2007 Property-Casualty Insurance Market

2007 Property-Casualty Insurance Market Opportunities & Competitive Challenges For Independent Agents & Brokers By Madelyn Flannagan, Vice President, Education & Research, IIABA Peter van Aartrijk, CIC, Managing Director, Aartrijk [Note: See the About the Data explanation at the back of this report for information about how the data is compiled.] Overall P-C Market While a main story of 2008 was the rapidly weakening economy, the property-casualty insurance industry actually has been feeling the impact of relentlessly soft pricing for several years running. The overall property-casualty market essentially was flat in 2007, at total direct written premiums of $489.0 billion, vs. $488.4 billion in 2006, according to data provided by A.M. Best Co. The p-c market had grown by only 2.5% in 2006, on the heels of less than 2% in 2005. (Preliminary year-end results coming in for 2008 indicate continuing weak pricing.) Only the homeowners insurance line increased by any measure, up 3% overall. Independent agents and brokers (collectively IAs ) are responsible for generating nearly $6 of every $10 in the industry s overall p-c premium revenue. They produced $288.5 billion of the total $489 billion market in 2007 (compared with $289.3 billion in 2006, $284.1 billion in 2005, and $276.11 billion in 2004). The market share of IAs held steady at just under 60% of the overall property-casualty premium pot. With the market shrinking slightly, regional and national independent agency companies together wound up writing $800 million less in premium in 2007, compared with a $5 billion and $4 billion gain in 2006 and05, respectively. Copyright 2009, Independent Insurance Agents & Brokers of America, Inc. All rights reserved.

2 Commercial Lines Mired in a soft market, the overall commercial lines property-casualty market actually declined in terms of premium growth in 2007, dropping a half-percent to $260.4 billion. This compares with $261.6 billion in 2006, which had been up 3% over the prior year. In fact, the commercial market had been slowing for years. Premiums grew by $8.2 billion in 2006, $4 billion in 2005, $10.3 billion in 2004, and $24.5 billion in 2003 clearly showing a slowing growth for five years running. The industry expected more weakening in 2008, with the slowing economy affecting commercial lines in myriad ways, such as reduced inventory, auto and truck fleets, and payrolls, along with the commensurate return of workers compensation premium following audits. While independent agents and brokers were down slightly in market share in commercial lines in 2007, they still dominate with more than 80% of all premiums in that space, as the chart below demonstrates. That equates to about $209 billion in premium, essentially flat vs. the prior year. IAs had booked increased premium in each of the prior three years: $5.5 billion in 2006, $2.5 billion in 2005 and $7.6 billion in 2004. Commercial Lines Market Share (Direct Premiums Written or DPW) 1 2005 2006 2007 National Agency Companies 47.6% 48.1% 48.1% Regional Agency Companies 33.0% 32.3% 32.1% Captive Agency Companies 18.8% 18.9% 19.0% Direct-Response Companies 0.6% 0.7% 0.8% As the chart above shows: National IA carriers essentially were flat, at $125.3 billion, or 48%, of the total market. Regional independent agency carriers wrote about 32% of that total market, or $83.6 billion of premium, down from $84.4 billion in 2006, a loss of 0.6% share. Captive agency carriers essentially were flat, at $49.5 billion, or about 19% of the total. Direct-response writers gained nearly 15% of share in 2007, to $2.2 billion, but their collective share is still under 1%. In commercial auto, the overall premium market dropped by 4.3% to $29.1 billion in 2007. Direct-response and captive-agent writers yielded most of that premium, while independent agents and brokers essentially wrote the same amount. In workers compensation, the overall market dropped 4.5% to $50.4 billion, with no major change in market share figures. 1 National agency companies and regional agency companies in all of the charts refer to companies that use independent agents and brokers. The traditional direct writers are split into captive agent companies and direct-response companies (which do not use agents). DPW refers to direct premium written.

