Boston, MA November 3, 2006

Transcription

1 Challenges & Opportunities in the P/C Insurance Industry Focus on Massachusetts Markets Massachusetts Association of Insurance Agents 2006 Annual Convention Boston, MA November 3, 2006 Robert P. Hartwig, Ph.D., CPCU, Executive Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY Tel: (212) Fax: (212)

2 Presentation Outline P/C Profit Overview: US vs. MA & Nearby States Underwriting Trends Primary & Reinsurance Pricing/Availability Trends Financial Strength & Ratings Investments Capital & Capacity Catastrophe Loss Management Residual Property Markets: US and MA Key Line Results Post-Katrina Litigation Update Optional Federal Chart (OFC) Terrorism: Are TRIA s Days Numbered?

3 P/C PROFIT OVERVIEW Awash in Profits, Starved for Growth

4 P/C Net Income After Taxes E ($ Millions)* $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $ ROE = -1.2% 2002 ROE = 2.2% 2003 ROE = 8.9% 2004 ROE = 9.4% 2005 ROE= 10.5% 2006 ROAS 1,2 = 13.0% $14,178 $5,840 $19,316 $10,870 $24,404 $20,598 $36,819 $30, Net Income may shatter previous records $21,865 $20,559 $3,046 $30,029 $38,501 $56,668 $43,013 -$10, $6,970 *ROE figures are GAAP; 1 Return on avg. surplus ROAS = 9.8% after adj. for one-time special dividend paid by the investment subsidiary of one company. 2 Based on H1 results; Sources: A.M. Best, ISO, Insurance Information Inst F

5 ROE: P/C vs. All Industries :H1 20% 15% 2004/5 ROEs excl. hurricanes Insurers will outperform only if CAT losses are normal 10% 5% Sept. 11 0% -5% Hugo Andrew Northridge Lowest CAT losses in 15 years Katrina, Rita, Wilma 4 Hurricanes * US P/C Insurers All US Industries P/C excl. Hurricanes *2006 P/C insurer ROE based on annualized H1 results. Source: Insurance Information Institute; Fortune

6 The Importance of Profits Profits compensate shareholders for the assets they put at risk Profitable companies can access capital markets under favorable terms after mega-cats or if market conditions are poor (e.g., post-9/11); Others will fail, are dissolved or acquired Preferred treatment by reinsurers Profits lead directly to increased capacity Profits build contingent capacity for mega-cats Profits enable investments in the future of the enterprise (tech, people, etc.) and to seize upon new opportunities (new states, M&A, etc.) Profitable companies have higher financial strength and credit ratings Profitable companies have more political and public policy clout Can lobby effective at state and federal level Can help support research and

7 WALL STREET: MAINTAINING THE CONFIDENCE OF WALL STREET IS CRITICAL FOR MANY INSURERS

8 Change in YTD Stock Performance by Sector Pre- & Post-Katrina/Rita/Wilma 15% 10% 5% P/C Reinsurers Brokers 4.2% 4.0% 4.5% 3.8% Katrina: Aug % P/C & reinsurer stocks hurt but now fully recovered. Brokers rose on expectation of tighter conditions and demand for broker services; closure of Spitzer issues. 2.5% 1.9% 3.3% 2.1% 2.7% 3.6% 3.9% 4.8% 2.6% 3.4% 3.2% 2.2% 2.9% 2.8% 4.9% 5.0% 8.7% 7.0% 9.3% 13.3% 0% -5% -10% -4.0% -5.5% 5- Aug -3.5% -6.4% 12- Aug -2.7% -4.8% 19- Aug -4.1% -5.5% 26- Aug -0.6% -5.3% 2- Sep -4.5% 9- Sep Rita comes ashore Sept % 16- Sep -5.8% 23- Sep -6.0% 30- Sep Wilma landfall Oct % 7- Oct -5.3% 14- Oct -5.6% 21- Oct -5.6% 28- Oct -1.3% 04- Nov -0.5% 31- Dec Source: SNL Securities; Insurance Information Institute

9 P/C Insurance Stocks: Slow Start, Strong Finish in 2006 Total YTD Returns Through October 27, 2006 P/C & reinsurer stocks now up in 2006 on low CAT losses, strong earnings -2.54% 2.76% 4.71% 10.34% 11.28% 10.90% Broker stocks hurt by weak earnings 13.46% S&P 500 Life/Health Reinsurers P/C All Insurers Multiline Brokers -5.0% 0.0% 5.0% 10.0% 15.0% Source: SNL Securities, Standard & Poor s, Insurance Information Institute

10 MASSACHUSETTS PROFITABILITY KEY LINES & NEARBY STATES

11 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Source: NAIC US All P/C Lines ROE: US vs. MA, MA Profitability in MA insurance markets is on average better than the US (PP Auto is the exception) US = 7.7% MA = 11.1%

12 Private Passenger Auto ROE: US vs. MA, % 15% Profitability in the MA auto market lags behind the US US = 8.5% MA = 5.9% 10% 5% 0% -5% US MA Source: NAIC

13 Homeowners Insurance ROE: US vs. MA, % 20% Profitability in the MA homeowners market exceeds that of the US due to relatively low CAT losses 15% 10% 5% 0% -5% -10% Source: NAIC Avg. US = 2.4% MA = 13.3% US MA

14 PP Auto: Average Return on Equity: US & MA, RI, CT, NH, VT, NY, NJ MA offers the lowest PP auto profitability of any state in the Northeast 5.9% % 8.7% 8.5% 11.7% 11.0% 12.1% 13.2% Connecticut Rhode Island New Hampshire Vermont New York New Jersey US Massachusetts 0% 5% 10% 15% Source: NAIC

15 Average Return on Equity: US & MA, RI, CT, NH, VT, NY, NJ, Homeowners % Rhode Island 15.9% New York 13.4% Connecticut 3.4% 9.2% 8.5% 12.1% 13.3% MA homeowners insurance has been relatively profitable Massachusetts New Jersey New Hampshire Vermont US 0% 5% 10% 15% 20% Source: NAIC

