0% Source: Insurance Information Institute; based on data from Conning and A.M. Best.

82 Cost of Risk vs. Commercial Lines Combined Ratio Commercial Lines Combined Rati $6.10 $ $ $7.70 $7.30 Commercial Combined Ratio Cost of Risk $6.49 $ $ $ $5.71 $5.20 $4.83 $8.42 $13.50 $ $ $11.94 $ $14 $12 $10 $8 $6 $4 $2 $0 Cost of Risk/$1000 Revenu Source: RIMS Benchmark Survey, A.M. Best 2007 Aggregates & Averages; Insurance Information Institute

83 How the Risk Dollar is Spent (2006) Total liability costs account for 35% - 40% of the risk dollar Firms w/revenues < $1 Billion Firms w/revenues > $1 Billion Other Costs, 4% Property Premiums, 18% Admin Costs, 14% Retained Property Losses, 5% Liability Premium 20% Other Costs, 4% Admin Costs, 12% Property Premiums, 13% Retained Property Losses, 11% Liabilit Premium 11% Prof. Liability Costs, 7% Retained WC Losses, 7% WC Premiums, 14% Liability Prof. Liability Retained Costs, 2% Losses, 5% Total Mgmt. Liab., 5% Retained WC, 21% WC Premiums, 5% Total Mgmt. Liab., 7% Retained Liability Losses, 13% Source: RIMS (2007); Insurance Information Institute

84 Average Expenditures on Auto Insurance $950 $900 $850 $800 $750 $700 $650 $600 $651 Countrywide auto insurance expenditures are expected to fall 0.5% in 2007, the first drop since 1999 $668 $691 $705 $703 $685 $ * 06* 07* *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute $724 $780 $823 $838 $847 $851 Lower underlying frequency and modest severity are keeping auto insurance costs in check $847

85 $900 $850 $800 $750 $700 $650 $600 $550 $500 $450 $400 Average Expenditures on Homeowners Insurance** Countrywide home insurance expenditures rose an estimated 4% in 2006 Homeowners in non- CAT zones have seen smaller increases than those in CAT zones $508 $536 $418 $440 $455$481 $488 $593 $729 $668 $787 $868 $ * 06* 07* *Insurance Information Institute Estimates/Forecasts **Excludes cost of flood and earthquake coverage. Source: NAIC, Insurance Information Institute

86 Average Expenditures on HO Insurance TX vs. U.S.** $1,500 $1,250 US Texas $1,328$1,362$1,372 $1,238 $1,000 $750 $500 $418 $785 $827 $440 $455 $855 $879 $481 $861 $880 $488 $508 $536 $955 $593 $668 $729 $787 $835 $868 $250 $ * 06* 07* *Insurance Information Institute Estimates. **Excludes cost of flood and earthquake coverage. Source: NAIC, Insurance Information Institute

87 Median Existing Home Pric $275,000 $225,000 $175,000 $125,000 $75,000 $25,000 ($25,000) Homeowners Insurance Expenditures as a % of Median Existing Home Prices, F $117,000 Record catastrophe losses and declining home prices are pushing HO insurance expenditures as a % of median home price up 0.357% $122, % $129, % $136, % $141, % $147, % $156, % $167, E 07F 08F 0.354% $180, % $195, % $219, % $221, % 0.397% $218, % $222, % 0.40% 0.39% 0.38% 0.37% 0.36% 0.35% 0.34% 0.33% 0.32% 0.31% HO Ins. Expend. As % Home Pric Median Existing Home Price Homeowners Insurance Expenditure as % Home Price Source: National Association of Realtors, NAIC; Insurance Info. Institute calculations and HO expenditure estimates/ forecasts for years

88 Average Commercial Rate Change, All Lines, (1Q:2004 1Q:2008) -13.3% -11.3% -11.8% -12.0% -9.4% -9.7% -9.6% -5.9% -7.0% -8.2% -4.6% -5.3% -3.2% -2.7% -3.0% -13.5% 0% -2% -4% -6% -8% -10% -12% -14% -16% 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 Magnitude of rate decreases diminished greatly after Katrina but have grown again -0.1% KRW Effect Source: Council of Insurance Agents & Brokers; Insurance Information Institute

89 Cumulative Commercial Rate Change by Line: 4Q99 1Q08 Commercial account pricing has been trending down for 3+ years and is now on par with prices in late 2001, early 2002 Source: Council of Insurance Agents & Brokers