3 Largest IA Gains These national and regional independent agency carriers experienced the largest percentage growth in commercial lines market share in 2007 2 : Assurant Solutions 23.5% Old Republic General 15.5 Foremost 10.6 Safeco 9.8 White Mountains 7.2 Hanover 5.8 Great American P&C 5.8 Allianz of America 3.9 ACE INA Group 3.5 EMC 2.3 Harleysville 1.8 Other major independent agency carriers essentially were flat in commercial lines market share in 2007, including AIG (sans direct response), Cincinnati, Travelers and Zurich; while others dropped slightly, including Chubb, CNA, Hartford and W.R. Berkeley. Competitors Major competitors to independent agents experienced the following percentage changes in their 2007 commercial lines market share: Captive Agency Liberty Mutual Direct Cos. 5.4% Farmers Group (less Foremost) 4.0 Nationwide Direct Cos. 1.2 Allstate Direct Cos. -4.4 State Farm -11.1 Direct-Response The direct-response category gained nearly 15% in their commercial lines market share, but these carriers start with a relatively small overall share. Progressive Direct Cos., a large writer of commercial auto, dropped 18.6% in market share in 2007. AIG Direct, the leader in direct-response commercial market share, was up 21%, and USAA was up 8.5%. 2 Note it is easier for smaller companies to show big percentage changes in their market share than larger companies because smaller companies are working from a smaller premium base.

Historical Look 4 In looking at data for the period of 1997 to 2007, the independent agency channel held up nicely. Regional IA companies picked up share during that time frame lost in part by national IA companies. Independent agents and brokers overall gained three points of share during that time frame. The captive agency carriers, meanwhile, yielded nearly four points. The percentage increase by direct-response may appear to loom large, but it starts from a tiny base. Historical Look: Commercial Lines Market Share & Percentage Change 1997 2007 Change National Agency Companies 50.1% 48.1% -4.0% Regional Agency Companies 27.0 32.3 19.6 Captive Agency Companies 22.6 18.9-16.4 Direct-Response Companies 0.3 0.7 130.0%

State-by-State Market Share Results 5 Around the U.S., and in most states, independent agents and brokers continue to dominate the commercial lines market and have retained their market share. The IA channel commercial lines market share in all the states (plus the District of Columbia) broke down as follows over the last four years: 2004 2005 2006 2007 Over 90% (share) 1 (state) 0 0 0 85-90% 4 6 5 5 80-85% 16 15 19 18 75-80% 18 20 19 21 70-75% 5 4 2 4 65-70% 3 1 2 2 60-65% 3 5 4 1 55-60% 1 0 0 0 The average independent agent market share around the states was 80.3% in 2007, compared with 80.4% in 2006, 79.8% in 2005, and 80.2% in 2004. Independent agents and brokers produced more than 85% of commercial lines in 2007 in each of five markets: Florida, Hawaii, Maine, Massachusetts, and Rhode Island. But in 27 states (the same number of states as in 2006) independents wrote less than the channel s national average offering an opportunity to increase their share of this market.

6 Personal Lines Similar to commercial insurance, the personal lines business found itself mired in a malaise in 2007, with overall market-wide premiums at $228.6 billion, up by only 0.8% ($1.8 billion) over the prior year. And declining home starts and weak automobile sales, which started in 2007, obviously continued into 2008. Independent agents and brokers maintained their overall 35% market share in personal lines during 2007. National IA carriers booked $27.6 billion in 2007, and their regional counterparts, $52.0 billion, of the overall market of $228.6 billion. Captive agency companies dominate this space, writing $121 billion. Direct-response carriers grew at a comparatively brisk pace, adding most of the gains in the overall market premium. Other channels were flat or down in terms of premium growth. Direct-response took in $27.7 billion in 2007 for a market share of 12.1%, up 3% from its 2006 share of 11.8%. Direct-response writers added $1 billion in personal lines premium, about a half-percent change in market share, as the chart below demonstrates. Three-Year Look: Overall Personal Lines Market Share (Direct Premiums Written) 2005 2006 2007 National Agency Companies 12.65% 12.05% 12.09% Regional Agency Companies 23.27% 22.99% 22.77% Captive Agency Companies 53.00% 53.20% 53.02% Direct-Response Companies 11.08% 11.77% 12.12% As the chart above shows: In 2007, regional agency writers yielded about a point of share, and captive agents and national IA writers essentially were flat. Over the three-year period from 2005 to 2007, the IA channel lost a point in share. Direct-response writers gained about 3% in market share in 2007 in personal lines. This equated to more than $1 billion in new premium dollars. With that change, the market share of direct-response (12.1%) surpassed that of the national IA companies for the first time.