16 Average Expenditure for HO Ins.: US & Northeast States (2003)* $750 $700 $650 MA homeowners insurance expenditures are about average $668 $671 $673 $714 $721 $600 $550 $539 $552 $585 $500 $450 $400 NH VT NJ US MA RI CT NY *Latest available. Source: NAIC, Insurance Information Institute (III)

17 Average Premiums for Auto Insurance US & Northeast States (2003)* $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 MA PP auto insurance expenditures are well above the US average $683 $776 $821 $983 $992 $1,052 $1,161 $1,188 VT NH US CT RI MA NY NJ *Latest available. Source: NAIC, Insurance Information Institute (III)

18 UNDERWRITING Surprisingly Strong in 2005, Stage is Set for a Good 2006!

19 P/C Industry Combined Ratio figure reflects heavy use of reinsurance which lowered net losses, but still a substantial deterioration from first half is could produce the best underwriting result since the 94.9 combined ratio in H H1 06F III Forecast* Sources: A.M. Best; ISO, III. *III forecasts/estimates for 2006 full year.

20 Personal Lines Combined Ratio, E A very strong 2006 is order due underwriting innovations and low CAT activity F Source: A.M. Best; Insurance Information Institute

21 Commercial Lines Combined Ratio, E* Outside CATaffected lines, commercial insurance is doing fairly well. Caution is required in underwriting longtail commercial lines results will benefit from relatively disciplined underwriting and low CAT losses F Source: A.M. Best; Insurance Information Institute.

22 Underwriting Gain (Loss) F* $ Billions $30 $25 $20 $15 $10 $5 $0 ($5) ($10) ($15) ($20) ($25) ($30) ($35) ($40) ($45) ($50) ($55) Insurers sustained a $5.9 billion underwriting loss in First half 2006 underwriting gain was $15.1B implying a record gain of about $30B for full-year Source: A.M. Best, Insurance Information Institute *2006F of $30.2B is annualized H1 gain of $15.1B

23 A 100 Combined Ratio Isn t What it Used to Be: 95 is Where It s At 110 Combined Ratio ROE* 18% Combined Ratio % 14.3% Combined ratios today must be below 95 to generate Fortune 500 ROEs % % 9.4% 10.4% 13.0% 16% 14% 12% 10% 8% Retrun on Equity* :H :H1 * 2006 figure is return on average statutory surplus. Source: Insurance Information Institute from A.M. Best and ISO data. 6%

24 Impact of Reserve Changes on Combined Ratio Reserve Development ($B) $25 $20 $15 $10 $5 $0 0.1 PY Reserve Development 6.5 $ $10.8 $ $ $9.9 Combined Ratio Points Reserve adequacy is improving substantially 1.9 $ $ $ E 2006E 2007E Combined Ratio Points Source: A.M. Best, Lehman Brothers for years 2005E-2007F

25 2004 Prior Year Reserve Development by Line ($ Millions) $2,118 $1,729 $1,109 $850 $241 $148 $27 ($27) ($103) ($617) ($799) ($1,156) ($1,686) ($1,779) $3,513 $6,320 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 ($1,000) ($2,000) ($3,000) Reserve Strengthening Reserve Releases Longer-tail casualty coverages have been the source of most reserve problems in recent years Other Liability Reinsurance Work. Comp Prod. Liab. Comml. MP Fidelity/Surety Comml. Auto Med Mal International Finl. Guaranty Special Liab. Other Special Prop. Homeowners PP Auto Auto PD Source: A.M. Best, Lehman Brothers.

26 EXPENSES Will Expense Ratio Rise as Premium Growth Slows?

27 *Ratio of expenses incurred to net premiums written. Source: A.M. Best; Insurance Information Institute Personal Lines Underwriting Expense Ratio,* % 30% 28% 26% 24% 22% 30.8% 30.6% 29.8% 30.3% 21.8% 22.0% 21.8% 31.1% Expenses ratios will likely rise as premium growth slows 23.6% 22.7% 30.8% 30.6% 29.4% 24.3% 24.4% 23.5% 28.5% 23.4% Auto 28.5% 27.7% 23.2% 23.6% Home 28.4% 23.5% 20%

28 *Ratio of expenses incurred to net premiums written. Source: A.M. Best; Insurance Information Institute Personal vs. Commercial Lines Underwriting Expense Ratio* 32% 31.1% Personal Commercial 30% 30.8% 30.0% 28% 26% 24% 22% 20% 23.4% 29.4% 29.9% 29.1% 24.3% 25.0% 25.6% 25.6% Expenses ratios will likely rise as premium growth slows 24.8% 26.6% 24.5% 25.0% 24.4% 25.6% 24.6% 26.6% 24.7%

29 REINSURANCE MARKETS Higher Reinsurance Costs Squeezing Insurers, Pushing Property CAT Prices Upward

30 Global Number of Catastrophic Events, The number of natural and man-made catastrophes has been increasing on a global scale for 20 years Record 248 manmade CATs & record 149 natural CATs in Natural catastrophes Man-made disasters Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.

31 Combined Ratio: Reinsurance vs. P/C Industry Reinsurance All Lines Combined Ratio Katrina, Rita, Wilma Sept. 11 Hurricane Andrew 4 Florida Hurricanes Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

32 Share of Losses Paid by Reinsurers, by Disaster* 70% 60% 50% 40% 30% 20% Reinsurance is playing an increasingly important role in the financing of mega- CATs; Reins. Costs are skyrocketing 30% 25% 60% 20% 45% 10% 0% Hurricane Hugo (1989) Hurricane Andrew (1992) Sept. 11 Terror Attack (2001) 2004 Hurricane Losses 2005 Hurricane Losses *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 Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.

