Insurance Industry Trends, Forecasts & Financials An Industry at the Crossroads

1. Insurance Industry Trends, Forecasts & FinancialsAn Industry at the Crossroads New York Insurance Association Annual Meeting Lake George, NY May 31, 2007 Download at www.iii.org/industry/outlooks/newyork Robert P. Hartwig, Ph.D., CPCU, President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org  www.iii.org

2. Presentation Outline • P/C Profit Overview—2006, A Cyclical Peak • Focus on New York State • Underwriting Trends: Unsustainable? • Premium Growth: Approaching a Standstill • Pricing: Competitive Pressures Mounting • Expenses: Will Ratios Rise a Growth Slows? • Capital & Capacity: UnderleveragedROE Pressure • Catastrophe Loss Management • What is the Appropriate Role for Government? • Reinsurance Summary • Financial Strength & Ratings • Investments: Less Bang for the Buck • Tort System: Great News for a Change (Mostly) • Legislative & Regulatory Update • Q&A

3. P/C PROFIT:An Historical PerspectiveProfits in 2006 ReachedTheir Cyclical Peak

4. P/C Net Income After Taxes1991-2006 ($ Millions)* Though up in 2006, insurer profits are highly volatile (2001 was the industry’s worst year ever). ROEs generally fall below that of most other industries. • 2001 ROE = -1.2% • 2002 ROE = 2.2% • 2003 ROE = 8.9% • 2004 ROE = 9.4% • 2005 ROE= 10.5% • 2006 ROAS1 = 14.0% *ROE figures are GAAP; 1Return on avg. Surplus. Sources: A.M. Best, ISO, Insurance Information Inst.

5. ROE: P/C vs. All Industries 1987–2008E P/C profitability is cyclical, volatile and vulnerable Sept. 11 Hugo Katrina, Rita, Wilma Lowest CAT losses in 15 years Andrew Northridge 4 Hurricanes *2007-08 P/C insurer ROEs are I.I.I. estimates. Source: Insurance Information Institute; Fortune

6. RETURN ON EQUITY (Fortune):Stock & Mutual vs. All Companies* Mutual insurer ROEs are typically lower than for stock companies, but gap has narrowed. All are cyclical. *Fortune 1,000 group. Source: Fortune Magazine, Insurance Information Institute.

7. Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2008F 1977:19.0% 1987:17.3% 2006:14.0% 10 Years 1997:11.6% 9 Years 10 Years 1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2% *2007-08 P/C insurer ROEs are I.I.I. estimates. Source: Insurance Information Institute; ISO, A.M. Best.

8. ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2007E The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years +3.0 pts +2.0 pts -9.0 pts +1.0 pts +0.2 pts -13.2 pts US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target or better 2003-07 The cost of capital is the rate of return insurers need to attract and retain capital to the business Source: The Geneva Association, Ins. Information Inst.

9. Insurance & Reinsurance Stocks:Strong Finish in 2006 Total Returns for 2006 P/C insurer & reinsurer stocks rallied in late 2006 as hurricane fears dissipated and insurers turned in strong results Broker stocks held back by weak earnings Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

10. Insurance & Reinsurance Stocks: Slow Start in 2007 in P/C, Reins Total YTD Returns Through May 25, 2007 P/C insurance, reinsurance stocks lagging on soft market concerns and worries over 2007 hurricane season Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

11. Top Industries by ROE: P/C Insurers Still Underperformed in 2006* P/C insurer profitability in 2006 ranked 30th out of 50 industry groups despite renewed profitability P/C insurers underperformed the All Industry median for the 19th consecutive year *Excludes #1 ranked Airline category at 65.1% due to special one-time bankruptcy-related factors. Source: Fortune, April 30, 2007 edition; Insurance Information Institute

12. Advertising Expenditures by P/C Insurance Industry, 1999-2005 Ad spending by P/C insurers is at a record high, signaling increased competition Source: Insurance Information Institute from consolidated P/C Annual Statement data.