Largest IA Gains 7 The following national independent agency companies realized the greatest percentage growth (at least 1%) in their personal lines market share in 2007 3 over the prior year: White Mountains 8.8% Allianz of America 6.7 Zurich Financial Svs NA Group 4.3 Foremost 3.3 Travelers 2.7 Assurant 2.4 Hartford 2.3 Hanover 2.1 Unitrin 1.9 The following regional independent agency companies saw at least a 1% percentage growth in their personal lines market share in 2007 4 over the prior year: Affirmative 92.4% 5 Balboa 16.6 Nationwide Agency Cos. 12.1 Liberty Mutual Agency Cos. 10.6 Safeway 10.4 American Modern 6.5 Donegal 3.9 Infinity P&C 3.4 Grange Mutual 2.9 Central 1.9 3 Note it is easier for carriers with smaller books in this line to show big percentage changes in market share because they are working from a smaller premium base. 4 Note it is easier for carriers with smaller books in this line to show big percentage changes in market share because they are working from a smaller premium base. 5 Affirmative nearly doubled its book from $201 million to $390 million during 2007, indicating a possible acquisition or other large book change.

8 On the flipside, the national and regional independent agency carriers below with more than $100 million in personal lines premium each were down by more than 5% in market share in 2007: United Automobile Ins. Gp. -25.9% Arch -19.2 ACE INA -18.1 Markel -8.2 GMAC -7.7 AIG (less direct-response) -6.9 Progressive Drive -6.6 Palisades Group -5.9 Competitors The main competitors to independent agents and brokers experienced the following percentage changes in personal lines market share in 2007 over the prior year: Major Direct-Response Competitors AIG Direct 5.2% GEICO 4.8 Progressive Direct 4.0 21 st Century 1.1 USAA 1.0 Amica Mutual -1.5 These major players saw smaller increases in 2007 vs. 2006. In the prior year, for example, Progressive Direct saw nearly a 13% growth in market share, while GEICO booked an 8% increase. Major Captive Agency Competitors Liberty Mutual Direct 2.5% Farmers (less Foremost) 2.3 State Farm 0.0 Allstate -1.5 Nationwide Direct Cos. -4.6

State-by-State Market Share Results 9 The personal lines market share held by independent agents and brokers varies widely by state. The share in 2007 ranged from a low in Alaska (about 18%) to a commanding 85% in Massachusetts. In the latter state, the share is down a bit from 2006 as regulatory changes in the auto insurance market were expected to challenge independent agents and brokers with fresh competition. While showing some decline, the IA channel also held relatively strong market shares around the rest of New England in 2007: Maine (55.8%, down from 57.4% in 2006), Vermont (51.5% vs. 52.2%), Connecticut (50.7% vs. 51.6%), Rhode Island (47.5% vs. 48.6%) and New Hampshire (44.7% vs. 45.9%). In other relatively stronger states for market share in personal lines for independent agents and brokers, Ohio came in at 46.7%; South Dakota, 45.8%; and Pennsylvania, 45.2%. The independent agency personal lines market share for all of the states (plus the District of Columbia) broke down this way for the last four years: 2004 2005 2006 2007 Over 50% (share) 5 (states) 4 4 4 45-50% 4 6 5 4 40-45% 9 6 5 7 35-40% 4 6 5 4 30-35% 11 10 11 12 Under 30% 18 19 21 20 In personal lines, the national average independent agency system market share was 35.4% in 2007, compared with 35.7% in 2006, 36.3% in 2005, and 36.1% in 2004. As noted in IIABA s report for the 2006 results, independent agents have an attractive opportunity in this huge consumer market: In 15 states, independent agents and brokers have been able to retain and/or grow market share well beyond the distribution channel s national average. While prices are soft, this $229 billion market continues to grow. Many new independent agencies are being launched, according to IIABA s 2008 Agency Universe Study, and many of these smaller firms are likely to be aggressively seeking personal lines. Many larger agencies are seeking growth through increased sales of personal lines. While it is difficult to compete with direct-response writers for advertising and marketing expenditures, there is a lot of market share on the table (relative to commercial lines) that IAs can go after. Moreover, reduced commercial lines premiums are squeezing agents who rely heavily on that side of the business. IAs are seeking customers in all lines.