33 Reinsurance Prices Surged in 2006 Following Record CATs in % 30% 20% 10% In hurricane-prone areas, property CAT reinsurance prices are up %+ US cat reinsurance price index: 1994 = % 21% 11% 25% % 2% 50-10% -5% -11% -9% -8% -4% -4% -6% 25-20% '00 '01 '02 '03 '04 05E 06F 0 rate changes [left] Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for index level [right]

34 A Look Ahead to Reinsurance Markets for 2007 Despite lack of major hurricane in 2006, reinsurance pricing strong in US for 2007 New capital entry not sufficient to fully meet demand Reinsurance prices flat at best outside peak CAT zones Retrocessional market still tight Softening in European p/c reinsurance markets Softening in US casualty reinsurance markets More pronounced if property cat reinsurers shift emphasis Capital market role expanding Hedge funds, private equity Securitization: Insurance Linked Securities Some concern over staying power, (lack of) regulation Complement or competitor to traditional reinsurance? Sources: Insurance Information Institute.

35 UNDERWRITING AFFECTS FINANCIAL STRENGTH Is There Cause for Concern?

36 Reasons for US P/C Insurer Impairments, Catastrophe Losses 8.6% Affiliate Problems 8.6% Deficient Loss Reserves/Inadequate Pricing 62.8% Misc. 9.2% Sig. Change in Business 4.6% Reinsurance Failure 3.5% Deficient Loss Reserves/Inadequate Pricing 38.2% Alleged Fraud 11.4% Investment Problems* 7.3% Rapid Growth 8.6% Deficient reserves, CAT losses are more important factors in recent years Affiliate Problems 5.6% Catastrophe Losses 6.5% Alleged Fraud 8.6% Rapid Growth 16.5% *Includes overstatement of assets. Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;

37 Historical Ratings Distribution, US P/C Insurers, 2000 vs C++/C+ 1.9% B/B- 6.9% C/C- 0.6% A++/A+ D 0.2% E/F 2.3% A++/A+ 11.5% Vulnerable* 12.1% shrinkage A++/A+ 9.2% B++/B+ 28.3% B++/B+ 26.4% Ratings agencies increasing emphasis on multiple events require more capital A/A- 48.4% A/A- 52.3% Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings B and lower.

38 Ratings Agencies Tightening Requirements for CATs 2006 SRQ CAT Model Reqs.* All Property Exposure Auto Physical Damage Reinsurance Assumed Pools & Assessments All Flood Exposure WC Losses from Quake Fire Following Storm Surge Demand Surge Secondary Uncertainty Best currently estimates PML for 100-yr. wind & 250-yr. quake to determine capital adequacy ALSO A.M. Best will perform additional stress-tested riskadjusted capital analysis for a second event in order to determine the potential financial condition of an entity post a severe event. IMPLICATION: Some insurers may be required to carry more capital to maintain the same rating. *SRQ = Supplemental Rating Questionnaire Source: A.M. Best Review & Preview, January 2006.

39 PRICE & AVAILABILITY Pricing Picture is Mixed

40 Strength of Recent Hard Markets by NWP Growth* 25% 20% 15% (post-katrina) period could resemble (post-andrew) 10% 5% 0% -5% -10% F 2007F 2008F 2009F 2010F Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute 2005: biggest real drop in premium since early 1980s * figures are III forecasts/estimates growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent figure of 2.9% is based on 2006:H1 data.

41 Property Catastrophe Price Index* US CAT prices are continue to rise faster than anywhere else in the world Worldwide US European Storm Rest of the World *Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B. Includes primary and reinsurance coverage. Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.

42 Average Expenditures on Auto Insurance $950 $900 $850 $800 $750 $700 $650 $600 Countrywide auto insurance expenditures are expected to rise just 0.5% in 2006 $723 $705 $691 $703 $685 $689 $668 $651 $777 $821 $844 $863 $867 Will the big guys stay disciplined? So far, so good. Tiering adopted to avoid adverse selection * 05* 06* *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute

43 Average Premiums for HO Insurance US & New England States (2003)* $750 $700 $650 $600 $550 $500 $450 $400 New Hampshire $539 $552 Vermont New Jersey $585 $714 $721 $668 $671 $673 US Massachusetts Rhode Island Connecticut New York *Latest available. Source: NAIC, Insurance Information Institute (III)

44 Average Expenditures on Homeowners Insurance $800 $750 $700 $650 $600 $550 $500 $450 $400 Countrywide home insurance expenditures are expected to rise 4% in 2006, but much more in hurricane zones $418 $440 $455 $481 $488 $508 $536 $593 $668 $693 $711$739 Hurricane zone residents can expect increases in the 20%-100% range, especially if insured by a state entity * 05* 06* *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute

45 Average Premiums for Auto Insurance US & New England States (2003)* $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $776 $683 Vermont New Hampshire $1,161 $1,188 $1,052 $983 $992 $821 US Connecticut Rhode Island Massachusetts New York New Jersey *Latest available. Source: NAIC, Insurance Information Institute (III)

46 New Private Housing Starts Will Slow Through Millions of Units New home construction is expected to fall by 18% from as interest rates rise. Exposure growth forecast for HO insurers will slow as a result Homeowners accounts for 12% of Direct Premiums Written F 07F 08F 09F 10F 11F 12F 13-17F Source: US Department of Commerce; Blue Chip Economic Indicators (3/06), Insurance Info. Institute 1.77

47 Average Commercial Rate Change, All Lines, (1Q:2004 3Q:2006) 0% -2% -4% -0.1% -3.2% Magnitude of rate decreases has diminished greatly since mid-2005 but is growing again -2.7% -3.0% -6% -8% -10% -4.6% -5.9% -7.0% -8.2% -9.4% -9.7% -5.3% -12% 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 Source: Council of Insurance Agents & Brokers; Insurance Information Institute

48 Average Commercial Rate Change by Line Commercial accounts trended downward from early 2004 to mid-2005 though that trend moderated post-katrina Source: Council of Insurance Agents & Brokers