13. PROFITABILITY IN NEW YORKRollercoaster Ride in theEmpire State

14. ROE: P/C (US & NY) vs. All Industries, 1995–2006E* NY P/C performance generally mirrors US P/C insurers (except in 2001) Average ROE: 1996-2006E US P/C: 7.82% NY P/C: 7.10% (9.77% excl. 2001) All Industries: 13.50% *2005 is the latest available NAIC data for NY. Actual data for US p/c insurers (ISO) and All Industries. Source: Insurance Information Institute; NAIC, Fortune

15. ROE for Major Commercial Lines in New York, 1995 - 2004 Commercial Auto & CMP have rebounded in New York in recent years, as in most other states Source: NAIC

16. ROE for Personal Linesin New York, 1995 – 2005* Average 1995-2005: Auto: 10.1% Home: 16.5% *Latest available Source: NAIC

17. Rates of Return on Net Worth for Homeowners Ins: US vs. NY NY HO market has been profitable, but coastal concerns loom large Averages: 1995 to 2005* US HO Insurance = 2.8% NY HO Insurance = 16.5% *Latest available. Source: NAIC, Insurance Information Institute

18. Rates of Return on Net Worth for Pvt. Passenger Auto: US vs. NY Averages: 1995 to 2005* US PPA Insurance = +8.7% NY PPA Insurance = +10.1% *Latest available. Source: NAIC, Insurance Information Institute

19. PP AUTO: Return on Equity,NY & Nearby States 1996 – 2005 Average Source: NAIC, Insurance Information Institute

20. HOMEOWNERS: Return on Equity,NY & Nearby States 1996 – 2005 Average Source: NAIC, Insurance Information Institute

21. WORKERS COMP: Return on Equity,NY & Nearby States 1996 – 2005 Average Source: NAIC, Insurance Information Institute

22. UNDERWRITINGExtremely Strong 2006, Momentum for 2007/08

23. P/C Industry Combined Ratio 2007/8 deterioration due primarily to falling rates, but results still strong assuming normal CAT activity As recently as 2001, insurers were paying out nearly $1.16 for every dollar they earned in premiums 2006 produced the best underwriting result since the 91.2 combined ratio in 1949 2005 figure benefited from heavy use of reinsurance which lowered net losses Sources: A.M. Best; ISO, III. *Estimates/forecasts based on III’s 2007 Early Bird survey.

24. Ten Lowest P/C Insurance Combined Ratios Since 1920 The industry’s best underwriting years are associated with periods of low interest rates The 2006 combined ratio of 92.4 was the best since the 87.6 combined in 1949 Sources: Insurance Information Institute research from A.M. Best data.

25. Underwriting Gain (Loss)1975-2006 Insurers earned an underwriting profit of $31.2 billion in 2006, the largest ever but only the second since 1978. Despite the 2006 underwriting profit, the cumulative underwriting deficit since 1975 is $419 billion. $ Billions Source: A.M. Best, Insurance Information Institute

26. Commercial Lines Combined Ratio, 1993-2006E* Commercial coverages have exhibited extreme variability. Are current results anomalous? Outside CAT-affected lines, commercial insurance is doing fairly well. Caution is required in underwriting long-tail commercial lines. 2006 results will benefited from relatively disciplined underwriting and low CAT losses Source: A.M. Best; Insurance Information Institute .

27. Personal LinesCombined Ratio, 1993-2006E A very strong 2006 resulted from favorable frequency & severity trends and low CAT activity Source: A.M. Best; Insurance Information Institute.

28. Impact of Reserve Changes on Combined Ratio Reserve adequacy has improved substantially Source: A.M. Best, Lehman Brothers for years 2005E-2007F

29. The Big Question: Is the Industry More Disciplined Today? • Signs suggest that the answer is yes • Current period of sustained underwriting profitability is the first since the 1950s • While prices are falling, underlying lost cost trends (frequency and severity trends) are generally favorable to benign • Suggest impact of falling prices will be less pronounced than late 1990s • Reserve situation appears much improved an under control • Management Information Systems: Much More Sophisticated • Insurers can monitor and make adjustments much more quickly • Adjustments made quickly by line, geographic area, producer, etc. • Investment Income • Relative to late 1990s, interest rates and stock markets returns are lower • Has effect of imposing (some) discipline • Ratings Agencies • More stringent capital requirements • Quicker to downgrade

30. PREMIUM GROWTHDeceleration in 2006, Even Slower in 2007

31. Strength of Recent Hard Markets by NWP Growth* 1975-78 1984-87 2001-04 2006-2010 (post-Katrina) period could resemble 1993-97 (post-Andrew) 2005: biggest real drop in premium since early 1980s *2007-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006-2008 figures from III Groundhog Survey. Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute

32. Growth in Net Written Premium, 2000-2008F P/C insurers will experience their slowest growth rates since the late 1990s…but underwriting results are expected to remain healthy Source: A.M. Best; Forecasts from the Insurance Information Institute’s Groundhog survey: http://www.iii.org/media/industry/financials/groundhog2007/.

