Riding the Economic Tsunami: Marine Insurance, Economic Crisis and the Insurance Cycle

1. Riding the Economic Tsunami:Marine Insurance, Economic Crisis and the Insurance Cycle

2. Presentation Outline Premium, Profits & Growth Ocean Marine markets have the upper hand Underwriting Trends Ocean Marine Outperforms The Economic Tsunami: Insurance Industry Impacts Economic Environment for Marine Insurers Marine insurers are riding the tide Bubble Trouble Top Threats Facing Marine Insurers Today Global Economic Review Ascendencey of China Restructuring of Global Trade Patterns Investment Overview Catastrophic Loss Shifting Legal Liability & Tort Environment

3. PREMIUMS, PROFITS & GROWTHMarine Market is More Stable Than Market Overall

4. PREMIUMSOverall Industry Growth Falling, But Marine Growth Continues

5. Global Marine Hull Premium 2005

6. Marine Insurance Hull Premiums 2005, Market Share

7. Global Marine Premium 1999-2005 (US$ Million), as reported

8. Strength of Recent Hard Markets by NWP Growth* testtest

9. Growth in Net Written Premium, 2000-2008F

10. Personal/Commercial Lines & Reinsurance NPW Growth, 2006-2008F

11. Net Written Premium Growth:Ocean Marine vs. All Lines

12. Ocean Marine Lines vs. All P/C Premium Growth,* 2006-2007

13. Average Commercial Rate Change,All Lines, (1Q:2004 � 1Q:2008)

14. Cumulative Commercial Rate Change by Line: 4Q99 � 1Q08

15. UNDERWRITINGTRENDS Ocean Marine Markets Outperform Industry

16. P/C Insurance Combined Ratio, 1970-2008F*

17. P/C Insurance Combined Ratio, 2001-2008F

18. Ten Lowest P/C Insurance Combined Ratios Since 1920 vs. 2007

19. Underwriting Gain (Loss)1975-2008F*

20. Impact of Reserve Changes on Combined Ratio

21. Combined Ratio: Ocean Marine Lines vs. All P/C, 2006-2007

22. Combined Ratio:Ocean Marine vs. Commercial Lines

23. Combined Ratio:Ocean Marine vs. All Lines

24. Commercial Lines Combined Ratio, 1993-2007E

25. PROFITABILITYProfits in 2006/07 ReachedTheir Cyclical Peak;

26. P/C Net Income After Taxes1991-2008F ($ Millions)*

27. ROE: P/C vs. All Industries 1987�2008E

28. Personal/Commercial Lines & Reinsurance ROEs, 2006-2008F*

29. Profitability Peaks & Troughs in the P/C Insurance Industry,1975 � 2008F*

30. ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2007

31. Factors that Will Influence theLength and Depth of the Cycle Capacity: Rapid surplus growth in recent years has left the industry with between $85 billion and $100 billion in excess capital, according to analysts All else equal, rising capital leads to greater price competition and a liberalization of terms and conditions Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which could extend the depth and length of the cycle Looming reserve deficiencies are not hanging over insurers they way they did during the last soft market in the late 1990s Many companies have been releasing redundant reserves, which allows them to boost net income even as underwriting results deteriorate Reserve releases will diminish in 2008; Even more so in 2009 Investment Gains: 2007 was the 5th consecutive up year on Wall Street. With sharp declines in stock prices and falling interest rates, portfolio yields are certain to fall?Contributes to discipline Realized capital gains are already rising as underwriting profits shrink, but like redundant reserves, realized capital gains are a finite resource A sustained equity market decline (and potentially a drop in bond prices at some point) could reduce policyholder surplus

32. Factors that Will Influence the Length and Depth of the Cycle (cont�d) Sarbanes-Oxley: Presumably SOX will lead to better and more conservative management of company finances, including rapid recognition of deficient or redundant reserves With more �eyes� on the industry, the theory is that cyclical swings should shrink Ratings Agencies: Focus on Cycle Management; Quicker to downgrade Ratings agencies more concerned with successful cycle management strategy Many insurers have already had ratings �haircut� over the last several years they way they did during the last soft market in the late 1990s; Less of a margin today Finite Reinsurance: Had smoothing effect on earnings; Finite market is gone Information Systems: Management has more and better tools that allow faster adjustments to price, underwriting and changing market conditions than it had during previous soft markets Analysts/Investors: Less fixated on growth, more on ROE through soft mkt. Management has backing of investors of Wall Street to remain disciplined M&A Activity: More consolidation implies greater discipline Liberty Mutual/Safeco deal creates 5th largest p/c insurer. More to come?