49 Average Commercial Rate Change by Account Size Accounts of all sizes are renewing downward and more quickly than in 06Q2 Source: Council of Insurance Agents & Brokers

50 Percent of Commercial Accounts Renewing w/positive Rate Changes, 2 nd Qtr % 70% 60% 50% 40% 30% 20% 10% 0% Commercial Property Business Interruption 71% 63% Largest increases for Commercial Property & Business Interruption are 48% in the Southeast, smallest in Midwest 32% 35% 21% 28% 21% 12% 10% Southeast Southwest Pacific NW Northeast Midwest Source: Council of Insurance Agents and Brokers

51 Commercial Accounts Rate Changes, 2 nd Qtr vs. 2 nd Qtr % 5% 0% 2Q05 2Q06 9.3% Only commercial property is renewing up in % -10% -4.5% -6.0% -6.9% -7.3% -9.1% -5.6% -6.6% -3.6% -8.4% -2.3% -15% -13.3% Commercial Auto Workers Comp Commercial Property General Liability Umbrella Average Source: Council of Insurance Agents and Brokers

52 Commercial Accounts Rate Changes, 2 nd Qtr vs. 3 rd Qtr % 8% 6% 4% 2% 0% -2% -4% -6% -8% -4.5% 2Q06-6.5% Commercial Auto 3Q06-6.8% -6.9% Workers Comp 9.3% -1.4% Commercial Property Even commercial property is now renewing down in % -6.9% General Liability -3.6% -2.3% -5.5% -5.4% Umbrella Average Source: Council of Insurance Agents and Brokers

53 Average Rate Increase/Decrease by Industry Class 6% 4% 2% 0% -2% -4% -6% -8% 5% 5% 0% -4% September 2005 September % 0% 0% -1% Largest increases are in the energy sector -2% 1% -4% -5% -5% -7% Energy Contracting Public Entity Transport. Habitational Service Manufacturing Source: MarketScout.com

54 INVESTMENTS Does Investment Performance Affect Discipline?

55 Net Investment Income $50 $40 $ Billions $30 $20 $10 $0 Growth History 2002: -1.3% 2003: +3.9% 2004: +3.4% 2005: +23.7%** 2006H1***: - 3.5% Source: A.M. Best, ISO, Insurance Information Institute; **Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. ***Annualized H1:06 figure.

56 US P/C Net Realized Capital Gains, :H1 ($ Millions) $20,000 $15,000 Realized capital gains rebounded strongly in 2004/5 but are trailing through the first half of 2006 due to weak markets. 3 rd qtr. rebound will help. $18,019 $13,016 $16,205 $10,000 $9,893$9,818 $10,808 $9,244 $9,696 $9,125 $5,000 $4,806 $2,880 $1,664 $5,997 $6,631 $6,610 $869 $0 -$1,214 -$5, Sources: A.M. Best, ISO, Insurance Information Institute.

57 Total Returns for Large Company Stocks: * 40% S&P 500 is up 9.54% so far in 2006* 30% 20% 10% 0% -10% -20% -30% Markets moving up as energy prices and LT interest rates fall & earnings rise Source: Ibbotson Associates, Insurance Information Institute. *Through November 3,

58 Property/Casualty Insurance Industry Investment Gain* $60 $50 $42.8 $47.2 $52.3 $57.9 $51.9 $ Billions $56.9 $44.4 $45.3 $48.9 $59.2 $50.8 $40 $35.4 $36.0 $30 $20 $10 $0 Investment gains are up but are only now comparable to gains seen in the late 1990s ** 06E *Investment gains consist primarily of interest, stock dividends and realized capital gains and losses estimate based on actual annualized 2006:H1 result of $25.375B. **2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.

59 UNDERWRITING CAPACITY Can the Industry Efficiently Employ Its Increasing Capital?

60 U.S. Policyholder Surplus: * $ Billions $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Foreign reinsurance and residual market mechanisms absorbed 45% of 2005 CAT losses of $62.1B Capacity TODAY is $445.5B, 4.3% above year-end 2005, 56% above its 2002 trough and 33% above its 1999 peak. 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 3/31/06.

61 Announced Insurer Capital Raising* ($ Millions, as of December 1, 2005) $ Millions $3,500 $3,000 $2,500 $2,000 $1,500 $1,500 As of Dec. 1, 19 insurers announced plans to raise $10.35 billion in new capital. Twelve start-ups plan to raise as much as $8.75 billion more for a total of $19.1 billion. Actual total higher as Lloyd s syndicates have added capacity for $3,200 $1,000 $500 $0 $38 $400 $450$600$710 $300 $100 $140 $600 *Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute. $129 $297 $620 $490 $124 $202 $150 $299 Ace Ltd. Argonaut Aspen Axis Endurance Everest Re Fairfax Finl. Glacier Re HCC Insurance IPC Hldgs Kiln PLC Max Re Montpelier Re Navigators Odyssey Re Partner Re Platinum PXRE XL Capital

62 Announced Capital Raising by Insurance Start-Ups ($ Millions, as of April 15, 2006) $ Millions $1,600 $1,400 $1,200 $1,000 $800 $600 $1,500 $1,000$1,000$1,000$1,000$1,000$1,000 As of April 15, 14 startups plan to raise as much as $10 billion. $500 $500 $500 $500 $400 $200 $220 $180 $100 $0 Harbor Point* Amlin Bermuda Flagstone Re Validus Holdings Lancashire Re** Augsburg Re Ariel Re Hiscox Bermuda New Castle Re Arrow Capital XL/Highfields Greenlight Re Omega Specialty Ascendent Re *Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs. Sources: Investment Bank Reports; Insurance Information Institute.

63 CATASTROPHE LOSS MANAGEMENT Insurers Have Done a Fairly Good Job at Managing CAT Risk

64 *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. ** As of Sept. 30, 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 = $12.2B. Source: Property Claims Service/ISO; Insurance Information Institute U.S. Insured Catastrophe Losses ($ Billions)* $120 $100 $80 $60 $40 $20 $0 $ $ $ $ $ $ $ $ $ Billions 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $ $ $ $ $ $100 Billion CAT year is coming soon $ $ $ $ $6.2 06** $ ??

