金融危机下的美国非寿险

Financial Crisis and the
Future of P/C Insurance

Challenges Amid the Global
Economic and Regulatory Storm
Society for Insurance Research
Savannah, GA
October 21, 2008
Download at: www.iii.org/media/presentations/SIR
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
Presentation Outline
• Financial Crisis: Federal Government’s Financial
Rescue Package
 Emergency Economic Stabilization Act of 2008 (w/revisions)
 Troubled Asset Relief Program (TARP)
 Impacts for Financial Services and Insurers
• The Weakening Economy: Insurance Impacts
 Exposure & Claim Impacts
 What Accelerating Inflation Means for Insurers
 Looming Financial Services Regulatory Reform
• P/C Insurance Industry Overview & Outlook
Q&A
Federal Government’s
Financial Rescue
Package*
(a.k.a. “The Bailout”)
Plan Details &
Insurer Implications
*Including additional provision of the Emergency
Economic Stabilization Act of 2008
Federal Government Financial
Services Rescue Package
THE SOLUTION: A 5-POINT PLAN
1. Treasury Purchase of Equity Stakes in Banks
 Treasury will buy up to $250B in senior preferred
shares in wide variety of banks (out of $700B in EESA)
 9 largest banks get $125B
 Stakes come in the form of non-voting shares and pay
5% for first 5 years and 9% thereafter
 Feds get warrants to buy up to 15% more shares
 Banks can buy back stake from government
 Must agree to limits on CEO compensation
 GOAL: Bolster bank capital/liquidity
2. Backing New Debt from Banks
 FDIC will guarantee new, senior unsecured debt issued by
banks, thrifts and bank holding cos. Must mature within 3
years; Banks can opt in until 6/30/2009
 GOAL: Restore confidence of buyers of bank debt that they
will be paid back (no matter what happens to bank)
Source: US Treasury, CNN Money.com and I.I.I. research.
THE SOLUTION: A 5-POINT PLAN (Cont’d)
3. More Coverage for Bank Deposits
 FDIC will provide unlimited coverage for all non-
interest bearing accounts through 12/31/09. (Such
accounts are typically used by businesses to meet short-
term expenses such as payrolls)
 Paid for by fees/premiums paid to FDIC
 GOAL: Boost liquidity for otherwise healthy banks (esp.
regional and local banks that might see nervous
depositors withdraw money in favor of bigger banks
4. Buy Short-Term Commercial Paper
 Federal Reserve will buy until 4/30/09 high-quality 3-month
debt issued by businesses in commercial paper market
 Commercial paper is the prime source of funding to cover
op. expenses at many large corps. and financial institutions
 GOAL: Guarantees there will be a buyer of debt, so private
sector buyers will be willing to buy too
Source: US Treasury, CNN Money.com and I.I.I. research.
THE SOLUTION: A 5-POINT PLAN (cont’d)
5. Buy Troubled Assets: “Troubled Asset Relief
Program” (TARP)
 Up to $450B available (theoretically) available to
purchase troubled assets from banks (and others?)
 Limits on CEO Compensation in Participating Firms
 Pricing: Debt Sold to Feds via Reverse Auction
• Reverse auction is one in which sellers bid lowest price it will
accept from the government (i.e., rather a traditional auction
in which the highest bid from buyer wins). Helps ensure that
the Feds (taxpayer) does not overpay for questionable debt
• Will be sold in multi-billion dollar increments and run by
outside asset managers in amounts ranging up to $50 billion
• Recoupment provision allows government to assess users of
program to make taxpayers whole if program loses money
• GOAL: By removing “toxic” assets with uncertain
underlying value from bank balance sheets, banks should be
better able to attract capital Source: I.I.I. research.
Distribution of $700 Billion in Funds Under
Emergency Economic Stabilization Act of 2008
Deals Exceeding $100 Million
Shifting Emphasis
Troubled Asset
•Original EESA Purchases, 450 ,
allocated all $700B 64%
9 Large Banks*,
to Troubled Asset 125 , 18%
Relief Program
•View was that
TARP would take
too long and that
liquidity/credit crisis
required direct Regional & Local
infusion of capital in Banks, 125 , 18%
banks by feds
Source: US Treasury Department; Insurance Information Institute research.
Stakes Taken by Federal
Government in 9 Large US Banks
Citigroup $25
JP Morgan Chase $25
Wells Fargo* $25
Bank of America $15
Merrill Lynch $10 •Feds announced a total $125B
stake in 9 large banks on Oct. 14.
Goldman Sachs $10 •Another $125B will be infused in
regional and local banks
Morgan Stanley $10
•Sum comes from $700B in
Bank of NY Mellon $3 Troubled Asset Relief Program in
the Emergency Economic
State Street $2 Stabilization Act of 2008
0 5 10 15 20 25 30
*Includes $5 billion for purchase of Wachovia.
Source: USA Today, Oct. 15, 2008, p. 1B.
Top 10 Largest Bank Failures
Resurgent bank failures Sept. 25 failure of
$350 (13 in 2008 as of Oct. 12) Washington
Mutual was bar $307.0
$300 are symptomatic of far the largest in
weakness in the financial US history. Sold to
$250 JP Morgan Chase
system. FDIC says many by govt. for $1.9B
$ Billions
$200 more may fail plus WaMu’s loans

and deposits
$150
Failure of IndyMac
$100 was the 4th largest in
history
$50 $30.2 $32.0 $32.5 $40.0
$12.2 $13.0 $15.1 $18.5 $21.7
$0
Bancorporation
England (1991,
First Republic
Savings & Loan
(1988, Houston)
Homefed Bank
Mcorp (1989,
IndyMac (2008,
Mutual (2008,
Savings (1989,
Illinois (1984,
(1988, Dallas)
Continental
Stockton, CA)
Washington
Bank of New
Simi Valley)
Chicago)
(1992, San
Gibraltar
Pasadena)
American
First City
Dallas)
Boston)
Seattle)
Diego)
(1988,
Source: FDIC; Insurance Information Institute research.