90 RISING EXPENSES Expense Ratios Will Rise as Premium Growth Slows

91 *Ratio of expenses incurred to net premiums written. Source: A.M. Best; Insurance Information Institute Personal vs. Commercial Lines Underwriting Expense Ratio* 32% 31.1% Personal Commercial 30% 28% 26% 24% 22% 20% 29.4% 30.8% 30.0% 29.9% 29.1% 27.0% 27.5% 26.6% 25.6% 26.4% 26.3% 27.1% 25.0% 24.3% 24.8% 25.6% 24.5% 25.0% 26.1% 26.6% 25.6% 23.4% 24.7% 24.4% 24.6% Expenses ratios will likely rise as premium growth slows E 08F

92 CAPACITY/ SURPLUS Capital/ Surplus Falling from 2007 Peak

93 U.S. Policyholder Surplus: :Q1* $550 $500 $450 Capacity as of 3/31/08 was $515.6, down 0.4% from 12/31/07 was $517.9B, but 80% above its 2002 trough. Recent peak was $521.8 as of 9/30/07 $ Billions $400 $350 $300 $250 $200 $150 $100 $50 The premium-to-surplus fell to $0.85:$1 at yearend 2007, approaching its record low of $0.84:$1 in 1998 Surplus is a measure of underwriting capacity. It is analogous to Owners Equity or Net Worth in non-insurance organizations $ Source: A.M. Best, ISO, Insurance Information Institute. *As of March 31, 2008

94 Annual Catastrophe Bond Transactions Volume, Risk Capital Issued Number of Issuances Risk Capital Issues ($ Mill $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Catastrophe bond issuance has soared in the wake of Hurricanes Katrina and the hurricane seasons of 2004/2005, despite two quiet CAT years $1,729.8 $1,991.1 $846.1 $984.8$1,139.0 $1,219.5 $966.9 $1,142.8 $633.0 $4,693.4 $7, Number of Issuances $ Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.

95 P/C Insurer Share Repurchases, Through Q ($ Millions) $25,000 $20,000 $15,000 $10,000 $5,000 $0 $564.0 Reasons Behind Capital Build- Up & Repurchase Surge Strong underwriting results Moderate catastrophe losses Reasonable investment performance Lack of strategic alternatives (M&A, large-scale expansion) Returning capital owners (shareholders) is one of the few options available $646.9 $311.0 $952.4 $418.1 $566.8 $310.1 $658.8 $ share buybacks shattered the 2006 record, up 214% 2007 repurchases to date equate to 3.9% of industry surplus, the highest in 20 years $2,385.6 $4,497.5 $4,586.5 $5,266.0 $4,297.3 $2,764.2 $1,539.9 $763.7 $5,242.3 $4,370.0 $22, $7, Sources: Credit Suisse, Company Reports; Insurance Information Inst.

96 REINSURANCE MARKETS Reinsurance Prices are Stabilizing; Falling in Some Areas

97 Share of Losses Paid by Reinsurers, by Disaster* 70% 60% 50% 40% 30% 20% Reinsurance is playing an increasingly important role in the financing of mega- CATs; Reins. Costs are skyrocketing 30% 25% 60% 20% 45% 10% 0% Hurricane Hugo (1989) Hurricane Andrew (1992) Sept. 11 Terror Attack (2001) 2004 Hurricane Losses 2005 Hurricane Losses *Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.

98 US Reinsurer Net Income & ROE, $0.12 $1.22 $1.38 $1.95 $1.94 $1.87 $2.03 $1.17 $2.52 $1.79 $1.95 $1.47 $1.99 $1.31 $3.71 $3.17 $4.53 $3.41 $2.51 $5.43 $9.68 $12 $10 $8 $6 $4 $2 $0 Net Income ($ Bill) ($2) ($4) ($2.98) % 15% 10% ROE Reinsurer profitability has rebounded Net Income ROE Source: Reinsurance Association of America. 5% 0% -5% -10%

99 MERGER & ACQUISITION Are Catalysts for P/C Consolidation Growing in 2008?

100 P/C Insurer M&A Activity,* ** Transaction Values Number of Transactions Transaction Value ($ Mill) $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 $36, $8, $13,808 M&A activity began to accelerated in The largest deals in 2008 are Liberty Mutual s acquisition of Safeco for $6.2B and Allied World s acquisition of Darwin for $550 million $3,318 2 $599 1 $18, $9, $ $12,823 $6, ** Source: Lehman Brothers. *Deals exceeding $500 million. *Through June 30, Number of Transactions

101 Median Price-to-Book Takeout Multiple for P/C M&As,* ** Acquisition multiples have risen and are now comparable to where they were when M&A activity peaked during the soft market of the late 1990s Acquisitions are occurring at about twice book value, though the P/C insurance sector currently trades at about half that *Refers to multiple of share price to book value at time of acquisition. Deals exceeding $500 million. **As of June 30, 2008 Source: Lehman Brothers

