Communications & Public Relations Obstacles in the P/C Insurance Industry Containing the Collateral Damage for Gove

1. Communications & Public Relations Obstacles in the P/C Insurance IndustryContaining the Collateral Damage for Government Affairs October 23, 2007 Robert P. Hartwig, Ph.D., CPCU, President 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 • Favorability Ratings of Insurers • Profitability: Egregious or Reasonable? • Underwriting Trends: Paying Less of the Premium Dollar? • Prices: Too High, Too Low or Just Right? • Catastrophic Loss: Are Insurers Exaggerating the Risk to Raise Rates? • Post-Katrina Litigation • Regulatory & Legislative Environment: Too Lax or Burdensome and Anti-Consumer • Q&A

3. INSURANCE INFORMATION INSTITUTE PUBLIC OPINION SURVEY

4. INSURANCE PULSE FAVORABILITY BY INDUSTRY

5. INSURANCE PULSE KEY FINDINGS 2007 • The percentage of Americans with a favorable attitude toward auto and home insurers basically held steady in 2007 at 57 percent, up two points from 2006. • Favorability improved significantly in the West, up nine points, and was unchanged in the South. • The percentage of people who say that auto insurance is somewhat of a financial burden fell 7 points in 2007 to 56 percent. • The percentage of people who say home insurance is somewhat of a financial burden fell 5 points in 2007 to 43 percent.

6. INSURANCE INFORMATION INSTITUTE I.I.I. MEDIA INDEX

7. MEDIA INDEX FIRST HALF 2006 vs. FIRST HALF 2007

8. MEDIA INDEX FIRST HALF 2006 vs. FIRST HALF 2007(percent increase/decrease)

9. #1. ProfitsCritics: Egregious ProfitsInsurers: Inadequate ProfitsReality: Critics Fail to Understand Cyclicality, Catastrophe Impacts & Relative Profitability of Industry

10. P/C Net Income After Taxes1991-2007F ($ Millions)* • 2001 ROE = -1.2% • 2002 ROE = 2.2% • 2003 ROE = 8.9% • 2004 ROE = 9.4% • 2005 ROE= 9.4% • 2006 ROAS1 = 14.0% • 2007F ROAS = 13.1%** Insurer profits peaked in 2006/7. “Normal” CAT year, average investment gain imply flattening *ROE figures are GAAP; 1Return on avg. surplus. 2007F figure is annualized actual first half net income of $32.596B **Actual first half 2007 result. Sources: A.M. Best, ISO, Insurance Information Inst.

11. 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 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate. Source: Insurance Information Institute; Fortune

12. 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 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate. Source: Insurance Information Institute; Fortune

13. 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 +3.5 pts +3.1 pts -9.0 pts -0.1 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.

14. US Reinsurer Net Income& ROE, 1985-2006 Reinsurer profitability has rebounded Source: Reinsurance Association of America.

15. Insurance & Reinsurance Stocks: Lagging Behind in 2007 Total YTD Returns Through October 19, 2007 P/C insurance, reinsurance stocks lagging on soft market concerns, subprime selloff Source: SNL Securities, Standard & Poor’s, Insurance Information Inst. *Includes Financial Guarantee

16. 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

17. Advertising Expenditures by P/C Insurance Industry, 1999-2006 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.

18. FINANCIAL STRENGTH & RATINGSA Weak Insurance Industry is in Nobody’sBest Interest

19. Cumulative Average Impairment Rates by Best Financial Strength Rating* Insurers with strong ratings are far less likely to become impaired over long periods of time. Especially important in long-tailed lines. *US P/C and L/H companies, 1977-2002 Sources: A.M. Best: Best’s Impairment Rate and Rating Transition Study—1977-2002, March 1, 2004.

20. P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2006 Impairment rates are highly correlated underwriting performance 2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969 Source: A.M. Best; Insurance Information Institute

21. #2: UnderwritingCritics: Insurers Paying Out Smaller Share of PremiumsInsurers: Underwriting Profits are JustifiedReality: Lower Investment Returns Imply Profits Must Come from Underwriting

22. P/C Insurance Combined Ratio, 1970-2008F* Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.8 2000s: 102.2** Sources: A.M. Best; ISO, III *Actual figure of 92.7 through first half 2007. **Through 2007:H1.

23. P/C Insurance Combined Ratio, 2001-2008F 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 87.6 combined ratio in 1949 2005 figure benefited from heavy use of reinsurance which lowered net losses Sources: A.M. Best; ISO, III. *III estimates for 2007/8.

24. Underwriting Gain (Loss)1975-2007F* Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the second since 1978. Expect figure near $28 billion in 2007 assuming “normal” CAT losses. Cumulative underwriting deficit since 1975 is $412 billion. $ Billions Source: A.M. Best, Insurance Information Institute *Actual 2007:H1 underwriting profit = $14.402B annualized to $28.8B.

25. Private Passenger Auto (PPA) Combined Ratio Auto insurers have shown significant improvement in PPA underwriting performance since mid-2002, but results are deteriorating. PPA is the profit juggernaut of the p/c insurance industry today Average Combined Ratio for 1993 to 2006: 101.0 Sources: A.M. Best; III

26. RNW: Private Passenger Auto, United States, 1992-2006E Segmentation should help profitability Private passenger auto profitability deteriorated throughout the 1990s but has improved dramatically Source: NAIC; Insurance Information Institute

27. Homeowners Insurance Combined Ratio Average 1990 to 2006= 111.8 Insurers have paid out an average of $1.12 in losses for every dollar earned in premiums over the past 17 years Sources: A.M. Best; III

28. Rates of Return on Net Worth for Homeowners Ins: US Averages: 1993 to 2005 US HO Insurance = +2.5% (+3.3% through 2006E) Source: NAIC; 2006 figure is Insurance Information Institute estimate.

29. Property/Casualty Insurance Industry Investment Gain1 Investment gains fell in 2006 and even now are only marginally larger than in the late 1990s 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. **Annualized H1 result of $30.301B. Sources: ISO; Insurance Information Institute.

30. #3. Prices/RatesCritics: Prices are OutrageousInsurers: Adequacy VariesReality: Markets are Highly Competitive But Regulatory Rate Suppression Hurts Competitionin Key States

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 Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute *2007-10 figures are III forecasts/estimates.

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 *2007 figure base on 2007 actual first half result of 0.1%. Source: A.M. Best; Forecasts from the Insurance Information Institute.

33. *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

34. *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

35. Homeowners Insurance Expenditures as a % of Median Existing Home Prices, 1995-2008F Record catastrophe losses and declining home prices are pushing HO insurance expenditures as a % of median home price up Source: National Association of Realtors, NAIC; Insurance Info. Institute calculations and HO expenditure estimates/ forecasts for years 2005-2008.

36. Average Commercial Rate Change,All Lines, (1Q:2004 – 3Q: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. #4. CAT LossesCritics: Insurers Exaggerate Insurers: Worst is Yet to ComeReality: Catastrophic Loss Potential is Growing Rapidly Everywhere

38. Most of US Population & Property Has Major CAT Exposure Is Anyplace Safe?

39. U.S. Insured Catastrophe Losses* $ Billions $100 Billion CAT year is coming soon 2006 was a welcome respite. 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Through 9/30/07. 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

40. Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions) After FL, many Northeast states have among the highest coastal exposure as a share of all insured exposure in the state. Source: AIR Worldwide

41. Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005) Seven of the 10 most expensive hurricanes in US history impacted Florida: Andrew, Katrina, Wilma, Charley, Ivan, Frances & Jeanne Hugo still ranks as the 6th most expensive storm ever Sources: ISO/PCS; Insurance Information Institute.

42. Insured Losses from Top 10 Earthquakes Adjusted to 2005 Exposure Levels (Billions of 2005 Dollars) With development along major fault lines, the threat of $25B+ quakes looms large 3 of the Top 10 are not West Coast events Source: AIR Worldwide

43. Percentage of California Homeowners with Earthquake Insurance, 1994-2004* The vast majority of California homeowners forego earthquake coverage & play Russian Roulette with their most valuable asset. *Includes CEA policies beginning in 1996. **2006 estimate from Insurance Information Network of CA. Source: California Department of Insurance; Insurance Information Institute.

44. Catastrophe Litigation • Insurers have won virtually every major case in post-Katrina litigation environment • Most cases centered on validity of flood exclusion and various wind vs. water theories • This came at a high PR cost as post-Katrina litigation was dragged out over a 2-year period accounting for the vast majority of negative press in the first 16 months after the storm • FL significantly added to negative press in 2007 • While industry was successful at explaining the rational for pursuing most cases, we struggled with the classic David vs. Goliath story • Championed by personally affected politicians • Feeds “Insurance Hoax” genre of stories • View that insurers systematically deny, delay and lowball • Exacerbated by hundreds of thousands of nonrenewals

45. States Create Their Own Vulnerability and Try to Blame Insurers

46. Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2006E* $ Billions Florida’s homeowners insurance market produces small profits in most years and enormous losses in others *2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B. 2006 estimate from Ins. Info. Inst.

47. Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2006E* Regulator under US law has duty to allow rates that are “fair,” “not excessive” and “not unduly discriminatory.” Reality is that regulators in CAT-prone states suppress rates. $ Billions It took insurers 11 years (1993-2003) to erase the UW loss associated with Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits & 2005 deepened the hole. *2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B. 2006 estimate from Ins. Info. Inst.

48. Rates of Return on Net Worth for Homeowners Ins: US vs. Florida 1990 – 2006E Averages: 1990 to 2006E US HO Insurance = -0.9% FL HO Average = -36.5% 4 Hurricanes Andrew Wilma, Dennis, Katrina Source: NAIC; 200/6 US and FL estimates from the Insurance Information Institute.

49. Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars) Hurricane Katrina pushed all of the residual market property plans in affected states into deficits for 2005, following an already record hurricane loss year in 2004 * MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid. Source: Insurance Information Institute

50. Florida Citizens Exposure to Loss (Billions of Dollars) Exposure to loss in Florida Citizens nearly doubled in 2006 and was up another 50% during the first half of 2007 Source: PIPSO; Insurance Information Institute. *As of June 30.