Top 10 P/C Insolvencies, Based
Upon Guaranty Fund Payments*
$2,500 $2,265.8 $ Millions
$2,000 The 2001 bankruptcy
of Reliance Insurance
$1,500 $1,272.7 was the largest ever
$1,049.7 among p/c insurers
$1,000 $843.4
$699.4
$566.5 $555.8 $543.1 $531.6 $516.8
$500
$0
s.
s.
.
s.
s.
s.
ce
e
ns
s.
In
In
In
nc
nc
In
In
In
n
nI
ra
ra
ra
O
ty
ily
l
ty
lty
na
io
su
IC
su
su
li
ni
m
at
bi
io
ua
In
In
In
em
PH
Fa
ns
ia
at
as
e
d
on
rN
lL
pe
nd
c
lan
rn
an
gi
ua
tI
he
sit
rio
eli
id
Le
Co
on
ut
ut
an
M
pe
R
M
em
So
Tr
a
Su
ni
an
Fr
or
ic
lif
er
Ca
Am
* Disclaimer: This is not a complete picture. If anything the numbers are understated as some states have not reported in certain years.
Source: National Conference of Insurance Guaranty Funds, as of September 17, 2008.

Top 10 Life Insolvencies, Based On Guaranty
Fund Payments and Net Estimated Costs*
$3,000 $2,821.7 $ Millions
$2,500 (Year Indicates Year of Liquidation)
$2,000 The 1991 bankruptcy

$1,500
of Executive Life was
by far the largest ever
$1,000 among life insurers
$500
$173.6 $172.4 $131.6 $107.8 $106.9 $81.9 $61.6 $61.5 $57.2
$0
Executive Life Corporate Life National London Inter- Guarantee New Jersey American American First National
Ins. Co. 1991 Ins. Co. 1994 Heritage Life Pacific Life & American Ins. Security Life Life Ins. Co. Chambers Life Integrity Ins. Life Ins. Co.
Ins. Co. 1995 Annuity Co. Co. of Illinois Ins. Co. 1992 1993 Ins. Co. 2000 Co. 1993 of America
2004 1991 1999
*As of 2007.
Source: National Organization of Life and Health Guaranty Funds
Other Recent Provisions
1. Fannie/Freddie Will Increase Mortgage Buying
• Feds step-up buying MBS in open market
2. 10-Day Ban on Short-Selling 829 Financial Stocks
• Most major public insurers on list
• Expired Oct. 7
3. Increase FDIC Insurance Limits on Deposits to
$250,000 from $100,000
4. Establish Financial Oversight Board
• Includes Treasury Secretary, Fed Chairman and others TBD
Source: Insurance Info. Inst. research.

Other Recent Provisions (cont’d)
5. Conversion of Last 2 Remaining Investment Banks

(Goldman Sachs and Morgan Stanley) to Bank
Holding Companies
• Recognition that Wall Street as it existed for decades is dead
• High leverage investment bank model no longer viable in
current market environment
• New entities will be subject to stringent federal regulation in
exchange for more access to federal dollars/liquidity facilities
• Capital and liquidity requirements will be greatly enhanced
• Reduced leverage means new entities will be less profitable
Source: Insurance Info. Inst. research.

Liquidity Enhancements
Implemented by Fed Due to Crisis
• Lowered Interest Rates for Direct Loans to Banks
 Federal funds rate cut from 5.5% in mid-2007 to 1.5% now
 Most recent cut from 2.0% to 1.5% globally coordinated on Oct. 7
• Injected Funds Into Money Markets
• Increased FDIC Insurance Limits to $250,000 from $100,000
• Coordinated Exchange Transactions w/Foreign Central Banks
• Injected Cash Directly Into Banks; Will Take Ownership Stake
• Created New and Expanded Auction & Lending Programs for
Banks
 e.g., Term Auction Facility expanded to $900B
• Started Direct Lending to Investment Banks for the First Time
Ever
• Authorized Short-Term Lending to Fannie/Freddie, Backstopping
a Treasury Credit Line
Source: Wall Street Journal, 9/22/08, p. A8; Insurance Information Institute research as of Oct. , 2008.
Why Have Credit Markets Frozen &
Why Are They So Hard to Thaw?
1. CRISIS OF CONFIDENCE: Banks are Fearful of Lending to
Each Other as Well as Even Highly-Rated Corporate Risks
 Lehman and bank bankruptcies have deeply damaged faith in the
financial integrity of financial institutions
 Fear has spread to European banks
 Concern that US actions are insufficient and Europe’s too uncoordinated
 CONSEQUENCES: Lending is shriveling and LIBOR is rising
2. DELEVERAGING: Banks & Investors Want to Reduce Debt
 Issuing new loans, even short term, slows purge of debt from balance sheets
3. TANGLED WEB OF RISK: Financial Innovations Designed to
Spread and Hedge Against Risk Obscure Where Risk is Held an
in What AmountsGenesis of the Systemic Risk
 The packaging, securitization and global sale of collateralized debt
obligations (CDOs) such as mortgage backed securities (MBS) has made
every financial institution in the world vulnerable
 Explosive and widespread use of derivative hedges such as credit default
swaps create large numbers of potentially vulnerable counterparties
Source: Wall Street Journal, 10/7/08, p. A2; Insurance Information Institute research.
Positive Signs & Silver Linings
in the Economy
1. CREDIT THAW: Banks are beginning to lend to each other and
to others in unsecured credit markets
 Key interest rates falling (LIBOR)
2. DELEVERAGING: Banks, Businesses & Consumers reducing
debt loads to more manageable levels
3. ENERGY PRICES FALLING: Oil prices are down more than
50% and gas prices down about 33%
 Falling energy prices are potent economic stimulus and confidence builder
 Helps all industries
4. INFLATION THREAT WANING: Falling energy, commodities
prices will help consumers and cut off price spiral
 Less erosion in real wages
5. AFFORDABILITY IN HOUSING: Rapidly falling home prices
will attract more buyers, more quickly
 Critical to clear away excess inventory, stem foreclosures
Source: Insurance Information Institute
The Deleveraging
of America
Economic Downdraft and
Regulatory Questions
Leverage Ratios for Investment
Banks and Traditional Banks*
Merrill Lynch 44.0
Morgan Stanley 33.0
Goldman Sachs 24.3
Lehman Brothers 23.3
Fannie Mae 21.5
Citibank 15.4 Investment bank leverage ratios
were extremely high.
JP Morgan Chase 13.3 Lehman filed for bankruptcy 9/15
Wells Fargo 12.4 Merrill merged with JP Morgan
Chase
Wachovia 10.8
Goldman and Morgan converted to
Bank of America 10.5 bank holding companies
0 10 20 30 40 50
*Based on data for last quarter reported (May or June 2008).
Source: “The Perils of Leverage,” North Coast Investment Research, Sept. 15, 2008
How Does Leverage Work?
• Example of Non-Leverage Transaction
 Buy 1 share of stock for $100
Investment banks and
 Price of share rises to $110 others juiced their returns
 RETURN = $10 or 10% by making big, bad bets
• Leveraged Transaction with (mostly) borrowed
money on mortgage
 Invest $10 and borrow $90 securities
 Stock rises to $110
 RETURN = $10 or 100% (less borrowing costs)
• This Pleasant Arithmetic Works Equally Unpleasantly
in the Opposite Direction
• Declining asset values, seizing of credit markets
made such borrowing impossible and the
operating model of investment banks nonviable
Source: Insurance Information Institute.
Credit Default Swaps: Notional Value
Outstanding, 2002:H2 – 2008:H1*
$70 $ Trillions
$62.2
At year end 2007, the
$60 notional value of CDS’s $54.6
outstanding was $62.2
$50 trillion or 4.5 times US GDP, $45.5
up nearly 40 fold from 2002.
$40 The 12% decline in 08:H1 $34.4
was the first since 2001.
$30 $26.0
$20 $17.1
$12.4
$8.4
$10 $3.8 $5.4
$1.6 $2.7
$0
02:H2 03:H1 03:H2 04:H1 04:H2 05:H1 05:H2 06:H1 06:H2 07:H1 07:H2 08:H1
*End of calendar half (H1 = June 30, H2 = December 31).