65 Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 $20.0 $24.0 $26.0 (Billions of 2005 Dollars) With rapid coastal development, $40B+ storms will be more common $33.0 $33.0 $34.0 $35.0 Northeast storms make the Top 10 list $41.0 $42.0 $80.0 $ Billions Homestead Hurr (1945, FL) Ft. Lauderdale Hurr (1947, FL) Donna (1960, FL) Okeechobee Hurr (1928, FL) Galveston (1900, TX) Bestsy (1965, LA) LI Express (1938, NY) Katrina (2005, LA)* Andrew (1992, FL)* Miami Hurr (1926, FL) Source: AIR Worldwide **ISO/PCS estimate as of June 8, 2006

66 Insured Losses from Top 10 Earthquakes Adjusted to 2005 Exposure Levels $120 $100 $80 $60 $40 $20 $9 $11 $11 $12 (Billions of 2005 Dollars) With development along major fault lines, the threat of $25B+ quakes looms large $16 3 of the Top 10 are not West Coast events $25 $27 $38 $88 $108 $ Billions $0 San Jose, CA ( ; 6.6) Portland, OR ( ; 6.3) San Francisco ( ; 7.2) Marked Tree, AR ( ; 6.5) Northridge, CA ( ; 6.7) Hayward, CA ( ; 6.8) Ft. Tejon, CA ( ; 7.9) Charleston, SC ( ; 7.3)* New Madrid, MO ( ; 7.7)* San Francisco ( ; 7.9) Source: AIR Worldwide

67 Insured Loss & Claim Count for Major Storms of 2005* Insured Loss Claims Insured Loss ($ Billions) $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3 million claims 104 $ $5.0 1,047 $10.3 1,744 $40.6 2,000 1,800 1,600 1,400 1,200 1, Claims (thousands) Dennis Rita Wilma Katrina Size of Industry Loss ($ Billions) *Property and business interruption losses only. Excludes offshore energy & marine losses. Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.

68 Sources: ISO/PCS; Insurance Information Institute. Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005) $45 $40 $35 $30 Seven of the 10 most expensive hurricanes in US history occurred in the 14 months from Aug Oct. 2005: $40.6 $ Billions $25 $20 $15 $10 $5 Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne $3.5 $3.8 $4.8 $5.0 $6.6 $7.4 $7.7 $10.3 $21.6 $0 Georges (1998) Jeanne (2004) Frances (2004) Rita (2005) Hugo (1989) Ivan (2004) Charley (2004) Wilma (2005) Andrew (1992) Katrina (2005)

69 2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season All 21 names were used for the first time ever, so Greek letters were used for the final storms Source: WeatherUnderground.com, January 18, set a new record for the number of hurricanes & tropical storms at 28, breaking the old record set in 1933.

70 2006 Hurricane Season: Much Less Active Than Expected What a difference a year makes! Just 9 named storms through Oct. 20, 2006 vs. 22 as of same date in 2005! Source: WeatherUnderground.com, October 20, 2006.

71 2006 Hurricane Season: Forecasts Repeatedly Scaled Back Named Storms % Year Average* Named Storms 275% hurricane seasons has turned out to be far less severe than anticipated 195% Actual May 31 Forecast Net Tropical Cyclone Activity 140% 15 August 3 Forecast 90% 13 September 1 Forecast 300% 250% 200% 150% 100% 50% *Average over the period Source: Insurance Information Institute compilation of forecasts by Dr. William Gray, Colorado State University. 0% Net Tropical Cyclone Activity

72 Global Number of Catastrophic Events, The number of natural and man-made catastrophes has been increasing on a global scale for 20 years Record 248 manmade CATs & record 149 natural CATs in Natural catastrophes Man-made disasters Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.

73 Insured Property Catastrophe Losses as % Net Premiums Earned, E 16% 14% 12% 10% 8% 6% 4% 2% US Worldwide US average: US CAT losses were a record 13.8% of net premiums earned in 2005 and were 4.2 times the average of 3.3% 0% E *Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B. Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.

74 *Figure for 2000s is extrapolated based on data for (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)). Source: Tillinghast from National Hurricane Center: Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade 1930s mid-1960s: Mid-1990s 2030s? Period of Intense Tropical Cyclone Activity New Period of Intense Tropical Cyclone Activity Tropical cyclone activity in the mid-1990s entered the active phase of the multi-decadal signal that could last into the 2030s Already as many major storms in as in all of the 1990s 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

75 Source: AIR Worldwide Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm Insured Losses: $110B Economic Losses: $200B+ Distribution of Insured Property Losses, by State, ($ Billions) $80 $60 $40 $20 $0 $70 $30 Total Insured Property Losses = $110B, nearly 3 times that of Hurricane Katrina $5 $4 $1 NY NJ PA CT Other

76 $ Billions $160 $140 $120 $100 $80 $60 $40 $20 $0 $147.2 Source: HighlineData LLC; Insurance Information Institute. Surplus Backing Top 10 Homeowners in US vs. MA, 2005 Homeowner insurer surplus in tiny RI is 80% larger than MA (Billions of Dollars) Surplus backing Top 10 home insurers in US (and in most states) is much larger than that of MA. This issue is related to peculiarities in the state s auto market. $75.6 $42.1 US RI MA

77 Hurricane Katrina Claim Status on Storm s 1 st Anniversary* 95% of the 1.2 million homeowners insurance claims in Louisiana & Mississippi are settled, with just 2% m dispute In Process, 3% Mediation/ Litigation, 2% Settled, 95% *Hurricane Katrina made its north Gulf coast landfall August 29, Source: Insurance Information Institute survey, August 2006.