33. A STORMY ECONOMIC FORECASTWhat a Weakening Economy & Credit Crunch Mean for the Insurance Industry

34. Percent Change in GDP By Country,2006-2009F

35. Real GDP Growth*

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

37. Toward a New WorldEconomic Order

38. What�s Being Done to Fix the Economy??Impacts on Insurers

39. What�s Being Done to Fix the Economy??Impacts on Insurers (cont�d)

40. Post-Crunch: Fundamental Issues To Be Examined Globally

41. Summary of Treasury �Blueprint�for Financial Services ModernizationImpacts on Insurers

42. Treasury Regulatory Recommendations Affecting Insurers

43. Treasury Regulatory Recommendations Affecting Insurers (cont�d)

44. Insurance &The EconomyImportant But Somewhat Muted Impacts

45. A Few Facts About the Relationship Between Insurance & Economy Vast Majority of Insurance Business is Tied to Renewals Approximately 98+% of P/C business (units) is linked to renewals A very large share of p/c insurance premiums are statutorily or de facto compulsory (e.g., WC, auto liability, surety, usually HO�) P/C insurers have marginal exposure impact due to economy Ocean Marine may be volatile because of association with global trade flows Yachts�luxury for some, necessity for others Insurers are Sensitive to Interest Rates About 2/3 of P/C invested assets and 75% if Life assets are fixed income Historically, yield on industry portfolios has tracked 10-year note closely All else equal, lower total investment gain implies greater emphasis on underwriting Historically, industry�s best underwriting performances are rooted in periods when interests rates were low and/or equity market performance poor (1930s � 1950s, early 2000s gave rise to strong 2006/07)

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

47. Summary of Economic Risks and Implications for (Re) Insurers

48. New Private Housing Starts,1990-2014F (Millions of Units)

49. Auto/Light Truck Sales,1999-2014F (Millions of Units)

50. Inflation Rate (CPI-U, %),1990 � 2009F

51. Favored Industry Groups for Insurer Exposure Growth

52. Bubble TroubleDirect Impacts onOcean Marine Insurers

53. World Crude Oil Prices: 1997- April 2008

54. Dow Jones-AIG Commodity Price Index, 2000-2008*

55. Energy Price Index, 2000-2008*

56. Petroleum Price Index,2000-2008*

57. Grain Price Index, 2000-2008*

58. Depreciation of Dollar is Partly Responsible for Rising Energy Prices

59. Economic Environment for Marine Insurers Protectionism, Commodities Boom, Economic Bust Make for Uncertain Future

60. Top Economic Threats toOcean Marine Insurers Global Economic Meltdown Universal and protracted decline in shipping volume Protectionism Anti-globalization forces, protectionist sentiments and xenophobia threaten to undo NAFTA and other accords Some politicians are fanning these flames (election year) Few, if any, new accords in the near/mid-term future Collapse of Commodities Bubble Collapse could dramatically slow shipments (temporarily) Terrorist Attacks Attacks on shipping or ports could be devastating in terms of hull, cargo, facilities and [contingent] business inter. Supply Chain Disruption Shift in Tort Environment Environmental vulnerabilities loom large Higher Taxes on the �Wealthy� & Capital Gains Hurts Yacht Sales

61. Global Economic Outlook Points to Long Run Marine Insurance Growth Global economic growth suggests intl. trade in finished products, raw materials as well as energy demand and exploration will remain strong. Current credit crunch will hurt global growth through 2009 The 21st century is the century of Chinese ascendancy. China today is very much like late 19th century America�industrious, rapid growth, internationally and militarily ambitious and certain of its destiny and primacy over the old world order. But inflation looms, country is an environmental disaster (incl. waterways) Defective products scare won�t dent trade much or for long US dollar is undervalued but not likely to fully recover Expect more shipping within regional trade zones and blocks (e.g., within Southeast Asia, Middle East)

62. But Patterns of Global Economic Growth and Trade May Shift Maturation of Chinese Economy Implies web of trade will extend further into developing world (South Asia, Africa), aiding international marine shipping business Number and Size of Marine Shipping Growth Zones Will Expand Intra-Asian trade will expand Asia-Africa Asia-Australia Middle East - World Russia � World Arctic (Transit & Resource Hub) � Europe/Asia/North America

63. Changes in Global Economy are Pushing Shipping Industry Changes Strong demand for shipping Building of ever larger ships Creates concentration of risk problem Significant number of new ships under construction Shipyards are building for or have orders for in 2007/2008 as much as 20% of the current world fleet Manpower (crew) shortages are more likely Port and lock log jams; New routes needed Expansion of Panama Canal Arctic routes Eventually shipping industry will see overcapacity and falling transport prices