Source: International Swaps and Derivatives Association: http://www.isda.org/statistics/recent.html
Percent Change in Debt Growth
(Quarterly since 2004:Q1, at Annualized Rate)
15% Home Mortgage Consumer Credit Business Corporate

Corporate
deleveraging
12%
9%
6%
Consumer
3%
desperation?
Deflation of housing
0% bubble is very evident
2004:Q1
2004:Q2
2004:Q3
2004:Q4
2005:Q1
2005:Q2
2005:Q3
2005:Q4
2006:Q1
2006:Q2
2006:Q3
2006:Q4
2007:Q1
2007:Q2
2007:Q3
2007:Q4
2008:Q1
2008:Q2
Source: Federal Reserve Board, at http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf
Ratio of Debt Service Payments
to Disposable Income, 1980 – 2008:Q2
% of Disposable Personal Income
15.0
14.5 HOUSEHOLD DELEVERAGING
14.0 In Q2 2008 13.85% of disposable
personal income went to service
13.5 mortgage and consumer debt, down
from a peak of 14.42% in Q4 2006,
13.0
12.5
12.0
11.5
Long-term ratio of debt
11.0 service to income is
10.5 12.1%, well below
where it is today
10.0
80q1
81q1
82q1
83q1
84q1
85q1
86q1
87q1
88q1
89q1
90q1
91q1
92q1
93q1
94q1
95q1
96q1
97q1
98q1
99q1
00q1
01q1
02q1
03q1
04q1
05q1
06q1
07q1
08q1
08q2
Source: Board of Governors of the Federal Reserve: http://www.federalreserve.gov/releases/housedebt/default.htm;
Reasons Why Insurers
Are Better Risk
Managers Than Banks
Insurers Will Emerge With Their Risk
Management Model Largely Intact
6 Reasons Why P/C Insurers Have
Fewer Problems Than Banks
1. Superior Risk Management Model
 Insurers overall approach to risk focuses on underwriting discipline,
pricing accuracy and management of potential loss exposure
 Banks eventually sought to maximize volume, disregarded risk
2. Low Leverage
 Insurers do not rely on borrowed money to underwrite insurance
3. Conservative Investment Philosophy
 High quality portfolio that is relatively less volatile and more liquid
4. Strong Relationship Between Underwriting and Risk Bearing
 Insurers always maintain a stake in the business they underwrite
 Banks and investment banks package up and securitize, severing the link
between risk underwriting and risk bearing, with disastrous consequences
5. Tighter Solvency Regulation
 Insurers are more stringently regulated than banks or investment banks
6. Greater Transparency
 Insurers are an open book to regulators and the public
Government Rescue
Package of AIG
Motivation &
Structural Details
AIG Rescue Package by the Fed
• AIG suffered a liquidity crisis due to large positions, mostly
associated with Credit Default Swaps, related to mortgage debt
through its AIG Financial Products division
• The losses at AIGFP brought AIG’s holding company to the
brink of bankruptcy by Sept. 16 (AIG has 245 divisions, 71 are
US domiciled insurers)
 Efforts to create large credit pool via private banks failed
• AIG’s separately regulated insurance subsidiaries were solvent at
all times and met local capital requirements in all jurisdictions*
• Federal Reserve Agreed to Lend AIG $85 Billion to Prevent
Bankruptcy, of which $70B has been borrowed (as of 10/10)
 2-year term @ 850 bps over LIBOR (about 11 to 11.5%); 8% unborrowed
 Fed gets 79.9% stake in AIG (temporary nationalization)
 CEO Robert Willumstad replaced by former Allstate CEO Edward Liddy
• Proceeds from sale of non-core assets will be used to repay loan
• New CEO says most insurance divisions are “core”
*Sources: AIG press releases and regulator statements.
Expansion of AIG Rescue Package
by the Fed on Oct. 8, 2008
• On Oct. 8 the Federal Reserve Bank of NY agreed to provide
liquidity to AIG’s Securities Lending Program
 Fed will borrow investment grade fixed income securities from AIG’s
domestic life insurance companies, on commercial terms and conditions, in
exchange for cash
 Puts Fed into traditional lender of last resort position
• Problem in the Securities Lending Program (SLP)
 AIG lent securities to 3rd parties, receiving collateral in return
 Invested some of collateral in other assets whose value declined
 When borrowers of securities returned them, AIG had to make up
difference and sometimes couldn’t lend out securities for fresh collateral
• NY Fed Authorized to Borrow $37.8B
 AIG’s total securities lending obligations = $37.2B as of Oct. 6
• Objective is to Provide Liquidity to SLP while Providing
Enhanced Credit Protection to NY Fed by Giving them Possession
of Third Party Investment Grade Securities*
*Sources: AIG press releases; Wall Street Jounal and regulator statements.
Rational for Federal Reserve’s
Rescue Package of AIG
• “Too Big to Fail” Doctrine Applied to Insurance for
First Time
• AIG is the Largest Insurer in the US and One of the Top