78 Hurricane Katrina Insured Loss Distribution by State ($ Millions)* Florida, $572.0, 1.4% Alabama, $1,032, 2.5% Mississippi, $13,605, 33.5% Total Insured Losses = $ Billion Tennessee, $59.0, 0.1% Georgia, $36.0, 0.1% Louisiana accounted for 62% of the insured losses paid and 56% of the claims filed Louisiana, $25,275, 62.3% *As of June 8, 2006 Source: PCS division of ISO.

79 Hurricane Katrina Loss Distribution by Line ($ Billions)* Total insured losses are estimated at $ billion from million claims. Excludes $2- $3B in offshore energy losses Commercial Property & BI, $20,847.0, 52% Vehicle, $2,168.0, 5% Homeowners, $17,564.0, 43% *As of June 8, 2006 Source: PCS division of ISO.

80 Hurricane Katrina Claim Count Distribution by State* Florida, 122,000, 7.0% Alabama, 109,000, 6.3% Tennessee, 15,000, 0.9% Georgia, 7,800, 0.4% Louisiana, 975,000, 55.9% Mississippi, 515,000, 29.5% Total # Claims = 1,743,800 *As of June 8, 2006 Source: PCS division of ISO. Louisiana accounted for 62%of insured losses paid and 56% of claims filed

81 Hurricane Rita Claim Count Distribution by State* Arkansas, 5,500, 1.4% Florida, 6,000, 1.6% Mississippi, 7,000, 1.8% Texas, 171,000, 44.6% Total # Claims = 383,000 Alabama, 5,000, 1.3% Tennessee, 3,500, 0.9% Louisiana, 185,000, 48.3% Louisiana accounted for 48.3% of the insured losses, Texas 44.6%. Excludes offshore energy losses of $2-3B *As of June 8, 2006 Source: PCS division of ISO.

82 Hurricane Rita Loss Distribution, by Line ($ Millions)* Total insured losses are estimated at $5.0 billion (excl. offshore energy of $2-$3B) from 383,000 claims. *As of June 8, 2006 Source: PCS division of ISO. Commercial Property & BI, $1,861.2, 37% Homeowners, $2,974.2, 59% Vehicles, $211.0, 4%

83 Hurricane Wilma Loss Distribution by Line ($ Millions)* Commercial Property & BI, $2,200, 21% Total insured losses are estimated at $10.3 billion from million claims Vehicle, $750, 7% Homeowners, $7,350, 72% *As of June 8, All losses are in FL. Source: PCS division of ISO.

84 Hurricane Wilma Claim Count Distribution by Line* Total insured losses are estimated at $10.3 billion from million claims Homeowners, 700,000, 67% Commercial Property & BI, 82,000, 8% Vehicle, 265,000, 25% *As of June 8, All losses are in FL. Source: PCS division of ISO.

85 Hurricane Ophelia Loss Distribution by Line ($ Millions)* Total insured losses are estimated at $35.0 million from 10,600 claims Commercial Property & BI, $5.0, 14% Vehicle, $3.0, 9% *As of June 8, All losses are in NC. Source: PCS division of ISO. Homeowners, $27.0, 77%

86 Hurricane Ophelia Claim Count Distribution by Line* Homeowners, 8,000, 76% Commercial Property & BI, 1,000, 9% Total insured losses are estimated at $35.0 million from 10,600 claims Vehicle, 1,600, 15% *As of June 8, All losses are in NC. Source: PCS division of ISO.

87 $45 $40 $35 $30 $25 $20 $15 $10 $5 $ % $38.1 $40.6 $ Storms Have Developed Adversely Wilma is the storm with the most extraordinary adverse development +54.0% $8.4 $9.4$10.3 $6.1 $4.7 Are the models inaccurate? +6.3% $5.0 $5.0 Katrina Wilma Rita Source: Insurance Information Institute from PCS survey data.

88 Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, ¹ Earthquakes 4 6.7% Winter Storms 7.8% Wind/Hail/Flood 5 Terrorism 7.7% 2.8% Civil Disorders 0.4% Fire 6 2.3% Water Damage 0.1% Utility Disruption 0.1% Tornadoes % All Tropical Cyclones % 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 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).. Insured disaster losses totaled $289.1 billion from (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from , up from 27.1% from

89 Total Value of Insured Coastal Exposure (2004, $ Billions) Florida New York Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Alabama Georgia Delaware New Hampshire Mississippi Rhode Island Maryland $740.0 $662.4 $505.8 $404.9 $209.3 $148.8 $129.7 $117.2 $105.3 $75.9 $73.0 $46.4 $45.6 $44.7 $43.8 $12.1 $1,937.3 $1,901.6 Massachusetts has the 4 th highest amount of coastal exposure at more than $662 Billion. Source: AIR Worldwide $0 $500 $1,000 $1,500 $2,000 $2,500

90 Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions) Florida Connecticut New York Maine Massachusetts Louisiana New Jersey Delaware Rhode Island S. Carolina Texas NH Mississippi Alabama Virginia NC Georgia Maryland Source: AIR Worldwide 13.5% 12.0% 11.4% 8.9% 5.9% 1.4% 37.9% 33.6% 33.2% 28.0% 25.6% 25.6% 23.3% 63.1% 60.9% 57.9% 54.2% 79.3% More than half (54.2%) of all insured exposure in MA is coastal 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

91 Value of Insured Residential Coastal Exposure (2004, $ Billions) Florida New York Massachusetts Texas New Jersey Connecticut Louisiana S. Carolina Maine Virginia North Carolina Alabama Georgia Delaware Rhode Island New Mississippi Maryland $88.0 $65.1 $64.5 $60.0 $60.0 $36.5 $29.7 $26.6 $25.9 $24.8 $20.9 $5.4 $306.6 $302.2 $247.4 $205.5 $512.1 $942.5 Massachusetts has more than $300 billion in insured residential exposure 3 rd highest in the US! Source: AIR $0 $200 $400 $600 $800 $1,000

