the insurance cycle, fi i l c i i &financial crisis & … · sap the economy workers comp...

The Insurance Cycle, Fi i l C i i &Financial Crisis &

CatastrophesCatastrophes Impacts and Implications for theImpacts and Implications for the Texas P/C Insurance MarketsInsurance Council of Texas Annual Symposium

Austin, TXJ l 23 2009July 23, 2009

Download at www.iii.org/presentations/ICT-TX072309/

Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

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

Presentation Outline• The Economic Storm: Financial Crisis & Recession: US• Texas: Somewhat Less of an Economic Mess• Texas: Somewhat Less of an Economic Mess• Economic Trends: Personal, Commercial Exposure Implications• Key Threats and Issues Facing P/C Insurers Through 2015• Regulatory Reform• Financial Strength & Ratings

• Key Differences Between Insurer and Bank Performance During Crisisy g• P/C Insurance Industry Overview & Outlook: US & Texas

• Profitability• Premium Growth• Premium Growth• Underwriting Performance• Financial Market Impacts

M & A i iti A ti it

2

• Merger & Acquisition Activity• Capital & Capacity• Catastrophe Loss Trends: US & Texas

THE ECONOMIC STORM

What the Financial Crisis and Recession Mean for theRecession Mean for the

Industry’s Exposure Base d G hand Growth

Real GDP Growth*

% %

The Q4:2008 decline was the steepest since the

3.7%

% 2.5%

3.6%

3.1%

2.9%

4.8%

4.8%

2.8%

9% 2.3% 2.

8%

2.8% 3.0%4%

6%the steepest since the

Q1:1982 drop of 6.4%

0.8% 1.

6% 2

0.1% 0.

9%

%

1.0% 1.

9 2

0 2%0%

2%

P l d

-0.5

%

-1.8

%

-0.2%

-4%

-2% Recession began in December 2007. Economic toll of credit crunch, housing slump, labor

Personal and commercial lines

exposure base have been hit

-5.5%-6.3%

-8%

-6%

, g p,market contraction has been severe but recovery is in sight

hard and will be slow to come

back

4

8%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

*Blue bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 7/09; Insurance Information Institute.

Length of U.S. Business Cycles, 1929-Present*1929 Present

120120

Contraction Expansion FollowingDuration (Months)

A erage D ration**

80

106

9290

100110120 Average Duration**

Recession = 10.4 MonthsExpansion = 60.5 Months

Length of expansions

greatly

50

80

58

73

60708090 g y

exceeds contractions

43

20

50

3745

39

2436

30405060

138 11 10 8 10 11

166

168 8

2012

01020

Month

5

Aug.1929

May1937

Feb.1945

Nov.1948

July1953

Aug.1957

Apr.1960

Dec.1969

Nov.1973

Jan.1980

Jul.1981

Jul.1990

Mar.2001

Dec.2007

* As of July 2009, inclusive; **Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.

Month Recession Started

Total Industrial Production,(2007:Q1 to 2010:Q4F)(2007:Q1 to 2010:Q4F)

End of recession in late 2009, Obama stimulus program t d t b fit i d t i l d ti d

1 5%3.2%3.6% 3.3%3.7%4.0%4.1%

2.7%5.0%

10.0%are expected to benefit industrial production and

therefore insurance exposure both directly and indirectly

1.5%0.3%0.2%

-0.4%-5 0%

0.0%

-4.6%

-9.0%

13 0%-10.5%

15 0%

-10.0%

5.0%

Industrial production began

to contracted

Figures for 2010 revised upwards to

reflect expected -13.0%

-19.0%-20.0%

-15.0% to contracted sharply in late

2008 and plunged in Q1 2009

impact of Obama stimulus program

and a gradual economic recovery

6

-25.0%

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/09); Insurance Info. Inst.

Real GDP Growth vs. Real P/C Premium Growth: Modest Association

3%

25% 8%

Premium Growth: Modest AssociationP/C insurance industry’s growth i i fl d d tl b th

18.6

% 20. 3

.7%

15%

20% 6%

is influenced modestly by growth in the overall economy

% % %13

7.7%10%

15%

Gro

wth

2%

4%

Gro

wth

5.2%

1.8%

4.3% 5.

8 %0.

3%

3.1%

1.1%

0.8%

0.4%

0.6% 1.

6%5.

6 %

1.2%

0%

5%

Rea

l NW

P

0%

2%

Rea

l GDP

-0.9

%

%-1

.5%

-1.6

%-1

.0%

-1.8

%-1

.0%

-0.4

%-0

.3%

-2.9

% -0.5

%3.

8%.4

%-3

.0%-5%

0%

-2%

7

-7.4

%-6

.5% -3 -4

.

-10%

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

-4%Real NWP Growth Real GDP

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 7/09; Insurance Information Inst.

Inflation TrendsInflation Trends Pressures Claim CostPressures Claim Cost

Severities via Medical andSeverities via Medical and Tort Channels

Annual Inflation Rates(CPI U %) 1990 2010F(CPI-U, %), 1990-2010F

6.0Inflation peaked at 5.6% in August 2008 on

high energy and commodity crisis The4.9 5.1

3 8 3 84 0

5.0

6.0 high energy and commodity crisis. The recession and the collapse of the commodity bubble have produced temporary deflation.

3.0 3.22.6

1 9

3.3 3.4

2.5 2.3

3.0

3.8

2.8

3.8

2.82.92.43.0

4.0

1.51.9

1.31.8

1.0

2.0

(0.6)(1.0)

0.0

9

(0.6)(1.0)90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F10F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, July 10, 2009 (forecasts).

Comparative 2008 Inflation Statistics Important to Insurers ( %)Statistics Important to Insurers ( %)

CPI and “Core” CPI are i f 7.4

6

7

8

)

not representative of many of the costs

insurers face

3.8 3.7 4.04

5

6

n R

ate

(%)

2.71.8

2

3

Infla

tion

0

1

CPI-U Core CPI* TotalM di l

PhysicianS i

HospitalS i

LegalS i

10

MedicalCare

Services Services Services

*Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs.Source: US Bureau of Labor Statistics; Insurance Information Institute.

Top Concerns/Risks for Insurers if Inflation is ReignitedInflation is Reignited

CONCERNS: The Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Govt. Has Approved a $787B ( g ), pp $Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary.

What are the potential impacts for insurers?Wh t / h ld i d t t t th l f th i k f i fl ti ?What can/should insurers do to protect themselves from the risks of inflation?

KEY RISKS FROM SUSTAINED/ACCELERATING INFLATION• Rising Claim Severities

Cost of claims settlement rises across the board (property and liability)Cost of claims settlement rises across the board (property and liability)• Rate Inadequacy

Rates inadequate due to low trend assumptions arising from use of historical data • Reserve InadequacyReserve Inadequacy

Reserves may develop adversely and become inadequate (deficient)• Burn Through on Retentions

Retentions, deductibles burned through more quickly

11

• Reinsurance Penetration/ExhaustionHigher costs risks burn through their retentions more quickly, tapping into re-insurance more quickly and potential exhausting their reinsurance more quickly

Source: Ins. Info. Inst.

Labor MarketLabor Market TrendsTrends

Fast & Furious: Massive Job LossesSap the Economy Workers Comp &Sap the Economy Workers Comp &

Other Commercial Exposure

Unemployment Rate:On the Rise

January 2000 through June 2009

On the Rise

9.0

10.0June 2009 unemployment

jumped to 9.5%, and is now at it highest level since August 1983Previous Peak: 6 3% in

6 0

7.0

8.0 highest level since August 1983Previous Peak: 6.3% in June 2003

Trough: 4.4% in March 2007

4.0

5.0

6.0

U l t ill lik l k 10 %

2.0

3.0

00 01 02 03 04 05 06 07 08 09

Unemployment will likely peak near 10 % during this cycle, impacting payroll

sensitive p/c and l/h exposuresAverage unemployment rate 2000-07 was 5.0%

09

13

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Source: US Bureau of Labor Statistics; Insurance Information Institute.

Jun-

0

U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*(2007:Q1 to 2010:Q4F)

% % %11.0% Rising unemployment

9.3%

9.8% 10

.0%

10.1

%

10.0

%

9.9%

9.7%

9.5%10.0%10.5%11.0% g p y

is eroding payrolls and workers comp’s exposure base.

%

8.1%

7 5%8.0%8.5%9.0% Unemployment is

expected to peak above 10% in early 2010.

4%

6.1%

6.9%

6.0%6.5%7.0%7.5% y

4.5%

4.5% 4.6% 4.

8% 4.9%

5.4

4.5%5.0%5.5%

14

4.0%07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4

* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/09); Insurance Info. Inst.

Monthly Change Employment*(Thousands)(Thousands)

0January 2008 through June 2009

-72-144 -122

-160 -137-161-128

-175-200

-100

-175

-321-380

-322-400

-300 Job losses since the recession began in Dec. 2007 total 7.2 mill; 14.7 -380

597-519

-467-600

-500

;million people are now defined as unemployed.

M thl l i D M -597-681

-741-681-652

-800

-700

J F b M A M J J l 08 A S O t N D J F b M A M J

Monthly losses in Dec. – May were the largest in the post-WW II period

but pace of loss is diminishing

15

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08 Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute

The Texas EconomyThe Texas EconomyLess of Mess in Texas & in Much Better Shape the US Overall, ButBetter Shape the US Overall, But

Weakness is Spreading

Less Severe Impacts on P/C Insurer Exposure GrowthExposure Growth

The Texas Economy Grew Faster than Most States in 2008than Most States in 2008

Th TX b

17

The TX economy grew by 2% in 2008 compared to

0.7% for the US

Fastest Growing States in 2008: TX is a Growth LeaderTX is a Growth Leader

PercentReal State GDP Growth

7.3%7.0%

8.0%The TX economy

expanded by 2.0% in 2008 compared to 0 7%

Percent

Texas was in a 4-way tie as the

8th-fastest

4.4%5.0%

6.0%

7.0% 2008 compared to 0.7% for the US: good for insurers in the state

8 -fastest growing state

in 2008

3.5%2.9%

2.0%2.1%2.5%2.7%

2 0%

3.0%

4.0%

0.0%

1.0%

2.0%

18

0.0%ND WY SD CO OK WV IA TX, MN,

NM, WA

Source: US Bureau of Economic Analysis; Insurance Information Institute.

