MPL INSURANCE INDUSTRY PERFORMANCE: What s the Latest? Chad C. Karls, FCAS, MAAA Principal & Consulting Actuary

MPL INSURANCE INDUSTRY PERFORMANCE: What s the Latest? Chad C. Karls, FCAS, MAAA Principal & Consulting Actuary

Agenda The Current Competitive Environment Loss Cost Components Claim Frequency Indemnity Severity Defense Cost Severity The Financial Statement Effect Where Does That Leave Us? 3

Topic #1 The Current Competitive Environment 4

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 The Current Competitive Environment MPL Direct Written Premium $14 Countrywide, $Billions 24% Decrease $14 $12 $12 $10 $10 $8 7% Decrease $8 $6 $6 $4 $4 $2 $2 $0 $0 Sources: Milliman analysis of A.M. Best Aggregates & Averages P&C; multiple editions Milliman analysis of P&C insurance statutory data as provided by SNL Financial 5

1.60 The Current Competitive Environment MPL Direct Written Premium by State, Relative to 2006 1.40 1.20 1.00 +8% 0.80 0.60 0.40-52% 0.20 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Bottom 5 Growth States Top 5 Growth States Source: Milliman analysis of P&C insurance statutory data as provided by SNL Financial 6

The Current Competitive Environment Distribution of MPL DWP by Sub-Line 2016, Countrywide Other Providers Physicians Other Facilities Hospitals Source: Milliman analysis of P&C insurance statutory data as provided by SNL Financial 7

100% The Current Competitive Environment PPL Share of Total MPL DWP Countrywide 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Milliman analysis of P&C insurance statutory data as provided by SNL Financial 8

The Current Competitive Environment Distribution of MPL DWP by Sub-Line 2016, by State Bottom 5 States for PPL Market Share Top 5 States for PPL Market Share Other Facilities Other Providers Physicians Hospitals Physicians Other Providers Other Facilities Hospitals Source: Milliman analysis of P&C insurance statutory data as provided by SNL Financial 9

The Current Competitive Environment Distribution of MPL DWP by Sub-Line Countrywide, $Billions $9 $8 32% Decrease $7 $6 $5 $4 $3 $2 $1 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Physicians Hospitals Other Facilities Other Providers Source: Milliman analysis of P&C insurance statutory data as provided by SNL Financial 10

2.50 The Current Competitive Environment PPL Direct Written Premium by State, Relative to 2006 2.00 1.50 1.00 +14% 0.50-54% 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Bottom 5 Growth States Top 5 Growth States Source: Milliman analysis of P&C insurance statutory data as provided by SNL Financial 11

1.20 The Current Competitive Environment PPL DWP per Physician Countrywide 43% Decrease 1.20 1.00 1.00 0.80 0.80 0.60 0.60 0.40 0.40 0.20 0.20 0.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0.00 Sources: Milliman analysis of AMA Physician Characteristics and Distribution in the U.S.; multiple editions Milliman analysis of P&C insurance statutory data as provided by SNL Financial 12

1.80 The Current Competitive Environment PPL DWP per Physician Variance by State, Relative to 2006 1.60 1.40 1.20 1.00 +1% 0.80 0.60 0.40-60% 0.20 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Bottom 5 Growth States Top 5 Growth States Sources: Milliman analysis of AMA Physician Characteristics and Distribution in the U.S.; multiple editions Milliman analysis of P&C insurance statutory data as provided by SNL Financial 13

The Current Competitive Environment A.M. Best Estimated Change in 2016 NWP 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% -6% -6% -8% -8% -10% Total P&C Private Passenger Auto HO / FO Multi Peril Other & Product Liability Workers' Comp Commercial Multiple Peril Fire & Allied Lines Commercial Auto Inland Marine Medical Professional Liability -10% Estimates from Prior Years Source: A.M. Best Review & Preview; multiple editions 14