64. Ship Prices Rising:Bigger Ships, Strong Demand

65. Real GDP By Country 1994-2008E(% change from previous year)

66. Current Account Balancesas a % of GDP

67. U.S./CHINA TRADE

68. China�s Trade With The World($ billion)

69. China�s Top Trade Partners 2006($ billion)

70. Top 5 Exports from China 2006(Volume $ billion)

71. Top 5 U.S. Imports from China 2006(Volume $ billion)

72. China�s Trade With The U.S.($ billion)

73. Recent Insurer Expansions in China China�s liberalizing market brings opportunities in non-life insurance, including marine: July 2007: AIG subsidiary AIU Insurance Co (AIU) granted approval to establish wholly owned subsidiary in China. AIG General will expand non-life capabilities. March 2007: Lloyd�s receives approval for new reinsurance operation Lloyd�s Reinsurance Co China Ltd (LRCCL). Will write onshore reinsurance biz throughout China. January 2007: Marsh awarded China�s first Wholly Owned Foreign Enterprise insurance broking license. Marsh (Beijing) Insurance Brokers will expand company�s focus on large-scale commercial risk, including international marine. Zurich gains control of a Chinese broker in Aug. 2007

74. KEY INDUSTRY FINANCIALS Factors Affecting the Industry Behind the Scenes

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

76. P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007E

77. Reasons for US P/C Insurer Impairments, 1969-2005

78. CAPACITY/SURPLUS Accumulation of Capital/ Surplus Depresses ROEs

79. U.S. Policyholder Surplus: 1975-2007*

80. Lloyd�s Insurance Market Capacity, 1998-2008 (� billions)*

81. Annual Catastrophe Bond Transactions Volume, 1997-2007

82. P/C Insurer Share Repurchases,1987- Through Q4 2007 ($ Millions)

83. MERGER & ACQUISITIONCatalysts for P/C Consolidation Growing in 2008

84. P/C Insurance-Related M&A Activity, 1988-2006

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

86. INVESTMENT OVERVIEW More Pain, Little Gain

87. Property/Casualty Insurance Industry Investment Gain1

88. Property/Casualty Industry Investment Results, 1994-2007

89. US P/C Net Realized Capital Gains,1990-2007 ($ Millions)

90. Total Returns for Large Company Stocks: 1970-2008*

91. P/C Investment Income as a % of Invested Assets Follows 10-Year US T-Note

92. CATASTROPHICLOSS What Will 2008 Bring?

93. Most of US Population & Property Has Major CAT Exposure

94. U.S. Insured Catastrophe Losses*

95. Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1987-2006�

96. Insured Offshore Energy Losses for Recent Major Gulf Storms

99. Natural Catastrophe Insured Lossesby Region, 2002 � 2007 ($ Bill)

100. The 2008 Hurricane Season:Preview to Disaster?

101. Outlook for 2008 Hurricane Season: 60% Worse Than Average

102. Landfall Probabilities for 2008 Hurricane Season: Above Average

103. REINSURANCE MARKETSReinsurance Prices are Falling in Non-Coastal Zones, Casualty Lines

104. Share of Losses Paid by Reinsurers, by Disaster*

105. US Reinsurer Net Income& ROE, 1985-2007*

106. Shifting Legal Liability & Tort EnvironmentIs the Tort PendulumSwinging Against Insurers?

107. Bad Year for Tort Kingpins*(Continued) �King of Class Actions� Bill Lerach Former partner in class action firm Milberg Weiss Admitted felon. Guilty of paying 3 plaintiffs $11.4 million in 150+ cases over 25 years & lying about it repeatedly to courts Will serves 1-2 years in prison and forfeit $7.75 million; $250,000 fine

108. Bad Year for Tort Kingpins*(Continued) �King of Class Actions� Melvyn Weiss Former partner in class action firm Milberg Weiss; Earned $251 million in legal fees Pled guilty to federal charges of racketeering and conspiracy for paying kickbacks to professional plaintiffs Will serve 18-33 months in prison, pay $9.75 million in restitution; $250,000 fine

109. Personal, Commercial & Self (Un) Insured Tort Costs*

110. Tort System Costs, 1950-2009E

111. The Nation�s Judicial Hellholes (2007)

112. Business Leaders Ranking of Liability Systems for 2007 Best States Delaware Minnesota Nebraska Iowa Maine New Hampshire Tennessee Indiana Utah Wisconsin Worst States Arkansas Hawaii Alaska Texas California Illinois Alabama Louisiana Mississippi West Virginia

113. Summary Results were excellent in 2006/07; Overall profitability reached its highest level (est. 13-14%) since 1988 Strong 2007 but ROEs slipping; Momentum for 2008 Ocean Marine markets generally outperform overall P/C insurance industry Low dollar benefiting exporting firms and marine transport business Restructucting of global trading pattern underway as China and other nations become exert more economic influence Industry growth rates are slowing to their levels since WW II; Rising investment returns insufficient to support deep soft market in terms of price, terms & conditions as in 1990s Major Challenges: Slow Growth Environment Ahead; Cyclical & Economic Maintaining price/underwriting discipline Managing variability/volatility of results Managing regulatory/legislative activism

114. Insurance Information Institute On-Line