Welcome to Committee Day 2009: Working to Advance the Promise of the Wholesale Insurance Industry

1. Welcome to Committee Day 2009: Working to Advance the Promise of the Wholesale Insurance Industry

2. Membership Composition & Leverage • Active Members: 285 • Associate Members: 156 • Business Services Members: 64 • Stamping & Surplus Lines Offices: 14 Total: 488

3. The AAMGA Value Proposition • Total MGA Members (2008): 285 • Total Employees: 9,347 • Number of Storefront Offices: 312 • Direct Written Premium (2007): $22,917,796,224 • Lloyd’s Market Premium (2007): $ 2,931,141,184 • AAMGA members account for 41.1%

4. The AAMGA • Total Direct Written Premium Written by MGA member coverholders: • 2007 $ 20.20 billion • 2006 $ 22.94 billion • 2005 $ 21.89 billion • 2004 $ 23.97 billion • 2003 $ 16.45 billion • 2002 $ 13.18 billion • 2001 $ 10.99 billion • 109% increase in DWP between 2002 and 2006

5. AAMGA Committees: a collaboration of strength & versatility • Insurance Automation & Technology • Education • Marketing • Communications • Inter-Association Liaison • Code of Ethics • Membership/Member Benefits • HR Subcommittee • Governmental Affairs • Operations • Under Forty Organization AAMGA Committee Day 2008: Dallas, TX

6. Industry/AAMGA Opportunities Maintaining the trust and producing the results to continue as the market of choice.

7. Other Developments • The AAMGA Summer School and student exchange at Cambridge University at Sydney Sussex College • The Lloyd’s Course and Test • Claims & Litigation Management School • On-line registration & confirmation • On-line tracking of classes and hours completed • Scheduled networking time at each University session

8. AAMGA UFO • Over 300 members (domestic & international) • UFO Annual Meeting: Leadership, perpetuation and management training sessions throughout the year • Increased networking and facilitating relationships with Lloyd’s & Bermuda “Under 35’s Group” • On-line chat room and bulletin board on AAMGA website

9. AAMGA Approach • Working with consumer protection groups • Working with Industry groups: • Big I • Council of Agents and Brokers • PCI • COFIR • ALEC • NAPLSO • NCOIL • State Stamping & Surplus Line Offices • Surplus Lines Law Group • White Papers and Presentations • Advocacy through education; not adversarially

10. Current Observations • Federal bailout has to date cost US taxpayers $2 trillion

11. Putting it in Perspective • 2 Trillion is equivalent to: • $2,000,000,000,000 • 66,300 years measured in seconds • 80,321,285 revolutions around the Earth at the Equator • 333 million federal regulators laid end to end (assuming each is an average of 6 feet tall) • 403,825 round trips by car (in miles) between New Orleans and Atlanta, GA

12. Current Observations • Failures and bailouts have placed ALL financial and insurance services under a federal and state regulatory microscope • There will be greater federal “oversight” or regulation of insurance including E&S

13. Current Observations • At the moment…all “insurance” products and services are being lumped and viewed together • E&S • P&C • LA&H • Banking

14. Today’s Surplus Lines Market Issues and Opportunities

15. E&S vs. P&C

16. Gross Surplus Lines Premiums Written (E&S GPW) +$5.5B +14.7 % The importance of Surplus Lines is demonstrated by much faster growth than for the overall P/C insurance industry -$1.4B -3.7% +$4.4B +21.4% Source: AM Best 2008 Special Report on E&S Lines

17. Surplus LinesTaxes Collected +$33.4M + 2.6 % Surplus Lines pay more than $1.3B + annually in premium taxes +$132.7M + 11.5 % +$50.5M +4.6% +$114.9M +11.7% Source: Business Insurance, December 2007; Insurance Information Institute.

18. Surplus Lines Premium & Taxes Collected Percentage change in premium 2005 – 2007: 6.4% Source: Business Insurance, September 8, 2008, page 28

19. Surplus Lines Carriers 32.5% rated A+ or better 66.3% rated A- or better None rated below B++ P&C Carriers 10.3% rated A+ or better 56.2% rated A- or better 24.6% rated B++ or below Solvency Ratings: Surplus Lines vs. P&C Market

20. Most Common Classes of E&SBusiness Written, 2008 Percentage of Most Common Types Offered GL and Commercial Property are the biggest sellers Source: Insurance Information Institute.