Unemployment Rate: Texas is Doing Much Better Than US

January 2000 through June 2009

Doing Much Better Than US

9.0

10.0US: 9.5% in June 2009

6 0

7.0

8.0

Texas: 7.5% in June 2009

4.0

5.0

6.0

TX had higher unemployment than the US from 2000

2.0

3.0

00 01 02 03 04 05 06 07 08 09 09

TX had higher unemployment than the US from 2000 through 2006 ( 5.5% vs. 5.1%) but has been lower since

2007 ( 5.1% in TX vs. 5.9% for US)

19

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0

Jan-

0


Jun-

0

Unemployment Rates by State, June 2009: Highest 25 States*2009: Highest 25 States

5.2

16The unemployment rate has been rising

h b

7 6 31.112

.0

.8.9.9.011.612

.412

.212

.1

15

12

14

16

%)

across the country, but some states are doing much better than others.

10.

10.6

10.3

10.1

10.1

9.3

9.2

9.0

9.0

8.69.

2

8.7

8.79.

3

11 10.

101011

1

8

10

12

ent R

ate

(%

4

6

8

empl

oym

e

0

2

4

Un

0MI RI OR SC NV CA OH NC DC KY TN IN FL IL AL GA MO WA NJ WV MS WI AZ NY MA

*Provisional figures for June 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Unemployment Rates By State, June 2009: Lowest 25 States*

10

2009: Lowest 25 StatesTexas had the 18th lowest unemployment rate in the

.2 .2 8 8 80.1

8.08.

4

7.37.47.57.68.

38.4

8.4

8.48.5

8

10

%)

unemployment rate in the US in June 2009 at 7.5% vs.

9.5% for the US

7 7 6.8

6.8

6.8

6.3

6.2

5.9

5.05.15.

7

7.07.

6.4

776

ent R

ate

(%

4.2

4

empl

oym

e

0

2Une

0ME AK MN DE ID PA CT CO TX HI MD AR VA VT KS LA NH NM MT OK IA WY UT SD NE ND

*Provisional figures for June 2009, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Unemployment in Texas is High for the Region but Low vs USfor the Region, but Low vs. US

Unemplo ment in TX isPercent

9.59 5

10.0

Unemployment in TX is the highest in the region,

it still compares favorably

Percent

8 08.59.09.5 p y

to the US

7.57.2

6.8 6.86.37.0

7.58.0

6.3

5.56.06.5

22

5.0TX AR LA NM OK US


Unemployment in Largest Texas Cities but Below US in AllCities but Below US in All

Unemployment is up in all Texas metroPercent

8.39.4

910

Unemployment is up in all Texas metro areas, but less so than in the US overall

Percent

5.7 5.56.1 6.6 7.1

8.3

6.95.8

7.1

6789

3.9 4.3 4.6 4.74.1

4.4

3456

0123

23

0Austin Corpus

CristiDallas-Ft.

WorthEl Paso Houston San

AntonioTexas--

StateUS


GREEN SHOOTSGREEN SHOOTS

Is the RecessionIs the RecessionNearing an End?g

Hopeful Signs That the EconomyWill Begin to Recover SoonWill Begin to Recover Soon

• Recession Appears to be Bottoming Out, Freefall Has EndedP f GDP h i k i b i i t di i i h• Pace of GDP shrinkage is beginning to diminish

• Pace of job losses is slowing• Major stock market indices well off record lows, anticipating recovery• Some signs of retail sales stabilization are evident

• Financial Sector is Stabilizing• Banks are reporting quarterly profits• Banks are reporting quarterly profits• Many banks expanding lending to credit worthy people & businesses

• Housing Sector Likely to Find Bottom Soon• Home are much more affordable (attracting buyers)• Mortgage rates are still low relative to pre-crisis levels (attracting buyers)• Freefall in housing starts and existing home sales is ending in many areas

25

Freefall in housing starts and existing home sales is ending in many areas

• Inflation & Energy Prices Are Under Control• Consumer & Business Debt Loads Are Shrinking Source: Ins. Info. Inst.

11 Industries for the Next 10 Years: Insurance Solutions NeededInsurance Solutions Needed

GovernmentEducation

Health CareEnergy (Traditional)Alternative Energy

A i lAgricultureNatural Resources

E i t lEnvironmentalTechnology

Li ht M f t i26

Light ManufacturingExport Oriented Industries

Crisis-DrivenCrisis Driven ExposureExposure

ImplicationsImplicationsHome, Contractor, Auto, , , ,Exposure Growth Slows

S l N dias Sales Nosedive

New Private Housing Starts,1990-2010F (Millions of Units)1990 2010F (Millions of Units)

Exposure growth due to home construction forecast for HO insurers is dim for 2009

New home starts plunged 34%

from 2005 2007;

2.07

801.85 1.

96

1 92.02.1

forecast for HO insurers is dim for 2009 with some improvement in 2010.

Impacts also for comml. insurers with construction risk exposure

from 2005-2007; Drop through 2009 is 73% (est.)—a net

annual decline of 1 52 million1.

361.48

351.46 1.47

1.62 1.64

1.57 1.60 1.

71

1

1.51.61.71.81.9 p 1.52 million

units, lowest since record

began in 1959

1.3

0

1.3

1.29

1.20

1.01

1.19

1.11.21.31.41.5

0.90

.55

0.76

1

0 60.70.80.91.0 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 2009 vs. 2005 is

28

0.

0.50.6

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09F 10F

pestimated at about $1.3 billion.

Source: US Department of Commerce; Blue Chip Economic Indicators (7/09); Insurance Information Inst.

Auto/Light Truck Sales,1999-2010F (Millions of Units)

Weak economy, credit crunch are h ti t l G i

New auto/light truck sales are expected to experience a

1999 2010F (Millions of Units)

17 117.517.8

17.41819

hurting auto sales; Gas prices have been a factor too.

are expected to experience a net drop of 6.7 million units annually by 2009 compared

with 2005, a decline of 40.3% and the lowest level

i th l t 196016.916.916.617.1

16.516.1

1516

17since the late 1960s

13.1131415

Impacts of falling auto sales will have a less pronounced effect on a to ins rance e pos re gro th

10.1

11.7

1011

12 auto insurance exposure growth than problems in the housing market will on home insurers

29

910

99 00 01 02 03 04 05 06 07 08 09F 10FSource: US Department of Commerce; Blue Chip Economic Indicators (7/09); Insurance Information Inst.

“Cash for Clunkers”Cash for Clunkers or Car Allowance

Rebate System (CARS)Program to Increase Fuel

Efficiency and Stimulate Auto SalesEfficiency and Stimulate Auto Sales Will Help Auto Insurers Too

Car Allowance Rebate System: How it WorksHow it Works

• President Obama in June 2009 signed into law the Car Allowance Rebate System (CARS) also knows as “Cash for Clunkers”Rebate System (CARS) also knows as Cash for Clunkers

• Administered by the National Highway Traffic Safety Admin. (NHTSA), the program helps people purchase a new, more fuel efficient vehicle when trading in a less fuel efficient vehicleefficient vehicle when trading in a less fuel efficient vehicle

• Program allocates $1 billion toward purchases between July 1 and Nov. 1, 2009 or until funds are exhausted (final rule July 24)

• Sense is that program will prove to be very popular and may be extended

• People can get between $3 500 and $4 500 per vehicle dependingPeople can get between $3,500 and $4,500 per vehicle, depending on fuel efficiency of new vehicle vs. old vehicle

• Auto insurers should be able to generate between $75 - $125 million in net new auto premiums as people trade up and buy full coverage*

31

in net new auto premiums as people trade up and buy full coverage**III estimate based on 250,000 cars purchased via CARS program generating $300-$500 additional premium per vehicle.Source: www.CARS.gov; NHSTA; Insurance Information Institute.

Car Allowance Rebate System: How it WorksHow it Works

Important Program Features• Car must be less than 25

years old• Only purchase or lease of y p

new vehicles qualify• Trade-in must get 18mpg or

less• Trade-in must have been

registered and continuously insured for the past yearinsured for the past year

• No voucher needed; dealer will apply credit at purchase

32Source: www.CARS.gov; NHSTA; Insurance Information Institute.

purchase• Trade-in must be scrapped;

Get scrap value

Key Threats Facing y gInsurers Amid

Financial CrisisChallenges for the

Next 5-8 YearsNext 5-8 Years

Important Issues & Threats Facing Insurers: 2009 2015Facing Insurers: 2009 - 2015

1. Erosion of CapitalL l d i idl th i lLosses are larger and occurring more rapidly than is commonly understood or presumedSurplus down 13%=$66B since 9/30/07 peak; 12% ($80B ) in 2008P/C policyholder surplus could be even more by year-end 2009P/C policyholder surplus could be even more by year-end 2009Some insurers propped up results by reserve releasesDecline in PHS of 1999-2002 was 15% over 3 years and was entirely made up and them some in 2003. Current decline is ~13% y pin 5 qtrs.During the opening years of the Great Depression (1929-1933) PHS fell 37%, Assets fell 28% and Net Written Premiums fell by 35% It took until 1939-40 before these key measures returned to35%. It took until 1939-40 before these key measures returned to their 1929 peaks.BOTTOM LINE: Capital and assets could fall much farther and faster than many believe. It will take years to return to the 2007

34Source: Insurance Information Inst.

peaks (likely until 2011 with a sharp hard market and 2015 without one)


2. Reloading Capital After “Capital Event”Continued asset price erosion coupled with major “capital event” could lead to shortage of capital among somecompaniesP ibl C I l i f d llPossible Consequences: Insolvencies, forced mergers, calls for govt. aid, requests to relax capital requirementsP/C insurers have come to assume that large amounts of capital can be raised quickly and cheaply after majorcapital can be raised quickly and cheaply after major events (post-9/11, Katrina).