5 Globally: Internationally Disruptive
 Disorderly unwinding of CDS positions (which guarantee large
amounts of debt) would have had large negative consequences
on already fragile credit markets
• Fear Was that Generally Healthy Insurance Operations
Affecting Millions of People and Businesses Would Have
to Be Sold at Fire Sale Prices
• Loan Allowed Time for an Orderly Sale of Assets and a
Minimal Disruption on Credit Markets while also
Protecting Policyholders
• New CEO says most insurance divisions are “core”
Source: Insurance Information Institute research.
AIG Actions to Date*
• On October 3, New CEO Ed Liddy Announced Plan to Sell Assets and Focus
on Core Commercial P/C Operations
 Worldwide P/C premiums totaled approximately $40B in 2007
• Overall Impact May Be More Transformational for Global Life Industry
• Will Sell:
 All of Its US Life Insurance Operations
 Valued at as much as $24B**
 Sell some foreign life operations, which collectively generated $64.5B in premiums,
deposits and other considerations in 2007 (24.5% in Japan and 37.5% in Europe)
 Involves sale of American Life Ins. Co. (operates in Japan, Europe and Middle East &
elsewhere) as well as other life units operating in Japan and Taiwan
 Will retain majority stake in another life insurer operating in China and other Asian
countries
 May sell personal lines business (excluding Private Client Group)
 Accounts for $4.8 billion in premiums ($4.1 billion excluding Private Client Group) and
3% market share in personal auto.
 AIG's personal lines business (excluding its PCG is 73% direct and 27% agency***
 Wind down AIG Financial Products (root of AIG’s problems), try to extract value
 Will sell aircraft leasing and asset management businesses
 Other, small insurance units and minor assets to be sold as well
*As of Oct. 5, 2008; **UBS analyst Andrew Klingerman (WSJ, Oct. 4, 2008) * **Barclay’s Capital, Oct. 3, 2008
Sources: AIG, Wall Street Journal (Oct. 4, 2008), Insurance Information Institute research.
“Rescue” Treatment of AIG
vs. Eight Large Banks
AIG 8 Large Banks*
U.S. 79.9% of common stock Non-voting preferred
Treasury’s stock; no dilution of
ownership common stock ownership
Interest/ •8.5% on unused line of credit up •5% on preferred stock**,
Dividends to $85 billion rising to 9% after 5 years
Payable to •8.5%+3-month LIBOR on •Can borrow from the
Treasury borrowed money (total recently = Fed’s discount “window”
12.92%) for as little as 1.75%
•2% one-time fee on credit line
Time limit 2 years Indefinite
to pay off
credit line
“Toxic” Unclear whether can sell to Can sell to Treasury
assets Treasury
*Citigroup, Bank of America (includes Merrill Lynch), JPMorganChase, Wells Fargo, Goldman, MorganStanley,
State Street, Bank of New York Mellon. **$25 billion for Citi, BoA, JPMorgan, and Wells; $10 billion for
Goldman and Morgan Stanley; $3 billion for BONY; $2 billion for State Street.
Leading U.S. Writers of P/C Insurance
by DWP, 2007 ($ Billions)1
Direct Written Premiums (DWP) $ Billions
$50 $49.4
AIG is the second largest p/c
$40 $37.7 insurer in the US and the
largest commercial insurer
$29.1 $27.7 (11% markets share)
$30
$22.2 $20.2
$20 $16.1 $15.4 $14.0
$11.5
$10
$0
State Farm AIG Zurich Allstate Travelers Liberty Nationwide Berkshire Progressive Hartford
IL Group Insurance Insurance Group Mutual Group Hathaway Group Fire &
Group Group Insurance Ins. Group Casualty
Group Group
1Before reinsurance transactions, excluding state funds.
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline
Data LLC.
Leading U.S. Writers of Life Insurance
By DWP, 2007 ($ Billions)1
$60 Direct Written Premiums (DWP) $ Billions
$53.0 $51.9
$50 AIG is the largest life insurer in
$42.3 the US in addition to being the
$40 $38.0 second largest p/c insurer
$32.4
$29.8 $29.7
$30
$22.7 $21.9 $21.5
$20
$10
$0
AIG Metropolitan Prudential of ING America Hartford Fire John Hancock Aegon USA Principal New York Lincoln
Group America Insurance & Casualty Group Holding Financial Life Group National
Holding Group Group Group
Group
1Premium and annuity totals, before reinsurance transactions, excluding state funds.
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline
Data LLC.
AFTERSHOCK:
Regulatory Response
Could Be Harsh
All Financial Segments
Including Insurers
Will Be Impacted
Incurred Liabilities of the Federal
Government Due to Financial Crisis
$800 $ Billions
$700
$700 The Fed (and hence taxpayer)
$250B for
$600 Bank
Stakes are now exposed to as much as
$500 $1.047 trillion in new debt tied to
$ Billions
$400 the current financial crisis*

