Darwin Professional Underwriters, Inc.

Transcription

1 Darwin Professional Underwriters, Inc. Credit Suisse Investor Presentation November 2007

2 Forward-Looking Statements The following information includes forward-looking statements. All statements other than historical information or statements of current condition contained herein, including statements regarding our future financial performance, our business strategy and expected developments in the commercial insurance market, are forward-looking statements. The words "expect," "intend," "plan," "believe," "project," "may," "estimate," "continue," "anticipate," "will," and similar expressions of a future or forward-looking nature identify forward-looking statements. We have based these forward-looking statements on management s current expectations. These statements are subject to a number of risks, uncertainties and other factors that may cause actual events or results to differ materially from those expressed or implied by any of these statements. These statements should not be regarded as a representation by us, the underwriters or any other person that the anticipated events, future plans or other expectations will be achieved. We undertake no obligation to update publicly or review for any reason any forward-looking statement after the date of this presentation or to conform these statements to actual results or changes in our expectations. All subsequent written and oral forwardlooking statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph. Neither the Private Securities Litigation Reform Act of 1995 nor Section 27A of the Securities Act of 1933 provides any protection to us for statements made in this presentation. 2

3 Stephen Sills President and Chief Executive Officer

4 Darwin Overview Specialty insurer focused on professional liability $272.4 million of in-force premium written as of September 30, 2007 Diversified across D&O, E&O, Medical Malpractice Liability and General Liability Focused on small and middle market business Strong presence across the health care industry spectrum Founded in 2003 by Stephen Sills and Alleghany Corporation Current ownership: 55% Alleghany / 35% Public / 10% Management Rated A- (Excellent) by A.M. Best Disciplined growth through specialized and proven expertise 4

5 Darwin Investment Highlights Deep and proven management team Attractive market dynamics Built to identify and underwrite profitable market niches Select distribution network that understands Darwin s risk parameters Technology platform that enhances distribution and supports efficient operations Integrated, disciplined underwriting culture Ready for loose bricks Strong capital base = Continued Superior Growth 5

6 Darwin s Management Team Name Title Previous Experience Years Experience Bob Asensio SVP Chief Information Officer Executive Risk Inc. 25 Paul Martin SVP Chief Actuary USFG 30 David Newman SVP Chief Underwriting Officer Lloyds of London 30 Paul Romano SVP Underwriting Executive Risk Inc. 25 Mark Rosen SVP and General Counsel Executive Risk Inc. 30 Jack Sennott Chief Financial Officer Executive Risk Inc. 20 Stephen Sills Chairman, President & CEO Executive Risk Inc. 30 Management increased its ownership during the IPO 6

7 Darwin s Successful IPO $96 million initial public offering completed on May 19, 2006 Priced at $16.00 per share Currently trading at ~$23.00 Market capitalization of ~$392 million Offering reduced Alleghany s ownership from 90% to approximately 55% Increased future financial flexibility 7

8 Shareholder Return Comparison of Darwin s Cumulative Total Shareholder Return 5/19/ /31/2007 $170 $160 $150 $140 $130 $120 $110 $100 $90 $80 5/19/2006 6/30/2006 9/30/ /31/2006 3/31/2007 6/30/2007 9/30/ /31/2007 Darwin S&P 500 Index S&P Insurance Index 8

9 What s Happening in our Market? Pricing still softening. Opportunities are available but harder to come by. Claims environment Sub-prime exposure continues to emerge 9

10 Attractive Market Dynamics, But Rates Softening Market Opportunity Rate Change from 4Q 99 2Q 07 Total market of $20 billion still room to grow Profitable pricing driven by poor industry underwriting results in late 1990s and early 2000s Companies without legacy issues are positioned for superior profitability As market softens, profits can be protected by writing less price-elastic small account business. Source: Council of Insurance Agents and Brokers Darwin s business model accentuates the impact of attractive market dynamics 10

11 The other side of the softening underwriting cycle An excellent Claims environment Securities Class actions filed have decreased every year since Tell Labs Supreme Court ruling raises the bar for new securities class actions. Significant reserve releases in the insurance industry. Tort reform successes in various states Last hard market allowed for improvement in terms and conditions. Source: Stanford Law School Class Action Clearinghouse in cooperation with Cornerstone Research 11

12 Our thoughts on Sub-Prime Exposure In Directors & Officers Liability Credit Providers - focus will be on disclosures relating to their business model, and practices, and results Holders of Securities - focus will be on disclosures of what they are holding, security acquisition controls and how securities are valued Private Equity/Hedge Funds focus will be on investment management decisions, extensive use of leverage and business controls In Errors & Omissions Mortgage Brokers and Lenders - allegations of unfair lending practices Real Estate Appraisers - This home is worth what? Investment Advisors - You put me in these securities! Rating Agencies - All A rated bonds are not the same. 12