This assumption may be incorrect in the current environmentCost of capital is much higher today reflecting bothCost of capital is much higher today, reflecting both scarcity & riskImplications: P/C (re)insurers need to protect capital today and develop detailed contingency plans to raise fresh


y p g y pcapital & generate internally. Already a reality for some life insurers.


3. Long-Term Reduction in Investment EarningsL i t t t i k i t d iti dLow interest rates, risk aversion toward equities and many categories of fixed income securities lock in a multi-year trajectory toward ever lower investment gainsPrice bubble in Treasury securities keeps yields lowPrice bubble in Treasury securities keeps yields lowMany insurers have not adjusted to this new investment paradigm of a sustained period of low investment gainsRegulators will not readily accept it; Many will reject itRegulators will not readily accept it; Many will reject itImplication 1: Industry must be prepared to operate in environment with investment earnings accounting for a smaller fraction of profitssmaller fraction of profitsImplication 2: Implies underwriting discipline of a magnitude not witnessed in this industry in more than 30 years. Yet to manifest itself.


yLessons from the period 1920-1975 need to be relearned

Important Issues & Threats Facing Insurers: 2009 – 2???

4. Regulatory Overreach Facing Insurers: 2009 – 2???

Principle danger is that P/C insurers get swept into vast federal regulatory overhaul and subjected to inappropriate, duplicative and costly regulation (Dual Regulation)Danger is high as feds get their nose under the tentStatus Quo is viewed as unacceptable by allQ p yPushing for major change is not without significantrisk in the current highly charged political environmentInsurance & systemic riskDisunity within the insurance industryImpact of regulatory changes will be felt for decades


Impact of regulatory changes will be felt for decadesBottom Line: Regulatory outcome is uncertain and risk of adverse outcome is high

Important Issues & Threats Facing Insurers: 2009 2015

5. Creeping Restrictions on UnderwritingFacing Insurers: 2009 - 2015

Attacks on underwriting criteria such as credit, education, occupation, territory increasingIndustry will lose some battlesyView that use of numerous criteria are discriminatory and create an adverse impact on certain populationsImpact will be to degrade the accuracy of rating systems pact w be to deg ade t e accu acy o at g syste sto increase subsidiesPredictive modeling also at riskCurrent social and economic environment couldCurrent social and economic environment could accelerate these effortsDanger that bans could be codified at federal level during regulatory overhaul


during regulatory overhaulBottom Line: Industry must be prepared to defend existing and new criteria indefinitely

Important Issues & Threats Facing Insurers: 2009 2015

6. Emerging Tort ThreatN t t f ( t ti f t f ) i

Facing Insurers: 2009 -2015

No tort reform (or protection of recent reforms) is forthcoming from the current Congress or AdministrationE i f t f i t i t ( l dErosion of recent reforms is a certainty (already happening)Innumerable legislative initiatives will create

t iti t d i i ti f dopportunities to undermine existing reforms and develop new theories and channels of liabilityTorts twice the overall rate of inflationInfluence personal and commercial lines, esp. auto liab.Historically extremely costly to p/c insurance industryLeads to reserve deficiency, rate pressure


y, pBottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012-2014

FINANCIAL STRENGTH &

RATINGSIndustry Has Weathered dust y as Weat e ed

the Storms Well

P/C Insurer Impairments,1969 20081969-2008

The number of impairments varies i ifi tl th / i l

60 860

70

significantly over the p/c insurance cycle, with peaks occurring well into hard markets

649 50 48

556 58

41

49 5047

40

50

60

34

19

36

3134

29 318 19

35820

30

40

815

127

11 9 913 12

19

16 14 13

1612

1 1 114 15

75

0

10

20

41

0

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Source: A.M. Best; Insurance Information Institute

P/C Insurer Impairment Frequency vs Combined Ratio 1969 2008vs. Combined Ratio, 1969-2008

Combined Ratio after DivP/C I i t F

Impairment rates are highly

115

1201.82.0

P/C Impairment Frequencye g ycorrelated with underwriting

performance and reached record lows in 2007/08

110

115

Rat

io

1.21.41.6

t Rat

e

lows in 2007/08

100

105

Com

bine

d

0 60.81.0

mpa

irmen

t

95

C

0.20.40.6 I

2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and

42

90

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

0.0


barely one-fourth the 0.82% average since 1969

Number of Impairments by State, 1969 20081969-2008

More TX insurers have become

140

140

160 impaired over the past 40 years than in any other state

9691100

120

rmen

ts

TX, FL and CA have the largest number of impairments.

Catastrophe risk plays a big role.

66 63

73

60

80

o. o

f Im

pair Catastrophe risk plays a big role.

Other factors influencing impairments include the political

i t d b i i

22 22 21 20 17 15 15 15 15 14 14 13 11 10 9 9 8 8 6 6 6 6 6

41

22242533

20

40No environment and business mix

8 8 6 6 6 6 6 5 5 5 5 5 5 5 4 4 4 3 3 3 2 2 2 2 1 1 00

TX FL CA IL NY PA LA MO

OK

OH AZ IN NJ GA NE WI

DE MA

MD SC CO TN PR RI HI KY MI

NC WV AL DC UT VA WA IA KS MN

MS

MT

NM OR SD VI WY AR CT VT AK ME

NH NV GU ID ND


Frequency of Impairments by State 1969 2008State, 1969-2008

(Impairments per 100 Insurers Domiciled in State)

3.36

2 0

3.48

3.5

4.0

)

WY, LA, FL have the highest impairment rates

.10

3.0

2.9 0

2.5

3.0

quen

cy (%

highest impairment rates in the country

TX has the 9th highest

1.34

1.29

1.29

1.29

1.25

1.25

1.23

04 8 8 7

1.58

2

1.35

1.411.

531.571.

63

1.5

2.0

men

t Fre

q

National average = 0.82%

gimpairment rate = 1.53%

1.0

0.98

0.98

0.97

0.92

0.92

0.91

0.90

0.89

0.89

0.83

0.78

0.75

0.72

0.70

0.68

0.60

0.58

0.55

0.49

0.46

0.41

0.36

0.36

0.35

0.35

0.25

0.22

0.21

0.21

0.16 .13

.13

08 06 0

0.5

1.0

Impa

irm

0 0 0 0. 0. 0.0

0.0

0.00

0.0

WY LA FL VI MT

CA WV AZ TX PR UT RI GA HI DC NM SC OK

MO

CO

MS NE NV GU

MD NJ TN KY OR IL NY PA AK MA

WA IN AL DE VA OH AR KS NC MI ID M

ESD W

INH IA CT M

N VT ND


P/C Impairment Frequency vs. Catastrophe Points in Combined Ratio, 1977-2008Points in Combined Ratio, 1977 2008

Catastrophe Points in Combined RatioImpairment rates

are highly

14

16

Rat

io

1.82.0

pP/C Impairment Frequency

e g ycorrelated with underwriting

performance and reached record lows in 2007/08

10

12

Com

bine

d

1 21.41.6

Rat

e

lows in 2007/08

6

8

Poin

ts o

n C

0.81.01.2

mpa

irmen

t

2

4

atas

troph

e

0.20.40.6 Im

2008 impairment rate was a record low 0.23%, second only to the 0.17% record low in 2007 and

0

77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Ca

0.0

Source: A.M. Best, PCS; Insurance Information Institute

barely one-fourth the 0.82% average since 1969

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2008*Ratings Actions in 2008

P/C insurance is by design a resilient in

Upgraded, 59 , 4.0%

Initial, 41 , 2.8%Downgraded, 55 , 3 8%

design a resilient in business. The dual threat of financial

disasters and catastrophic losses are Under Review, 63 ,

4.3%

O h 59 4 0%

3.8%catastrophic losses are anticipated in the

industry’s risk management strategy.

Other, 59 , 4.0%

Despite financial market turmoil, high cat losses

and a soft market inand a soft market in 2008, 81% of ratings actions by A.M. Best

were affirmations; just 3.8% were downgrades

46

Affirm, 1,183 , 81.0%*Through December 19.Source: A.M. Best.