102 Distribution of P/C Insurer Acquisitions, Jan June 2008 SUMMARY STATS 22 deals Deals Exceeding $100 Million Personal & Commercial, 32%, 32% $23 billion total transaction value $475 million median deal value Acquirers mostly p/c insurers and limited number of private equity deals Source: SNL, Lehman Brothers. Commercial, 45%, 45% Personal, 23%, 23%

103 Motivating Factors for Increased P/C Insurer Consolidation Motivating Factors for P/C M&As Slow Growth: Growth is at its lowest levels since the late 1990s NWP growth was 0% in 2007; Appears similarly flat in 2008 Prices are falling or flat in most non-coastal markets Accumulation of Capital: Excess capital depresses ROEs Policyholder Surplus up 6-7%% in 2007 and up 80% since 2002 Insurers hard pressed to maintain earnings momentum Options: Share Buybacks, Boost Dividends, Invest in Operation, Acquire Option B: Engage in destructive price war and destroy capital Reserve Adequacy: No longer a drag on earnings Favorable development in recent years offsets pre-2002 adverse develop. Favorable Fundamentals/Drop-Off in CAT Activity Underlying claims inflation (frequency and severity trends) are benign Lower CAT activity took some pressure of capital base Source: Insurance Information Institute.

104 INVESTMENT OVERVIEW More Pain, Little Gain

105 Property/Casualty Insurance Industry Investment Gain 1 $60 $50 $40 $35.4 $57.9 $56.9 $52.3 $51.9 $42.8 $47.2 $ Billions $44.4 $36.0 $45.3 $48.9 $59.4 $55.7 $63.6 $30 $20 $10 $ Investment gains are off in 2008 due to lower yields and poor equity market conditions Investment gains consist primarily of interest, stock dividends and realized capital gains and losses 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 * $ Q1

106 P/C Insurer Net Realized Capital Gains, :Q1 $ Billions $20 $18 $16 $14 $12 $9.89 $10 $9.82 $18.02 $16.21 $13.02 $10.81 $9.24 Realized capital gains exceeded $9 billion in 2004/5 but fell sharply in 2006 despite a strong stock market. Nearly $9 billion again in 2007, but $-0.5 billion in 2008:Q1. $9.70 $9.13 $8.97 $8 $6 $4 $2 $2.88 $4.81 $1.66 $6.00 $6.63 $6.61 $3.52 $0 -$2 -$1.21 -$ Sources: A.M. Best, ISO, Insurance Information Institute :Q1

107 Total Returns for Large Company Stocks: * S&P 500 was up 3.53% in 2007, but down 15.59% so far in 2008* 40% 30% 20% 10% 0% -10% -20% -30% Markets were up in 2007 for the 5 th consecutive year; 2008 off to a rough start * Source: Ibbotson Associates, Insurance Information Institute. *Through July 11, 2008.

108 P/C Investment Income as a % of Invested Assets Follows 10-Year US T-Note P-C Inv Income/Inv Assets 10-Year Treasury Note 9% 8% 7% 6% Investment yield historically tracks 10-year Treasury note quite closely 5% 4% 3% 2% *As of January 2008 month-end. Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute *

109 FINANCIAL STRENGTH & RATINGS Industry Has Weathered the Storms Well

110 P/C Insurer Impairments, The number of impairments varies significantly over the p/c insurance cycle, with peaks occurring well into hard markets Source: A.M. Best; Insurance Information Institute

111 P/C Insurer Impairment Frequency vs. Combined Ratio, Combined Ratio Impairment rates are highly correlated underwriting performance and could reached a record low in 2007 Combined Ratio after Div P/C Impairment Frequency 2007 impairment rate was a record low 0.12%, one-seventh the 0.8% average since 1969; Previous record was 0.24% in Impairment Rate Source: A.M. Best; Insurance Information Institute

112 Reasons for US P/C Insurer Impairments, Affiliate Problems 8.6% Catastrophe Losses 8.6% Deficient Loss Reserves/Inadequate Pricing 62.8% Sig. Change in Business 4.6% Misc. 9.2% Reinsurance Failure 3.5% Deficient Loss Reserves/Inadequate Pricing 38.2% Alleged Fraud 11.4% Rapid Growth 8.6% Deficient reserves, CAT losses are more important factors in recent years Investment Problems* 7.3% Affiliate Problems 5.6% Catastrophe Losses 6.5% Alleged Rapid Fraud Growth 8.6% 16.5% *Includes overstatement of assets. Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;

113 CATASTROPHE RISK IN TEXAS Texas is Among the Riskiest Places for Insurers to Operate

114 Most of US Population & Property Has Major CAT Exposure Texas is among the riskiest places in America for insurers to operate Is Anyplace Safe?