13 Is Sub-Prime going to change the claims environment? Approximately 25 Securities Class Actions filed to date-all against Credit Providers. Have seen the beginning of activity in the E&O area. Significant amount of adjustable rate mortgages will re-set over the next 12 months. As foreclosure rates increase, claims frequency will follow. This feels bigger than Backdating of Options to us, given the surface area of companies that are effected. Still need to wait and see. A little volatility would provide some loose bricks. 13

14 What s Unique About our Operating Model? Focus on small accounts Small business outperforms large business in softer markets Select distribution Portfolio management of our business Separation of engineering and manufacturing Ground-up underwriting approach Our health care expertise Technology geared to handle small accounts and to promote operational efficiency 14

15 Darwin s Distribution of Business by Size As the market softens Darwin s book increases its weight in small business accordingly PY 2003 PY 2004 PY 2005 PY 2006 In-Force 2007 Small Medium Large 15

16 2007 Price Monitoring by Size of Business Size Group Quarterly Expiring Premium Grand Total Small 16,788,579 19,194,359 21,954,766 57,937,704 Medium 9,654,830 11,675,731 17,426,636 38,757,197 Large 13,498,600 11,496,042 6,120,594 31,115,236 Total 39,942,009 42,366,132 45,501, ,810,137 Size Group Quarterly Rate Change Grand Total Small -4.7% -6.4% -8.2% -6.6% Medium -6.6% -17.1% -14.4% -13.3% Large -13.1% -18.3% -11.5% -14.7% Total -8.0% -12.6% -11.0% -10.6% Does not include Darwin business written through program agreements. 16

17 Our Business Portfolio Business Mix In-Force Gross Premiums Written September 30, 2007 Total GPW Growth ($ in millions) D&O D&O 13.1% 14.3% GL.1% $246.3 $209.5 E&O E&O 50.9% 50.2% Medical Malpractice Medical Malpractice 35.4% 35.7% $100.5 $165.8 $ YTD '06 YTD '07 Total In-Force Premiums: $272.4 million A balanced business, responding to market opportunities 17

18 D&O Underweight, Pricing Pressure In-Force Premiums Written September 30, 2007 D&O GPW Growth ($ in millions) D&O 14.3% GL.1% $24.5 $32.9 $40.6 $29.2 $27.5 E&O 50.2% Medical Malpractice 35.4% YTD 06 YTD 07 Selected Classes Year of Business Started D&O In-Force Premiums: $38.9 million Public Accounts 2003 Private Accounts 2003 Employment Practices 2003 Health Care Management Liability 2003 Fiduciary 2004 Non-profit Accounts Financial Institutions

19 D&O Price Monitoring As of September 30, 2007 Report Year No. of Renewals Expiring Premium Renewal Premium Rate Change $5,709,523 $6,361, % $12,502,698 $12,325, % $19,413,889 $19,838, % YTD $15,112,713 $13,723, % Rate change calculated as premium change adjusted to take into account the effect of changes in limit, deductible / attachment, policy term, commission, exposure and claims-made step 19

20 E&O Overweight, Expanding Classes 2007 In-Force Premiums Written September 30, 2007 D&O 14.3% GL.1% $36.7 $58.9 E&O GPW Growth ($ in millions) $111.0 $81.1 $106.7 E&O 50.2% Medical Malpractice 35.4% YTD 06 YTD 07 Selected Classes Year of Business Started E&O In-Force Premiums: $136.7 million Managed Care E&O 2003 Lawyers Professional E&O 2003 Insurance Agents E&O 2003 Miscellaneous Professional E&O 2003 Technology E&O 2005 Municipal Entity and Public Officials E&O 2005 Insurance Company E&O 2006 Psychologists E&O 2006 (i-bind) E&O 2007 Media Liability

21 E&O Price Monitoring As of September 30, 2007 Report Year No. of Renewals Expiring Premium Renewal Premium Rate Change $8,640,302 $10,190, % $26,964,915 $26,401, % $46,615,029 $49,059, % YTD ,430 $59,901,485 $58,088, % Rate change calculated as premium change adjusted to take into account the effect of changes in limit, deductible / attachment, policy term, commission, exposure and claims-made step. 21

22 Medical Malpractice Overweight, Pricing Still Strong 2007 In-Force Premiums Written September 30, 2007 Medical Malpractice GPW ($ in millions) D&O 14.3% GL.1% $74.0 $94.6 $73.1 $74.8 $39.3 E&O 50.2% Medical Malpractice 35.4% YTD 06 YTD 07 Selected Classes Year of Business Started Hospital Professional Liability 2003 Physicians and Physician Groups 2003 Miscellaneous Medical Facilities 2004 Psychiatrists 2004 Medical Malpractice In-Force Premium: $96.3 million Life Sciences

23 Medical Malpractice Price Monitoring As of September 30, 2007 Report Year No. of Renewals Expiring Premium Renewal Premium Rate Change $2,937,426 $4,062, % $28,655,917 $32,471, % $43,218,165 $45,781, % YTD ,827 $52,814,790 $54,719, % Rate change calculated as premium change adjusted to take into account the effect of changes in limit, deductible / attachment, policy term, commission, exposure and claims-made step 23