46

3.8% were downgrades and 4.0% upgrades

Historical Ratings Distribution,US P/C Insurers 2008 vs 2005 and 2000US P/C Insurers, 2008 vs. 2005 and 2000

2008 2005 2000A++/A+ and

D0.2%C++/C+

1.9%

E/F2.3% A++/A+

11 5%

C/C-0.6%

A++/A+9.2%

Vulnerable*

A++/A+10.8%Vulnerable*

A++/A+ and A/A- gains

.9% 11.5%B/B-6.9%

Vulnerable12.1%

B++/B+21.3%

7.9%

A/A-

B++/B+28.3%

A/A-52 3%

B++/B+26.4%

A/A48.4%

P/C insurer financial strength has improved since 2005

52.3%A/A-

60.0%

47Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,November 8, 2004 for 2000; 2006 and 2009 Review & Preview. *Ratings ‘B’ and lower.

has improved since 2005 despite financial crisis

Reasons for US P/C Insurer Impairments 1969 2008Impairments, 1969-2008

Reinsurance Sig. Change Deficient

Deficient loss reserves and inadequate i i th

Failure3.7%

Misc.9.1%

Sig. Change in Business

4.2%

Loss Reserves/In-

adequate Pricing38 1% pricing are the

leading cause of insurer

impairments

38.1%

Investment Problems

7 0% impairments, underscoring the

importance of discipline. Affiliate

Impairment

7.0%

pInvestment

catastrophe losses play a much

ll lRapid

Impairment7.9%

All d F d

Catastrophe Losses

48Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008

smaller role.Growth14.3%

Alleged Fraud8.1%

Losses7.6%

Critical Differences Between P/C

Insurers and BanksSuperior Risk Management ModelSuperior Risk Management Model

& Low Leverage MakeBi Diffa Big Difference

How Insurance Industry Stability Has Benefitted ConsumersHas Benefitted Consumers

BOTTOM LINE:I M k U lik B ki A O i• Insurance Markets—Unlike Banking—Are Operating Normally

• The Basic Function of Insurance—the Orderly TransferThe Basic Function of Insurance the Orderly Transfer of Risk from Client to Insurer—Continues Uninterrupted

• This Means that Insurers Continue to:P l i ( h 82 b k h d f 7/17/09)Pay claims (whereas 82 banks have gone under as of 7/17/09)

The Promise is Being FulfilledRenew existing policies (banks are reducing and eliminating li f dit)lines of credit)Write new policies (banks are turning away people who want or need to borrow)

50

Develop new products (banks are scaling back the products they offer)

Source: Insurance Information Institute50

Reasons Why P/C Insurers Have Fewer Problems Than Banks:

A Superior Risk Management Model• Emphasis on Underwriting

Matching of risk to price (via experience and modeling)

A Superior Risk Management Model

g p ( p g)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk

• Strong Relationship Between Underwriting and Risk BearingInsurers always maintain a stake in the business they underwrite keeping “skin in the game”Insurers always maintain a stake in the business they underwrite, keeping skin in the game at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences—straightforward moral hazard problem from Econ 101

• Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry

• Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid

• Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge

51

y g y p g g ( g gfunds, private equity, complex securitized instruments, credit derivatives—CDS’s)

• Greater TransparencyInsurance companies are an open book to regulators and the public

Source: Insurance Information Institute51

Regulatory Reform egu ato y e oObama Administration’s Plan

for Reforming Financialfor Reforming Financial Services Industry Regulation

Will Impact InsurersWill Impact Insurers

CONSUMER POLL: 2009 I.I.I. PULSE SURVEYPULSE SURVEY

Don't

State govt.35%

Don t know13%The average

American has little to d t di f 35%

No one19%

no understanding of insurance regulation:

1/3 believe the i d t i l t d

Federal govt

industry is regulated by the federal

government and l 20% b li it govt.

33%nearly 20% believe it is unregulated

Barely 1/3 of Americans know th t i i l t d b

53Source: Insurance Information Institute, 2009 Pulse Survey, May 2009.

that insurance is regulated by the states. There is a popular

notion that the industry is unregulated.

CONSUMER POLL: 2009 I.I.I. PULSE SURVEYPULSE SURVEY

State

Neither11%

Don't know6%

Americans are split on who they believe

h ld l t th government34%

Both state and federal government

should regulate the insurance industry.

More than 20% b li th i d t

Federal government

government21%believe the industry

should be regulated by both the state andf d l t government

28%

There is no strong support

federal government.

54Source: Insurance Information Institute, 2009 Pulse Survey, May 2009.

g ppfor state or federal

regulation among the American public

REGULATORY REFORM:2009 AND BEYOND2009 AND BEYOND

55

Obama Regulatory Reform Proposal:Plan ComponentsPlan Components

I. Office of National Insurance (ONI) Duties( )1. Monitor “all aspects of the insurance industry”2. Gather information3. Identify the emergence of any problems or gaps in

regulation that could contribute to a future crisis4. Recommend to the Federal Reserve insurance companies

it believes should be supervised as Tier 1 FHCs5 Administer the Terrorism Risk Insurance Program5. Administer the Terrorism Risk Insurance Program6. Authority to enter into international agreements and

increase international cooperation on insurance regulation

56

p g

Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.

Obama Regulatory Reform Proposal:Plan Components (cont’d)

II. Systemic Risk Oversight & Resolution AuthorityF d l R i th it t t i i k

Plan Components (cont d)

Federal Reserve given authority to oversee systemic risk of large federal holding companies (Tier 1 FHCs)

Insurers are explicitly included among the types of entities that could be f Cfound to be a Tier 1 FHC

ONI given authority to “recommend to the Federal Reserve any insurance companies that the ONI believes should be supervised as Tier 1 FHC.”

Proposal also recommends “creation of a resolution regime to avoid disorderly resolution of failing bank holding companies, including Tier 1 FHCs “…in situations where the stability of the financial system is at risk ” Directlythe stability of the financial system is at risk. Directly affects insurers in 2 ways:

Resolution authority may extend to an insurer within the BHC structure if the BHC is failing

57

the BHC is failing

If systemically important insurer is failing (as identified by ONI as Tier 1 FHC) resolution authority may apply

Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009.


III. Consumer Financial Protection Agency (CFPA)R d ti th t “CFPA h ld h b d j i di ti t t t


Recommendation that “CFPA should have broad jurisdiction to protect consumers in consumer financial products and services such as credit, savings and payment products.”

Appears that Administration does not intend that the CFPA have jurisdiction overAppears that Administration does not intend that the CFPA have jurisdiction over the insurance industry products or market practices

At the same time, there is no language that expressly excludes insurance from the scope of the CFPA’s authority

CFPA proposal contains numerous references specific to credit and savings products but none to insurance. However, the Administration clearly anticipates that CFPA would have broad powers with the scope f th ’ d d fi d b l “P i i l f A ti ”of the agency’s agenda defined by several “Principles for Action,”

which clearly could apply to insurance regulation: Transparency: Disclosures and communications with clients should be “reasonable”

58

Simplicity: Standards for simplified products, straightforward pricing

Fairness: Restrictions on products if benefits outweigh costsSource: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009; “Obama .Proposal Would Create Office of National Insurance But is Unclear on Federal Chartering,” Dewey & LeBoeuf, Client Alert, June 17, 2009.


IV. Other Provisions Potentially Affecting InsurersCreation of Financial Services Oversight Council (FSOC)


Creation of Financial Services Oversight Council (FSOC)ONI is not included among Council’s membership

Strengthen Capital and Other Prudential Standards for All Banks, Bank Holding Companies and Tier 1 Financial Holding CompaniesHolding Companies and Tier 1 Financial Holding CompaniesRequire Hedge Funds and Other Private Pools of Capital to Register

Alternative sources of capital have played a more important role in the wake of major catastrophes such as 9/11 and Hurricane Katrinamajor catastrophes such as 9/11 and Hurricane Katrina

Institute Regulation of All OTC Derivatives, Including CDS’sInternational:

Strengthen Intl. Capital Framework & Improve Oversight of Global Financial Markets

Enhance Supervision of Internationally Active Financial Services Firms

Determine appropriate Tier 1 FHC definition for foreign financial firms

59

Improve Accounting StandardsTighten Oversight of Credit Rating Agencies

Source: “Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation,” US Department of the Treasury, June 2009; “

Rating of Auto/Home Insurance Regulatory & Operating Environment*

GRADE 2009 2008S d h i GRADE 2009 2008A 4 7B 10 25C 17 10D 12 5

Study suggest the insurance regulatory and operating

environments deteriorated in 2009 for auto and home insurance

ME

NH

ND

MN

WA

AL

VTMT

AK

D 12 5F 6 4

NH

MA

CT

PA

NE

MN

MI

IL

IA

ID

OR

NJRI

MDDE

NY

**DC

SD WI

INOH

WY

= A

= B

= CWV

VA

NC

OK

IL

AZ

MD

SC

TN

ARNM

KYMOKS

IN

CA

NVUT

CO

C

= D

= F

Source: James Madison Institute, February 2008.

LATX

HI GAAL

FL

MS

NM

*Criteria considered were auto/home residual mkts.,

60

auto/home mkt. concentration, loss ratio stability, reg. env., regulatory clarity, credit scores, auto market entry/exit, territorial restrictions, political oversight.

**Information not available.Source: Heartland Institute, May 2009http://www.heartland.org/custom/semod_policybot/pdf/25091.pdf

P/C INSURANCE FINANCIAL

PERFORMANCE

A R ili I d iA Resilient Industry in Challenging TimesChallenging Times

ProfitabilityProfitability

Hi t i ll V l tilHistorically Volatile

P/C Net Income After Taxes1991 2009:Q1 ($ Millions)*1991-2009:Q1 ($ Millions)

677$80 0002005 ROE= 9.4%2006 ROE = 12 2%

Insurer profits peaked in 2006 and

9

$62,

496

$65,

77

,155

1

$60,000

$70,000

$80,000 2006 ROE = 12.2%2007 ROAS1 = 12.4%2008 ROAS = 0.5%*2009:Q1 ROAS = -1.2%*

peaked in 2006 and 2007, but fell 96.2% during the economic

crisis in 2008

78 ,316

0,59

8

24,4

04 $36,

819

$30,

773

1,86

5

$30,

029 $4

4,

,559

$38,

501

$30 000

$40,000

$50,000

$14,

17

$5,8

40

$19,

$10,

870

$20 $2 $21

$3,0

46

$2,3

79

-$1,

309$2

0 ,

$10,000

$20,000

$30,000

$

-$6,970-$10,000

$0

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 8F Q1

63

0

09: Q

*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guarantee insurers yields an 4.2% ROAS for 2008 and 2.2%. 2009:Q1 net income was $2.4 billion excl. M&FG.Sources: A.M. Best, ISO, Insurance Information Inst.

63

ROE: P/C vs. All Industries 1987–2009: Q1*

20%

1987–2009: Q1P/C profitability is Excludes Mortgage &

Financial Guarantee Insurers

15%cyclical and volatile

5%

10%Sept. 11

0%

%

A d

Hugo Lowest CAT losses in 15 years

Katrina, Rita, Wilma

-5%87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809:Q1

Andrew Northridge 4 Hurricanes

64

US P/C Insurers All US Industries

*Excludes Mortgage & Financial Guarantee in 2008 and 2009Sources: ISO, Fortune; Insurance Information Institute.