Private Passenger Auto 10 It s no wonder the airwaves and Internet are loaded with messages on buying car insurance. The personal automobile insurance segment alone represented a premium opportunity equivalent to 72% of all personal lines and 34% of the entire propertycasualty market in 2007. But carriers battled in a tough pricing marketing in 2007. Premium growth for the overall private passenger auto has been flat or slightly down for several years running now, ending 2007 at $164 billion, the same as in 2006. Independent agents and brokers produced about one third of this premium, as shown in the chart below (based on direct premiums written). Among the big direct-response players, GEICO added $626 million in premium in 2007, booking a total $11.7 billion for a total market share of 7.2% (an increase of about 6% in share over 2006). Progressive Direct grew by $173 million, to $3.7 billion in premium, a $2.3% share (up 5%). In 2007, captive agency carriers wrote 51.8% of the private passenger auto market, or premium of $84.9 billion, losing about a half-percent of market share over 2006. Directresponse wrote $24.4 billion, up by nearly 15% over 2006. With the regional independent agency companies at $38.0 billion in premium (a 23.2% share) and national IA companies at $16.7 billion (10.2%), the IA channel lost a combined 1.5% of market share in 2007 vs. 2006. (Each market share point in personal auto was the equivalent of $1.6 billion in premium in 2007.) Three-Year Look: Personal Auto Market Share 2005 2006 2007 National Agency Companies 11.77% 10.27% 10.16% Regional Agency Companies 23.93 23.27 23.19 Captive Agency Companies 52.84 52.10 51.81 Direct-Response Companies 12.45 13.36 14.86 At the end of 2007, direct-response market s share in personal auto insurance stood at nearly 15%, up by more than 3% from the year prior. GEICO s share of the overall car insurance market was at 7.2% ($11.7 billion in premium), up by 5.7% over its 2006 share. Progressive Direct was at 2.3% ($3.7 billion), up by nearly 5%. Meanwhile, market share for the other channels dropped. Some national and regional independent agency carriers, however, bucked the trend. Those showing at least a 1% gain in personal auto market share for 2007 vs. 2006 include 6 : 6 Note it is easier for carriers with smaller books in this line to show big percentage changes in market share because they are working from a smaller premium base.

11 Affirmative 94.1% Nationwide Agency Cos. 24.1 Liberty Mutual Agency Cos. 13.6 Safeway 10.7 Permanent General 10.5 White Mountains 10.2 Zurich Financial Svs. NA Gp. 7.3 American Modern 5.1 Donegal 4.7 Infinity 4.3 Great American 3.7 Grange Mutual 3.6 Unitrin 3.2 Hanover 2.5 Hartford 2.0 Assurant 1.5 Travelers 1.4 Competitors Among competitors to the independent agency channel, GEICO led the way in personal auto insurance market share growth, at nearly 6%, followed by the 5% gain booked by Progressive Direct. Most other competitors, however, were flat or down in market share. Comparable percentage changes in market share in 2007 (over year-prior numbers) for the independent agents major competitors were as follows: Major Direct-Response GEICO 5.7% Progressive Direct 4.9 21 st Century 2.0 USAA 0.2 AIG Direct -2.1 Amica Mutual -2.3 Major Captive Agent Farmers Group (less Foremost) 2.7% American Family 0.7 Liberty Mutual Direct Cos. 0.3 State Farm 0.3 Allstate Direct -0.3 Nationwide Direct Cos. -6.5

Historical Look 12 Year-over-year numbers typically reflect little change in market share held by the various distribution channels. But the chart below clearly shows the market share movements in private passenger auto in the various distribution channels over the last decade (1997-2007), based on direct premiums written. In this period, direct-response carriers nearly doubled their collective share of personal car insurance premiums in that period. The collective billions of dollars spent on consumer advertising and promotion by these big companies during that time frame clearly has benefited them. Starting with a small base (8% in 1997), it is easier to show percentage gains for direct-response. However, in pure dollars the gains are significant: Each percent of market share in 2007 equated to $1.6 billion of private passenger auto insurance premium, for example. Most of the direct-response channel s gain in personal car insurance came at the expense of captive agency companies, which were down by 13% in 1997-2007. The exclusive agency market share stood at 51.8% in 2007, down from 59.5% in 1997, with many large players reducing their captive agency forces while at the same time investing in the independent agency channel. While the captives and directs battle it out, the independent agency channel maintained its one-third share of the overall personal auto market in 1997-2007. The share held by national and regional IAs combined stood at 33.4% in 2007, up from 32.6% in 1997. The regional IA carriers picked up all but three points of share from that lost by the national IA markets. Personal Auto Market Share & Percentage Change 1997 2007 Change National Agency Companies 13.4% 10.2% -23.9% Regional Agency Companies 19.2 23.2 20.8 Captive Agency Companies 59.5 51.8-12.9 Direct-Response Companies 7.9 14.9 88.6

