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What Keeps Insurance CEOs Awake at Night? Especially in South Carolina. South Carolina Insurance News Service & South Carolina Legislative Conference Annual Meetings Charleston, SC October 18, 2007. Robert P. Hartwig, Ph.D., CPCU, President

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What keeps insurance ceos awake at night especially in south carolina l.jpg

What Keeps Insurance CEOs Awake at Night?Especially in South Carolina

South Carolina Insurance News Service &

South Carolina Legislative Conference Annual Meetings

Charleston, SC

October 18, 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


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Presentation Outline

  • Declining Profitability—Past the Cyclical Peak

    • Subprime Lending Crisis: What Does it Mean for Insurers?

    • Ratings & Financial Strength

  • Deteriorating Underwriting Trends: Still Strong, for How Long?

    • Key Personal & Commercial Lines Review

  • Vanishing Premium Growth: Approaching a Standstill

  • Weak Pricing: Competitive Pressures Mounting

  • Rising Expenses: Creeping Upward

  • Overcapacity: Rapid Capital/Surplus GrowthROE Pressure

  • Investment Volatility: More Pain, Less Gain

  • Catastrophic Loss: The Worst Has Yet to Come

    • Reinsurance Summary

  • Shifting Legal Liability & Tort Environment: Will the Pendulum Swing Against Insurers?

  • Regulatory & Legislative Zealotry: Scrutiny is Mounting

  • Q&A


1 declining profitability profits in 2006 7 reached their cyclical peak roes already falling l.jpg

#1DECLINING PROFITABILITYProfits in 2006/7 ReachedTheir Cyclical Peak;ROEs Already Falling


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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.


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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


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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


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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.


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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


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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.


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South Carolina:PROFITABILITY COMPARISON


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ALL LINES: 10yr Avg Return on Equity, SC & Nearby States

1996-2005

Source: NAIC, Insurance Information Institute


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PP AUTO: 10yr Avg Return on Equity, SC & Nearby States

1996-2005

Source: NAIC, Insurance Information Institute


Home 10yr avg return on equity sc nearby states l.jpg

HOME: 10yr Avg Return on Equity, SC & Nearby States

1996-2005

Source: NAIC, Insurance Information Institute


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Comm M-P: 10yr Avg Return on Equity, SC & Nearby States

1996-2005

Source: NAIC, Insurance Information Institute


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WC: 10yr Avg Return on Equity, SC & Nearby States

1996-2005

Source: NAIC, Insurance Information Institute


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Comm Auto: 10yr Avg Return on Equity, SC & Nearby States

1996-2005

Source: NAIC, Insurance Information Institute


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FINANCIAL STRENGTH & RATINGSIndustry Has Weathered the Storms Well, But Cycle May Takes Its Toll


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

2003-2005

1969-2005

Deficient reserves, CAT losses are more important factors in recent years

*Includes overstatement of assets.

Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report,Nov. 2005;


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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


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#2DETERIORATINGUNDERWRITINGExtremely Strong 2006/07;Relying on Momentum & Discipline for 2008


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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.


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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.


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Ten Lowest P/C Insurance Combined Ratios Since 1920 (& 2007:H1)

2007 is off to a great start

The industry’s best underwriting years are associated with periods of low interest rates

The 2006 combined ratio of 92.5 was the best since the 87.6 combined in 1949

Sources: Insurance Information Institute research from A.M. Best data. *2007 first half actual.


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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.


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Impact of Reserve Changes on Combined Ratio

Reserve adequacy has improved substantially

Source: A.M. Best, Lehman Brothers estimates for years 2007-2009


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Cumulative Prior Year Reserve Development by Line (As of 12/31/06)

Strengthening

Reserve redundancies in most lines have resulted in releases in recent years

Release

Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2.


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PERSONAL LINES:Private Passenger Auto


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Personal LinesCombined Ratio, 1993-2006

A very strong 2006 resulted from favorable frequency & severity trends and low CAT activity

Source: A.M. Best; Insurance Information Institute.


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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


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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


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Homeowners Insurance


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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


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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.


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COMMERCIAL LINESCommercial AutoCommercial Multi-PerilWorkers Comp


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Commercial Lines Combined Ratio, 1993-2006

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 benefited from relatively disciplined underwriting, low CAT losses and reserve releases

Source: A.M. Best; Insurance Information Institute.


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#3VANISHING PREMIUM GROWTHAt a Virtual Standstillin 2007/08


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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.


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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.


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Leading US Captive Domiciles, 2005 vs. 2006

U.S. captive domiciles experienced dramatic growth in 2006, hurting traditional commercial insurers, especially in the middle market space

SC added 24 captives in 2006, a 20% increase

Sources: Business Insurance, March 12, 2007; III


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#4WEAK PRICING Under Intense Pressure in 2007/08, Especially Commercial Lines


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*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


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*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


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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.


