The Insurance Cycle and Credit Crunch: Impacts & Implications for the US & Ohio Insurance Markets

Transcription

1 The Insurance Cycle and Credit Crunch: Impacts & Implications for the US & Ohio Insurance Markets Central Ohio Insurance Education Day Columbus, OH April 2, 2008 Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute 110 William Street New York, NY Tel: (212) Fax: (212)

2 Presentation Outline Weakening Economy: Insurance Impacts & Implications Implications of Treasury Blueprint for insurers Profitability Underwriting Trends Premium Growth Rising Expenses Capacity Investment Overview Catastrophic Loss Shifting Legal Liability & Tort Environment Regulatory and Legislative Environment Q&A

3 A STORMY ECONOMIC FORECAST What a Weakening Economy & Credit Crunch Mean for the Insurance Industry

4 What s Going On With the US and Global Economies Today? Fundamental Factors Affecting Global Economy in 2008 Puncture of Two Bubbles: Credit and Housing in US Burst Bubble Asset Price Deflation Subprime mortgage market was first part of credit bubble to burst Credit Crunch: Some credit markets have effectively seized Global Contagion Effect: Securitization of asset back securities, derivatives based on those securities amplified via leverage produced contagion effect Many financial institutions around the world found they are exposed Many hedge funds, banks caught holding CDOs, credit default swaps and other instruments against which they borrowed heavily (sometimes 10:1) Some face margin calls, distressed selling of every type of asset except Treasuries Global Economic Impacts: Global Economic Slowdown GDP growth in US down sharply, employment falling; Deceleration abroad too Decoupling theory was naïve Crashing dollar is symptom of irresponsible US fiscal policy, trade deficits. IOUs are being redeemed for hard assets or states in corporations New bubbles forming in commodities and currencies Source: Insurance Information Institute.

5 Real GDP Growth* 6% 0.8% 0.6% 0.6% 0.1% 0.5% 1.6% 2.5% 2.4% 2.2% 2.1% 3.1% 2.9% 2.7% 2.8% 2.9% 3.7% 3.6% 3.8% 4.9% 5% 4% 3% 2% Economic growth is expected to slow dramatically in the year ahead 1% 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. Source: US Department of Commerce, Blue Economic Indicators 3/08; Insurance Information Institute.

6 Percent Change in GDP By Country, % 12% 10% 8% 2006* 2007** Economic growth is expected to slow globally in 2008, adversely impact global exposure growth and slowing absorption of excess capital 11.1% 11.3% 10.1% 9.3% US growth is among the slowest in % 4% 2% 2.8% 2.6% 2.0% 2.6% 4.8% 3.0% 3.0% 3.6% 2.2% 1.9% 1.4% 1.9% 2.8% 3.0% 2.0% 2.2% 2.8% 2.6% 1.8% 2.0% 2.9% 2.2% 1.7% 2.6% -1% Canada Mexico Japan U.K. China EuroZone U.S. * Best estimates available. **In most cases, actual data for 2007 GDP are not yet available. Where actual data not available, figures are consensus forecasts from Dec. 10., 2007 issue of Blue Chip Economic Indicators. Source: Blue Chip Economic Indicators, Feb. 10, 2008.

7 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

8 Economic Fix Fed Rate Cuts Fed Debt Swap Fed Bailout of Bear Stearns What s Being Done to Fix the Economy? Impacts on Insurers Source: Insurance Information Institute Impacts on Insurers Reduces bond yields (65% - 80% of portfolio) Potentially contributes to inflation longer run Fed will swap up to $200B in bank holdings of mortgage back securities for Treasuries up to 28 days; Improves bank finances Fed on 3/14 (via J.P. Morgan) provided Bear with cash after what is effectively a run on the bank Too Big to Fail doctrine is activated Fed acting to prevent broader loss of confidence 3/17: J.P. Morgan buys Bear for $236 million ($2/share); Price increased to $10 on 3/24

9 What s Being Done to Fix the Economy? Impacts on Insurers (cont d) Economic Fix Impacts on Insurers Stimulus Package Housing Bailout (?) Regulatory/ Legislative Action (?) Hope is that $168B plan boosts overall economic activity and employment (by 500,000 jobs) and therefore p/c personal and commercial exposures Contributes to already exploding budget deficits Washington may expand its search for people and industries to tax Keeps more people in their homes and hopefully paying HO insurance premiums Abandoned and neglected homes have demonstrably worse loss performance Treasury March 31 Blueprint affects all financial firms For insurers, major recommendation is established of Optional Federal Charter under Office of National Insurance within Treasury Source: Insurance Information Institute

10 Post-Crunch: Fundamental Issues To Be Examined Globally Adequacy of Risk Management, Control & Supervision at Financial Institutions Worldwide Colossal 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