$300
$200
$200 $122.8
$100 $29
$0
Mortgage Security Fannie/Freddie AIG Loans Bear Stearns Illiquid
Buyouts & Bank Takeover Asset Assumption
Stakes
*As of October 10, 2008. Amounts reflect maximum losses under terms at time of announcement.
Source: Wall Street Journal, 9/22/08, p. A8; Insurance Information Institute research. AIG amount consistent of
$85B loan on Sept. 16 and additional $37.8B on Oct. 8.
From Hubris to the Humbling
of American Capitalism?
“Government is not the

solution to our problem,
government is the problem.”
--Ronald Reagan, from his first
inaugural address, January 20, 1981
From Hubris to the Humbling
of American Capitalism?
“Given the precarious state of
today’s financial markets, and
their vital importance to the daily
lives of the American people,
Government intervention is not
Only warranted, it is essential.”
--President George W. Bush, Sept. 19, 2008, on
the $700 billion financial institution bailout
Post-Crunch: Fundamental
Issues To Be Examined Globally
• Failure of Risk Management, Control & Supervision at
Financial Institutions Worldwide: Global Impact
 Colossal failure of risk management (and regulation)
 Implications for Enterprise Risk Management (ERM)?
 Misalignment of management financial incentives
• Focus Will Be on Risk Controls: Implies More Stringent
Capital & Liquidity Requirements; Prevention of Systemic
Risks
 Data reporting requirements also likely to be expanded
 Non-Depository Financial Institutions in for major regulation
 Changes likely under US and European regulatory regimes
 Will new regulations be globally consistent?
 Can overreactions be avoided?
• Accounting Rules
 Problems arose under FAS, IAS
 Asset Valuation, including Mark-to-Market
 Structured Finance & Complex Derivatives
• Ratings on Financial Instruments
 New approaches to reflect type of asset, nature of risk Source: Ins. Info. Inst.
Regulatory Issues & Insurance
• Federal Encroachment on Regulation of Insurance in
Certain Amid a Regulatory Tsunami
 $123 billion in loans to AIG makes increased federal involvement in
insurance regulation a certainty
 States will lose some of their regulatory authority
 What Feds get/what states lose is unclear
• Removing the “O” from “OFC”?
 Treasury in March proposed moving solvency and consumer
protection authority to a federal “Office of National Insurance”
 Moving toward more universal approach for regulation of financial
services, perhaps under Fed/Treasury
 Is European (e.g., FSA) approach in store?
 Treasury proposed assuming solvency and consumer protection roles
while also eliminating rate regulation
 Expect battle over federal regulatory role to continue to be a divisive
issue within the industry
 States will fight to maximize influence, arguing that segments of the
financial services industry under their control had the least problems
Regulatory Issues & Insurance
• Unclear How Feds Will Approach and Implement New
Regulations on Financial Services Industry
 Option A: Could take “Big Bang” Approach and pass massive,
sweeping reform measure that draws little distinction between various
segments of the financial services industry
 Option B: Limited legislation pertaining to all segments with detailed
treatment of each segment
• Removing the “O” from “OFC”?
 Treasury in March proposed moving solvency and consumer
protection authority to a federal “Office of National Insurance”
 Moving toward more universal approach for regulation of financial
services, perhaps under Fed/Treasury
 Is European (e.g., FSA) approach in store?
 Treasury proposed assuming solvency and consumer protection roles
while also eliminating rate regulation
 Expect battle over federal regulatory role to continue to be a divisive
issue within the industry
 States will fight to maximize influence, arguing that segments of the
financial services industry under their control had the least problems
Government Takeover
of Fannie Mae &
Freddie Mac
Beneficial for Insurers
Treasury’s Fannie/Freddie Rescue Package
Should Help Residential Property Insurers
THE PROBLEM
• Fannie Mae/ Freddie Mac borrow huge sums to buy
mortgages from mortgage lenders and do so with an
implicit government guarantee that should these
mortgage sour the government will come to the rescue
• Together the entities own or guarantee $5.4 trillion in
mortgages (about 50% of US total)
• Collectively Fan/Fred have lost about $14 billion over the
past 4 quarters and their capital is nearly depleted
• Loss of confidence in Fannie/Freddie is primary reason
why Fed’s slashing of rates since has not lowered interest
rates (esp. on mortgages)
Source: Wall Street Journal Online, 9/7/08; Insurance Information Institute.
Treasury’s Fannie/Freddie Rescue Package
THE SOLUTION: A 4-POINT PLAN
1. Government seizes Fannie Mae/ Freddie Mac and places
them in “conservatorship” under their regulator the
Federal Housing Finance Agency (FHFA)
 Current CEOs ousted. Fannie will be run by Herb Allison (CEO
TIAA-CREF) and Freddie by David Moffet (CEO US Bancorp)
2. Treasury purchases senior preferred stock; Govt. gains
79.9% ownership. Could buy up to $100 billion per firm.
3. Treasury will buy mortgage backed securities (MBS) in
the open market issued by Fan/Fred in attempt to lower
borrowing costs ($ unspecified)
4. Treasury establishing new lending facilities for Fan/Fred
Total federal involvement could amount to $200 billion
Source: Federal Housing Finance Agency; Wall Street Journal Online, 9/7/08; Insurance Information Institute.
Why Treasury’s Fannie/Freddie Rescue Package
• Crash in housing market is already costing home

insurers alone about $1 billion annually in lost premium
growth based on 50%+ decline in new home
construction (about 1 million fewer homes per year)
 Plan should lower interest rates, accelerate clearing away
existing inventory and stimulate new construction (don’t expect
big gains until 2010 at earliest)
 Mortgage rates fell ½ point day after announcement
• Home in or headed for foreclosure are likely to suffer
worse than average loss experience (neglect, abuse,
abandonment, vandalism, theft…). Plan may bring
interest rate relief to people who’s mortgages will reset
over the next several years, averting some foreclosures.
• Insurers hold tens of billion in Fan/Fred MBS debt as
well as shares in both companies. Both survive.
Credit Crisis: Fed Interest Rate Cuts
Failed to Reduce Mortgage Rates
January 2000 through August 2008
Fed slashes interest rates by 325 Interest rate on conventional
9.0 basis points (from 5.25% to 2.00 mortgages remained high
from July 2007 to mid-2008) despite Fed rate cuts
8.0
7.0
6.0
5.0
4.0 Mortgage FF spread
3.0 increased to 4.5% from
about 1% pre-crisis
2.0
1.0
0.0
Aug-08
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Source: US Bureau of Labor Statistics; Insurance Information Institute.
THE ECONOMIC
STORM
What a Weakening Economy and
The Threat of Inflation Mean for
the Insurance Industry
Exposure & Claim
Cost Effects
Real Annual GDP Growth, 2000-2009F
4.0%
3.7% March 2001-
3.6%
November
3.5% 2001 Recession is
recession likely second
3.0% 2.9%
2.8%
half 2008 into
first half 2009
2.5%
2.5%
2.0%
2.0%
1.6%
1.5%
1.5%
1.0% 0.8%
0.5%
0.5%
0.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
* Red bars are actual; Yellow bars are forecasts
Sources: US Department of Commerce (actual), Blue Economic Indicators 10/08 (forecasts).
Real GDP Growth*
Recession likely began Q2:08.
Economic toll of credit
6% crunch, housing slump, labor
4.8%
4.8%
market contraction and high
5% energy prices is growing
3.7%
3.6%
3.1%
4%
2.9%
2.8%
2.5%
2.5%
2.1%
3%
1.6%
1.2%
2%
0.9%
0.8%
0.1%
1%
0%
-0.1%
-0.3%
-0.2%
-1%
-1.1%
-2%
07:1Q
07:2Q
07:3Q
07:4Q
08:1Q
08:2Q
08:3Q
08:4Q
09:1Q
09:2Q
09:3Q
09:4Q
2000
2001
2002
2003
2004
2005
2006
*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.