P/C Insurance Industry ROEs,1975 – 2009:Q1*

25%1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2%

Q

15%

20%

25%

10%

15%

09:Q1: -1 2%

0%

5%

2008: 0.5%

09:Q1: -1.2%

-5%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809

Q1

1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2%

65Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2% and 2.2 in Q1 2009.Sources: ISO; A.M. Best; Insurance Information Institute. 65

A 100 Combined Ratio Isn’t What it U d t B 95 i Wh It’ At

110 18%

Used to Be: 95 is Where It s At

100 6 100 7 101 0

14.3% 15.9%105

110

14%

16%

18%Combined Ratio ROE*

97.5

100.6 100.1 100.798.4

101.0

12.7%9.6%

95

100

ed R

atio

10%

12%

n Eq

uity

*

92.68.9%

4.2%90

95

Com

bine

6%

8%

Ret

run

on

Combined ratios must me must lower in today’s depressed

i t t

2.2%

80

85

0%

2%

4%investment environment to generate risk

appropriate ROEs

66

801978 1979 2003 2005 2006 2008* 2009:Q1*

0%

* 2008/9 figures are return on average statutory surplus. Excludes mortgage and financial guarantee insurers.Source: Insurance Information Institute from A.M. Best and ISO data.

Advertising TrendsAdvertising Trends

Advertising Expenditures by P/C Insurance Industry 1999-2008Insurance Industry, 1999 2008

$ Billions$ Billions

$4.102$4.354

$4 0

$4.5 Ad spending by P/C insurers was at a

$3.426

$2.975$3.5

$4.0 record high in 2008, signaling strong

competition despite $2.975

$2.111$2.5

$3.0 competition despite the recession.

$1.736 $1.737 $1.803 $1.708

$2.111$1.882

$1.5

$2.0

68

$99 00 01 02 03 04 05 06 07 08

Source: Insurance Information Institute from consolidated P/C Annual Statement data.

P/C PremiumP/C Premium GrowthGrowth

Primarily Driven by thePrimarily Driven by the Industry’s UnderwritingIndustry s Underwriting Cycle, Not the Economy

Strength of Recent Hard Marketsby NWP Growth

24%

y NW G1975-78 1984-87 2000-03

Sh d d

16%18%20%22%

Net written premiums fell 1.0%

in 2007 (first decline since 1943)

Shaded areas denote “hard

market” periods

10%12%14%16% decline since 1943)

by 1.4% in 2008, and 3.6% in Q1 2009, the first 3-

year declines since

4%6%8%

y1930-33

4%-2%0%2%

70

-4%

1971

1972

1973

1974

1975

1976

1977

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

09:Q

1

Sources: A.M. Best (historical and forecast), ISO, Insurance Information Institute70

Year-to-Year Change in Net Written Premium 2000-2009:Q1Written Premium, 2000 2009:Q1

P/C insurers are Protracted i d f

15.3%experiencing their

slowest growth rates since 1930-33

period of negative or slow growth is due to soft markets and

5 0%

8.4%10.0% Slow growth means

retention is critical

markets and slow

economy

5.0%3.9%

0.5%

4.2%

-1.0% -1.4%-3.6%

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

3.6%2000 2001 2002 2003 2004 2005 2006 2007 2008 2009:Q1

71

Average Expenditures on Auto InsuranceAuto Insurance

Countrywide auto insurance

$875

0 41042 1

$900

$950Countrywide auto insurance expenditures increased 2.6% in 2008 and are rising at a

4% pace in 2009

6

$786 $8

30 $84

$817

$82 0$8

4

$83

$800

$8504% pace in 2009

651

$668 $6

91 $705

$703

$685

$690 $7

2 6$700

$750

$6 $

$600

$650

72

94 95 96 97 98 99 00 01 02 03 04 05 05 07* 08* 09**Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.

Monthly Change in Auto Insurance Prices*

% %

6%

Insurance PricesAuto insurance

% 4% 3.7% 4.

0%4.

0% 4.3% 4.4% 4.

7%4.

4% 4.7%

4%

5%Auto insurance

prices have clearly begun to rise in

t th

%2.

6%2.

6% 2.7% 3.

0% 3.1% 3.

4 3

3%

recent months

0.8%

0.8%

5% 4% % % 5% .6%

5%%

5% 0.9% 1.1% 1.3% 1.

7%

%1%

2%

0 00.

50.

40.

3%0.

3% 0.5 0. 0.5

0.1% 0.

50.

2%

0%

%

-07

-07

-07

-07

-07

-07

-07

ug-

-07

-07

-07

-07

-08

-08

-08

-08

-08

-08

-08

ug-

-08

-08

-08

-08

-09

-09

-09

-09

-09

-09

73

Jan-

Feb-

Mar

-A

pr-

May

-Ju

n-Ju

l- Au

Sep-

Oct

-N

ov-

Dec

-Ja

n-Fe

b-M

ar-

Apr

-M

ay-

Jun-

Jul- Au

Sep-

Oct

-N

ov-

Dec

-Ja

n-Fe

b-M

ar-

Apr

-M

ay-

Jun-

*Percentage change from same month in prior year.Source: US Bureau of Labor Statistics

Average Premium forHome Insurance Policies**Home Insurance Policies

Countrywide auto insurance

04 07 820

$841

$850$900$950

yexpenditures increased 1.6% in 2008 and are increasing at 2.6% annual rate in 2009

8 $729 $7

64 $80

$80 $8 $

$750$800$850

6 $593

$66

$600$650$700

$508 $5

36

$500$550$600

74

00 01 02 03 04 05 06 07* 08* 09**Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2007-2009 based on CPI data.

Average Commercial Rate Change,All Lines (1Q:2004 2Q:2009)All Lines, (1Q:2004 – 2Q:2009)

0%% Magnitude of price

.2%

%2.

7%3.

0%-4%

-2%

-0.1

% Magnitude of price declines is now

shrinking. Reflects shrinking capital,

reduced investment i d t i ti-3

-5.9

%7.

0%

%-4

.6% - -3

-5.3

%

-6.0

% -5.0

%-5

.0%

-8%

-6%gains, deteriorating

underwriting performance, higher cat losses and costlier

reinsurance-7-9

.4%

-9.7

% -8.2

%

-9.6

%.3

%8% % 1.

0%-12%

-10%reinsurance

-11.

-11.

8-1

3.3% -1

2.0%

-13.

5%-1

2.9% -1

1

-16%

-14%

4 4 4 4 5 5 5 5 6 6 6 6 7 7 7 7 8 8 8 8 9 9

KRW Effect

75

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

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

PROFITS IN TEXAS:PROFITS IN TEXAS:

Sometimes a Laggard, Ike Sets TX gg ,

Further BehindFurther Behind

Profitability Index: Texas vs. US P/C vs All Industries 1990=100

900

1000

vs. All Industries, 1990=100The Fortune 500 outperformed insurers’

return in the TX P/C insurance market by

700

800

900 return in the TX P/C insurance market by 350% from 1990-2008E, given expected poor

results of 2008.

%

500

600

700How much would an

investment of $100 made in 1990 be worth today?

Fortune 500: $914

217%

300

400Fortune 500: $914

P/C Insurance US: $369P/C Insurance TX: $288 28

%

100

200

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

All US Industries P/C Insurance Texas*Assumes a TX RNW of -15% in 2008.Source: Insurance Information Institute; NAIC, Fortune

Homeowners Direct Loss Ratios: TX vs US

1985-2007

Ratios: TX vs. US

120%US Texas

Loss Ratios in Texas were worse

than the US 12 out

80%

100% of 24 years *

60%

80%

40%Averages: 1985-2007

TX: 69.9%US: 68 2%20%

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07Source: NAIC; Insurance Information Institute. *Official 2008 figures unavailable, but Hurricane Ike assures TX performed worse that the US overall.

US: 68.2%

ROE for Homeowners Insurance in Texas 1992 2008ETexas, 1992 – 2008E

Average ROE in TX 1992 through 2007 was 1 9%; -0 6% through 2008E

Texas will need to provide insurers with

38.1%31.3%

28.2%30%

40%

50%was 1.9%; 0.6% through 2008Eprovide insurers with

high rates of return in some years to offset

huge losses in others

14.7%10.2% 13.1%

6.2%

20.7%19.4%

11.9%10%

20%

30%

-6.0%-10.9%

20%

-10%

0%The avg. return on TX homeowners

insurance is now in

38 8%

-23.5%

-40%

-30%

-20% insurance is now in the red over the past 18 years. Return is lower than risk free Treasury securities.

-38.8% -40.0%-42.4% -41.9%-50%1992 1994 1996 1998 2000 2002 2004 2006 2008E

Source: NAIC; Insurance Information Institute.

TEXAS:TEXAS:

A GROWTH & PROFIT COMPARISON

Growth in Direct Written Premiums: TX and USPremiums: TX and US

Despite all the rhetoric, premiums collected by insurers have actually

TX premium growth is well above US

20%

25% collected by insurers have actually risen slightly more in TX on an

average annual basis than the nation overall between 1985 and 2007: 7.7%

is well above US average in recent

years

10%

15%overall between 1985 and 2007: 7.7%

in TX vs. 6.3% for the US

5%

-5%

0%

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0785 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Texas USSource: A.M. Best, Insurance Information Institute

ROE: US & TX P/C vs. All Industries 1992 2008E

20%

25%

Industries, 1992–2008E

10%

15%

20%

0%

5%

28.1

pts

s

15%

-10%

-5% Historically, profitability in Texas has seriously lagged

the p/c insurance industry in

1.7

pts

-20%

-15%

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*

general and the Fortune 500

US P/C Insurers All US Industries TexasSource: Insurance Information Institute; NAIC, Fortune; I.I.I. estimate of -15% in 2008 influenced primarily by Hurricane Ike losses.