Topic #2 Loss Cost Components 15

Loss Cost Components Closed Claim Frequency Note: Countrywide frequency per physician, relative to 2001 Sources: Milliman analysis of AMA Physician Characteristics and Distribution in the U.S.; multiple editions Milliman analysis of National Practitioner Data Bank Public Use Data File; December 31, 2016 16

Loss Cost Components Change in Closed Claim Frequency 2014-2016 Level Relative to 2000-2002 Level, by State 0% -10% -20% -30% -40% -50% -60% -70% Countrywide Average -80% -90% -100% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 Sources: Milliman analysis of AMA Physician Characteristics and Distribution in the U.S.; multiple editions Milliman analysis of National Practitioner Data Bank Public Use Data File; December 31, 2016 17

Loss Cost Components Reported Claim Frequency Note: Source: Change in frequency relative to prior three years Milliman analysis of individual company data 18

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Loss Cost Components Paid Indemnity Severity 15% Increase $400,000 $350,000 29% Increase $400,000 $350,000 $300,000 $300,000 $250,000 $250,000 $200,000 $200,000 $150,000 $150,000 $100,000 $100,000 $50,000 $50,000 $0 $0 Note: Source: Countrywide severity by claim closure year Milliman analysis of National Practitioner Data Bank Public Use Data File; December 31, 2016 19

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Loss Cost Components Paid Indemnity Severity Large Claim Impact $400,000 $400,000 $350,000 $350,000 $300,000 $300,000 $250,000 $250,000 $200,000 $200,000 $150,000 $100,000 Largest 10 Claims All Other Claims $150,000 $100,000 $50,000 $50,000 $0 $0 Note: Source: Countrywide severity by claim closure year Milliman analysis of National Practitioner Data Bank Public Use Data File; December 31, 2016 20

Loss Cost Components 200% Change in Indemnity Severity 2014-2016 Level Relative to 2000-2002 Level, by State 150% 100% Countrywide Average 50% 0% -50% -100% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 Note: Source: Paid severity by claim closure year Milliman analysis of National Practitioner Data Bank Public Use Data File; December 31, 2016 21

Loss Cost Components Stratification of Indemnity Claims Note: Source: Countrywide paid indemnity claims by claim closure year Milliman analysis of National Practitioner Data Bank Public Use Data File; December 31, 2016 22

Loss Cost Components Stratification of Indemnity Claims 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 Change in Claim Counts, Relative to 1991 Change in % of Claims, Relative to 1991 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 1991 2016 >= $1M >= $1M 1991 2016 >= $2M >= $2M 1991 2016 >= $5M >= $5M 0.00 1991 2016 >= $1M >= $1M 1991 2016 >= $2M >= $2M 1991 2016 >= $5M >= $5M Note: Source: Countrywide paid indemnity claims by claim closure year Milliman analysis of National Practitioner Data Bank Public Use Data File; December 31, 2016 23

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Loss Cost Components Paid Indemnity per Physician Countrywide, Relative to 2001 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 Sources: Milliman analysis of AMA Physician Characteristics and Distribution in the U.S.; multiple editions Milliman analysis of National Practitioner Data Bank Public Use Data File; December 31, 2016 24

Loss Cost Components Change in Paid Indemnity per Physician 2014-2016 Level Relative to 2000-2002 Level, by State 60% 40% 20% 0% -20% -40% -60% Countrywide Average -80% -100% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 Sources: Milliman analysis of AMA Physician Characteristics and Distribution in the U.S.; multiple editions Milliman analysis of National Practitioner Data Bank Public Use Data File; December 31, 2016 25

Loss Cost Components Paid Indemnity and ALAE Severities 2.00 1.80 1.60 2000-2015 = 4.3% ALAE Trend 2005-2015 = 6.3% ALAE Trend 1.40 1.20 1.00 0.80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Indemnity Severity Total ALAE Severity Note: Countrywide severity by claim closure year, relative to 2000 Sources: Milliman analysis of PIAA Claim Trend Analysis; 2012 Edition Milliman analysis of PIAA Closed Claim Comparative; multiple editions 26