115 U.S. Insured Catastrophe Losses* $120 $100 $80 $60 $40 $20 $0 $ $ Billions 2008 CAT losses already exceed the annual totals recorded for all of 2007 and was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $2.7 $ $22.9 $ $16.9 $ $7.4 $ $10.1 $ $ $ $5.9 $12.9 *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Based on preliminary PCS data through June 30. $100 Billion CAT year is coming soon $ $ $9.2 $6.7 $ :Q2** 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 $ ??

116 Natural Disasters in the United States, (Jan June Totals) Number of events has more than doubled since events through June 30 is a record Number Geophysical (earthquake, tsunami, volcanic activity) 2008 Munich Re Group Meteorological (storm) Hydrological (flood, mass movement) Climatological (temperature extremes, drought, wildfire) Source: MR NatCatSERVICE

117 Global Insured Catastrophe Losses ($ 2007) $ Billions $2.4 $5.0 $5.8 $9.1 $5.0 $6.4 $5.6 $5.4 $11.3 $7.0 $4.2 $8.9 $10.3 $6.8 $11.6 $5.6 $15.4 $12.4 $23.7 $27.9 $24.4 $42.5 $18.4 $34.4 $25.6 $18.0 $11.2 $24.9 $43.1 $15.0 $41.8 $16.7 $21.6 $52.8 $16.9 $27.6 $113.9 $120 $100 $80 Impact of Hurricane Katrina on 2005 losses was dramatic, but losses are trending upward in general $60 $40 $20 $ Source: Swiss Re Sigma No.1/08, Natural catastrophes and man-made disasters in 2007

118 States With Largest Insured Catastrophe Losses in 2007 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 $1,230 TX CAT losses were 3 rd highest in the US in 2007 $747 $677 $320 $ Millions $272 $ CAT STATS 1.18 million CAT claims across 41 states arising 23 catastrophic events $6.5 billion in insured losses $262 $223 $202 $200 $200 CA MN TX GA IL OK KS MO NY CO AL Source: PCS/ISO; Insurance Information Institute.

119 TEXAS: Insured Catastrophe Losses, ($2005, in Millions)* $3,500 $361 $546 $386 $331 $430 $364 $194 $470 $328 $516 $440 $176 $346 $601 $350 $599 $681 $677 $688 $1,334 $1,083 $1,350 $1,872 $1,718 $1,570 $2,866 $2,933 $2,850 $3,000 $2,500 $2,000 $1,500 $1,000 $500 Texas has experienced billion dollar-plus CAT losses in 9 of the past 28 years* Average Annual CAT Losses: $931 Million* $ Millions Sources: ISO/PCS; Insurance Info. Inst. *Losses stated in 2005 dollars except 2006/07 figures are unadjusted

120 Distribution of US Insured CAT Losses: TX, FL vs US, * $ Billions of 2005 Dollars Texas accounted for 10% of all US insured CAT losses from : $25.6B out of $249.3B Rest of US, $176, 68% Texas, $25.6, 10% Florida, $57, 22% *All figures (except 2006 loss) have been adjusted to 2005 dollars. Source: PCS division of ISO.

121 Top 10 Major Disaster Declaration Totals By State: * Total Number Texas 77 California 71 Florida 57 Louisiana *Through July 12, Source: Federal Emergency Management Agency (FEMA) New York From *, Texas leads the country in major disaster declarations Oklahoma Alabama Kentucky Mississippi Pennsylvania

122 Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, ¹ Fire, $6.6, 2.2% Wind/Hail/Flood, $9.3, 3.1% Earthquakes, $19.1, 6.4% Winter Storms, $23.1, 7.8% Terrorism, $22.3, 7.5% Civil Disorders, $1.1, 0.4% All Tropical Cyclones, $137.7, 46.3% Water Damage, $0.4, 0.1% Utility Disruption, $0.2, 0.1% Tornadoes, $77.3, 26.0% Insured disaster losses totaled $297.3 billion from (in 2006 dollars). Wildfires accounted for approximately $6.6 billion of these 2.2% of the total. 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in Adjusted for inflation by the III. 2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires. Source: Insurance Services Office (ISO)..

123 Number of Tornadoes, p 2,000 1,800 1,600 1,400 1,200 1, There are usually more than 1,000 confirmed tornadoes each year in the US. They accounted for about 25% of catastrophe losses since p Source: NOAA Storm Prediction Center, National Weather Service; Ins. Info. Inst

124 Insured Offshore Energy Losses for Recent Major Gulf Storms $ Billions $4.0 $3.0 $2.0 Hurricanes Katrina, Rita and Ivan cost energy insurers at least $7 billion $2.0 $2.25 $3.0 $1.0 $0.0 Katrina (2005) Ivan (2004)* Rita (2005) Sources: Insurance Information Institute research estimates. *Midpoint of estimated range for $2.0 to $2.5 billion)

125 The 2008 Hurricane Season: Preview to Disaster?

126 Outlook for 2008 Hurricane Season: 60% Worse Than Average Average* F Named Storms Named Storm Days Hurricanes Hurricane Days Intense Hurricanes Intense Hurricane Days Accumulated Cyclone Energy 96.2 NA 150 Net Tropical Cyclone Activity 100% 275% 160% *Average over the period Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 3, 2008.