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Average Commercial Rate Change,All Lines, (1Q:2004 – 2Q:2007)

Magnitude of rate decreases diminished greatly after Katrina but have grown again

KRW Effect

Source: Council of Insurance Agents & Brokers; Insurance Information Institute


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Cumulative Commercial Rate Change by Line: 4Q99 – 2Q07

Commercial account pricing has been trending down for 3 years and is now on par with prices in late 2001, early 2002

Source: Council of Insurance Agents & Brokers


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#5RISING EXPENSESExpense Ratios Will Rise as Premium Growth Slows


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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


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#6 OVERCAPACITYAccumulation of Capital/ Surplus Depresses ROEs


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U.S. Policyholder Surplus: 1975-2007*

Capacity as of 6/30/07 was $512.8B, 5.3% above year-end 2006, 80% above its 2002 trough and 54% above its 1999 peak.

Capacity exceeded a half trillion dollars for the first time during the 2nd quarter of 2007

$ 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. *As of June 30, 2007


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P/C Industry Premium-to-SurplusRatio, 1985-2007:H1Private Carriers

$512.8B

$447 B

$145 B

$76 B

$ BillionsP:S Ratio

At 0.87:1 as of 6/30/07, now approaching all-time record premium-to-surplus ratio of 0.84:1 in 1998

1.92:1

Low P:S Ratio 0.84:1 in 1998

0.87:1

Calendar Year

H1 = First Half

Source:1985–2006, A.M. Best Aggregates & Averages;; 2007 ISO


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Capital Raising by Class Within 15 Months of KRW

$ Billions

Insurers & Reinsurers raised $33.7 billion in the wake of Katrina, Rita, Wilma—much of via offshore vehicles

Source: Lane Financial Trade Notes, January 31, 2007.


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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.


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P/C Insurer Share Repurchases,1987- First Half 2007 ($ Millions)*

Reasons Behind Capital Build-Up & Repurchase Surge

  • Strong underwriting results

  • Moderate catastrophe losses

  • Reasonable investment performance

  • Lack of strategic alternatives (M&A, large-scale expansion)

    Returning capital owners (shareholders) is one of the few options available

First half 2007 share buybacks are already 86% of the 2006 record

Sources: Credit Suisse, Company Reports; Insurance Information Inst.


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MERGER & ACQUISITIONFew Catalysts for Major P/C Consolidation in ‘08


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

2006 surge due mostly to 2 deals. No trend started.

Reinsurance, distribution are exceptions

No model for successful consolidation has emerged

.

Source: Conning Research & Consulting.


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Distribution Sector: Insurance-Related M&A Activity, 1988-2006

No extraordinary trends evident

Source: Conning Research & Consulting.


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Distribution Sector M&A Activity, 2005 vs. 2006

2005

2006

Number of bank acquisitions is falling years

Source: Conning Research & Consulting


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#7FLAT & VOLATILE INVESTMENTS More Pain, Little Gain


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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.


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#8CATASTROPHICLOSSWhat Will 2008 Bring?


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Most of US Population & Property Has Major CAT Exposure

Is Anyplace Safe?


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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


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Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1986-2005¹

Insured disaster losses totaled $289.1 billion from 1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up from 27.1% from 1984-2003.

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.

2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.

Source: Insurance Services Office (ISO)..


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2007 Hurricane Season:No Big Hits…So Far

So Far, So Good

2007 season has seen 13 named storms including two rare Category 5 storms, but both have missed the US

Source: www.wunderground.com, accessed 9/29/07; Insurance Information Institute


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Total Value of Insured Coastal Exposure (2004, $ Billions)

South Carolina has at least $150 billion in insured coastal property exposure—more than Mississippi, which suffer $13 billion in Katrina losses

Source: AIR Worldwide


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Value of Insured Residential Coastal Exposure (2004, $ Billions)

44% or all insured coastal exposure in South Carolina is residential, totaling some $65.1 billion in 2004

Source: AIR


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Value of Insured Commercial Coastal Exposure (2004, $ Billions)

56% or all insured coastal exposure in SC is commercial, totaling some $83.7 million in 2004

Source: AIR


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Hurricane Strikes & Population Growth in South Carolina, By County


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Hurricane Strikes vs. Population for Beaufort County, South Carolina

Source: NOAA


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Hurricane Strikes vs. Population for Charleston County, South Carolina

Source: NOAA


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Hurricane Strikes vs. Population for Colleton County, South Carolina

Source: NOAA


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Hurricane Strikes vs. Population for Georgetown County, South Carolina

Source: NOAA


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Hurricane Strikes vs. Population for Horry County, South Carolina

Source: NOAA


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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.


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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


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THE FLORIDA APPROACH TO CATASTROPHE RISKInsurer, Policyholder & State Impacts


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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


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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.