Loss Cost Components Paid ALAE Severity by Claim Type 2.20 2.00 1.80 1.60 1.40 1.20 1.00 0.80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ALAE Severity on Indemnity Claims ALAE Severity on Expense Only Claims Note: Countrywide severity by claim closure year, relative to 2000 Sources: Milliman analysis of PIAA Claim Trend Analysis; 2012 Edition Milliman analysis of PIAA Closed Claim Comparative; multiple editions 27

Loss Cost Components Distribution of ALAE Costs 2014 by Category ADR or Contract Agreement 3% Plaintiff Verdict 4% Defendant Verdict 18% Settlement 37% Dropped / Withdrawn / Dismissed 38% Source: Milliman analysis of PIAA Closed Claim Comparative; multiple editions 28

Loss Cost Components ALAE Severity by Category 2.60 2.40 2.20 2.00 Plaintiff Verdict Defendant Verdict ADR or Contract Agreement Settlement Dropped / Withdrawn / Dismissed 1.80 1.60 1.40 1.20 1.00 0.80 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Note: Countrywide paid severities by claim closure year, relative to 2003 Source: Milliman analysis of PIAA Closed Claim Comparative; multiple editions 29

Loss Cost Components ALAE Annual Trend Rate by Category 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Plaintiff Verdict Defendant Verdict ADR or Contract Agreement Settlement Dropped / Withdrawn / Dismissed Overall Note: Countrywide paid severities by claim closure year, relative to 2003 Source: Milliman analysis of PIAA Closed Claim Comparative; multiple editions 30

Topic #3 The Financial Statement Effect 31

The Financial Statement Effect Breakdown of 2016 Operating Ratio 120% 100% 80% Reserve Release 60% 40% 20% Calendar Year Ratio LAE Ratio Loss Ratio 0% -20% Accident Year Loss and LAE Ratio Calendar Year Loss and LAE Ratio Underwriting Expense Ratio Policyholder Dividend Ratio Combined Ratio Net Investment Income Ratio Net Realized Capital Gain Ratio Operating Ratio Source: Milliman analysis of P&C insurance statutory data as provided by SNL Financial Chart represents results of 38 MPL specialty companies 32

30% The Financial Statement Effect Net Reserve Development to Net Earned Premium Total MPL Industry 30% 20% 20% 10% 10% 0% 0% -10% -10% -20% -20% -30% -30% -40% -40% -50% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-50% Sources: Milliman analysis of A.M. Best Aggregates & Averages P&C; multiple editions Milliman analysis of P&C insurance statutory data as provided by SNL Financial 33

The Financial Statement Effect A.M. Best Industry Reserve Deficiencies $49 Billion as of year-end 2016 Asbestos & Environmental All Other Lines Medical Professional Liability Personal Auto Liability Homeowners Commercial Auto Liability Commercial Multiple Peril Other/Products Liability Reinsurance - Nonprop Assumed Workers' Compensation ($10) ($5) $0 $5 $10 $15 $20 $25 $30 Undiscounted Deficiency Source: A.M. Best Review & Preview; January 2017 Undiscounted Redundancy Statutory Discount 34

The Financial Statement Effect A.M. Best Industry Reserve Deficiencies as a Percentage of 2016 Net Written Premium Asbestos & Environmental N/A All Other Lines Medical Professional Liability Personal Auto Liability Homeowners Commercial Auto Liability Commercial Multiple Peril Other/Products Liability Reinsurance - Nonprop Assumed N/A Workers' Compensation -40% -20% 0% 20% 40% 60% 80% Source: A.M. Best Review & Preview; January 2017 35

The Financial Statement Effect MPL Combined Ratio after Policyholder Dividends Sources: Milliman analysis of A.M. Best Aggregates & Averages P&C; multiple editions Milliman analysis of P&C insurance statutory data as provided by SNL Financial 2014 and 2015 ratios have been adjusted for unrelated anomalous events impacting single companies 2016 and 2017 estimates from A.M. Best Review & Preview; January 2017 edition 36

The Financial Statement Effect MPL Investment Gain Ratio Sources: Milliman analysis of A.M. Best Aggregates & Averages P&C; multiple editions 2014 ratio has been adjusted for an anomalous event impacting a single company 37