Homeowners 13 If there was any relief in premium growth in 2007, the homeowners market was it. The overall home insurance premium market grew to $62.0 billion in 2007, up by 3% from $60.2 billion the year prior. This growth follows increases of 7.4%, 6.1%, 9.8% and 13.6% in 2006, 2005, 2004 and 2003, respectively. National independent agency carriers grew by 1.8% (to $10.6 billion, or a 17.0% share), while regional IA companies dropped by 2.5% ($13.3 billion, or a 21.4% share). Combined, IAs wrote $24.7 million, or 40.3%, of the 2006 market, adding more than $2 billion of premium, following an increase of $1.2 billion in 2005. Independent agents and brokers, who had maintained a roughly 40% share of the homeowners market in recent years, saw their share slip to 38.5% in 2007. Most of their prior share management or growth in the recent past had come at the expense of captive agency companies, some of which had been reducing exposure in catastrophe-prone areas. Captive agency writers were flat in 2007 over 2006, but they command 56% of the market, or $34.8 billion of premium. The direct-response writers led the way in growth in 2007, adding 4.5% of market share (to finish at 5.4% of the total home market), but have built a relatively tiny base only $3.4 billion in premium. The chart below provides a three-year look at market share changes in homeowners, based on direct premiums written. Homeowners Market Share 2005 2006 2007 National Agency Companies 16.64% 16.78% 17.09% Regional Agency Companies 22.88% 21.92% 21.36% Captive Agency Companies 55.55% 56.13% 56.15% Direct-Response Companies 4.94% 5.17% 5.40%

Largest IA Gains 14 National and regional independent agency carriers showing the biggest percentage gains in homeowners market share for 2007 include 7 : Republic 35.5% W.R. Berkley Group 18.8 Balboa 10.0 Vermont Mutual 8.9 Allianz of America 6.7 Arbella 6.6 Commerce 6.5 White Mountains 6.0 Liberty Mutual Agency Cos. 4.0 Harleysville 3.2 Hartford 3.2 CNA 3.0 Travelers 2.9 Foremost 2.3 Chubb 2.1 Central 2.1 Competitors The larger competitors to independent agents and brokers in the homeowners line saw these market share gains or losses: Major Direct-Response AIG Direct 32.5% Progressive Direct 24.0 USAA 2.9 Amica Mutual 0.0 Major Captive Agent Liberty Mutual Direct 7.0% Nationwide Direct Cos. 1.3 Farmers Group (less Foremost) 1.2 State Farm 0.4 Allstate Direct -4.4 7 Note it is easier for carriers with smaller books in this line to show big percentage changes in market share because they are working from a smaller premium base.

Historical Look 15 The chart below shows the market share changes in the various distribution channels over the last decade (1997-2007), based on direct premiums written for homeowners. Homeowners Market Share & Percentage Change 1997 2007 Change National Agency Companies 19.7% 17.1% -13.2% Regional Agency Companies 18.2 21.4 17.6 Captive Agency Companies 57.9 56.2% -2.9 Direct-Response Companies 4.2 5.4% 28.6 Captive agency companies were down by about 3% in market share from 1997 to 2007. The regional independent agency carriers picked up the share generally yielded by national IA companies. Direct-response carriers grew their collective share by 29% in that period; although, starting from a smaller base makes it easier to show larger percentage gains. Leveraging their impressive gains in the personal car insurance market since 1997, it will be interesting going forward to see how the direct-response channel garners consumer interest in buying home insurance as well without the support of an agent. Technology advances in underwriting may make that an easier proposition.

16 Company Expense Comparisons Beyond market share trends, each year we review the expenses incurred by each distribution system. We consistently have found over the 13 years in which we have conducted this study that: 1. There are efficient and less-than-efficient companies within each distribution system; and 2. The overall expenses to provide insurance (operating ratios) for these efficient carriers often come close to one another. The following data compare some operating ratios 8 of companies in each distribution method for personal auto the primary market in which all three of the distribution systems compete in a major way. 2007 By-Channel Private Passenger Auto Operating Ratios National IA Companies (with better-than-average operating ratios) Chubb 39.49% Travelers 39.35 Cincinnati 37.96 Safeco 37.18 Hartford 33.61 Regional IA Companies (with better-than-average operating ratios) Mercury General 39.02% Permanent General 39.02 State Auto 38.73 MetLife Agency Cos. 38.39 GMAC 38.34 Commerce Group 37.88 Main Street America Group 37.33 Erie 36.26 Safety Group 35.17 Progressive Drive 34.13 Auto-Owners 32.00 Affirmative 29.04 8 Because of the discrepancies in how companies categorize their expenses, we have found that the only way to get a true apples to apples comparison is to use operating ratios. The operating ratio is the combination of the company s underwriting expense ratio and loss adjustment expense ratio. The underwriting expense ratio includes the commissions/broker fees ratio, other acquisition expense ratio, general expense ratio, and the taxes, licenses and fees ratio.