127 Landfall Probabilities for 2008 Hurricane Season: Above Average Entire US East & Gulf Coasts US East Coast Including Florida Peninsula Gulf Coast from Florida Panhandle to Brownsville Caribbean Average* 52% 31% 30% NA 2008F 69% 45% 44% Above Average *Average over the past century. Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 3, 2008.

128 Flood Insurance Analysis of Flood Policy Purchase and Lapse Rates Since Katrina in Texas

129 NFIP Flood Policy Growth in Gulf States Since Katrina* 90% 80% 70% 60% The number of flood insurance policies sold in the Gulf states in the 2 years following Katrina increased by 21.6% 80.24% There was a 40.5% increase in the number of flood policies sold in TX in the year after Katrina/Rita 50% 40% 30% 20% 26.69% 14.15% 29.04% 40.54% 21.62% 10% 0% Alabama Florida Louisiana Mississippi Texas Total Gulf States *Change from July 2005 through August Sources: NFIP ; Insurance Information Institute.

130 Percentage of NFIP Flood Policies Issued Since Katrina That Are Not Renewed* 35% 30% 25% 20% 32% 23% Flood policy nonrenewal rates in Gulf states are surprisingly high 25% 19% 17% 15% 10% 5% 0% One out of four flood policies sold in TX in the year after Katrina/Rita was nonrenewed in the second year 8.6% Alabama Florida Louisiana Mississippi Texas US** *Policies issued since July 2005 as of August **US figure is nonrenewal rate for all policies in force, average over 12 month period ending August Sources: NFIP ; Insurance Information Institute.

131 Flood Insurance Penetration Rates: Top 25 Counties/Parishes in US* JEFFERSON/LA WALTON/FL BROWARD/FL COLLIER/FL LEE/FL GALVESTON/TX GLYNN/GA ST. BERNARD/LA MIAMI-DADE/FL ORLEANS/LA CARTERET/NC ST. CHARLES/LA ST. JOHNS/FL CHARLOTTE/FL ST. TAMMANY/LA HORRY/SC INDIAN RIVER/FL BAY/FL BRUNSWICK/NC NASSAU/FL BERKELEY/SC PINELLAS/FL BRAZORIA/TX CHATHAM/GA TERREBONNE/LA Highest flood insurance penetration rates are in LA and FL 84.0% 81.5% 80.0% 78.7% 77.1% 74.1% 69.6% 68.4% 68.1% 66.7% 65.9% 65.5% 62.4% 59.0% 56.2% 51.6% 49.6% 48.0% 46.3% 44.4% 42.8% 42.8% 42.0% 41.9% 40.1% 0% 20% 40% 60% 80% 100% *As of 12/31/05. Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.

132 Flood Insurance Penetration Rates: Counties/Parishes Ranked 26-50* BALDWIN/AL SARASOTA/FL PALM BEACH/FL CHARLESTON/SC MANATEE/FL MARTIN/FL ATLANTIC/NJ LAFOURCHE/LA OKALOOSA/FL GEORGETOWN/SC FLAGLER/FL MAUI/HI LIVINGSTON/LA BREVARD/FL SUSSEX/DE VOLUSIA/FL ST. LUCIE/FL JEFFERSON/TX HAMPTON CITY/VA OCEAN/NJ HARRIS/TX PASCO/FL BOSSIER/LA NEW HANOVER/NC BRONX/NY 39.8% 39.7% 39.2% 39.1% 38.7% 37.2% 36.5% 36.2% 34.2% 33.0% 32.1% 30.6% 28.3% 27.6% 27.0% 26.8% 26.4% 26.1% 25.4% 25.3% 25.2% 23.4% 23.3% 22.1% 21.7% 0% 10% 20% 30% 40% 50% *As of 12/31/05. Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.

133 Flood Insurance Penetration Rates: Counties/Parishes Ranked 51-75* CAMERON/TX FORT BEND/TX SANTA ROSA/MS HARRISON/MS JACKSON/MS NORFOLK CITY/VA HILLSBOROUGH/FL LAFAYETTE/LA EAST BATON ROUGE/LA VIRGINIA BEACH ESCAMBIA/FL HONOLULU/HI SACRAMENTO/CA CALCASIEU/LA MONTGOMERY/TX CITRUS/FL MERCED/CA CHESAPEAKE, OSCEOLA/FL HUDSON/NJ DUVAL/FL BARNSTABLE/MA MARIN/CA TULARE/CA MONMOUTH/NJ 16.7% 16.3% 15.8% 15.6% 15.4% 14.5% 14.0% 13.3% 12.9% 12.6% 11.7% 11.6% 11.3% 10.2% 9.3% 9.1% 8.5% 21.6% 20.9% 20.1% 19.1% 18.3% 17.8% 17.7% 17.5% MS coastal counties rank abysmally low 0% 5% 10% 15% 20% 25% *As of 12/31/05. Source: New Orleans Times-Picayune, 3/19/06, from NFIP and US Census Bureau data.