11 Elements of Credit Market Reform Currently Being Considered Reform Increased Disclosure/ Transparency Enhanced Awareness of Risk Stronger Risk Management Increased Capital Stronger Regulatory Policies Rationale Require issuers of mortgage-backed securities to disclose more about the level and scope of due diligence More details on actual underlying assets of the security Disclose if issuers had shopped for ratings and why Require ratings firms to differentiate between ratings on complex structured products and conventional products Ratings firms must disclose conflicts of interest and provide greater scrutiny of firms that originate loans Multi-national effort to require enhanced and tested risk management policies for large financial institutions Require financial institutions to implement stronger risk controls Revisit latest bank capital requirements (Basel II) to ensure banks have sufficient capital/liquidity for risks assumed Strengthen state and federal oversight of mortgage lenders Nationwide licensing of mortgage brokers Source: Wall Street Journal, 3/15/07

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

13 Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 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 insurers would still be subject to state taxes, provisions for compulsory coverage, residual market and guarantee funds OFC would specify specific lines covered by charter; Separate charters needed for P/C and Life 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

14 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 Establishment of Office of Insurance Oversight (OIO) Department within Treasury to handle issues needing immediate attention such reinsurance collateral ; [Recognizes that OFC debate is difficult and ongoing ] OIO could focus immediately on key areas of federal interest in the insurance sector OIO would be the lead regulatory voice on international regulatory policy Would have authority to ensure states achieved uniform implementation of declared US international insurance policy goals OIO would also serve as advisor to Treasury Secretary on major domestic and international policy issues Ultimately incorporated into OFC framework Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March Treasury Regulatory Recommendations Affecting Insurers (cont d)

15 Insurance & The Economy Important But Somewhat Muted Impacts

16 A Few Facts About the Relationship Between Insurance & Economy Vast Majority of Insurance Business is Tied to Renewals Approximately 98+% of P/C business (units) is linked to renewals A very large share of p/c insurance premiums are statutorily or de facto compulsory (e.g., WC, auto liability, surety, usually HO ) P/C insurers have marginal exposure impact due to economy Most life revenues and units are renewals, but some products (e.g., variable annuities are sensitive to market volatility) Life insurers who manage 401(k) assets seeing more loans and hardship withdrawals; Insurers are Sensitive to Interest Rates About 2/3 of P/C invested assets and 75% if Life assets are fixed income Historically, yield on industry portfolios has tracked 10-year note closely All else equal, lower total investment gain implies greater emphasis on underwriting Historically, industry s best underwriting performances are rooted in periods when interests rates were low and/or equity market performance poor (1930s 1950s, early 2000s gave rise to strong 2006/07) Source: Insurance Information Institute.

17 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% -2.9% -2.7% 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, 2/08; Insurance Information Inst.

18 Summary of Economic Risks and Implications for (Re) Insurers Economic Concern Subprime Meltdown/ Credit Crunch Housing Slump 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 Reduced exposure growth Deteriorating loss performance on neglected, abandoned and foreclosed properties 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 Increased workers comp frequency

19 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 $954 million New home starts plunged 34% from ; Drop through 2008 trough is 53% (est.) a net annual decline of 1.09 million units F08F 09F 10F11F 12F 13F 14F Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 3/08 edition of BCEF; Insurance Info. Institute

20 Auto/Light Truck Sales, F (Millions of Units) Weakening economy, credit crunch and high gas prices are hurting auto sales Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth than problems in the housing market will on home insurers New auto/light trick sales are expected to experience a net drop of 1.4 million units annually by 2008 compared with 2005, a decline of 8.3% F 08F 09F 10F 11F 12F 13F 14F Source: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 3/08 edition of BCEF; Insurance Info. Institute

21 Nonresidential Fixed Investment,* F Nonresidential Fixed Investment ($ Bill) $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $1,082 $1,144 $1,226 $1,307 $1,370 Sharp dip in business investment growth in 2007/2008 will slow commercial exposure growth $1,396 $1,438 $1,495 $1,563 $1,641 8% 7% 6% 5% 4% 3% 2% $200 $0 1% 0% E 08F 09F 10F 11F 12F % Change Nonresidential Fixed Investment % Change Nonresidential Fixed Investment *Nonresidential fixed investment consists of structures, equipment and software. Sources: US Bureau of Economic Analysis (Historical), Value Line (2/22/08) estimates/forecasts for

22 Total Industrial Production, (2007:Q1 to 2009:Q4F) 4.0% 3.0% 3.5% 3.6% Industrial production affects exposure both directly and indirectly 2.4% 2.5% 2.6% 2.7%2.9% 2.0% 1.0% 1.1% 0.5% 0.3% 1.6% 0.0% -1.0% -2.0% -1.0% Industrial production shrank during the final quarter of 2007 and is expected to grow only very slowly during the first half of :Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/08); Insurance Info. Inst.