Selected Captive Agent Companies (at least $1 billion in personal auto premium) 17 Nationwide Direct Cos. 44.35% Auto Club Group 41.99 Liberty Mutual Direct Cos. 40.02 Farmers Group (less Foremost) 38.82 Country Ins. & Financial Svs. 38.24 Allstate Direct 37.69 California State Auto Group 37.08 State Farm 36.03 American Family 35.54 Auto Club Enterprises Ins. Gp. 32.84 Southern Farm Bureau 29.42 Major Direct-Response Companies AIG Direct-Response 40.27% 21 st Century 39.36 Progressive Direct 33.63 Amica Mutual 32.70 GEICO 28.81 USAA 24.57 Several independent agency companies posted 2007 operating ratios that compare well against those of major captive agency carriers. In particular, the operating ratios of some regional independent agency carriers handily beat those of the largest captive agent writers and topped, or at least matched, those of some big direct companies. Note USAA s very low ratio above, as the firm enjoys an expense and marketing advantage. Leveraging a major affinity group, the firm generates business from military personnel without incurring substantial advertising outlays. Average Operating Ratios for Private Passenger Auto The above figures are company-specific. How do they compare with averages for the respective distribution channel? For 2007, the direct-response category held an average 10-point expense advantage over the IA channel and an eight-point advantage over captive agency carriers. Here are the respective overall average operating expense ratios of each of the channels: Direct-response 29.78% Captive 37.36 National IA 39.59 Regional IA 39.47

18 Conclusions & Considerations For property-casualty insurance companies in any of the three major distribution channels, the story in recent years has been finding a way to succeed in soft or, at best, uncertain markets. Competition has been fierce in most lines, and the weakening economy impaired carriers ability to grow premium. This report looked at 2007 data the most-recent year available from A.M. Best Co. but insurers likely dealt with similar, or worse, conditions in 2008. But there are winners and losers within any property-casualty insurance market hard or soft as this report illustrates. Opportunities abound for aggressive and smart firms in each of the three distribution channels. It is important to note that even small percentage movements in market share can translate hundreds of millions of premium moving in or out of a particular distribution channel, or to or from a specific insurer. Trends Since 1997 For 13 years running, this study has presented data that demonstrates both threats and opportunities for independent agents and brokers. This year s report mainly covers year-end numbers for 2005, 2006 and 2007. In addition, this report revisits data from 1997, in addition to our traditional review of the past three years. Despite some leakage, particularly in personal auto, the independent agency system withstood competitive charges in 1997-2007, even adding a few points to its dominant commercial lines market share (standing at about 80% in 2007), and adding a point to its personal lines market share, at about 35% in 2007. In personal lines, most of the gain likely can be attributed to captive agency carriers, which dominate this insurance sector, as they made two key moves: 1) adding independent agents for distribution; and 2) exiting certain areas of the country with catastrophe exposure, opening opportunity for the IA channel. In some pockets around the U.S., independent agents and brokers truly dominate both commercial and personal lines. That proves the opportunity exists for IAs in other states to grow. Expenses & Growth Review The A.M. Best data for 2007 demonstrate that efficient companies are leveraging each type of distribution system a consistent finding in the 13 years of this market share analysis. To be sure, in 2007, the direct-response category held an average 10-point expense advantage over the IA channel and an eight-point advantage over captive agency carriers. But those are averages. As the data show, well-managed independent agency writers can