92 Value of Insured Commercial Coastal Exposure (2004, $ Billions) New York Florida Texas Massachusetts New Jersey Connecticut Louisiana S. Carolina Virginia Maine North Carolina Georgia Alabama Mississippi New Hampshire Delaware Rhode Island Maryland $437.8 $355.8 $258.4 $199.4 $121.3 $83.7 $69.7 $52.6 $45.3 $43.3 $39.4 $23.8 $20.9 $19.9 $17.9 $6.7 $994.8 $1,389.6 Commercial property exposure in MA is 4 th highest in the US at $356 billion Source: AIR $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

93 Percentage of California Homeowners with Earthquake Insurance, * 35% 30% 25% 32.9% 33.2% The vast majority of California homeowners forego earthquake coverage & play Russian Roulette with their most valuable asset. 20% 15% 10% 5% 19.5% 17.4% 16.8% 15.7% 15.8% 14.6% 13.3% 13.8% 0% *Includes CEA policies beginning in Source: California Department of Insurance; Insurance Information Institute.

94 Property Residual Markets Explosive Growth Due to Rapid Coastal Exposure

95 Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars) $0 -$200 -$400 -$600 -$800 -$1,000 -$1,200 -$1,400 -$1,600 -$1,800 -$2,000 -$1,425 -$516 -$1, Florida Hurricane Catastrophe Fund (FHCF) Florida Citizens Louisiana Citizens -$954 Mississippi Windstorm Underwriting Association (MWUA) -$595 * 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

96 US FAIR Plans Exposure to Loss* (Billions of Dollars) $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $419.5 billion in In the 15-year period between 1990 and 2005, total exposure to loss in the FAIR plans has surged by a massive 965 percent, from $40.2bn in 1990 to $387.8bn in 2005! $170.1 $140.7 $113.3 $96.5 $40.2 $269.6 $345.9 $400.4 $ Source: PIPSO; Insurance Information Institute *Hurricane exposed states only.

97 US Beach and Windstorm Plans Exposure to Loss (Bill. of Dollars) In 2002 Florida combined its Windstorm and Joint Underwriting Association to create Florida Citizens, so Florida data shifted to the FAIR plans from this date. $120 $100 $80 $111.8 $108.0 $103.5 In the 15-year period between 1990 and 2005, total exposure to loss in the Beach and Windstorm plans has more than doubled, from $14.5bn in 1990 to $31.7bn in $60 $53.5 $40 $20 $14.5 $22.4 $26.4 $30.0 $31.7 $ Source: PIPSO; Insurance Information Institute. *Hurricane exposed states only.

98 Massachusetts FAIR Plan Exposure to Loss ($ Billions) $60 $50 In the 15-year period between 1990 and 2005, total exposure to loss in the MA FAIR Plan has surged by 1317 percent, from $4.1bn in 1990 to $54bn in $54.0 $40 $39.2 $30 $20 $10 $4.1 $8.3 $10.3 $15.3 $16.7 $20.5 $26.7 $ Source: PIPSO; Insurance Information Institute

99 Mass. FAIR Plan Habitational Policy Count ( ) 250, , , ,000 50,000 45,480 In the 15-year period between 1990 and 2005, the MA FAIR plan habitational policy count has shown rapid growth, going from 45,480 policies in 1990 to 191,828 policies in 2005, an increase of 322% 75,060 87,026 84,287 87,033 97, , , , Source: PIPSO; Insurance Information Institute

100 MA FAIR Plan Operating Gain or Loss ($ Millions) $40 $30 $20 $10 $0 -$10 -$20 $1.96 In three of the last six years the MA FAIR Plan has incurred an operating deficit. -$6.20 -$3.38 -$14.27 $9.46 $ Source: PIPSO; Insurance Information Institute

101 KEY LINE RESULTS: A SUCCESSFUL SHIFT TO THE UNDERWRITING CULTURE?

102 Private Passenger Auto

103 Private Passenger Auto is Enormous Part of P/C Industry Total 2004 Direct Personal + Commercial Premiums Written = $467.0 Billion Private passenger auto accounted for 34.7% or $162.2B in DPW in 2004 $95.8B PPA Liability 20.5% $66.4B PPA Coll/Comp 14.2% All Commercial Lines 53.9% $251.6B $53.2B Homeowners 11.4% Source: A.M. Best; Insurance Information Institute

104 Private Passenger Auto Combined Ratio PPA is the profit juggernaut of the p/c insurance industry today Average Combined 1993 to 2005= Most auto insurers have shown significant improvements in underwriting performance since mid F Sources: A.M. Best; III

105 RNW: Private Passenger Auto, United States, F 16% 14% 12% 10% 8% 6% 4% 2% 0% 14% 14% 12% 11% 12% 12% 10% Private passenger auto profitability deteriorated throughout the 1990s but has improved dramatically Segmentation should help profitability 8% 2% 2% 4% 13% 9% 15% 14% E 05E 06F Source: NAIC; Insurance Information Institute

106 Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data. Pure Premium Spread: Personal Auto PD Liability, :Q1 10% 8% 6% 4% 2% 0% Auto Insurance Component of CPI Margin necessary to maintain PPA profitability Personal Auto-PD Pure Premium Inversion of pure premium spread is a warning sign but now in synch -2% -4% 00:Q1 00:Q PPA Combined=110 01:Q1 01:Q3 02:Q1 02:Q PPA Combined=94 03:Q1 03:Q3 04:Q1 04:Q3 05:Q1 05:Q3 06:Q1

107 Bodily Injury: Severity & Frequency Trends Offset Severity 6% 4% 2% 0% -2% -4% -6% Medical inflation is a powerful cost driver -2.2% -0.3% -5.3% 4.7% 3.0% 3.6% 3.8% 3.4% 2.8% 2.4% -4.0% -3.3% Frequency -0.9% Severity -2.6% -5.4% -5.6% -8% * *2 nd quarter 2006 vs. 2 nd quarter Source: ISO Fast Track data.