Average ROE Comparison Shows Texas is Profit Laggard, 1992 – 2008*f gg ,

Despite occasional goodTX is below even a risk free return on

13.3%14%

Despite occasional good years, improvements is

TX appear to be t i bl

risk-free return on Treasury securities. HINT: TX is not a i k f i

7 7%10%

12%unsustainable risk free investment

for insurers

4.8%

7.7%5.4%

4%

6%

8%

0%

2%

4%

Texas US P/C Fortune 500 10-YearTreasury*2008 return for TX of -15% is I.I.I. estimate.

Source: Insurance Information Institute from NAIC, Fortune and Federal Reserve data.

ROE for Personal Lines in Texas1992 20071992 - 2007

%50% Personal Auto

16-Year Average: 92-07Auto: +8.7%

4% 8.8%

% %7% %

38.1

%

31.3

%

28.2

%

% % 19.4

%

20.7

%30%

40%

50%Homeowners Home: 1.9%

5.3% 9.

1% 14.4

8.8%

4.8% 8.

2%

18

12.7

%

12.6

%

5.6%

14.7

10.2

%

13.1

%

14.1

6.7%

5.1% 5.9%11

.9% 12

6.2%

0%

10%

20%

-5.0

%

-3.1

%-1

0.9%

%

-6.0

%

-20%

-10%

0%

Despite recent improvements, TX

8.8% -41.9%-42 4%

-

-23.

5%

50%

-40%

-30%p ove e s,

is a very risky long-run proposition

-38 41.9%-42.4%-50%1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: NAIC

ROE for Major CommercialLines in TX 1992 2007Lines in TX, 1992 - 2007

1%40% Workers Comp

20.0

% 24.4

% 32.1

4% 7.7%

% % %

% 4% 8.2%

%

30%

0% Workers CompCommercial Multi-Peril

2

15.4

10.1

%

8.5%

7.7%

3.0%

1 7

12.9

%

13.0

%

11.5

%

6.1%

.1%

14.4 16

. 18

9.8%

.5% 6.

2%

3.0% 6.

4%

4.9% 9.

3% 11.8

%

10%

20%

-3.3

%

32

%

-1.2

%

2. 3

6.1%-10%

0%

Profits in TX -

-15.

6% -9.8

%

-12.

7%

-18.

7%

-6

30%

-20%

Profits in TX are highly

volatile

--30%1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Source: NAIC

Merger & gAcquisitionq

Barriers to Consolidation i i i i i 2009/10Will Diminish in 2009/10

P/C Insurance-Related M&A Activity 1988 2008M&A Activity, 1988-2008

Transaction Values Number of Transactions

32

$55,825

$50 000

$60,000

120

1402009 off to a stronger start with AIG unit sales and

$ Value of deal up 20% in 2009,

volume down 12%

$40,

03

$35,

221

30,8

73$40,000

$50,000

ue ($

Mill

)

80

100

nsac

tions

AIG unit sales and Bermuda

consolidation

$19,

118

$20,

353

4 ,615

16,2

94

$ 3

4$20 000

$30,000

actio

n Va

l

60

80

ber o

f Tra

n

2,43

5

$5,1

00

1,24

986 25

$9,2

64 $13 $1

$8,0

59$1

1,53

,882

$3,4

50$2

,780

$5,1

37

$5,6

38

$10,000

$20,000

Tran

sa

20

40

Num

b

87

$ $1 $4 $4$1,$ $

$088 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

0.Source: Conning Research & Consulting.

Distribution Sector: Insurance-Related M&A Activity 1988 2008Related M&A Activity, 1988-2008

Transaction Values Number of Transactions

$15,205

$14,000

$16,000

ll) 300

350

s

Consolidation within the distribution sector

$10,000

$12,000

alue

($ M

il

200

250

ansa

ctio

nsremains elevated

$5,8

12

20

$6,000$8,000

sact

ion

Va

100

150

200

mbe

r of T

ra

$542

$446$1

,934

7

$1,633

$2,7

2

689

0 212 $9

44$2,000$4,000

Tran

s

50

100

Num

88

$$7 $

$60

$2$096 97 99 00 01 02 03 04 05 06 07 08

0

Source: Conning Research & Consulting.

Distribution Sector M&A Activity 2008 vs 2006Activity, 2008 vs. 20062008 2006

TitleInsurer

PE Buying Agency

4% Agency Buying

Other2%

Title4%

Insurer Buying

Distributor

Agency Buying Agency

Other2%

2%Insurer Buying

Distributor12%

Buying Agency

67%7%

Agency62%

Bank Buying

Bank Buying Agency

13%

Bank Buying Agency

25%

Number of bank acquisitions is

89Source: Conning Research & Consulting

acquisitions is falling; More private equity

interest

Capital/P li h ldPolicyholder

SurplusSurplusShrinkage, butShrinkage, but

Capital is WithinHi t i NHistoric Norms

U.S. Policyholder Surplus: 1975 2009:Q1*

$550

1975-2009:Q1*Actual capacity as of 3/31/09 was $437.1, down 4.2%

$400

$450

$500 from 12/31/08 at $455.6B, but still 53% above its 2002 trough. Recent peak was $521.8 as of 9/30/07. Surplus

as of 3/31/09 is 16.2 below 2007 peak.

$300

$350

$400

$ B

illio

ns The premium-to-surplus ratio stood at $1.03:$1 as of

3/31/09 f

$150

$200

$250

$

“Surplus” is a measure of underwriting capacity It is

3/31/09, up from near record low of $0.85:$1 at

year-end 2007

$50

$100

$150 underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

y

91

$075 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809*

Source: A.M. Best, ISO, Insurance Information Institute. *As of 3/31/0991

Policyholder Surplus, 2006:Q4 – 2009:Q12006:Q4 2009:Q1

$ BillionsCapacity peaked at $ Billions

$512.8$521.8

$505 0$515.6$517.9

$520

$540$521.8 as of 9/30/07

$487.1$496.6

$478.5

$4 6

$505.0

$480

$500

D li Si 2007 Q3 P k $455.6$437.1$440

$460 Declines Since 2007:Q3 Peak08:Q2: -$16.6B (-3.2%) 08:Q3: $43 3B ( 8 3%)

$380

$400

$420 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2 (-12.9%)

09:Q1: -$84.7B (-16.2%)

92

$38006:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1

Source: ISO.92

Premium-to-Surplus Ratios Before Major Capital Events*Before Major Capital Events

P/C insurance industry was better it li d i i t th

$1.65

$1.42 $1 40$1 5$1.7$1.9 capitalized going into the

financial crisis than before any “capital event” in recent history

$1.42 $1.40

$1.03 $1.03$0 88

$1.05$1.15

$1.1$1.3$1.5

$0.88

$0 5$0.7$0.9

$0.5

/30/

1989

Hur

rican

eH

ugo

/30/

1992

Hur

rican

eA

ndre

w

2/31

/93

rthr

idge

rthq

uake

6/30

/01

Sept

. 11

Atta

cks

6/30

/04

Flor

ida

urric

anes

6/30

/05

Hur

rican

eK

atrin

a

6/30

/07

Fina

ncia

lC

risis

As

of3/

31/0

9**

93

6/ H 6/ H A 12 No

Ear 6 F

Hu H F 3

*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.

U.S. P/C Industry Premiums-to-Surplus Ratio: 1985-2009:Q1

2.0

Surplus Ratio: 1985 2009:Q1Premiums measure risk accepted; surplus is funds

b d t t d l Th l

1.8

beyond reserves to pay unexpected losses. The larger surplus is in relation to premiums—the lower the ratio

of premiums to surplus—the greater the industry’s capacity to handle the risk it has accepted.

1 4

1.6P/C insurers remain well

capitalized despite recent erosion f it l 50 1 52

1.2

1.4

19980.84:1–the lowest

of capital. 50-year average = 1.52.

1.0

0.84:1 the lowest (strongest) P:S ratio

in recent history. 1.03:1 as of 3/31/09

94

0.885 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

Sources: A.M. Best, ISO, Insurance Information Institute *As of 3/31/09.

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*Largest Capital Events Since 1989

The financial crisis now ranks as the largest

10 9%

16.2%13.8%

14%16%18%

ranks as the largest “capital event” over the

past 20+ years

9.6%6.9%

10.9%

6.2%8%10%12%

3.3%

0%2%4%6%

0%

/30/

1989

Hur

rican

eH

ugo

/30/

1992

Hur

rican

eA

ndre

w

2/31

/93

rthr

idge

rthq

uake

6/30

/01

Sept

. 11

Atta

cks

6/30

/04

Flor

ida

urric

anes

6/30

/05

Hur

rican

eK

atrin

a

nanc

ial

sis

as o

f/3

1/09

**

95

6/ H 6/ H A 12 No

Ear 6 F

Hu H Fi Cri 3 /

*Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.

Historically, Hard Markets Follow When Surplus “Growth” is Negative*

30%

NWP % changeSurplus % change

When Surplus Growth is NegativeSharp decline in capacity is a necessary but not sufficient

20%

25%

30% Surplus % change necessary but not sufficient condition for a true hard market

10%

15%

5%

0%

5%

-15%

-10%

-5%

96

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

*2009 NWP and Surplus figures are % changes for Q1:09 vs Q1:08Sources: A.M. Best, ISO, Insurance Information Institute

Investment Performance

Investments are the PrincipleInvestments are the Principle Source of Declining

fi bilif g

Profitability

Property/Casualty Insurance Industry Investment Gain:1994- 2009:Q11Q

$ Billions$64 0

$42 8$47.2

$52.3$44.4 $45.3

$48.9

$59.4$55.7

$64.0$56.9

$51.9

$57.9

$50

$60

$35.4$42.8 $44.4

$36.0$31.4

$30

$40

$3.7$10

$20 Investment gains fell by 51% in 2008 due to lower yields, poor equity market

conditions. Falling again in 2009. $

$0

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08

09:Q

1

conditions. Falling again in 2009.