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Pre- vs. Post-Event in FL for 2007 Hurricane Season

$80.0B

There is a very significant likelihood of major, multi-year assessments in 2007

$55.0B

$49.5B

Billions

$43.8B

$35.0B

Total =

$20.0 Billion

$25.0B

Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available

through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not include

financing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.”

Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.


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Average Annual Assessment per Household, 1-in-100 Year Event in 2007

The average Florida household will pay $8,699 over 30 years in assessments if a 1-in-100 year event strikes in 2007. Assessments could rise if additional storms hit in 2007 or beyond.

Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.


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REINSURANCE MARKETSReinsurance Prices are Stabilizing; Falling in Some Areas


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Share of Losses Paid by Reinsurers, by Disaster*

Reinsurance is playing an increasingly important role in the financing of mega-CATs; Reins. Costs are skyrocketing

*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.

Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.


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Ratio of Reinsurer Loss & Underwriting Expense to Premiums Written, 1985-2006

Despite the respite in 2006, reinsurers paid an average of $1.11 in loss and expense for every $1 in written premium since 1985

Sept. 11

Katrina, Rita, Wilma

Hurricane Andrew

Liability Crisis

Source: Reinsurance Association of America.


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#9Shifting Legal Liability & Tort EnvironmentIs the Pendulum SwingingAgainst Insurers?


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Tort System Costs,2000-2008F

After a period of rapid escalation, tort system costs as % of GDP are now falling

Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends;2006 is III estimate.


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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

Business Leaders Ranking of Liability Systems for 2007

New in 2007

ME, NH, TN, UT, WI

Drop-Offs

ND, VA, SD, WY, ID

Newly Notorious

AK

Rising Above

FL

Midwest/West has mix of good and bad states

Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.


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TEXAS

Rio Grande Valley and Gulf Coast

South Florida

West Virginia

The Nation’s Judicial Hellholes(2006)

Some improvement in “Judicial Hellholes” in 2006

Watch List

Miller County, AR

Los Angeles County, CA

San Francisco, CA

Philadelphia, PA

Orleans Parish, LA

Delaware

Dishonorable Mentions

Providence, RI

MA Supreme Court

LA Supreme Court

New Jersey

NE Supreme Court

California

ILLINOIS

Cook County

Madison County

St. Clair County

Source: American Tort Reform Association; Insurance Information Institute


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#10REGULATORY/ LEGISLATIVE ZEALOTRYScrutiny is Mounting


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Legal, Legislative & Regulatory Threats are Multiplying

  • Attacks on Underwriting: Perennial issue, with challenges to even long-established underwriting criteria popping up; Will be a bigger problem with evolution of Predictive Modeling

    • Credit-Based Insurance Scores: Remain the largest issue & became the subject of a US House O&I hearing Oct. 2

    • Education/Occupation Attacked (e.g., FL)

    • CAT Models: Black box allegation, short vs. long-term model

    • Any type of individual risk rating factor is subject to allegations of discrimination

  • Allegations of Collusion via Ratings Agencies, Trades & Modelers: Novel theory espoused by Gov. Crist and OIR in FL that insurers collude indirectly via ratings agencies, trade associations and modeling firms

    • Some insurers subpoenaed for documents

    • Some discussion at recent NAIC meeting

  • Proliferation of Insurance Regulators: Insurance Commissioner’s influence and power is waning in many states. There are 632 insurance regulators in the US (50 Commissioners, 50 AGs, 50 Governors, 50 Senators and 432 US)

    • Attorneys General: Spitzer (and copycats) did serious damage to commissioner authority; Followed by AG Hood in MS

    • Congress is exerting itself over a wide range of issues

    • Governors like Crist not shy on insurance matters

Source: Insurance Information Institute.


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Legal, Legislative & Regulatory Threats are Multiplying

  • Antitrust Allegations Against Reinsurance Broker: CT Attorney General Richard Blumenthal on Oct. 9 filed an antitrust action against Guy Carpenter in CT Superior Court accusing the reinsurance broker of “choreographing the reinsurance market to fix prices, stifle competitors and collect excessive profits at the expense of the entire industry.”

    • Alleges 170 small/medium insurers over 50 years overpaid for reinsurance

    • Blumenthal says policyholders consequently paid premiums that were up to 40% higher costing them potentially hundreds of millions of dollars

    • Suit alleges “Guy Carpenter conspired with numerous reinsurers to exploit its position as a well-known and dominant reinsurance broker in order to fix prices and output, foreclose competitors from access, allocate markets, eliminate competition and substantially increase profits in the extremely lucrative market for reinsurance.”