134 Hurricane Risk in Texas Where Even the Disasters are Bigger

135 Total Value of Insured Coastal Exposure (2004, $ Billions) Florida New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Alabama Georgia Delaware New Hampshire Mississippi Rhode Island Maryland $148.8 $129.7 $117.2 $105.3 $75.9 $73.0 $46.4 $45.6 $44.7 $43.8 $12.1 $740.0 $662.4 $505.8 $404.9 $209.3 $1,937.3 $1,901.6 In 2004 Texas had more insured coastal exposure at nearly 3/4 of a trillion dollars than all but 3 states. Future Mega-Losses are UNAVOIDABLE. Source: AIR Worldwide $0 $500 $1,000 $1,500 $2,000 $2,500

136 Total Value of Insured Coastal Exposure (2007, $ Billions) Florida New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Alabama Georgia Delaware New Hampshire Mississippi Rhode Island Maryland $479.9 $224.4 $191.9 $158.8 $146.9 $132.8 $92.5 $85.6 $60.6 $55.7 $51.8 $54.1 $14.9 $895.1 $772.8 $635.5 $2,458.6 $2,378.9 $155B increase since 2004, up 21% In 2007, Texas still ranked as the 3rd most exposed state to hurricane loss, with $895 billion exposure, an increase of $155B or 21% from $740B in The insured value of all coastal property was $8.9 trillion in 2007, up 24% from $7.2 trillion in Source: AIR Worldwide $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

137 $1,500 $1,250 $1,423.0 Average Annual Tropical Cyclone Insured Losses* (Top 10 States, $ Millions) All Other 15.7% Distribution of Annual Losses Florida 49.5% $1,000 $750 $615.0 Mississippi 2.7% N. Carolina 3.8% $500 $250 Louisiana 6.8% Texas 21.4% $196.0 $109.0 $77.0 $64.0 $62.0 $61.0 $61.0 $51.0 $154.0 $0 FL TX LA NC MS MA SC AL NY CT All Other *Normalized losses adjusted for inflation, housing density, wealth and wind insurance coverage, based on historical data for 100-year period Source: Tillinghast-Towers Perrin

138 Sources: ISO/PCS; Insurance Information Institute. Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2007) $ Billions $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 Seven of the 10 most expensive hurricanes in US history occurred in the 14 months from Aug Oct. 2005: Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne $3.8 $4.0 $5.0 $6.0 $7.0 $7.8 $8.2 $10.9 $22.9 $43.6 $0 Georges (1998) Jeanne (2004) Frances (2004) Rita (2005) Hugo (1989) Ivan (2004) Charley (2004) Wilma (2005) Andrew (1992) Katrina (2005)

139 Top 10 Deadliest Hurricanes to Strike the US: ,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 LA-Grande Isle (1909) Katrina Deaths by State**** LA, 1,075, 81.3% Audrey-SW LA,TX (1957) GA, 2, 0.2% LA-Last Island (1856) FL Keys (1935) MS, 230, 17.4% FL, 14, 1.1% AL, 2, 0.2% 700 GA/SC (1881) LA-Cheniere (1893)***** 1900 Galveston Hurricane was the deadliest in US history 1,250 1,323 1,500 Katrina (SE LA, MS)**** SC/GA Sea Islands (1893)*** *Could be as high as 12,000 **Could be as high as 3,000 ***Midpoint of 1,000 2,000 range ****Associated Press total as of Dec. 11, *****Midpoint of 1,100-1,400 range. Sources: NOAA; Insurance Information Institute. 2,500 SE FL/L. Okechobee (1928)** 8,000 Galveston (1900)*

140 Insured Losses from Top 10 Hurricanes Since 1900 & Katrina Adjusted for Inflation, Growth in Coastal Properties, Real Growth in Property Values & Increased Property Insurance Coverage $ Billions $70 $60 $50 $40 $30 $20 $10 (Billions of 2005 Dollars) The p/c insurance industry will likely experience a $20B+ event approximately every years, on average mostly associated with hurricanes $10.1 $11.0 $12.4 $12.6 $13.1 $14.5 $20.8 $21.1 Great Miami Hurricane Galveston Storm $31.3 $41.1 $65.3 $0 Number 9 (1909, FL) Hazel (1954, NC) Number 4 (1938, NY) Number 2 (1919, FL) Number 4 (1928, FL) Bestsy (1965, LA) Number 2 (1915, TX) Number 1 (1900, TX) Andrew (1992, FL) Katrina (2005, LA)* Number 6 (1926, FL) *ISO/PCS estimate as of June 8, Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005; Insurance Info. Institute.