23 Employment Change by Industry 50,000 40,000 30,000 20,000 10,000 0 (10,000) (20,000) (30,000) (40,000) (50,000) (60,000) (34,000) (39,000) (52,000) Jan to Feb. 2008p Employment fell by 63,000 in February, the biggest decline in 5 years. Manufacturing and Construction are always the hardest hit in an economic slowdown, with each losing several hundred thousand jobs over the past 12 months. (20,000) Construction Manuf. Retail Trade Professional & Biz Services 30,000 21,000 38,000 Education & Health Sources: US Bureau of Labor Statistics; Insurance Information Institute. Leisure & Hospitality Government

24 30 20 Monthly Change in Financial Activities Employment, Jan Feb. 2008, (Thousands) Financial sector employment turned consistently negative shortly after the credit crunch began during the 3 rd quarter of Change in Employment (Thousands) Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Feb-08 99,000 jobs lost since July 2007 Source: Bureau of Labor Statistics; Insurance Information Institute.

25 US Unemployment Rate, (2007:Q1 to 2009:Q4F) 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 4.5% 4.5% 4.6% 4.8% 5.0% 5.4% 5.5% 5.5% 5.5% 5.4% 5.4% 5.2% Rising unemployment rate negative impacts workers comp exposure and could signal a temporary claim frequency surge 3.0% 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/08); Insurance Info. Inst.

26 Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Wage & Salary Disbursement (Private Employment) vs. WC NWP $ Billions $ Billions 7/90-3/91 3/01-11/01 Wage & Salary Disbursements WC NPW Shaded areas indicate recessions * *As of 7/1/07 (latest available). Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at I.I.I. Fact Books Weakening wage and salary growth is expected to cause a deceleration in workers comp exposure growth $45 $40 $35 $30 $25 $20 $15 $10 $5 $0

27 Inflation Rate (CPI-U, %), F Inflation was just 2.2% 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 rate inadequacy and adverse reserve development * 08F 09F 2.4 *12-month change Feb vs. Feb. 2007; Source: US Bureau of Labor Statistics; Blue Chip Economic Indicators, Mar. 10, 2008; Ins. Info. Institute.

28 Sources: Insurance Information Institute Favored Industry Groups for Insurer Exposure Growth Industry Health Care Energy (incl. Alt.) Agriculture & Food Processing & Manufacturing Export Driven Natural Resources & Commodities Rationale Economic Necessity Recession Resistant Demographics: aging/immigration Growth Fossil, Solar, Wind, Bio-Fuels, Hydro & Other Consumer Staple Recession Resistant Grain and land prices high due to global demand, weak dollar (exports) Acreage Growing Farm Equipment, Transport Benefits many other industries Weak dollar, globalization persist; Cuba angle? Strong global demand, Supplies remain tight but beware of bubbles Significant investments in R&D, plant & equip required

29 D&O/E&O Turbulent Markets, Bankruptcies Can Give Rise to Suits

30 Shareholder Class Action Lawsuits* A credit crunch creating a contagion effect resulting in significant financial distress and bankruptcies in other sectors could breed more securities litigation Includes 44 suits related to subprime in 2007/ * *Securities fraud suits filed in U.S. federal courts; 2008 figure is current through March 31. Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute Pace of suits is up due in part to subprime issues, housing collapse and market volatility. Defendants include banks, investment banks, builders, lenders, bond and mortgage insurers 54

31 Origin of D&O Claims for Public Companies, % of D&O suits originate with shareholders Employees, 25% Competitors, 6% Customers & Clients, 4% Shareholders, 40% Government, 2% Other 3rd Party, 22% Source: Tillinghast Towers-Perrin, 2006 Directors and Officers Liability Survey.

32 PROFITABILITY Profits in 2006/07 Reached Their Cyclical Peak; By No Reasonable Standard Can Profits Be Deemed Excessive

33 P/C Net Income After Taxes F ($ 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% 2007E ROAS 1 = 13.1%** $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 $63,695 $59,200 $46,300 $0 -$10, $6,970 *ROE figures are GAAP; 1 Return on avg. surplus. **Return on Average Surplus; Actual 9-month 2007 result. Sources: A.M. Best, ISO, Insurance Information Inst E 08F

34 ROE: P/C vs. All Industries E 20% P/C profitability is cyclical, volatile and vulnerable 15% 10% Sept. 11 5% 0% -5% Hugo Andrew Northridge US P/C Insurers Lowest CAT losses in 15 years All US Industries *2007 is actual 9-month ROAS of 13.1% P/C insurer ROE is I.I.I. estimate. Source: Insurance Information Institute; Fortune Katrina, Rita, Wilma 4 Hurricanes 07F 08F

35 Personal/Commercial Lines & Reinsurance ROEs, F* 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% E 2008F 14.0% 9.4% 6.3% 16.8% 13.2% 9.8% ROEs are declining as underwriting results deteriorate 12.3% 10.7% 9.8% Personal Commercial Reinsurance Sources: A.M. Best Review & Preview (historical and forecast).