Source: US Department of Commerce, Blue Economic Indicators 10/08; Insurance Information Institute.
Unemployment Rate:
On the Rise
January 2000 through August 2008
6.5 Previous Peak: 6.3% in August 2008 unemployment
June 2003 jumped to 6.1%, its highest
6.0 level since Sept. 2003
5.5
5.0
4.5 Trough: 4.4% in March 2007
4.0 Unemployment will likely continue to

approach 6% during this cycle, impacting
3.5 Average unemployment payroll sensitive p/c and non-life exposures
rate since 2000 is 5.0%
3.0
Aug-08
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
U.S. Unemployment Rate,
(2007:Q1 to 2009:Q4F)*
7.5% Rising unemployment will
7.0%
7.0%
erode payrolls and workers
6.9%
6.7%
7.0% comp’s exposure base.
6.3%
6.5%
Unemployment is expected
to peak at about 7% in the
6.0%
6.0%
second half of 2009.
5.3%
5.5%
4.9%
4.8%
4.7%
4.7%
5.0%
4.6%
4.6%
4.5%
4.5%
4.5%
4.5%
4.0%
06:Q1 06:Q2 06:Q3 06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
* Blue bars are actual; Yellow bars are forecasts
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/08); Insurance Info. Inst.
Total Private Employment* Grew by
25½ Million Workers from 1991 to 2008
Millions
120
115.4
115.2
114.0
111.8
110.9
111.0
109.8
108.8
108.6
108.2
106.0
110
103.0
100.1
97.7
100
94.9
The US economy added 25.5

91.7
million jobs between 1991 and

89.9
89.7
90 2008, but job growth has recently

stagnated, impacted payrolls and
the workers comp exposure base
80
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
*seasonally adjusted at mid-year
Source: U.S. Bureau of Labor Statistics, at http://data.bls.gov/cgi-bin/surveymost
Monthly Change Employment*
(Thousands)
0
-20
-40
-60 -47
-80 -67 -67 -73
-76
-100 -83 -88
-100
-120
-140 Job losses now total 760,000

-160 (from January through
-180
September 2008) -159
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08
Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute

Average Weekly Real Earnings in Private
Employment Were Flat from 1999 to 2008
(at mid-year)
Constant 1982 dollars
$290
Virtually all of the
$281.2
real wage growth
$279.4
$279.3
$277.3
$276.9
occurred between
$276.1
$276.1
$275.1
$276.0
$280
$275.0
1995 and 1999 and
$271.5
has now stagnated
$270
$264.3
$260.7
$260.1
$259.2
$258.3
$258.0
$257.9
$260
$250
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Sources: U.S. Bureau of Labor Statistics; I.I.I.
New Private Housing Starts,
1990-2019F (Millions of Units)
Exposure growth forecast for HO New home starts plunged
34% from 2005-2007;
insurers is dim for 2008/09 Drop through 2009
2.07
trough is 57% (est.)—a
2.1 Impacts also for comml. insurers
1.96
net annual decline of
2.0 with construction risk exposure 1.17 million units
1.85
1.80
1.9
1.71
1.68
1.8
1.66
1.66
1.64
1.62
1.62
1.60
1.7
1.57
1.50
1.6
1.48
1.47
1.46
1.5
1.36
1.35
1.29
1.4
1.20
1.19
1.3
1.17
1.2 I.I.I. estimates that each incremental
100,000 decline in housing starts costs
1.01
1.1
0.96
home insurers $87.5 million in new
0.90
1.0 exposure (gross premium). The net
0.9 exposure loss in 2008 vs. 2005 is
estimated at about $1 billion.
0.8
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F09F10F11F12F13F14F 15-
19F
Source: US Department of Commerce; Blue Chip Economic Indicators (10/08); Insurance Information Inst.
Auto/Light Truck Sales,
Weakening economy, New auto/light trick sales are
expected to experience a net
credit crunch and high drop of 3.3 million units
19 gas prices are hurting annually by 2008 compared
with 2005, a decline of 18.3%
17.8
auto sales
18 17.5
17.4
17.1
16.9 16.9
17 16.6 16.5 16.4
16.1 16.1 16.2
16 15.8
15.5
Impacts of falling auto sales will
15 have a less pronounced effect on 14.7
auto insurance exposure growth
14 than problems in the housing 13.8
market will on home insurers 13.5
13
99 00 01 02 03 04 05 06 07F 08F 09F 10F 11F 12F 13F 14F 15-
19F
Wage & Salary Disbursements
(Payroll Base) vs. Workers Comp
Net Written Premiums
Wage & Salary Disbursement (Private Employment) vs. WC NWP
$ Billions $ Billions
7/90-3/91 3/01-11/01
$7,000 Wage & Salary $45
Disbursements
WC NPW $40
$6,000
$35
$5,000
$30
$4,000 $25
Weakening wage
$3,000 and salary $20
growth is $15
$2,000 expected to cause
Shaded areas indicate recessions a deceleration in $10
$1,000 workers comp $5
exposure growth
$0 $0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
*Average of quarterly figures.
Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at
http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books
Workplace Injury Incidence Rates
Declined in Last 4 Economic Downturns
15 3750
Incidence Rates per 100 FTE Workers
Claims per 100,000 Workers

10 2500
(NCCI)
(BLS)
5 1250
Recessions
Manufacturing Industry Injuries and Illnesses per 100 Full-Time Workers
Private Industry Injuries and Illnesses per 100 Full-Time Workers
NCCI Lost-Time Claims per 100,000 Workers
0 0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007p
p Preliminary
Source: US Department of Labor, Bureau of Labor Statistics (BLS), National Bureau of Economic Research; NCCI Frequency and
Severity Analysis
Nonresidential Fixed Investment,*
2003 – 2009F (Billions of 2000 $)
$1,405
$1,368
$1,367
$1,600 8%
$1,307
Nonresidential Fixed Investment ($ Bill)
$1,226
$1,400
$1,144
6%
$1,082
$1,200
4%
$1,000
% Change
Sharp dip in business
$800 investment growth in 2007- 2%
2009 will slow commercial
$600 exposure growth. 0%
Investment is projected to
$400 fall by 2.8% in 2009
-2%
$200 Nonresidential Fixed Investment
% Change Nonresidential Fixed Investment
$0 -4%
03 04 05 06 07 08F 09F
*Nonresidential fixed investment consists of structures, equipment and software.
Sources: US Bureau of Economic Analysis (Historical), Blue Chip Economic Indicators (10/08) for forecasts.
Total Industrial Production,
(2007:Q1 to 2009:Q4F)
Industrial production affects
4.0% 3.6% exposure both directly and indirectly
3.2%
3.0% 2.6%
2.1%
2.0% 1.5%
1.0%
0.8%
0.3% 0.4%
0.0%
-1.0% Industrial production

contracted sharply -0.8%
-2.0% during Q2 2008 and is
expected to shrink -2.1%
-3.0% through early 2009 -2.5%
-3.1%
-4.0%
07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/08); Insurance Info. Inst.
Real GDP Growth vs. Real P/C
Premium Growth: Modest Association
25% 8%
20.3%
P/C insurance industry’s growth
18.6%
is influenced modestly by growth
20% in the overall economy 6%
13.7%
15%
4%
Real NWP Growth
Real GDP Growth