    • Suit accuses Guy Carpenter of trading exclusive access to a lucrative book of business in exchange for “excessive fees and other benefits by creating a series of reinsurance ‘facilities’ aimed at a large block of its smallest clients.” and“by withholding critical information and leading them to believe that Guy Carpenter was acting in their best interests.”


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REGULATORY UPDATEBusy Year for Insurersin Washington


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Federal Legislative Update

  • Federal Terrorism Reinsurance (TRIA)

  • TRIA expires 12/31/07.  The current federal program offers $100 billion of coverage subject to a $27.5B industry aggregate retention.

  • Under S. XXXX: “Terrorism Risk Insurance Program Reauthorization Act of 2007”

    • 7-Yr. Extension, expiring 12/31/14

    • Maintains 20% Direct Earned Premium Deductible for duration of Extension

    • NBCR risks remain excluded (in contrast to House bill)

    • Eliminates distinction between foreign and domestic acts of terrorism

    • Deletes requirement that terrorist act be on behalf of foreign person or foreign interest

    • Changes in definition of terrorist act require substantial rate and form filings in states

    • Federal government’s cap remains at $100 billion through 2014

    • Requires Comptroller General to issue report within 1 year on feasibility of NBCR insurance market; CG must also issue report within 180 days on obstacles in development of private sector market for terror insurance

  • Administration has said it will not oppose Senate bill (issued veto threat for House)

Sources: Insurance Information Institute


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Federal Legislative Update

  • Natural Disaster Coverage

  • Some insurers are pushing for federal catastrophic risk fund coverage in the wake of billions of dollars of losses suffered by insurers from the 2004-2005 hurricane seasons.

  • Legislative relief addressing property/casualty insurers’ exposure to natural catastrophes, such as the creation of state and federal catastrophe funds, has been advocated by insurers include Allstate and State Farm recently.  However, there is active opposition many other insurers and all reinsurers.

  • There are supporters in Congress, mostly from CAT-prone states. Skeptics in Congress believe such a plan would be a burden on taxpayers like the NFIP and that the private sector can do a better job. Unlike TRIA, the industry is not unified on this issue.

  • Allowing insurers to establish tax free reserves for future catastrophe losses has also been proposed, but Congress has not yet indicated much support.

Sources: Lehman Brothers, Insurance Information Institute


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Federal Legislative Update

  • Optional Federal Charter (OFC)

  • Large P&C and life insurers are the major supporters of OFC. Supporters argue that the current patchwork of 50 state regulators reduces competition, redundant, slows new product introductions and adds cost to the system.

  • In general, global P/C insurers , reinsurers and large brokers mostly support the concept, while regulators (state insurance commissioners), small single-state and regional insurers, and independent agency groups largely oppose the idea. An optional federal charter is more favorable for global P&C insurers, because an insurer that operates in multiple states could opt to be regulated under federal rules rather than multiple state regulations. As a result, this could increase innovation in the industry.

  • Currently appears to be more momentum for OFC for life than for P&C insurers based on the homogeneous nature of many life products.  The debate should intensify and although passage may not occur in the current session of Congress, it may lay the groundwork for passage in the 2009-2010 session.

Sources: Lehman Brothers, Insurance Information Institute


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Federal Legislative Update

  • McCarran-Ferguson Insurance Antitrust Exemption

  • Under McCarran-Ferguson Act of 1945, insurers have limited immunity under federal anti-trust laws allowing insurers to pool past claims information to develop accurate (actuarially credible) rates.

  • Very low level of understanding of M-F in Washington

  • Certain legislators threaten to revoke McCarran-Ferguson because of alleged collusion in the wake of Hurricane Katrina.  However, the view among some Washington insiders is that such a move would hurt small insurers with less resources rather than the large insurers perhaps being targeted.  The current bills designed to revoke McCarran-Ferguson are S.618 and H.R. 1081.

  • The government appointed Antitrust Modernization Commission in an April 2007 report strongly encouraged Congress to re-examine the McCarran-Ferguson Act.  Notably, 4 of the commissions 12 members called for a full repeal of the law.

Sources: Lehman Brothers, Insurance Info. Institute


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Summary

  • Results were unsustainably good 2006/07; Overall profitability reached its highest level (est. 14%) since 1988

    • Strong first half in 2007 but ROEs slipping

  • Underwriting results were aided by lack of CATs & favorable underlying loss trends, including tort system improvements

  • Property cat reinsurance markets past peak & more competitive

  • Premium growth rates are slowing to their levels since the late 1990s; Commercial leads decreases.

  • Rising investment returns insufficient to support deep soft market in terms of price, terms & conditions

  • Clear need to remain underwriting focused

  • How/where to deploy/redeploy capital??

  • Major Challenges:

    • Slow Growth Environment Ahead

    • Maintaining price/underwriting discipline

    • Managing variability/volatility of results

    • Managing regulatory/legislative activism


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Insurance Information Institute On-Line

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