36 Profitability Peaks & Troughs in the P/C Insurance Industry, F* 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% 1984: 1.8% 1992: 4.5% 2001: -1.2% E 08F *GAAP ROE for all years except 2007 which is actual 9-month ROAS of 13.1% P/C insurer ROE is I.I.I. estimate. Source: Insurance Information Institute; Fortune

37 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 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 Looming reserve deficiencies are not hanging over insurers they way they did during the last soft market in the late 1990s Many companies have been releasing redundant reserves, which allows them to boost net income even as underwriting results deteriorate Reserve releases will diminish in 2008; Even more so in 2009 Investment Gains: 2007 was the 5 th consecutive up year on Wall Street. With sharp declines in stock prices and falling interest rates, portfolio yields are certain to fall Contributes to discipline Realized capital gains are already rising as underwriting profits shrink, but like redundant reserves, realized capital gains are a finite resource A sustained equity market decline (and potentially a drop in bond prices at some point) could reduce policyholder surplus Source: Insurance Information Institute.

38 Factors that Will Influence the Length and Depth of the Cycle (cont d) 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 Ratings agencies more concerned with successful cycle management strategy Many insurers have already had ratings haircut over the last several years they way they did during the last soft market in the late 1990s; Less of a margin today Finite Reinsurance: Had smoothing effect on earnings; Finite market is gone 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 Source: Insurance Information Institute.

39 ROE vs. Equity Cost of Capital: US P/C Insurance: E 18% 16% 14% 12% 10% The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years +1.7 pts +3.1 pts 8% 6% 4% 2% 0% -2% -4% US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target or better E Source: The Geneva Association, Ins. Information Inst pts -9.0 pts ROE +0.2 pts -0.1 pts The cost of capital is the rate of return insurers need to attract and retain capital to the business Cost of Capital

40 P/C, L/H Stocks: Ahead of the S&P 500 Index in 2008 Total YTD Returns Through March 28, 2008 P/C insurance stocks not affected as much as the overall market by credit, subprime concerns Mortgage & Financial Guarantee insurers were down 69% in % % % % % % -8.06% -8.61% S&P 500 All Insurers P/C Life/Health Multiline Reinsurance Mortgage* Brokers -60.0% -50.0% -40.0% -30.0% -20.0% -10.0% 0.0% *Includes Financial Guarantee. Source: SNL Securities, Standard & Poor s, Insurance Information Inst.

41 Top Industries by ROE: P/C Insurers Still Underperformed in 2006* Oil & Gas Equip., Services Petroleum Refining Metals Food Services Household & Pers. Products Pharmaceuticals Industrial & Farm Equipment Mining & Crude Oil Prod. Aerospace & Defense Chemicals Securities Food Consumer Prod. Medical Prod. & Equip. Specialty Retailers Homebuilders P/C Insurers (Stock) All Industries: 500 Median P/C insurer profitability in 2006 ranked 30 th out of 50 industry groups despite renewed profitability 14.9% 15.4% 30.7% 30.3% 26.4% 24.6% 24.2% 22.6% 21.8% 21.5% 20.9% 20.9% 20.5% 19.6% 19.4% 19.1% 31.8% P/C insurers underperformed the All Industry median for the 19 th consecutive year 0% 5% 10% 15% 20% 25% 30% 35% *Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors. Source: Fortune, April 30, 2007 edition; Insurance Information Institute

42 Advertising Expenditures by P/C Insurance Industry, E $4.5 $4.0 $3.5 $3.0 $ Billions Ad spending by P/C insurers is at a record high, signaling increased competition $2.975 $3.695 $4.323 $2.5 $2.0 $1.736 $1.737 $1.803 $1.708 $2.111 $1.882 $ E Source: Insurance Information Institute from consolidated P/C Annual Statement data.

43 OHIO P/C INSURANCE MARKETS Often, but Not Always Outperforming the US

44 In Most Years, P/C ROE From All Lines in OH Topped US All-Lines ROE 21% 18% 15% 12% 9% 6% 3% 0% -3% * US P/C Insurers Ohio Sources: Insurance Information Institute; NAIC. *Latest available.

45 OH Private Passenger Auto ROEs Also Top US ROEs 18% 16% 14% Averages: 1997 to 2006 US PPA Insurance = +8.4% Ohio PPA Insurance = +11.1% 13.1% 16.6% 15.4% 16.0% 12% 10% 8% 6% 11.3% 11.4% 11.6% 12.1% 12.4% 11.5% 9.0% 8.5% 10.8% 10.1% 8.4% 7.7% 5.9% 6.2% 9.9% 9.4% 13.3% 12.1% 11.0% 4% 2% 0% US Ohio 2.2% 2.0% 4.1% Source: NAIC, Insurance Information Institute

46 PP AUTO: 10-yr Avg. Return on Equity, Ohio & Nearby States % Ohio 9.6% Indiana 8.4% US 2.3% 5.6% 10.0% 9.1% 9.9% Michigan Wisconsin Illinois Iowa Kentucky 0% 2% 4% 6% 8% 10% 12% Source: NAIC, Insurance Information Institute