141 Historical Hurricane Strikes in Aransas County, TX, Source: NOAA Coastal Services Center, Insurance Info. Institute.

142 Historical Hurricane Strikes in Brazoria County, TX, Source: NOAA Coastal Services Center, Insurance Info. Institute.

143 Historical Hurricane Strikes in Galveston County, TX, Source: NOAA Coastal Services Center, Insurance Info. Institute.

144 Historical Hurricane Strikes in Harris County, TX, Source: NOAA Coastal Services Center, Insurance Info. Institute.

145 Historical Hurricane Strikes in Jefferson County, TX, Source: NOAA Coastal Services Center, Insurance Info. Institute.

146 2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season All 21 names were used for the first time ever, so Greek letters were used for the final storms Source: WeatherUnderground.com, January 18, set a new record for the number of hurricanes & tropical storms at 28, breaking the old record set in 1933.

147 2007 Hurricane Season: No Big Hits Once Again A Sigh of Relief The 2007 season saw 15 named storms (same as devastating 2004 season) including two rare Category 5 storms, but the US escaped this year with very little loss Source: accessed 1/11/08; Insurance Information Institute

148 Spotlight on Galveston Island Houston s Version of The Hamptons or Miami Beach?

149 New Construction in Galveston: Will Dreams be Blown Away? More than $2.3 Billion Residential, Commercial and Public Construction is Under Way in 2007 More than 6,500 Residential Units Under Construction Mostly condos, including several towers up to 27 stories high One development by Centex Homes will consist of 2,300 condos and houses on 1,000 acres The Average Home Price Rose 89% to $232,800 over the 4 Years Ending Jan Typical Price Range for Newer Condos: $400,000 Up to $1.5 Million An undeveloped waterview lot can go for as much as $300,000 Most will be insured via TWIA Limits up to $1.6 million + contents Inconvenient Truth: Galveston is Site of the Deadliest Natural Disaster in US History At least 8,000 people were killed in a 1900 hurricane 3,600 homes were destroyed The current seawall is only 15.6 ft. high; Katrina s storm surge was nearly 30 feet. Insured Losses Today from Repeat of 1900 Storm Would Exceed $21 Billion Would become the 3 rd most expensive hurricane in US history (after Katrina and Andrew) Source: Insurance Information Institute from A Texas-Sized Hunger for Gulf Coast Homes, New York Times, March 18, 2007 and and accessed July 9, 2007.

150 Texas Windstorm Insurance Association A Big Financial Risk for Texas Residents

151 TWIA Growth In Exposure to Loss (Building & Contents Only, $ Billions) Exposure to Loss (Building & Contents Only) $70 $60 $50 TWIA s liability in-force for building & contents has surged by nearly 400 percent in the last eight years from $12.1bn in 2000 to $59.6bn as of 03/31/08 $58.6 $59.6 $40 $38.3 $30 $20 $12.1 $13.2 $16.0 $18.8 $20.8 $23.3 $10 $ Mar Source: TWIA; Insurance Information Institute;

152 U.S. Residual Market Exposure to Loss (Billions of Dollars) Exposure to Loss $700 $600 In the 16-year period between 1990 and 2006, total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged 12 fold from $54.7bn in 1990 to $656.7bn in $656.7 $500 $400 $372.3 $430.5 $419.5 $300 $200 $150.0 $281.8 $221.3 $244.2 $292.0 $100 $54.7 $ Source: PIPSO; Insurance Information Institute

153 Shifting Legal Liability & Tort Environment Is the Tort Pendulum Swinging Against Insurers?

154 Bad Year for Tort Kingpins* (Continued) King of Class Actions Bill Lerach Former partner in class action firm Milberg Weiss Admitted felon. Guilty of paying 3 plaintiffs $11.4 million in 150+ cases over 25 years & lying about it repeatedly to courts Will serves 1-2 years in prison and forfeit $7.75 million; $250,000 fine King of Torts Dickie Scruggs Won billions in tobacco, asbestos and Katrina litigation Pleaded guilty for attempting to offer a judge $40,000 bribe to resolve attorney fee allocation from Katrina litigation in his firm s favor. His son/others guilty on related charges Could get 5 years in prison, $250,000 fine Source: San Diego Union Tribune, 9/19/07 Source: Wall Street Journal, 3/15/07

155 Bad Year for Tort Kingpins* (Continued) King of Class Actions Melvyn Weiss Former partner in class action firm Milberg Weiss; Earned $251 million in legal fees Pled guilty to federal charges of racketeering and conspiracy for paying kickbacks to professional plaintiffs Sentenced to 30 months in prison, pay $9.75 million in restitution; $250,000 fine Source: Wall Street Journal, various issues.