98

09

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

98

P/C Insurer Net Realized Capital Gains 1990-2009:Q1Capital Gains, 1990 2009:Q1

$16.21$18.02

$16$18$20 $ Billions

$9.89

$6 00

$9.24$10.81

$13.02

$6.63 $6.61$8.92$9.70$9.13$9.82

$8$10$12$14$16

$2.88$4.81

$1.66

$6.00$3.52

$2$0$2$4$6$8

-$1.21

-$7.99-$10-$8-$6-$4-$2

Realized capital losses hit a record $19.8 billion in 2008 due to financial market turmoil, a $27.7

-$19 80$20-$18-$16-$14-$12$ ,

billion swing from 2007, followed by an $8.0B drop in Q1 2009. This is a primary cause of 2008/2009’s large drop in profits and ROE.

99

-$19.80-$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

09Q

1

Sources: A.M. Best, ISO, Insurance Information Institute. 99

Treasury Yield Curves: Pre Crisis vs Current*

4 96% 5 04% 4 96% 5 00% 5 00% 5.19%6%

Pre-Crisis vs. Current

4.22% 4.23%

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%

4%

5%

Treasury Yield Curve is at its

2.81%3.29%

3%

4% most depressed level in at least 45 years. Investment income will fall as a result.

0 93%1.39%

2.13%2% Stock dividend cuts will

further pressure investment income

0.14% 0.18% 0.30% 0.50%0.93%

0%

1%

Current Yield Curve*Pre-Crisis (July 2007)

investment income

100100

0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

*May 2009.Sources: Federal Reserve; Insurance Information Institute.

UnderwritingUnderwriting TrendsTrends

Financial Crisis Does Not DirectlyFinancial Crisis Does Not Directly Impact Underwriting

P f C l C t t hPerformance: Cycle, Catastrophes Were 2008’s Drivers

P/C Insurance Industry Combined Ratio, 2001-2009:Q1*

120

Ratio, 2001 2009:Q1As recently as 2001, insurers

paid out nearly $1.16 for every Relatively low CAT

115.8 $1 in earned premiums low CAT losses, reserve releases

Cyclical

2005 ratio benefited from heavy use of reinsurance

hi h l d t l107.5110

Best combined ratio since 1949

(87 6)

Cyclical Deterioration

which lowered net losses

100.198.4

100.898.4

101.0100

(87.6)

92.6

95.7

102

902001 2002 2003 2004 2005 2006 2007 2008 2009:Q1*

*Excludes Mortgage & Financial Guarantee insurers in 2008/09. Including M&FG, 2008=105.1, 2009=102.2 Sources: A.M. Best, ISO.

102

Underwriting Gain (Loss)1975 2009:Q1*

3035 Insurers earned a record underwriting profit of $31.7B in

2006 d $19 3B i 2007 h l b l h 2 d

1975-2009:Q1

1015202530 2006 and $19.3B in 2007, the largest ever but only the 2nd

and 3rd since 1978. Cumulative underwriting deficit from 1975 through 2008 is $442B.

15-10-505

10

$ B

illio

ns

-35-30-25-20-15$

$19.8 Bill underwriting loss in 2008

-55-50-45-4035

5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 1

loss in 2008 incl. mort. & FG insurers, -2.5B in Q1:09

103

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809

:Q1

Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers103

Number of Years With Underwriting Profits by Decade 1920s –2000sProfits by Decade, 1920s 2000s

Number of Years with Underwriting ProfitsU d i i fi10

88

10Underwriting profits were common before the 1980s (40 of the 60 years

before 1980 had combined ratios below 100)—but then they vanished. N i l d i i fi

67

56

8 Not a single underwriting profit was recorded in the 25 years from 1979

through 2003.

45

34

0 00

2

104

01920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*

Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.

104

Homeowners Insurance Combined Ratio

158.4165

Combined Ratio

Average 1990 to 2008E= 111.1

145

155g

Insurers have paid out an average of $1.11in losses for every dollar earned

121.7 121.7125

135in premiums over the past 17 years

117.7113.6

118.4112.7

121.7

108.2111.4

121.7

109.3

116.5113.0

109.4115

125

101.098.3

94.2100.1

89.495.7 98

95

105

105

8590 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F

Sources: A.M. Best (historical and forecasts)

States With Problem Chinese Drywall Reports*Chinese Drywall Reports

As of July 16, 2009, the C P d tConsumer Product Safety Commission

had received 608 reports of defective

Chi d ll fChinese drywall from 21 states plus DC, 77%

of those from FL

Most problems haveMost problems have arisen in hotter, more

humid climates such as FL and LA

106* First report was received 12/22/08.Source: US Consumer Product Safety Commission, http://www.cpsc.gov/info/drywall/where.html accessed 7/16/09.

106

Number and Percentage of Problem Chinese Drywall Reports by State*Chinese Drywall Reports by State

Coverage for defective drywall is excluded

Virginia, 22 , 3.9%

Alabama 7 1 2%Lo isiana 67 11 8%

drywall is excluded under a standard

homeowners insurance policy (construction defect and pollution

Other States, 34 ,6.0%

Alabama, 7 , 1.2%Louisiana, 67 , 11.8%defect and pollution exclusions apply and there is no covered

cause of loss)

The vast majority of problem Chinese drywall

was used in FL in thewas used in FL in the wake of the 2004/2005

hurricanes

107

Florida, 438 , 77.1%

* First report was received 12/22/08.Source: US Consumer Product Safety Commission, http://www.cpsc.gov/info/drywall/where.html accessed 7/16/09.

107

Private Passenger Auto (PPA) Combined Ratio

109.5110

(PPA) Combined RatioPPA is the profit Auto insurers have

h i ifi t107.9

104 2105

juggernaut of the p/c insurance

industry today

shown significant improvement in PPA

underwriting performance since

101.7101.3 101.0

99 5

101.1

103.5104.2

101.3

105 y y pmid-2002, but results

are deteriorating.

99.598.4

95 1 95.5

98.3 98.597.5

100

Average Combined94.4

95.195

Average Combined Ratio for 1993 to 2006:

100.7

108

9093 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F


Commercial Lines Combined Ratio 1993 2009F

3

Commercial coverages have exhibited significant

Ratio, 1993-2009FMortgage and financial

guarantee may account for up

3

122.

3

5

120

125have exhibited significant

variability over time.gu ee y ccou o upto 4 points on the commercial

combined ratio in 2008

110.

3

110.

2

107.

6

3.9 10

9.7

112.

3

111.

1

110.

2

5 05.4

106.

5

05.1

0

112.

5

110

11510

3

102.

5 10

5.1

1 10

102.

0

100

105

2006/07 benefited from favorable loss cost trends improved tort environment low CAT

91.1 95

90

95trends, improved tort environment, low CAT

losses, WC reforms and reserve releases. Most of these trends reversed in 2008 and

mortgage and financial guarantee segments have big influence 2009 is transition year

109

85

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08E 09F

have big influence. 2009 is transition year.


Catastrophic LossCatastrophic Loss Catastrophe Losses Trends

Are Trending AdverselyAre Trending Adversely

Global Number of Catastrophic Events 1970 2008Catastrophic Events, 1970–2008The number of natural

d dRecord 258 man-

made CATs &

250

300 and man-made catastrophes has been increasing on a global

scale for 20 years

made CATs & record 152 natural

CATs in 2005

150

200scale for 20 years

100

0

50

970

972

974

976

978

980

982

984

986

988

990

992

994

996

998

000

002

004

006

008

Natural catastrophes Man-made disasters

19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20

Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 2/2009.

Insured Property Catastrophe Losses as % Net Premiums Earned 1984–2008as % Net Premiums Earned, 1984 2008

16% US CAT losses were d 14 4% f

12%

14% US

US average: 1984-2008

a record 14.4% of net premiums

earned in 2005 and were 4 times the

1984 2008

8%

10%1984-2008 average

of 3.6%

4%

6%

8%

0%

2%

4%

0%

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.

U.S. Insured Catastrophe Losses

0.0

$120$ Billions

2008 CAT losses exceeded$100 Billion CAT

year is coming t ll

$100

.9

$100

$120 2008 CAT losses exceeded 2006/07 combined. 2005 was by

far the worst year ever for insured catastrophe losses in the

eventually

2009 cat losses were down 25%

5 5 0

$61.

$60

$80 insured catastrophe losses in the US, but the worst has yet to come.

down 25% in Q1 from $3.545 in Q1 2008

$7.5

2.7 4.7

$22.

95.

5 $16.

9$8

.3$7

.42.

6 $10.

1$8

.34.

6$2

6.5

5.9 $12.

9 $27.

5

$6.7

$26.

02.

7$9.2$20

$40

$ $2 $4 $5 $ $ $2$ $ $4 $ $ $2

$

$0

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

20??

113

2

*Based on PCS data through March 31 = $2.66 billion.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

113

States With Highest Insured Catastrophe Losses in 2008Catastrophe Losses in 2008

$ Billions$ Billions

$10.2$10 0

$12.0 In 2008, insurers paid $26 billion to 3.9 million victims of 37 major

$8.0

$10.0 jnatural catastrophes across 40 states. 64% of the payouts (in $ terms) went

to homeowners 27% to business

$2 2$4.0

$6.0 to homeowners, 27% to business owners and 9% to vehicle owners

$2.2 $1.6 $1.3 $1.0

$0.0

$2.0

114

$Texas California Minnesota Ohio Georgia

Source: PCS; Insurance Information Institute.