47 But the Profit Story Is Different for Homeowners Insurance 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% 3.6% 7.8% -1.7% -3.4% Averages: 1997 to 2006 US HO Insurance = 5.0% Ohio HO Insurance = 1.2% 12.4% 3.0% -4.2% -9.3% 5.4% 3.6% 5.4% -1.9% 3.8% -5.2% -7.2% -13.9% 1.4% 9.7% -9.0% -6.6% 7.6% 3.7% 26.0% -2.8% 18.5% 8.6% US Ohio Source: NAIC, Insurance Information Institute

48 HOME: 10yr Avg Return on Equity, Ohio & Nearby States % -2.7% -0.8% -3.9% 1.2% -5.2% 3.0% 5.0% Ohio US Indiana Michigan Wisconsin Illinois Iowa Kentucky -10% -5% 0% 5% 10% Source: NAIC, Insurance Information Institute

49 FINANCIAL STRENGTH & RATINGS Industry Has Weathered the Storms Well, But Cycle May Takes Its Toll

50 P/C Insurer Impairment Frequency vs. Combined Ratio, E Combined Ratio Impairment rates are highly correlated underwriting performance and could reach nearrecord low in 2007 Combined Ratio after Div P/C Impairment Frequency 2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969; 2007 will be lower; Record is 0.24% in Impairment Rate E Source: A.M. Best; Insurance Information Institute

51 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;

52 Cumulative Average Impairment Rates by Best Financial Strength Rating* 60% 50% 40% 30% Insurers with strong ratings are far less likely to become impaired over long periods of time. Especially important in long-tailed lines. D C/C- C++/C+ B/B- B++/B+ 20% A/A- 10% A++/A+ 0% Average Years to Impairment Sources: A.M. Best: Best s Impairment Rate and Rating Transition Study , March 1, *US P/C and L/H companies,

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

54 P/C Insurance Combined Ratio, F* Combined Ratios 1970s: s: s: s: 101.8* * 08F Sources: A.M. Best; ISO, III *Full year 2007/08 estimates from III 2008 Earlybird Survey.

55 P/C Insurance Combined Ratio, F As recently as 2001, insurers were paying out nearly $1.16 for every dollar they earned in premiums /8 deterioration due primarily to falling rates, but results still strong assuming normal CAT activity 2006 produced the best underwriting result since the 87.6 combined ratio in figure benefited from heavy use of reinsurance which lowered net losses F 08F Sources: A.M. Best; ISO, III. *III estimates for 2007/8.

56 Ten Lowest P/C Insurance Combined Ratios Since 1920 vs. 2007E The 2006 combined ratio of 92.5 was the best since the 87.6 combined in was one of the Top 12 best since The industry s best underwriting years are associated with periods of low interest rates E Sources: Insurance Information Institute research from A.M. Best data. *2007: III Earlybird survey.

57 Underwriting Gain (Loss) F* $ Billions Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the second since Expected gain for 2007 is approximately $20 billion. Cumulative underwriting deficit since 1975 is $421 billion E 08F Source: A.M. Best, Insurance Information Institute *Actual 2007:9M underwriting profit = $18.146B

58 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) (1) (2) (3) Combined Ratio Points F 08F 09F Source: A.M. Best, Lehman Brothers estimates for years

59 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.

60 PERSONAL LINES

61 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

62 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)

63 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 Inversion of pure premium spread is a warning sign that price and costs are out of sync -2% -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

64 Bodily Injury: Severity Trend Running Ahead of Frequency 8% 6% 4% Medical inflation is a powerful cost driver 4.7% Frequency Severity 3.0% 3.6% 3.8% 3.4% 2.8% 4.8% 6.0% 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% Source: ISO Fast Track data.

65 PD Liability: Frequency Trend No Longer Offsets Severity 8% 6% 4% 2% 0.8% Frequency 4.3% 6.2% Severity 3.9% 3.3% 2.8% 0.3% Fewer accidents, but more damage when they occur: Higher Deductibles? 0.5% 2.8% 3.7% 2.1% 0.6% 0% -2% -1.5% -2.0% -2.3% -2.1% -1.9% -4% -3.8% -6% Source: ISO Fast Track data.

66 PIP: Severity Trend Now Offsets Smaller Claim Frequency Decline 20% 15% Frequency Severity 16.1% Fraud caused problems from % 5% 0% -5% -10% -1.6% 6.3% 1.1% 3.2% -1.1% 6.5% 0.0% Is No-Fault living on borrowed time? -0.6% -4.0% 0.5% 4.8% 2.3% 6.1% -7.2% -5.4% -5.1% -4.0% *Average of 4 quarters ending with 3 rd quarter Source: ISO Fast Track data.

67 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% 0.1% -0.4% -1.7% -3.8% -3.7% -5.1% -4.6% Source: ISO Fast Track data.

68 Comprehensive: Favorable Frequency and Severity Trends 20% 15% 10% Frequency 8.9% Severity Weather related claims from Hurricanes Katrina, Rita & Wilma: 681,900 claims valued $3.29 billion 14.9% 5% 3.3% 3.3% 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% * Source: ISO Fast Track data.