156 Personal, Commercial & Self (Un) Insured Tort Costs* $250 Commercial Lines Personal Lines Self (Un)Insured Total = $216.7 Billion Billions $200 $150 $100 $50 $0 Total = $39.3 Billion $5.2 $17.1 $17.0 Total = $121.0 Billion $20.4 $51.0 $30.0 $70.9 $49.6 $58.7 $45.5 $85.6 $ *Excludes medical malpractice Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends. Total = $159.6 Billion

157 Growth in Cost of U.S. Tort System, F Tort costs moderated beginning in 2003 as many improvements in the tort system began to bear fruit 15% 10% 11.6% 11.9% 11.8% 9.8% 13.8% 13.7% : 7.8% F: 1.6% 5% 0% -5% -10% Source: Tillinghast-Towers Perrin % % 5.7% 0.4% -5.4% 2.4% 4.7% E 2008E Asbestos-related and other costs drove tort growth sharply upward in 2001 and 2002

158 Cost of US Tort System ($ Billions) $300 $250 $200 $150 $129 $130 Tort costs consumed 1.87% of GDP in 2006, down from 2.24% in 2003 Per capita tort tax was $825 in 2006, up from $680 in 2000 $141 $144 $148 $159 $156 $156 $167 $169 $180 $205 $233 $246 $260 $261 $247 $253 $265 $277 $100 $50 $0 Reducing tort costs relative to GDP by just 0.25% (to 1.84%) would produce an economic stimulus of $31.1B E 08E 09E Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

159 Tort System Costs, E Tort System Costs $300 $250 $200 $150 $100 $50 $0 0.62% After a period of rapid escalation, tort system costs as a % of GDP are now falling 0.82% 2.24% 2.14% 2.24% $265 $ % $246.0 $ % 1.83% 1.83% 1.53% 1.87% $ % 1.22% $ % 1.03% $130.2 $1.8 $3.4 $5.4 $7.9 $13.9$20.0 $42.7 $ E 09E 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Tort Costs as % of GDP Tort Sytem Costs Tort Costs as % of GDP Source: Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs as % of GDP

160 Tort System Costs and Tort Costs as a Share of GDP, F Tort System Costs $300 $280 $260 $240 $220 $200 $180 $160 $140 $120 $ % 2.24% 2.23% 2.03% $233 $246 $ % $179 $ % $ % 1.84% 1.83% 1.83% $261 $247 $253 After a period of rapid escalation, tort system costs as % of GDP are now falling $ E 08E 09E Tort Sytem Costs Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends. Tort Costs as % of GDP 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Tort Costs as % of GDP

161 The Nation s Judicial Hellholes (2007) Watch List Madison County, IL St. Clair County, IL Northern New Mexico Hillsborough County, FL Delaware California Dishonorable Mentions District of Columbia MO Supreme Court MI Legislature GA Supreme Court Oklahoma NEVADA Clark County (Las Vegas) TEXAS Rio Grande Valley and Gulf Coast Some improvement in Judicial Hellholes in 2007 ILLINOIS Cook County Source: American Tort Reform Association; Insurance Information Institute West Virginia NEW JERSEY Atlantic County (Atlantic City) South Florida

162 Business Leaders Ranking of Liability Systems for 2007 Best States 1. Delaware 2. Minnesota 3. Nebraska 4. Iowa 5. Maine 6. New Hampshire 7. Tennessee 8. Indiana 9. Utah 10. Wisconsin New in 2007 ME, NH, TN, UT, WI Drop-Offs ND, VA, SD, WY, ID Midwest/West has mix of good and bad states Worst States 41. Arkansas 42. Hawaii 43. Alaska 44.Texas 45. California 46. Illinois 47. Alabama 48. Louisiana 49. Mississippi 50. West Virginia Newly Notorious AK Rising Above FL Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.

163 Sum of Top 10 Jury Awards, $6,000 $5,000 $4,000 $3,000 $5,158.8 $2,953.7 $ Millions Total of Top 10 awards in 2007 was 25% lower than in 2006 $2,000 $1,000 $815.0 $615.0 $ Source: Insurance Information Institute from LawyersWeekly USA, January 2005, 2006, 2007 and 2008.

164 Number of Top 10 Jury Awards, TX, NY and CA lead the U.S. in jumbosize jury awards TX NY CA FL MO DC* AL GA IL TN LA MD OR SC NM NV NJ Source: LawyersWeekly USA,, January 22, *All against Iran for terrorist activity

165 Source: Lawyers USA, 2007 Total Top 10 Verdicts, 1995 through 2006