7.7%
10%
5.8%
5.6%
5.2%
2%
4.3%
3.1%
5%
1.8%
1.6%
1.2%
1.1%
0.8%
0.6%
0.4%
0.3%
0%
0%
-0.3%
-0.4%
-0.5%
-0.9%
-1.0%
-1.0%
-1.5%
-1.6%
-1.8%
-2.9%
-2%
-3.4%
-5%
08F -4.9%
81 -6.5%
Real NWP Growth Real GDP

80-7.4%
-10% -4%
78
79
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 8/08; Insurance Information Inst.
Summary of Economic Risks and
Implications for (Re) Insurers
Economic Concern Risks to Insurers
•Some insurers have some asset risk
Subprime Meltdown/ •D&O/E&O exposure for some insurers
Credit Crunch •Client asset management liability for some
•Bond insurer problems; Muni credit quality
•Mortgage insurers face losses; Also tightening
standards and slowing real estate market
•Banks less able to lend, slowing construction
•Lower investment income
Lower Interest Rates
•Decreased capital gains (which are usually
Stock Market Slump relied upon more heavily as a source of
earnings as underwriting results deteriorate)
•Reduced commercial lines exposure growth
General Economic •Surety slump
Slowdown/Recession •Decreased workers comp frequency due to
drop in high hazard class employment
The Housing Crash
Collapse of Home Price Bubble
Will Influence Auto &
Home Purchases and Slow
Insurer Exposure Growth
Case-Schiller Home Price Index:
20 City Composite
January 2000 = 100
250
Peak in July 2006 at 206.52,
meaning home prices had
200 more than doubled between
Jan. 2000 and July 2006
150
July 2008 index value was 166.23,
100 meaning home prices were 19.5%
below their July 2006 peak
Home prices are
50 approximately where Loss of home equity is
they were in mid 2004 hurting car sales
0
Jul-08
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Source: Standardandpoors.com (SPCS20R Index); Insurance Info. Institute
Change in Home Values from July 2006
Housing Bubble Peak, by City*
Home prices are falling across the country,
4.1%
10%
5% down 19.5% on average in July 2008
0%
-1.8%
-1.9%
-5%
-3.0%
-5.4%
-7.2%
-10%
-8.6%
-10.4%
-10.7%
-11.5%
-15%
-16.0%
-20%
-19.5%
-21.8%
-25%
-24.4%
-26.5%
Home equity is a common

-27.9%
-30%
-29.7%
Fr le -30.9%
source of wealth used to

-32.9%
-35%
Sa iam -34.2%
eg -34.4%
-40% fund car purchases
D a
i
Po ver
lev is
C nd
po ton
nd
te
s V ix
pa
C hin t
ha s
tle
rk
on
ew o
as
co
an s
in -20
s A ego
as roi
C lla
nt
N cag
C pol
ot
La oen
cis
at
Yo
a
m
la
st
n nge
tla
en
om g
M site
a
Lo D i
W et
el
rl
Bo
rt
M
Ta
Se
a
D
hi
Ph
A
ne
n
Sa
*Calculated as of July 2008 (latest available) by III from monthly Case-Schiller price index data. Date of
maximum price varies by city (July 2006 for 20-city composite: SPCS20R Index).
Source: Case-Schiller Home Price Index at Standardandpoors.com; Insurance Info. Institute
Home Price History:
Anatomy of a Bubble
Annual Change on a Monthly Basis: Jan. 1988 – Jul. 2008
Jan. 1988 Jul. 2004
25% Peak annual increase reached: 20.5%;
Jan. 2007
Early stages of S&L
fallout; Credit tightens Home
20% Credit standards deteriorate rapidly;
post-Oct. 1987 crash Explosion in subprime loans, MBS, CDS prices
begin to
15% Aug. 1990 fall
10% Price decline begins.

Gulf War, Energy
5% price spike, Recession
0%
-5% Feb. 2002
March 1996 Home price increases slow
-10% post 9/11 and tech bubble
April 1991 Jul. 2008
House price recovery collapse; recession ends
-15% Max pace of decline. begins after 6 years of late 2001. Stock markets Home
falling or flat prices. down; Lowest interest
S&L bank shakeout; prices
-20% rates in 40 years begin to
Recession, Gulf War, fuel massive real estate plunge
Energy price spike and credit bubble 17.5% vs.
July 2007
Source: Standardandpoors.com (CSXR series); Insurance Info. Institute
New Private Housing Starts,
Exposure growth forecast for HO New home starts plunged
34% from 2005-2007;
insurers is dim for 2008/09 Drop through 2009
2.07
trough is 57% (est.)—a
2.1 Impacts also for comml. insurers
1.96
net annual decline of
2.0 with construction risk exposure 1.17 million units
1.85
1.80
1.9
1.71
1.68
1.8
1.66
1.66
1.64
1.62
1.62
1.60
1.7
1.57
1.50
1.6
1.48
1.47
1.46
1.5
1.36
1.35
1.29
1.4
1.20
1.19
1.3
1.17
1.2 I.I.I. estimates that each incremental
100,000 decline in housing starts costs
1.01
1.1
0.96
home insurers $87.5 million in new
0.90
1.0 exposure (gross premium). The net
0.9 exposure loss in 2008 vs. 2005 is
estimated at about $1 billion.
0.8
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F09F10F11F12F13F14F 15-
19F
Inflation
Overview
Pressures Claim Costs,
Expands Probable &
Possible Max Losses
Annual Inflation Rates
(CPI-U, %), 1990-2009F
In September 2008, on a year-over-year
6 basis inflation was 4.9% -- still high but
5.1 down from its peak of 5.6% in August
4.9 4.9
5
4.4
4 3.8
3.2 3.3 3.4
3.0 2.9 2.8 3.0 2.8
3 2.4 2.6 2.5 2.3 2.5
1.9
2 1.5 1.3
1
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 08F 09F
*12-month change September 2008 vs. September 2007
Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, October 10, 2008. (forecasts)
Inflation: Important Economic Risks
and Implications for Insurers
Effects of Inflation Risks to Insurers & Buyers