33. PRICING Under Pressure in 2007

34. *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute Average Expenditures on Auto Insurance Countrywide auto insurance expenditures are expected to fall 0.5% in 2007, the first drop since 1999 Lower underlying frequency and modest severity are keeping auto insurance costs in check

35. *Insurance Information Institute Estimates/Forecasts **Excludes cost of flood and earthquake coverage. Source: NAIC, Insurance Information Institute Average Expenditures on Homeowners Insurance** Countrywide home insurance expenditures rose an estimated 6% in 2006 Homeowners in non-CAT zones will see smaller increases, but larger in CAT zones

36. Average Commercial Rate Change,All Lines, (1Q:2004 – 1Q:2007) Magnitude of rate decreases diminished greatly after Katrina but have grown again KRW Effect Source: Council of Insurance Agents & Brokers; Insurance Information Institute

37. Average Commercial Rate Change by Line: 4Q99 – 1Q07 Commercial accounts trended downward from early 2004 to mid-2005 though that trend moderated post-Katrina Source: Council of Insurance Agents & Brokers

38. Average Commercial Rate Change by Account Size: 4Q99 – 1Q07 Accounts of all sizes are renewing downward and more quickly than in 2006 Source: Council of Insurance Agents & Brokers

39. Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2ndQtr. 2006 Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest Source: Council of Insurance Agents and Brokers

40. Percent of Commercial Accounts Renewing w/Positive Rate Changes, 1stQtr. 2007 Commercial Property & Business Interruption increases are disappearing in the Southeast; Completely gone in the Midwest & Northeast “Soft” market seemed to hit Midwest about 1 year before the rest of the US Source: Council of Insurance Agents and Brokers

41. Commercial Accounts Rate Changes,2ndQtr. 2006 vs. 1st Qtr. 2007 Even commercial property is now renewing down in 2007 Source: Council of Insurance Agents and Brokers

42. EXPENSESWill Expense Ratio Rise as Premium Growth Slows?

43. Personal vs. Commercial Lines Underwriting Expense Ratio* Expenses ratios will likely rise as premium growth slows *Ratio of expenses incurred to net premiums written. Source: A.M. Best; Insurance Information Institute

44. CAPACITY/SURPLUSThe Industry in Underleveraged

45. U.S. Policyholder Surplus: 1975-2006 Capacity as of 12/31/06 was $487.1B (est.), 14.4% above year-end 2005, 71% above its 2002 trough and 46% above its 1999 peak. $ Billions Foreign reinsurance and residual market mechanisms absorbed 45% of 2005 CAT losses of $62.1B “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations Source: A.M. Best, ISO, Insurance Information Institute.

46. Capital Raising by Class Within 15 Months of KRW $ Billions Insurers & Reinsurers raised $33.7 billion in the wake of Katrina, Rita, Wilma Source: Lane Financial Trade Notes, January 31, 2007.

47. Annual Catastrophe Bond Transactions Volume, 1997-2006 Catastrophe bond issuance has soared in the wake of Hurricanes Katrina and the hurricane seasons of 2004/2005 Source: MMC Securities and Guy Carpenter; Insurance Information Institute.

48. MERGER & ACQUISITIONFew Catalysts for Major P/C Consolidation

49. P/C Insurance-Related M&A Activity, 1988-2006 2006 surge due mostly to 2 deals. No trend started. Liberty Mutual acquired Ohio Casualty for $2.7B* No model for successful consolidation has emerged *Announced May 7, 2007. Source: Conning Research & Consulting.

50. Distribution Sector: Insurance-Related M&A Activity, 1988-2006 No extraordinary trends evident Source: Conning Research & Consulting.