21. Market Trends • Key Points • Consolidations will play a key role in the landscape of surplus lines groups and single companies over the near term and going forward • Targets will be those who: • can attain geographic and product line diversification • Secure top line growth • Strong, well established distribution platforms, well established market profiles and mature books of business will carry the day

22. THE ECONOMIC STORMWhat a Weakening Economy and Financial Crisis Mean for the Insurance IndustryExposure & Claim Cost Effects

23. Real GDP Growth* Recession began in December 2007. Economic toll of credit crunch, housing slump, labor market contraction is growing The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.4% *Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 2/09; Insurance Information Institute.

24. Real GDP Growth vs. Real P/C Premium Growth: Modest Association P/C insurance industry’s growth is influenced modestly by growth in the overall economy Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/09; Insurance Information Inst.

25. Length of US Recessions:1929 - Present* Months in Duration “We will rebuild. We will recover.” President Barack Obama addressing a joint session of Congress February 24, 2009 Current recession began in Dec. 2007 and is already the longest since 1981. If it extends beyond April, it will become the longest recession since the Great Depression. * As of March 2009 Sources: National Bureau of Economic Research; Insurance Information Institute.

26. THE $787 BILLION ECONOMIC STIMULUS: Impacts & Implications for P/C Insurance

28. Emerging Blueprint for Financial Services Regulatory Overhaul • Phase I: Systemic Risk Regulation/Regulator • Oversight Responsibility: Likely With Federal Reserve • Fed would have capacity and power to assess risk across financial markets regardless of corporate form and to intervene when appropriate* • Fed could oversee (according to House Financial Services Committee Chairman Barney Frank): • Hedge funds (need to ensure “complete transparency”) • Credit ratings agencies • Executive compensation (to curb “perverse risk incentives”) *http://financialservices.house.gov/press110/press0320082.shtml Source: Wall Street Journal, “Frank Backs Regulator for Systemic Risk,” 2/4/09, p. C3; I.I.I. research.

29. Emerging Blueprint for Financial Services Regulatory Overhaul • Phase I: Systemic Risk Regulation/Regulator: OTHER • Unification of federal bank regulatory agencies • Creation of a Financial Products Safety Commission to vet products before sold to investors • Creation of federal insurance program for municipal bonds paid via premiums • Support for status quo on mark-to-market • Phase II: Sectoral Reform/Overhaul • Each segment of the financial services industry will be examined and subject to regulation specific to its function, risks and other factors • TIMELINE: August 2009 or later Source: Wall Street Journal, “Frank Backs Regulator for Systemic Risk,” 2/4/09, p. C3; I.I.I. research.

30. Possible Regulatory Scenarios for P/C Insurers as of Year-End 2009 • Status Quo: • P/C Insurers Remain Entirely Under Regulatory Supervision of the States • Unlikely, but some segments of the industry might welcome this outcome above all others

31. Possible Regulatory Scenarios for P/C Insurers as of Year-End 2009 • Federal Regulation: • Everything is Regulated by Federal Government • Unlikely that states will be left totally in the cold

32. Possible Regulatory Scenarios for P/C Insurers as of Year-End 2009 • Optional Federal Charter (OFC): • Insurers Could Choose Between Federal and State Regulation • Unlikely to be implemented as envisioned for past several years by OFC supporters

33. Possible Regulatory Scenarios for P/C Insurers as of Year-End 2009 • Dual Regulation: • Federal Regulation Layer Above State • Feds assume solvency regulation, states retain rate/form regulation • Hybrid Regulation: • Federal Government Assumes Regulation of Large Insurers at the Holding Company Level • Systemic Risk Regulator: • Feds Focus on Regulation of Systemic Risk Points in Financial Services Sector • P/C vs. Life? Source: Insurance Information Inst.

34. Regulatory Oversight and Federal Government Intervention

35. Legislative Developments • Non-Admitted & Reinsurance Reform Act of 2009 • Only the insured’s Home State’s statutory and regulatory requirements apply, including those with regard to producer licensing. • All non home state, non-admitted insurance laws and regulations are preempted. • Will be re-introduced in the US House and Senate soon • Optional Federal Charter • Establishes single federal regulator of insurance • Office of Insurance Information • Provides Congress information on insurance related regulation and developments

36. Industry Opportunities • Disciplined capital management and deployment • Continued profitability in Soft Market? • Market Hardening in 3rd-4th Quarter 2009? • CAT Modeling (100 mile wide storm vs. 400 mile wide Ike) • Shift from Hard Market Growth to Innovation in the Soft Market • Embracement of technology