108 PD Liability: Frequency Trend Roughly Offsets Severity 8% 6% 4% Frequency 4.3% Severity 6.2% Fewer accidents, but more damage when they occur: 3.9% 3.3% 2.8% Higher Deductibles? 2.8% 4.0% 2% 0% 0.8% 0.3% 0.5% -2% -4% -1.5% -1.8% -2.6% -2.1% -1.9% -6% -8% -5.7% * *2 nd quarter 2006 vs. 2 nd quarter Source: ISO Fast Track data.

109 PIP: Frequency Trend Now Offsets Rising Claim Severity 20% 15% Frequency Severity 16.1% Fraud caused problems from % 5% 0% -5% -10% -1.6% 6.3% 1.1% 3.2% -1.1% 0.0% 6.5% Is No-Fault living on borrowed time? -0.6% -4.0% 0.5% -7.2% 4.8% -5.4% -2.5% -3.0% * *2 nd quarter 2006 vs. 2 nd quarter Source: ISO Fast Track data.

110 *2 nd quarter 2006 vs. 2 nd quarter Source: ISO Fast Track data. Collision: Frequency Trend Offsetting Rising Claim Severity 8% 6.8% Frequency Severity 6% 4% 2% 2.6% 4.1% 3.0% 1.9% 3.7% 3.7% 1.6% 3.9% 3.7% 0% -2% -0.4% -1.7% -4% -6% -3.8% -5.1% -4.6% -4.5% *

111 Comprehensive: Favorable Frequency and Severity Trends 25% Frequency Severity 20% 15% 10% 5% 8.9% 3.3% 3.3% Comprehensive severity is up substantially due to weather losses 15.1% 19.3% 0% -5% -10% -1.7% -2.6% -2.4%-2.1% -3.1% -4.7% -4.1% -3.6% -5.7% -6.9% -8.3% * *2 nd quarter 2006 vs. 2 nd quarter Source: ISO Fast Track data.

112 Homeowners

113 Private Passenger Auto is Enormous Part of P/C Industry Total 2004 Direct Personal + Commercial Premiums Written = $467.0 Billion Private passenger auto accounted for 34.7% or $162.2B in DPW in 2004 $95.8B PPA Liability 20.5% $66.4B PPA Coll/Comp 14.2% All Commercial Lines 53.9% $251.6B $53.2B Homeowners 11.4% Source: A.M. Best; Insurance Information Institute

114 Homeowners Insurance Combined Ratio Average 1990 to 2005= Insurers have paid out an average of $1.13 in losses for every dollar earned in premiums over the past 16 years F Sources: A.M. Best; III 92

115 Rates of Return on Net Worth for Homeowners Ins: US 15% 10% 12.4% Averages: 1993 to 2005E US HO Insurance = +3.8%* 9.7% 11% 7.0% 5% 0% 2.5% 3.6% 5.4% 3.8% 5.4% 1.4% -5% -10% -1.7% -4.2% -7.2% E 05E *Net of reinsurance; Excludes losses to state residual markets (FAIR, Beach & Wind Plans). Source: NAIC; 2004/5 figures are Insurance Information Institute estimates.

116 Underwriting Gain (Loss) in Florida Homeowners Insurance, E* $ Billions $4 $2 $0 ($2) ($4) ($6) ($8) ($10) ($12) ($10.60) ($0.21) $0.69 $0.43 $0.86$1.08$1.23$1.28$1.43 $1.16 $1.47 $1.88 Florida s homeowners insurance market produces small profits in most years and enormous losses in others ($10.39) ($3.73) E *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.

117 Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, E* $ Billions $2 $0 ($2) ($4) ($6) ($8) ($10) ($12) ($14) ($16) -$1.2 -$2.7 -$3.8 -$5.2 -$6.5 -$7.7 -$8.8 -$10.1-$9.7 -$10.6-$10.8 It took insurers 11 years ( ) 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. $0.7 -$9.7 -$ E *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.

118 COMMERCIAL MULTI-PERIL COMMERCIAL AUTO

119 Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion) Sources: A.M. Best; III CMP- has improved recently Liab. Combined 1995 to 2005 = Non-Liab. Combined = CMP-Liability CMP-Non-Liability

120 Farmowners Multi-Peril FMP- has improved substantially over the past decade Average Combined Ratio 1996 to 2005 = Sources: A.M. Best; III

121 Commercial Auto Liability & PD Combined Ratios Average Combined: Liability = PD = Commercial Auto has improved dramatically Sources: A.M. Best; III

122 INLAND MARINE

123 Inland Marine vs. All P/C Lines Inland Marine All Lines Sources: A.M. Best; III Avg. Combined 1996 to 2005 Inland Marine = 92.2 All P/C Lines = Inland Marine has consistently outperformed the industry overall

124 WORKERS COMPENSATION OPERATING ENVIRONMENT

125 Workers Comp Combined Ratios, P Percent Workers Comp Calendar Year vs. Ultimate Accident Year Private Carriers p Calendar Year Accident Year p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2005 and developed to ultimate Source: Calendar Years , A.M. Best Aggregates & Averages; Calendar Year 2005p and Accident Years pbased on NCCI Annual Statement Analysis. Includes dividends to policyholders

126 Workers Comp Lost-Time Claim Frequency (% Change) Percent Change Lost-Time Claims 0.5 Cumulative Change of 45.8% ( ) p Accident Year 2005p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2004, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI

127 Workers Comp Indemnity Claims Costs Have Accelerated, p Indemnity Claim Cost (000s) $19 $17 $15 $13 $11 $9 $7 Annual Change : +1.3% Annual Change : +7.4% $9.9 $9.6 $9.4 $9.8 $10.0 Lost-Time Claims $10.6 $11.4 $12.4 $18.6 $17.7 $16.5 $16.9 $15.1 $13.6 Cumulative Change = % ( p) $19.1 $ p Accident Year 2005p: Preliminary based on data valued as of 12/31/ : Based on data through 12/31/2004, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI