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Industry Overview

Industry Overview. Moderator: Matthew Dolan, President OneBeacon Professional Partners Panelists: Paul F. Sherbine, Managing Director Marsh Inc. James D. Hurley, Principal Tillinghast, Towers Perrin Daryl Douglas, Hospital Claims Manager Employers Reinsurance Corporation.

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Industry Overview

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  1. Industry Overview Moderator: Matthew Dolan, President OneBeacon Professional Partners Panelists: Paul F. Sherbine, Managing Director Marsh Inc. James D. Hurley, Principal Tillinghast, Towers Perrin Daryl Douglas, Hospital Claims Manager Employers Reinsurance Corporation

  2. 2003 U.S InsuranceIndustry ResultsIts About Time!Paul F. SherbineMarch 30, 2004

  3. What has the industry done since 9/11? • Raised Capital • Raised Rates • Raised Loss Reserves • Raised Questions About its Viability

  4. Net Result 2002* vs. 2001An improvement, but... 2002 2001 • Net Underwriting Loss $26 billion $53 billion • Net Income After Taxes $11 billion -$7billion • Net Unrealized Capital Losses $18 billion $18 billion • Policyholders’ Surplus Decline** $ 5 billion $27 billion • Combined Ratio 106% 116% • Commercial Lines 108% 117% • U.S. Reinsurers 123% 146% • Personal Lines 105% 112% • ** Includes $9.5 billion ($11 billion) in new capital invested into the industry

  5. Eventually Something Had to Give Because • Twenty seven months of price increases • Investment market rallied • Catastrophe losses low • New capital In • Bad capital out • End game for 2003 is...

  6. Year end Results 2003 vs. 2002BIG DIFFERENCE 2002 • Net Underwriting Loss $9.6 billion $32 billion • Net Income After Taxes $31 billion $9 billion • Net Unrealized Capital Gains $13 billion -$24 billion • Policyholders’ Surplus Change** $39.6 billion -$4.2 billion • Combined Ratio 101.1 107.4% • Commercial Lines 104% 108% • U.S. Reinsurers 98% 123% • Personal Lines 99% 105% • ** Includes $8 billion ($18.7 billion) in new capital invested into the industry 2003

  7. Major Points on 2003 Results • Net Income of $31 billion despite nearly $17 billion in loss reserve strengthening • Combined ratio of 101% is after 3.2 points for cat losses and 2.1 points for A&E reserve additions • Rate increases of 2003 will not show up until 2004 results • Investment yield climate still bad with no end in sight • Underwriting results something to write home about for the first time since the eighties

  8. U.S. P&C Policyholders’ Surplus($ in billions)

  9. U.S. P&C Combined Ratios

  10. A Look BackSurplus Increase, 2003 ($ in billions) Beginning surplus, 2002 Underwriting gain/loss Investment income Realized Gains Other Operating gain/loss Unrealized gain/loss Taxes Dividends New Capital Surplus Change Ending surplus, 2003 $291.9 (9.6) 42.3 6.5 (.5) 32.2 13.1 (8.3) (10.9) 8 39.6 $330.8

  11. Despite 2003 healthy returnsHistorical industry returns on equity remain poor Source: ISO, Goldman Sachs Research Estimates

  12. Despite Historically Poor Returns Insurance Remains a Magnet For New Capital. Why? • Alternative investment vehicles available post 2001 not appealing • Venture capital firms are big player in 2001 and later following success of KKR and others in late 1990’s • Ease of entrance and exit-There’s a sucker born every minute! • Results of Bermuda companies in this marketplace are excellent just like in 1994 • Consequently; • $15 billion invested in 2002 in US and Bermuda insurers • $14.7 billion invested in 2003 in US and Bermuda insurers

  13. Arch Re-$1 Billion-Warburg Pincus-$500 Million,Hellman & Friedman-$250 Million, Arch Capital $250 million AWAC-$1.5 Billion AIG-$291 million,Chubb-$250 million,Goldman Sachs-$250 million AXIS Specialty-$1.65 billion-Trident(MMC Capital)-$250 million,MMC- $100 million,J.P. Morgan-$200 million,T.H.Lee Prtnrs-$200 million,Blackstone Grp-$200 million,CSFB-$200 million Da Vinci Re-$500 million-State Farm-$200 million,Ren Re-$100 million Endurance Specialty-$1.2 Billion-Aon-$200 million,Zurich-$200 million Goshawk Re-$100 million-Goshawk Ins Holdings Montpelier Re-$1 billion-White Mountains-$200 million Olympus Re-$500 million-Leucadia National,Gilbert Global Equity Prtnrs,Franklin Mutual Advisors Quanta-$500 million New Insurers, Capitalization and Major Investors 2002 and 2003

  14. ACE-$1.1 Billion- AIG-$1 Billion Alea-$150 Million- KKR Investment American Re-$1 Billion AVIVA-$1.43 Billion Chubb-$600 Million CNA-$1.4 Billion Everest Re-$575 Million Fairfax Fin’l -$150 Million-Private Placement Hannover Re- $700 Million Hartford-$2.4 Billion IPC Re-$547 Million Markel-$220 Million Partner Re-$400 Million PMA-$158 Million PX Re-$150 Million QBE- $323 Million Ren Re-$233 Million SCOR - $1.4 Billion Swiss Re- $3.3 Billion W.R. Berkley-$175 Million XL- $1.5 Billion White Mountain- $1 Billion Established Insurers Also Added Capital to Replace Losses and Increase Capacity

  15. New Capital, Both for New Ventures And Existing Insurers was Substantial But... • Capital Lost Since 1999 is $49 Billion In US Alone • Capital Lost Since 2000 is $32 Billion In US Alone • 2003 results takes capital back to about 1998 levels • Hard market leveling off despite many tough issues facing the industry including: • Loss Reserve Strengthening for Recent Losses and Old A&E Issues • Other Legacy Issues • Investment portfolio problems • Ratings still fall

  16. Rating Changes Since 9-11(Through 02/29/04) • Major insurer groups used by Marsh which maintained their rating by all rating agencies • ACE, AIG, Berkshire Hathaway, FM, Old Republic • Major group upgrades • A.M. Best: 4 • Standard & Poor’s: 4 • Major group downgrades • A.M. Best: 30 • Standard & Poor’s: 40 • 2004- Negative outlook

  17. Chubb-$625 Million CNA- $2.3 billion Employers Re-$540 million Equitas -$666 million Gulf-$252 million Hartford- $2.6 billion Liberty-$331 million PMA- $160 million Royal Sun Alliance-$1 billion SCOR-$421 million St Paul-$350 million XL-$694 million Major Reserve Additions 2003

  18. Current Operating EnvironmentEstimated reserve deficiencies • Standard & Poors - $60 billion -Excluding asbestos • A.M. Best - $65 billion at year end 2003 with $36.6 billion for A&E and $24 billion for Commercial lines business • Fitch- $45-$77 Billion under reserved at year end 2002 includes $9 billion to $29 billion in asbestos • Moody’s-$30 billion as of September 2003 • 90% of these deficiencies are in commercial lines and reinsurance • Estimated 2003 PHS of commercial insurers and reinsurers: $180 billion • Despite good year in 2003 old problems will not go away.Not the time to fight for market share

  19. What is a buyer to do in 2004? • Another cycle like the last one will kill a lot more companies-Solvency matters • Legacy issues will not go away.New ones will emerge. Which companies are best suited to survive these issues? • New companies have no legacy issues but do have ownership issues. What are the venture capital firms exit strategy?Pick your partners well. • Follow your markets carefully- Use Marsh’s My Insurer Monitor

  20. Medical MalpracticeFinancial OverviewJames D. Hurley

  21. Medical Malpractice - Financial Overview 21 Source: Best’s Aggregates and Averages

  22. Medical Malpractice - Financial Overview 22

  23. Medical Malpractice - Financial Overview 23 Source: Best’s Aggregates and Averages

  24. Medical Malpractice - Financial Overview 24 Source: Best’s Aggregates and Averages

  25. Medical Malpractice - Financial Overview 25 Source: Best’s Aggregates and Averages

  26. Medical Malpractice - Financial Overview 26 Source: Best’s Aggregates and Averages

  27. Medical Malpractice – Financial Overview OBSERVATIONS • Ratios • Combined – improve to sub 130% • Operating – improve to sub 110% • Trends • Frequency • Severity

  28. Medical Malpractice – Financial Overview OBSERVATIONS (cont’d) • Investment Income • 2003 helps, but... • Interest rates still low • Impact grows • Rates • Still up, but slowed

  29. Medical Malpractice Claims Trends – A View From the Trenches Daryl Douglas March 30, 2004

  30. Discussion • Good News • Tort Reform Successes • Public Awareness of Med Mal Crisis • Bad News – Severity is Still Rising • National and Regional Loss Data • Trend Drivers • What Can We Do?

  31. Tort Reform Successes and Legal Victories • Texas – Meaningful reforms likely to be upheld – for now • OH (caps, j/s), FL (caps), PA, AR– also enacted reform • Many others considering reforms • NJ, OK, W.VA, IL, WA, NC, KY, AZ, MD • Campbell v. State Farm – limits punitive awards • Ohio – docs suing plaintiffs for frivolous lawsuits • Debates are raising public’s awareness of crisis

  32. Importance of the Problem • In Jan 03, three-quarters (74%) said the issue of med malpractice insurance was at least a major problem Source: Gallup Poll – Jan 22, 2003

  33. Support for Limiting Jury Awards • Nearly three-quarters (72%) of the public say they would favor putting limits on amount patients can recover for emotional pain and suffering. Source: Jan 2003 Kaiser Family Foundation Health Poll Report

  34. The Bad News • Despite Some In-Roads with Tort Reform and Legal Opinions, Severity and Loss Costs Are Still Rising in Claims against • Doctors • Hospitals • Nursing Home Cases

  35. Physician Professional Liability Historical Loss Costs Per Class One Physician Limited to $2 Million per Occurrence • Based on the annual physician liability loss costs for years 1995 through 2002, the annual loss cost trend rate is 9.7%. • Projected loss costs for 2003 and 2004 are $12,230 and $13,600, respectively. Source: Aon Risk Services – 2003 Benchmark Analysis

  36. Hospital Severity Takes Major Up-Tick More than 800 paymentsover $1MM in 2002 Claims Per 1K Hospital Beds # Payments Claims Per 1,000 Hospital Beds Payments Source: National Practitioners Data Bank Public Use Files; AON HealthLine Special Edition 2003

  37. Sample Large Losses (03-04) • Florida (Palm Beach) – 63mm verdict in forceps delivery case (1/04) • Wash D.C. – 50mm verdict in nicked sphincter (8/03) • New York – 48mm settlement of impaired infant case (03) • Detroit – 35mm verdict for paralysis (2/04) • Chicago – 35mm settlement impaired infant case (2/04) • Texas (Dallas) – 31mm verdict impaired infant (7.7mm punitives) (11/03) • Chicago – 30mm wrongful death (2/04) • Philadelphia – 20mm (abdominal pain) and 15mm (bad ankle) verdicts (2/04) • Ohio – 6.7mm verdict in wrongful death case

  38. Long Term Care Trends Countrywide Loss Cost Per Occupied Bed Cost per occupied bed of GL/PL losses increasing at annual rate of 24% a year Source: Aon Risk Services -Long Term Care General Liability and Professional Liability Actuarial Analysis Note: Conclusions are based on actuarial analysis of long term care industry data available to Aon. This data set represents 26% of the U.S. market.

  39. Long Term Care Trends Countrywide Severity of Claim Average size of claim increasing in recent years at annual rate of 9% Current claim sizes are triple the average size at beginning of 90’s Source: Aon Risk Services -Long Term Care General Liability and Professional Liability Actuarial Analysis Note: Conclusions are based on actuarial analysis of long term care industry data available to Aon. This data set represents 26% of the U.S. market.

  40. Trend Drivers – Why is Severity Still on the Rise? • Expanding reach of best plaintiffs’ counsel • Illinois, Pennsylvania, Maryland, Ohio • Plaintiffs more effective and creative • Difficulty settling cases – “pigs at a trough” • Jury Selection - pro-tort reform jurors identified • Creative attacks around reform • Negligent Credentialing (TX); Multiple caps (MO) • Doctors cutting deals with plaintiffs • Other issues – Aggregate erosion; Bankruptcies

  41. Impact of Malpractice Lawsuits • In 2002, over half the public (54%) thought that having more malpractice lawsuits would be at least somewhat effective in reducing preventable medical errors Source: Jan 2003 Kaiser Family Foundation Health Poll Report

  42. Personal Experience With Medical Errors • In 2002, 42% reported that they have been personally involved in a situation where a preventable medical error was made in their own care of that of a family member Source: Harvard School of Public Health/Kaiser Family Foundation. Survey conducted April-July 2002

  43. What Can We Do – From a Legal/Claims Perspective? • Support Tort Reform Efforts at State Level • Use Texas Model – need caps, annuity, J & S • Hire Best Defense Lawyers • Aggressively Defend Cases – jury research • Consider Arbitration Provisions and Mediation • Hire Experienced and Skilled Claims Consultants • Do not outsource • Increase Claims Input on Front End Underwriting

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