69 Homeowners Insurance

70 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

71 COMMERCIAL LINES Commercial Auto Commercial Multi-Peril Workers Comp

72 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)

73 COMMERCIAL MULTI-PERIL & COMMERCIAL AUTO

74 Commercial Auto Liability & PD Combined Ratios Comm Auto Liab Comm Auto PD Commercial Auto has improved dramatically Average Combined: Liability = PD = E* 08F* Sources: A.M. Best (historical and forecasts) *Includes both liability and property damage.

75 Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion) CMP- has improved recently Liab. Combined 1995 to 2004 = Non-Liab. Combined = CMP-Liability CMP-Non-Liability E* 08F* Sources: A.M. Best (historical and forecasts) *Includes both liability and property damage.

76 WORKERS COMPENSATION OPERATING ENVIRONMENT

77 Workers Comp Combined Ratios, F* Percent Workers Comp Calendar Year vs. Ultimate Accident Year Private Carriers p 07E 08F Calendar Year Accident Year p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2006 and developed to ultimate Source: Calendar Years , A.M. Best Aggregates & Averages; Calendar Year 2006p and Accident Years pbased on NCCI Annual Statement Analysis. Includes dividends to policyholders *2007/2008 figures are A.M. Best estimates/forecasts.

78 Workers Comp Lost-Time Claim Frequency (% Change) Percent Change Lost-Time Claims 0.5 Cumulative Change of 52.1% since 1991 means that lost work time claims have been cut by more than half p Accident Year 2003p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2005, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI

79 WC Medical Severity Rising Far Faster than Medical CPI 16% 14% 12% 10% 8% WC medical severity rose more than twice as fast as the medical CPI (8.8% vs. 4.0%) from 1995 through % 10.1% 8.3% 10.6% 8.2% 14.0% 7.4% 9.0% 6.8% 11.7% 7.5% 6% 5.1% 3.5 pts 4% 2% 0% 4.5% 3.6% 2.8% 3.2% 3.5% 4.1% 4.6% 4.7% 4.0% 4.4% 4.2% 4.0% Change in Medical CPI Change Med Cost per Lost Time Claim Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

80 Med Costs Share of Total Costs is Increasing Steadily 2006p 1996 Indemnity 41% 1986 Indemnity 52% Medical 48% Medical 59% Indemnity 55% Medical 45% Source: NCCI (based on states where NCCI provides ratemaking services).

81 PREMIUM GROWTH At a Virtual Standstill in 2007/08

82 Strength of Recent Hard Markets by NWP Growth* 25% 20% 15% Post-Katrina period resembles (post- Andrew) 10% 5% 0% -5% -10% 2008: Projected -0.3% premium growth would be the first decline since F 2008F Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute *2007 figure is actual 9-month figure.

83 Growth in Net Written Premium, E 8.4% 15.3% 10.0% P/C insurers are experiencing their slowest growth rates since 1943 but underwriting results are expected to remain relatively healthy 5.0% 3.9% 2.7% 0.5% 0.0% * *2007 figure based on actual 9-month results. Source: A.M. Best; Forecasts from the Insurance Information Institute.

84 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).

85 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.

86 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.

87 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.

88 Premium Growth in Ohio Slower than the US

89 Year-to-Year Growth in Direct Written Premiums: Ohio and US 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Decline in premiums in OH was marginal (-0.72%) in while US was up 2.5% Ohio US Source: Insurance Information Institute; NAIC.

90 WEAK PRICING Under Pressure in 2007/08, Especially Commercial Lines

91 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

92 $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

93 Median Existing Home Price $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 Record catastrophe losses and declining home prices are pushing HO insurance expenditures as a % of median home price up $117, % $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 Price 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

94 Average Commercial Rate Change, All Lines, (1Q:2004 4Q:2007) 0% -2% -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% -4% -6% -8% -10% -12% -14% -16% Magnitude of rate decreases diminished greatly after Katrina but have grown again 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07-0.1% KRW Effect Source: Council of Insurance Agents & Brokers; Insurance Information Institute

95 Cumulative Commercial Rate Change by Line: 4Q99 4Q07 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

96 Average Commercial Rate Changes by Line: 4Q99 4Q07 Commercial account pricing has been trending down for 3+ years and is now on par with prices in late 2001, early 2002 Post-Katrina bump was short-lived Source: Council of Insurance Agents & Brokers

97 Rate Changes by Line, 4 th Qtr % 0% 0.2% -1% -2% -3% -4% -5% -1.0% -0.9% -4.2% -4.6% -4.7% -2.0% -2.7% -3.0% -0.4% Strong tightening in 05Q4 the Katrina effect -4.6% Comm Prop Biz Comm Auto WC GL Umbrella EPL D&O Surety Const. ALL Lines Interruption Source: Council of Insurance Agents & Brokers; Insurance Information Institute