19 produce, distribute and service insurance products just as cost-effectively as captive agent writers and direct companies and, in some cases, even more so. Generally speaking, across the distribution platform, the obvious differential in expenses with direct-response is savings on commissions, an advantage offset by the steep advertising bills these firms pay, and internal salary expenses. Another expense advantage is a single workflow and technology the same advantage enjoyed by captive agency writers. However, moving into 2008 the independent agency system reached a tipping point with a technology of its own, known as Real Time and Download. Multiple and/or proprietary technology products and workflows once inherent to agent-carrier communications are giving way to a smoother way of doing business. IA carriers will gain further efficiencies as they implement real-time and download electronic interfaces with agents and policyholders for rating, inquiries and other transactions, thereby reducing the need for human intervention in transactional communications. The investments that have been made in technology are paying off carriers are reporting increased usage, resulting in lower expenses and high-quality books of business. These developments will continue to even out the technology playing field and enhance the long-term competitive position of this distribution channel. Independent agents and their carriers should continue to work together to implement Real Time and Download. Evolving System While independent agents and brokers already write about 60% of all property-casualty insurance, many IIABA Best Practices firms are not resting on their laurels; they are demonstrating continued growth. As we ve said in the past, the true value of the independent agent and broker distribution channel lies in its flexibility. They are not hawking off-the-shelf coverages that are inadequate, for example, as a commercial account grows in complexity. When one carrier leaves a market, agents can turn to other carriers or even alternative E&S outlets. IAs are using risk management services to initially prove their worth to accounts, bringing in the insurance piece later. Moreover, the independent agency system is seeing a growth in startup agencies, according to the IIABA Future One 2008 Agency Universe Study. As the report says, New agencies are concentrated geographically: 33% in the South Atlantic states; 20% in the West South Central states; 11% in the Mountain region, and 10% each in the East North Central and West North Central States. The concentration in the South Atlantic (including Florida) and West South Central (including Louisiana and Texas) suggests that non-independent agency carriers withdrawing from coastal areas may have encouraged formation of new independent agencies. These new firms are aggressive, typically with younger ownership (average principal age of 47), and are going after personal lines in particular, the Future One study found. On average, new agencies grow much more rapidly than agencies generally. Between 2006 and 2007, 80% of the new agencies experienced growth. For the growing new agencies, the average increase was 55%. This is good news for the distribution system, as these aggressive firms can take back market share in pockets of the U.S. where they write on average less than in other areas, such as New England.

On the other side of the coin, however, are the older agency owners who are dealing with how best to perpetuate or sell their firms. As we ve noted in the past, the merger and acquisition activity in the independent agent and broker world may account for some of the market share losses. Personal relationships can be disrupted, and some customers move to alternate channels. (It should be noted that the 2008 Future One research found a tempering of the M&A activity.) Car Insurance Leads Changes For the first time, the market share of direct-response in car insurance (at 15%) has surpassed that of national independent agency companies, the 2007 figures show. It s another milestone for these marketers, who even in the difficult market of 2007 were able to shift hundreds of millions of premium to their side of the fence GEICO alone added $626 million. The private passenger automobile line is a huge battleground, representing one-third of all property-casualty premium, including commercial. Led by GEICO and Progressive Direct, these firms are aggressively marketing in all sorts of media, including online, which has been changing how Americans of all ages view insurance shopping. It will be interesting to see if and how direct-response can take significant market share in other lines, such as homeowners. The growth of direct-response here has mounted a serious challenge. Many independent agents and brokers consider simple-needs buyers of car insurance as someone else s issue. They prefer to sell value over price, solid coverage over state minimum limits, and long-term relationships over an annual shopping churn. Those are worthy goals. And certainly, some online buyers don t bother understanding coverage limits and aren t loyal year-to-year. But many of these shoppers represent the typical agency customer as well families with multiple cars and other needs, such as home insurance, personal umbrellas, and add-on coverages. IAs who commit to aggressive marketing tactics and maintaining a convenient, enjoyable shopping experience as well as in-person, telephone and online service where appropriate will retain and win back market share. The value proposition is sitting there. Moreover, as we ve noted in the past, the existing personal lines market share held by the independent agency system is nothing to scoff at. Successful independent agents have demonstrated that a keen focus on personal lines as a business unit not as a merely as a walk-in or one-off sale or an accommodation to commercial accounts pays off. Opportunities Abound Overall, the independent agency system works. It is a channel consisting of tens of thousands of distribution points around the U.S. a powerful, time-tested asset to carriers that want to move into new markets or products. More agents and brokers need to be creative and aggressive to continue to compete. Savvy firms are aggressively marketing, selling and servicing coverage to families and businesses resulting in strong retention and new customer growth. Most of the 20