Number of PCS Catastrophe Events 1998-2008*Events, 1998 2008

$ Billions

37

33

37

35

40 The number of catastrophe events reached

27

33

2530

35 pa 10-year high in 2008

24

20

24 232221

25

20

25

15

20

115

98 99 00 01 02 03 04 05 06 07 08*PCS defines a catastrophe as an even that caused at least $25 million in insured property damage andaffects and significant number of policyholders and insurers.Source: PCS; Insurance Information Institute

Top 12 Most Costly Disasters in US History (Insured Losses $2007)US History, (Insured Losses, $2007)

$50 9 of the 12 most expensive $43.6

$35$40$45

pdisasters in US history

have occurred since 2004

$22.0 $22.9$25$30$35

Bill

ions In 2008, Ike became the 6th most

expensive insurance event and 4th most expensive hurricane in US history

$7 0 $7 8 $8.2$10.7 $10.9 $10.9

$10$15$20$

B expensive hurricane in US history

$4.0 $5.0 $6.0 $7.0 $7.8 $8.2

$0$5

$10

Jeanne Frances Rita Hugo Ivan Charley Ike Wilma Northridge 9/11 Andrew Katrina

116

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Ike(2008)*

Wilma(2005)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

*PCS estimate as of 12/15/08.Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.

116

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1988 2007¹1988-2007¹

Fire, $8.1 , 2.6%Civil Disorders, $1.1

, 0.4% Water Damage, $0.4

T d $82 4

,

Utility Disruption, $0.2 , 0.1%

g , $, 0.1%Wind/Hail/Flood,

$9.9 , 3.2%

Earthquakes, $19.5 , 6 3% Tornadoes, $82.4 ,

26.5%

6.3%

Winter Storms, $24.4 , 7.9% Insured disaster losses

t t l d $310 5 billi f

Terrorism, $22.9 , 7.4%

totaled $310.5 billion from 1988-2007 (in 2007 dollars)

All Tropical Cyclones, $141.6 ,

45.6%1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars.

117Source: Insurance Services Office (ISO)..

p g p p yCatastrophe threshold changed from $5 million to $25 million beginning in 1997. 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.

Government Aid After Major Disasters (Billions)*( )

Hurricane Katrina aid will dwarf aid following all other

$137.1

$120

$140

$160dwarf aid following all other

disasters. Congress may authorize $150-$200 billion ultimately (about $400,000

for each of the 500,000The federal government

poured an estimated $22 8 i ff

$80

$100

$120

llion

s

for each of the 500,000 displaced families). Is the incentive to buy insurance

and insure to value diminished?

$22.8B into areas affected by Hurricane Ike

$48.4

$22 8 $19 5$40

$60

$80

$ B

il diminished?

$22.8 $19.5 $17.1 $16.5

$0

$20

Hurricane Katrina Sept 11 Terrorist Hurricane Ike Hurricane Andrew Northridge HurricanesHurricane Katrina(2005)*

Sept. 11 TerroristAttack (2001)

Hurricane Ike(2008)

Hurricane Andrew(1992)

NorthridgeEarthquake (1994)

HurricanesCharley, Frances,

Ivan & Jeanne(2004)*Adjusted to 2008 dollars by the Insurance Information Institute.

Source: United States Senate Budget Committee, Insurance Information Institute as of 12/31/05; Houston Chronicle, 09/24/08 for Ike.

The 2009 HurricaneThe 2009 Hurricane Season:Season:

Preview to Disaster?

Outlook for 2009 Hurricane Seasonf

Average* 2005 2009FAverage 2005 2009F

Named Storms 9.6 26 11N d S D 49 1 115 5 50Named Storm Days 49.1 115.5 50Hurricanes 5.9 14 5Hurricane Days 24.5 47.5 20Intense Hurricanes 2.3 7 2Intense Hurricane Days 5 7 4Net Tropical Cyclone Activity 100% 275% 90%y y

*Average over the period 1950-2000.Source: Dr. Phil Klotzbach and Dr. William Gray, Colorado State University, June 2, 2009.

Probability of Major Hurricane Landfall (CAT 3 4 5) in 2009Landfall (CAT 3, 4, 5) in 2009

2005NOAA CSU

2005 Actual

Number Named Storms 9-14 11 28Number Named Storms 9-14 11 28

Number of Hurricanes 4-7 5 15

Number of Major Hurricanes (Category 3+) 1 3 2 7Hurricanes (Category 3 ) 1-3 2 7

Source: Dr. Phil Klotzbach and Dr. William Gray, Colorado State University, June 2, 2009; NOAA (May 2009).

Probability of Major Hurricane Landfall (CAT 3 4 5) in 2009Landfall (CAT 3, 4, 5) in 2009

Average* 2009FAverage 2009F

Entire US Coast 52% 48%

US East Coast Including Florida Peninsula

31% 28%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 28%

ALSO…Slightly Below-Average Major HurricaneLandfall Risk in Caribbean for 2009

*Average over past century. Source: Dr. Phil Klotzbach and Dr. William Gray, Colorado State University, June 2, 2009.

TEXASTEXASCatastrophe Loss

O ip

Overview Everything’s Bigger in TX—Everything s Bigger in TX—

Including the CAT Losses

Top 10 Major Disaster Declaration Totals By State: 1953- 2009*Totals By State: 1953 2009

Total Number From 1953-2009*, Texas

837480

90leads the country in major

disaster declarations

63 6257 55 51 50 49 49 48 46 44 43 4250

60

70

44 43 42

30

40

50

0

10

20

TX CA FL OK NY LA AL KY AR MO IL MS OH WA MN,PA,WV

*Through July 2, 2009.Source: Federal Emergency Management Agency (FEMA)

TEXAS: Insured Catastrophe Losses,1980 2008* ($2008 in Millions)1980-2008 ($2008, in Millions)

69$12,000 Average Annual CAT

$10,

8

$10,000

,

Texas has experienced billion dollar plus

Losses: $1.35 billion*

$6,000

$8,000

Mill

ions

billion dollar-plus CAT losses in 10 of the

past 29 years

2,06

4

,894 89$3

,234

731 $3

,142

$3,1

60470

$4,000

$ , p y

$398

$601

$426

$ 2$3

65$4

74$4

01$2

13 $519

$361

$569

$1,

$485

$194

$382 $663 $1

,4

$751 $1

, 7$3

86 $734

$280$1

,194

$1,4

7

$661

$0

$2,000

$

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

*Losses stated in 2008.Sources: ISO/PCS; Insurance Information Institute

TEXAS: Windpool Direct Liability In Force 1971 2009: Q1*In-Force,1971-2009: Q1

.2 .2$70T i d l li bilit h

.5 $49.

1 $55.

9$5

8.6

$59.

6$5

9.8

$62 .

$58.

6 $62.

$50

$60Texas windpool liability has

mushroomed 231% from $18.8B as of 12/31/03 to

$62 2B f 3/31/09

3$3

8.3 $4

3.

$30

$40

$50 $62.2B as of 3/31/09, coinciding with the increase

in hurricane activity that b i 2004

5 6 8.8 10

.0$1

0.9

$11.

6$1

2.0

$12.

1$1

3.2

$16.

0$1

8.8

$20.

8$2

3.3

$20

$30 began in 2004Exposure

figures have recently

$0.3

$0.7

$1.0

$1.1

$1.2

$1.4

$1.6

$1.6

$1.8

$1.9

$2.1

$2.3

$2.2

$3.2

$4.1

$4.5

$4.4

$4.3

$4.2

$4.2

$4.3

$5.2 $6. 5

$7. $ 8 $ $

$0

$10

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 /07

/07

/07

1/0

/08

/08

/08

1/0

/09

recently leveled out

3/31

/6/

30/

9/30

/12

/33/

31/

6/30

/9/

30/

12/3

3/31

/

*As of Dec. 31 for annual figures.Sources: Texas Windstorm Insurance Association; Insurance Information Institute

Distribution of US Insured CAT Losses: TX FL LA vs US 1980 2008*TX, FL, LA vs US, 1980-2008*

$ Billions of Dollars

Rest of US, $176, 60% Texas, $31.2,

10%Texas accounted for 10% of all US

Louisiana, $33.6, 11%

10% of all US insured CAT losses from

Florida, $57.1,

1980-2008: $31.2B out of

$297 9B , ,19%

$297.9B

*All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

2008 Was A Relatively ActiveHurricane SeasonHurricane Season

2008 saw a total of 16 hurricanes and tropical

storms, including Hurricane Ike -- the fourth costliest

hurricane in U.S. history with an estimated $10.7 billion in

insured lossesinsured losses.

Source: WeatherUnderground.com

2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season& Expensive Hurricane Season

All 21All 21 names were used for the first time ever, so

Greek letters were used for thewere used for the

final storms

2005 set a new record for the

Source: WeatherUnderground.com, January 18, 2006.

2005 set a new record for the number of hurricanes &

tropical storms at 28, breaking the old record set in 1933.

Tropical Cyclone Activity in 1933 Held the Record Before 2005Held the Record Before 2005

E h h 1933Even though 1933 was the 2nd busiest year for

hurricanes, TX & north Gulf (future offshore oil

) t littlzone) coast little affected

Source: WeatherUnderground.com, accessed November 2, 2005.

Historical Hurricane Strikes in Aransas County TX 1900 2007Aransas County, TX, 1900-2007

Source: NOAA Coastal Services Center, http://hurricane.csc.noaa.gov/hurricanes/pop.jsp; Insurance Info. Institute.

Historical Hurricane Strikes in Brazoria County TX 1900 2007Brazoria County, TX, 1900-2007


Historical Hurricane Strikes in Galveston County TX 1900 2007Galveston County, TX, 1900-2007


Historical Hurricane Strikes in Harris County TX 1900 2007Harris County, TX, 1900-2007


Historical Hurricane Strikes in Jefferson County TX 1900 2007Jefferson County, TX, 1900-2007


Insurance Information Institute On LineInstitute On-Line

THANK YOU FOR YOUR TIME ANDTHANK YOU FOR YOUR TIME AND

YOUR ATTENTION!

Download at http://www.iii.org/presentations/ICT-TX072309.ppt

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