98 Rate Changes by Line, 4 th Qtr % -2% -4% All lines but Surety are strongly negative -1.7% -6% -8% -10% -12% -14% -13.0% -8.9% -11.0% -11.9% -11.9% -13.0% -6.1% -7.6% -9.3% -12.2% Comm Prop Biz Comm Auto WC GL Umbrella EPL D&O Surety Const. ALL Lines Interruption Source: Council of Insurance Agents & Brokers; Insurance Information Institute

99 RISING EXPENSES Expense Ratios Will Rise as Premium Growth Slows

100 *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% 29.9% 25.0% 24.3% 23.4% 30.8% 30.0% 29.1% 26.6% 24.8% 24.5% 25.0% 25.6% 25.6% 24.4% Expenses ratios will likely rise as premium growth slows 27.0% 25.6% 26.4% 26.3% 24.7% 24.6% 26.1% 26.6% E 08F 27.5% 27.1%

101 CAPACITY/ SURPLUS Accumulation of Capital/ Surplus Depresses ROEs

102 U.S. Policyholder Surplus: * $ Billions $550 $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 Capacity as of 9/30/07 was $521.8B, 5.3% above year-end 2006, 80% above its 2002 trough and 54% above its 1999 peak. Premium-to-surplus ratio neared a record low of $0.84:$1 at year end 2007, suggesting excess capital Capacity exceeded a half trillion dollars for the first time during the 2 nd quarter of 2007 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 September 30, 2007

103 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.

104 P/C Insurer Share Repurchases, Through Q ($ Millions) $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $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 $769.2 $2,385.6 $4,497.5 First 9-months 2007 share buybacks are already 133% of the 2006 record 2007 repurchases to date equate to 4.4% of industry surplus, the highest in 20 years $4,586.5 $5,266.0 $4,297.3 $2,764.2 $1,539.9 $763.7 $5,242.3 $17,412.7 $4,370.0 $7, Sources: Credit Suisse, Company Reports; Insurance Information Inst Q3

105 MERGER & ACQUISITION Catalysts for P/C Consolidation Growing in 2008

106 P/C Insurance-Related M&A Activity, Transaction Values Number of Transactions Transaction Value ($ Mill) $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 $5,638 M&A activity began to accelerate during the second half of 2007 $3,450 $2,780 $5,137 $2,435 $1,882 $5,100 $11,534 $8,059 $55,825 $30,873 $19,118 $40,032 No model for successful consolidation has emerged $1,249 $486 $20,353 $425 $9,264 $35, Number of Transactions Source: Conning Research & Consulting.

107 Distribution Sector: Insurance- Related M&A Activity, Transaction Value ($ Mill) $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 $1,934 $2,720 Source: Conning Research & Consulting. Transaction Values $1,633 $7 $542 Number of Transactions No extraordinary trends evident $689 $446 $60 $212 $ Number of Transactions

108 Distribution Sector M&A Activity, 2005 vs Insurer Buying Distributor 7% Title 9% Other 4% Agency Buying Agency 51% Bank Buying Agency 25% Insurer Buying Distributor 7% Title 4% Other 2% Agency Buying Agency 62% Bank Buying Agency 29% Number of bank acquisitions is falling years Source: Conning Research & Consulting

109 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.

110 INVESTMENT OVERVIEW More Pain, Little Gain

111 Property/Casualty Insurance Industry Investment Gain 1 $60 $50 $40 $35.4 $42.8 $47.2 $52.3 $57.9 $51.9 $ Billions $56.9 $44.4 $36.0 $45.3 $48.9 $59.4 $55.7 $63.6 $30 $20 $10 $ Investment rose in 2007 but are just 9.8% higher than what they were nearly a decade earlier in * 06 07** 1 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. **Annualized 9-month result of $47.718B. Sources: ISO; Insurance Information Institute.

112 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 *

113 CATASTROPHIC LOSS What Will 2008 Bring?

114 Most of US Population & Property Has Major CAT Exposure Is Anyplace Safe?

115 U.S. Insured Catastrophe Losses* $120 $100 $80 $60 $40 $20 $0 $7.5 $2.7 $4.7 $ Billions 2006/07 were welcome respites was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $100 Billion CAT year is coming soon $22.9 $5.5 $16.9 $8.3 $7.4 $2.6 $10.1 $8.3 $4.6 $26.5 $5.9 $12.9 $ ?? *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Source: Property Claims Service/ISO; Insurance Information Institute $61.9 $9.2 $6.5 $100.0

116 States With Largest Insured Catastrophe Losses in 2007 $1,400 $1,200 $1,000 $800 $600 $1,230 $747 $677 $ Millions 2007 CAT STATS 1.18 million CAT claims across 41 states arising 23 catastrophic events $400 $200 $320 $272 $270 $262 $223 $202 $200 $200 $0 CA MN TX GA IL OK KS MO NY CO AL Source: PCS/ISO; Insurance Information Institute.