24 Health Care Spending in the U.S. A significant part of the U.S. GNP and projected to grow. Projected Health Care Spending in the U.S. Projected Prescription Drug Spending in the U.S. ($ in Billions) $3,960 ($ in Billions) $1,976 $792 $ Medicare Spending Total Health Care spending $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $ E 2015E Total HC spending is estimated at over 22% of GNP 24

25 Demonstrated Expertise in Health Care Industry 2007 In-Force Premiums Written September 30, 2007 D&O 14.3% GL.1% Health Care GPW ($ in millions) $151.9 $176.7 E&O 50.2% Medical Malpractice 35.4% $61.3 $ In-Force 9/30/07 Focus on health care encompasses all business lines 25

26 Growth Drives Technology Expense Control Drives Profitability Drives Benefits of Superior Technology Service differentiation with key producers Drives cost advantages Difficult-to-serve markets become profitable Promotes real-time underwriting / pricing refinements Enhances tactical flexibility Why Our Technology is Superior Everything has been created in the past four years Senior management is committed to technologybased corporate strategy Technology permeates every aspect of our business Single operating platform Seamless interactivity between claims, underwriting, actuarial and finance (i-bind) extends Darwin s operating systems to its producers Technology drives competitive advantage 26

27 Executing the Vision 1%+ 12 Darwin Market.8:1 Underwriting 180 Select Distribution Partners New Classes of Business Added Since 2003 Share of $20B Market Leverage Strong Capital Base to Support Growth Effective Distribution Expanded Classes of Business Profitable Underwriting Opportunities 27

28 Jack Sennott Senior Vice President and Chief Financial Officer

29 Pro Forma Capitalization ($ in millions) Debt As of September 30, 2007 Preferred Stock Common Equity $239.8 Total Capitalization $239.8 Shares Outstanding (000s) 17,025.5 Book Value per Common Share $14.08 Debt / Capitalization 0.0% 29

30 GAAP Financial Results ($ in thousands) As of December 31, As of September 30, Gross Premiums Written $165,824 $246,252 $183,375 $209,466 Net Premiums Written $100,650 $157,004 $115,135 $148,574 Net Operating Income(1) $3,821 $15,957 $10,171 $21,333 GAAP Underwriting Ratios: Loss Ratio 69.2% 66.9% 69.2% 58.2% Expense Ratio 28.1% 27.4% 27.2% 28.5% Combined Ratio 97.3% 94.3% 96.4% 86.7% (1) Excludes realized gains and losses after taxes. 30

31 Overview of Loss Reserves By Statutory Line of Business - 9/30/07 By Category Total $357.0 Million ULAE: 2.9% $10.4 Million Case: 12.3% Medical liability, claims-made $44.0 Million 37.5% 61.5% Other liability, claims-made Other liability, occurrence 1.0% IBNR: 84.8% $302.6 Million Darwin s loss reserves are predominantly IBNR 31

32 Darwin Underwriting Results September 30, 2007 Report Year Gross Earned Premium Gross Case Incurred Loss / ALAE Case Incurred Loss / ALAE Ratio Initial Booked Loss Direct / ALAE Ratio Current Booked Loss Direct / ALAE Ratio 2003 $5.4M $0.4M 6.5% 65.0% 40.5% 2004 $65.0M $6.1M 9.4% 65.0% 48.5% 2005 $131.8M $28.5M 21.6% 67.0% 62.6% 2006 $210.7M $25.6M 12.1% 65.0% 62.3% 2007 $194.6M $7.2M 3.7% 62.5% 62.5% TOTAL $607.5M $67.8M 11.2% 64.6% AVG 60.8% AVG 32

33 Conservative Investment Portfolio 9/30/07 Investment Portfolio Fixed Maturity Ratings and Breakdown Short-term Investments 13.4% BBB+, BBB 1.8% A+, A, A- 9.3% AA+, AA, AA- 14.1% Fixed Maturities 86.6% AAA 74.8% Current Tax-Equivalent Yield: 5.64% Average Duration: 4.01 Years Market Value: $522.1 Million 33

34 Darwin ROE by Year 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% Profitability Drivers 0.0% 4Q05 4Q06 3Q07 ROAE 1.9% 7.7% 12.4% NPW/Equity Combined Ratio 97.3% 94.3% 86.7% Investment Leverage

35 Key Financial Considerations Pricing set in a hard market Strategy in place as market softens Expansion of premium base within current product classes Additional growth opportunities through loose bricks Fully deploy current capital base Target 90% combined ratio Conservative reserving philosophy target 60% loss ratio Declining expense ratio as we add business Realization of investment in technology platform, including (i-bind) sm underwriting system Investment income from increased asset base Extending investment horizon as reserves build Positioned to benefit from rising rates Target medium-term ROE of 13% 35

36 Building Blocks for Success 36

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