37. Industry Opportunities • New opportunities • Enterprise Risk Management • Wealth and Asset Management • Climatological Change • Aggregation of Exposures • Closer collaboration with local authorities on building and zoning codes • Increasing data quality • Insurance to value and coding accuracy • Implementation of ACORD Standards • Ratemaking techniques • Territorial analyses and allocation of reinsurance costs • CAT Model sophistication

38. Industry Opportunities • Use of advanced analytics by reinsurers at the transaction level and capital allocation process • Convergence of risk management activities to better achieve well-controlled and transparent management of risk and capital on a cost effective basis • Creating better efficiencies and compliance with regulations and insurance rules by eliminating siloed redundancies and misalignments • Modernize processes • Refocus on customer demands • Increase turnaround time on contract documentation, policy issuance and claim management • Enhance intellectual capital and professional development

39. Industry Opportunities Maintaining the trust and producing the results to continue as the market of choice.

40. “Crystal Balling” the Future • Price softening across all lines is waning, but should continue to generate positive underwriting results through • adequate rates • disciplined underwriting and • favorable prior-year loss-reserve development • Leading surplus lines companies have well-established relationships with wholesale MGA’s, brokers, and agents • will allow them to defend their core books of business and • withstand the heightened competition from the standard market. Source: A. M. Best Special Report: “Excess & Surplus Lines Annual Report – 2007”

41. “Crystal Balling” the Future • Favorable prior-year reserve development reported over the past two years indicates the return of adequate reserves. • Accident year reserve development for professional surplus lines companies has been more favorable than that experienced by the overall industry. • Improved pricing and more accurate loss picks in recent years, should cause reserve development to not be a drain on the surplus lines market during the near term. Source: A. M. Best Special Report: “Excess & Surplus Lines Annual Report – 2007”

42. “Crystal Balling” the Future • Rates on smaller risks historically tend to mirror loss costs, which at the beginning of 2007 still were going up, although at a decelerating rate. • Surplus lines insurers still looking to grow their portfolios, particularly start-up companies, will be challenged to grow their books of small and middle-market accounts while maintaining underwriting profitability. Source: A. M. Best Special Report: “Excess & Surplus Lines Annual Report – 2007”

43. Key Challenges for our Industry • The ability to effectively manage operations through the soft market cycle • Impact of a potential “on-shore” catastrophe • Competitiveness from standard markets • The ability to effectively utilize emerging technology to enhance productivity • Migrating underwriting, policy administration and other systems on to a single platform Source: A. M. Best Special Report: “Excess & Surplus Lines Annual Report – 2007”

44. Nonadmitted and Reinsurance Reform Act of 2009 (“NRRA”) • Only the Home State of the insured may require a premium tax payment. The states may enter into a compact or otherwise establish procedures to allocate those premium taxes. • Only the insured’s Home State’s statutory and regulatory requirements apply, including those with regard to producer licensing. All non home state, non-admitted insurance laws and regulations are preempted. • Insureds which meet a substantial definition of sophistication and financial wherewithal can consent to coverage being acquired from surplus lines insurers without the broker having to first conduct a diligent search.

45. Nonadmitted and Reinsurance Reform Act of 2009 (“NRRA”) • HR 5637 passed unanimously in the 109th Congress in 2006 • HR 1065 introduced in the 110th Congress in 2007 • Passed by a vote of 417-0 in June 2007. • S.929 introduced into the US Senate in March 2007 • Committee hearings on S 929 were held – and then recession hit • New Bills expected to be introduced soon

46. Optional Federal Charter • Authorizes the issuance of charters and licenses for the sale, solicitation, negotiation, and underwriting of insurance or any other insurance operations • Provides a comprehensive system for the regulation and supervision of National Insurers and National Agencies, as well as provides for policyholder protections in the event of an insolvency or impairment of a National Insurer • Creates a new insurance regulatory structure that would allow companies that operate across state borders the option to operate under one set of Federal rules and regulations

47. Thank You! American Association of Managing General Agents 150 South Warner Road Suite 156 King of Prussia, PA 19406 610.225.1999 (o) 610.225.1996 (f) bernie@aamga.org

48. The Benefits of Membership in the American Association of Managing General Agents November 2007

49. The Top Six Reasons: • The AAMGA’s brand value in the wholesale insurance marketplace, and its respect in the greater insurance community • The Annual Meeting • Education & Professional Development • Leadership by Committees of Industry Peers • Networking, Networking, Networking • A Heritage of Integrity & Professionalism

50. Membership Composition & Leverage • Active Members: 256 • Associate Members: 145 • Business Services Members: 60 • Stamping & Surplus Lines Offices: 14 Total: 475