The Financial Statement Effect Net Investment Income to Average Invested Assets 6% 5% 4% 3% 2% 1% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Milliman analysis of P&C insurance statutory data as provided by SNL Financial Chart represents results of 38 MPL specialty companies 38

The Financial Statement Effect Average Invested Assets to Net Earned Premium 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Milliman analysis of P&C insurance statutory data as provided by SNL Financial Chart represents results of 38 MPL specialty companies 39

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Est. The Financial Statement Effect MPL Operating Ratio 180% 180% 160% 1987-1998 (12 years) Cumulative Profit = 287% 2004-2016 (13 years) Cumulative Profit = 292% 160% 140% Average Profit = 24% Average Profit = 22% 140% 120% 120% 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% Sources: Milliman analysis of A.M. Best Aggregates & Averages P&C; multiple editions Milliman analysis of P&C insurance statutory data as provided by SNL Financial 40

The Financial Statement Effect Operating Profits: Investments versus Underwriting 500% 1987 Through 1998: 287% 2004 Through 2016: 292% 400% 300% 200% 100% 0% -100% -200% Investment Results Underwriting and Other Investment Results Underwriting and Other Sources: Milliman analysis of A.M. Best Aggregates & Averages P&C; multiple editions Milliman analysis of P&C insurance statutory data as provided by SNL Financial 41

Topic #4 Where Does That Leave Us? 42

Where Does That Leave Us? Risk-Based Capital (RBC) Ratio 1400% 1200% 1000% 800% 600% 400% 200% 0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Milliman analysis of P&C insurance statutory data as provided by SNL Financial Chart represents results of 38 MPL specialty companies 43

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Est. Where Does That Leave Us? DWP versus Combined Ratio A Three Year Lag? 180% $18 160% $16 140% $14 120% $12 100% $10 80% $8 60% $6 40% $4 20% $2 0% $0 MPL Combined Ratio Direct Written MPL Premium ($B) Sources: Milliman analysis of A.M. Best Aggregates & Averages P&C; multiple editions Milliman analysis of P&C insurance statutory data as provided by SNL Financial 2014 and 2015 combined ratios have been adjusted for unrelated anomalous events impacting single companies 2016 combined ratio estimate from A.M. Best Review & Preview; January 2017 edition 44

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Est. Where Does That Leave Us? DWP versus Operating Ratio A Three Year Lag? 160% $16 140% $14 120% $12 100% $10 80% $8 60% $6 40% $4 20% $2 0% $0 MPL Operating Ratio Direct Written MPL Premium ($B) Sources: Milliman analysis of A.M. Best Aggregates & Averages P&C; multiple editions Milliman analysis of P&C insurance statutory data as provided by SNL Financial 45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Est. Where Does That Leave Us? RBC Ratio versus Operating Ratio Will the Lag Be Longer than Three Years? 160% 1600% 140% 1400% 120% 1200% 100% 1000% 80% 800% 60% 600% 40% 400% 20% 200% 0% 0% MPL Operating Ratio Composite RBC Ratio Sources: Milliman analysis of A.M. Best Aggregates & Averages P&C; multiple editions Milliman analysis of P&C insurance statutory data as provided by SNL Financial RBC ratio represents results of 38 MPL specialty companies 46

Other Considerations 47

Other Considerations Accompanying Oral Discussion This document is not complete without the accompanying oral discussion and explanation of the underlying information and concepts, as well as any interpretational limitations. Limited Distribution This document should not be distributed, disclosed or otherwise furnished, in whole or in part, without the express written consent of Milliman. Data Reliance We have relied on data and other information provided prepared by others, as documented throughout this presentation. We have performed a limited review of the data for reasonableness and consistency and have not found material defects in the data. If there are material defects in the data, it is possible that they would be uncovered by a detailed, systematic review and comparison of the data to search for data values that are questionable or relationships that are materially inconsistent. Such a review was beyond the scope of our assignment. 48

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