117 Distribution of 2007 US CAT Losses, by Type and Insured Loss $ Billions Personal (home, condo, rental, contents etc.) accounted for 68% of all US insured CAT losses paid in CAT claim count was 1.18 million. Source: PCS division of ISO. Commercial, $1.3, 20% Personal, $4.4, 68% Vehicle, $0.8, 12%

118 Distribution of 2007 US CAT Losses, by Type and Claim Count Thousands of Claims Commercial, 144, 12% Vehicle, 315, 27% Personal (home, condo, rental, contents etc.) accounted for 61% of all US insured CAT claims in 2007, but 68% of loss dollars paid. Personal, 721, 61% Source: PCS division of ISO.

119 Top Catastrophic Wildland Fires In Oct , 1978 Los Angeles, Ventura Cos., CA Nov , 1980 Bradbury, Pacific Palisades, Malibu, Sunland, Carbon Canyon, Lake Elsinore, CA Oct. 9-10, 1982 Los Angeles, Ventura, Orange Cos., CA The United States, Sep , 1970 Oakland-Berkeley Hills, CA Nov , 1980 Los Angeles, San Bernardino, Orange, Riverside, San Diego Cos., CA Jul , 1977 Santa Barbara, Montecito, CA Insured Losses (Millions 2007 $) Oct , 1991: Oakland, Alameda Cos., CA Oct. 2003: Southern CA Fires Oct. 2007: Southern CA Fires* Nov. 2-3, 1993 Los Angeles Co., CA Oct , 1993 Orange Co., CA Jun. 27-Jul. 2, 1990 Santa Barbara County, CA May 10-16, 2000 Cerro Grande, NM July 2007: Lake Tahoe, CA** Jun , 2002 Rodeo-Chediski Complex, AZ May 17-20, 1985 Florida Sep , 1979 Hollywood Hills, CA $154.4 $138.4 $132.6 $108.3 $68.4 $63.6 $47.7 $40.2 $34.4 $14.3 $168.7 $538.4 $502.5 $420.7 $2,294.4 $2,260.0 $2,589.3 Fourteen of the top 17 catastrophic wildfires since 1970 occurred in California $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 *Estimate from CA Insurance Dept., Jan. 10, Source: ISO's Property Claim Services Unit; California Department of Insurance; Insurance Information Institute.

120 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)..

121 Global Insured Catastrophe Losses by Region, North America accounted for 70% of global catastrophe losses $ Billions Seas/Space Africa Oceania/Australia South America Asia Europe North America* Notes: figures for N. America include US only figure includes only property losses from 9/11. Source: Insurance Information Institute compiled from Swiss Re sigma issues.

122 The 2008 Hurricane Season: Preview to Disaster?

123 Outlook for 2008 Hurricane Season: 25% Worse Than Average Average* F Named Storms Named Storm Days Hurricanes Hurricane Days Intense Hurricanes Intense Hurricane Days Accumulated Cyclone Energy 96.2 NA 115 Net Tropical Cyclone Activity 100% 275% 125% *Average over the period Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.

124 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 60% 37% 36% Above Average *Average over the past century. Source: Philip Klotzbach and Dr. William Gray, Colorado State University, December 7, 2007.

125 REINSURANCE MARKETS Reinsurance Prices are Falling in Non-Coastal Zones, Casualty Lines

126 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.

127 US Reinsurer Net Income & ROE, * $12 $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 $3.41 $2.51 $4.53 $5.43 $7.96 $9.68 $10 $8 $6 $4 $2 $0 ($2) Reinsurer profitability rebounded post-katrina but is now falling 20% 15% 10% 5% 0% ($4) ($2.98) * Net Income ($ Bill) ROE Net Income ROE -5% -10% Source: Reinsurance Association of America. *2007 ROE figure is III estimate based return on average 2007 surplus.

128 International reinsurers from Germany, Switzerland and France account for 40 percent of global reinsurance volume. Bermuda is a growing market, with a 10 percent share. Lloyd s and London-based reinsurers account for 6 percent of the world market. Regional Distribution of Reinsurers by NWP, 2006 Other 11% Ireland 2% Japan 6% U.S. 25% Eight countries account for 89 percent of global reinsurance volume. Switzerland 12% France Source: Standard & Poor s, Global Reinsurance Highlights, 2007 Edition3% U.K. 6% Germany 25% Bermuda 10%

129 Reinsurer Market Share Comparison: 1990 vs Offshore Reinsurer 35.3% U.S. Reinsurer 64.7% Offshore Reinsurer 53.1% U.S. Reinsurer 46.9% U.S. Reinsurer market share fell precipitously between 1990 and 2006 Sources: Reinsurance Association of America; Insurance Information Institute.

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

131 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

132 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 Will serve months in prison, pay $9.75 million in restitution; $250,000 fine Source: Wall Street Journal, 3/24/07

133 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

134 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

135 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.

136 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

137 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

138 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

139 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.

140 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.

141 Number of Top 10 Jury Awards, TX, NY and CA lead the U.S. in jumbosize jury awards TX NY CA FL MO 8 DC* 7 AL 6 GA 5 IL 4 TN 3 LA MD OR SC NM NV NJ Source: LawyersWeekly USA,, January 22, *All against Iran for terrorist activity

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