21 following proven strategies and tactics are not particularly new. They re hard work, plain and simple. They include: Invest in people. Make necessary investments in younger generations of employees, flexible and modern work schedules and environments, technology, and perpetuation plans. Cross-selling. Leverage property-casualty lines and cross-selling into product areas that build further trust, such as financial services, life insurance and employee benefits. These new lines are a valued path to proactively retain accounts. Systematic sales. Implement disciplined marketing and sales initiatives that build an ongoing pipeline of prospects. Workflow improvements. Innovate with modern workflows and technologies (e.g., real-time communications, policy download, and a paperless work environment) to free up employee time to engage in value-added functions. Marketing prowess. Reach out to an entirely new customer segment younger generations and new families in need of the service and products available, delivered in a way that is appealing to the customer. Consider allocating more marketing dollars to agency Web sites and other e-marketing approaches, such as online Yellow Pages over their print counterparts. Build capabilities. Develop employee expertise as trusted advisors, knowledgeable about risk management, new products and particular industry sectors, as well as the pain businesses are feeling with the economy. Independent agents and brokers still dominate the property-casualty insurance marketplace. If more IAs can leverage and market their strengths skilled employees, strong carriers, technology advances, and the customer advocacy, trust and customization inherent in the Trusted Choice brand they will have opportunity in every state and in every product line. We invite your comments and questions about this research. Please contact Madelyn Flannagan, IIABA Vice President, Education and Research, madelyn.flannagan@iiaba.net.

22 About the Data This is the 13th year in which A.M. Best Co. has provided the Independent Insurance Agents & Brokers of America with year-end industry market share and company expense data for the association to provide an annual assessment of the state of the independent agency system. All data in this report comes from A.M. Best and is printed with its permission. The 2007 calendar-year figures represent the latest year in which segmented data is available from A.M. Best. The A.M. Best data offers IIABA the most accurate picture of changes with propertycasualty insurance distribution because it separates captive agency and direct-response carriers. In addition, as requested by IIABA, the affiliates of groups leveraging various distribution systems are separated and placed in the appropriate distribution category (wherever the company group uses separate affiliates for this purpose). Adjusted Numbers In the charts in this report, previous year market share numbers are the most mature numbers compiled by A.M. Best, and they reflect the same affiliate adjustments in order to provide as accurate comparisons as possible. Careful readers of these IIABA market share reports will note some premium and market share data changes; we use the new numbers for prior years from the latest report, which is 2006. This occurs because carriers report adjustments for prior years as well in subsequent years, which changes the market share percentages for prior years. Rounding Note that some numbers in the charts may not add to 100% of market share; this is due to rounding of minute numbers. Two Recent Data Changes In recent years, there were two major changes recently made to the IIABA information to further enhance the accuracy of the numbers. A.M. Best separated Progressive s direct business from what is written by its agency group. Several company groups from the regional independent agency company category were reallocated to the national independent agency category. A A.M. Best requires a company to write in many states and to write multiple lines of business in order to fit into the national agency category. When A.M. Best makes such changes, the changes are made for the prior years as well in order to produce as accurate comparisons as possible. As a result of these changes, it is virtually impossible to use this data to make any broad conclusions as to trends affecting either the national agency company or regional agency company sub-segments of the independent agency and broker market. Some of the groups that were re-allocated to the national agency category include: W.R. Berkley Companies, Cincinnati Insurance Company, EMC, Harleysville, HDI U.S. Group, Markel Corporation, Old Republic General Group, Winterthur Swiss Group, and XL America Group. The Progressive agency companies, however, remained in the regional group because of the limited lines of business being written by those companies.

A.M. Best moved the following companies from the national agency category to the regional category: Amerisure, Atlantic Mutual and Utica National. 23 Re-Allocation to Distribution Category In all charts, A.M. Best has re-allocated premium volume to the proper distribution category wherever the carrier used separate affiliates for its different distribution methods. In the personal lines, personal auto, and homeowners charts, however, the market shares for the direct-response companies are somewhat understated because the direct business written by The Hartford cannot be separated from the independent agency business written by this company, as it is not written in a separate affiliate. In addition, A.M. Best has not been able to separate out most of AIG s direct auto business (written in the AIG name) from that written through independent agencies, and that business appears in the national agency company category. A.M. Best does separate out AIG s 21st Century business to the direct category, as well as the direct-response business it acquired from GE Financial Assurance. This overstatement of independent agency numbers is partially offset by the fact that Allstate s rural independent agency program is still classified as part of its captive agency business. Allstate s other independent agency business, which is written in separate affiliates such as Encompass and Deerbrook, has been placed in the proper distribution system category. In addition, A.M. Best has not been able to separate out Farmers independent agency business that it writes in eastern states, except for the business written in the Foremost name. This additional Farmers independent agency business continues to be included in the captive agency category. It is important to note that IIABA and A.M. Best work together each year to continually refine the data and make adjustments wherever possible. IIABA uses only the numbers A.M. Best ultimately provides.