Claim Severity •Claims (property and liability) costs may rise as
the price of goods and services increase
Increase •PMLs could be (much) higher
•Accelerating inflation historically contributed to
Rate Inadequacy rate inadequacy because ratemaking is largely a
retrospective process
•Many types of loss trends are sensitive to the pace
of inflation: medical cost, tort, etc.
•Historical loss cost trends could be biased
predictors of future loss if inflation accelerates
Inflation: Important Economic Risks
and Implications for Insurers (cont’d)
Effects of Inflation Risks to Insurers

•Reserves are established using certain assumptions
Reserve about future development and discounting factors
Deficiency •If inflation accelerates, development could be more
rapid and/or be more substantial (in dollar terms)
than assumed and discount factors may be too low
•Policyholders could find themselves inadequately
Inadequate insured as claims costs escalate
Insurance Limits
•Inflation can lead to a more rapid and unexpected
Inadequate exhaustion of reinsurance because losses are higher
Reinsurance than expected
Comparative 2007 Inflation
Statistics Important to Insurers ( %)
CPI and “Core” CPI are Medical/Legal costs typically
not representative of run well ahead of inflation
8
many of the costs 6.7
7
insurers face
6
Inflation Rate (%)
5 4.4 4.1
3.9
4
2.8
3
2 2.3
1
0
CPI-U Core CPI* Total Physician Hospital Legal
Medical Services Services Services
Care
*Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs.
Medical & Tort
Cost Inflation
Amplifiers of Inflation, Major
Insurance Cost Driver
Consumer Price Index for Medical
Care vs. All Items, 1960-2007
(Base: 1982-84=100)
400
Inflation for Medical
Soaring medical Care has been surging
ahead of general 351.1
inflation is among inflation (CPI) for 25
the most serious years. Since 1982-84, the
Index Value (1982-84=100)
300 cost of medical care has

long-term more than tripled
challenges facing
200
casualty, disability 207.3
and LTC insurers
100
All Items Medical Care

0
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.
Tort Cost Growth & Medical Cost Inflation
vs. Overall Inflation (CPI-U), 1961-2008*
14% Tort costs move with Tort System is an

inflation but at twice the rate Inflation Amplifier
Avg. Ann. Change: 1961-2008*
12%
Torts Costs: +8.4%
10% Med Costs: +6.0%
8% Overall Inflation: +4.2%
6%
4%
2%
Tort Costs Medical Costs CPI
0%
1961-70 1971-80 1981-90 1991-2000 2001-08E
*Medical cost and CPI-U through April 2008 from BLS. Tort figure is for full-year 2008 from Tillinghast.
Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.
WC Medical Severity Rising Far
Faster than Medical CPI
16% WC medical severity rose
13.6% more than twice as fast as the
14% medical CPI (8.3% vs. 4.0%)
from 1995 through 2007p
12%
10.6%
10.1%
10% 9.2%
8.3% 8.6%
7.4% 7.3% 7.6% 7.2%
8%
6.2% 6.0%
6% 5.1%
1.6 pts
4%
4.5% 4.6% 4.7%
4.1% 4.0% 4.4% 4.2% 4.0% 4.4%
2% 3.5% 3.2% 3.5%
2.8% Change in Medical CPI
0%
Change Med Cost per Lost Time Claim
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007p
Sources: NCCI; Med CPI from Economy.com; WC med severity from NCCI based on NCCI states.
Workers Comp Medical Claims
Costs Continue to Climb
Medical
Claim Cost ($000s)
$25.4
$25 Annual Change 1991–1993: +1.9%
$24.0
Annual Change 1994–2001: +8.9% $22.1
Annual Change 2002-2006: +7.8% $20.2
$20 $19.0
$17.7
$16.5
$14.5
$15 $13.5
$12.2
$11.3
$10.3
$9.5
$10 $8.4 $8.5 $8.3 $9.1 Cumulative Change = +200%
(1993-2007p)
$5
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07p
2007p: Preliminary based on data valued as of 12/31/2007 Accident Year
1991-2006: Based on data through 12/31/2006, developed to ultimate
Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies
Med Costs Share of Total
Costs is Increasing Steadily
Med cost inflation is one
factor to high WC severity.
2007p
Med cost are now nearly 60%
of all lost time claim costs
1997 Indemnity
41%
Medical
59%
1987
Indemnity Medical
53% 47%
Medical
Indemnity 46%
54%
Source: NCCI (based on states where NCCI provides ratemaking services).

WC Med Cost Will Equal 70% of
Total by 2017 if Trends Hold
2017 Estimate
This trend will
likely be supported
Indemnity by the increased
30% labor force
participation of
workers age 55 and
Medical older.
70%

Rising Energy Costs
Driving Patterns and

Auto Claiming Behavior
Miles Driven vs. Gas Prices
in Recent Months
Gas Price/
Miles Driven Miles Driven Gas Prices Gallon
280,000 Miles driven in June were down 4.7% vs. June 2008; Between $4.50
Nov. 2007 and June 2008 Americans drove 53.2B fewer miles
270,000
$4.00
260,000
250,000
$3.50
240,000
$3.00
230,000
As gas prices fall,
220,000 willing people
drive more? $2.50
210,000
200,000 $2.00
Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug
2007 2008
Sources: Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm);
Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08juntvt/index.cfm).
Retail Gas Price* and Percent Change
In Miles Driven, 1970 – 2008:H1
Inflation adjusted gas prices There is a strong
% change in miles driven
association between gas
$4.00 prices and miles driven. 8%
Retail Gas Price, Inflation adjusted ($/gallon)
Until 2007/8 miles driven

$3.50
had not declined since the 6%
energy crises of the 1970s
% Change Miles Driven

$3.00 4%
$2.50 2%
$2.00 0%
$1.50 -2%
$1.00 -4%
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
*1970-1977 retail gas prices based on leaded only. 1970-2007 adjusted to 2007 dollars.
Sources: Energy Highway Administration, Federal Highway Administration.
Do Increases in Gas Prices Affect
Auto Collision Claim Frequency?
Paid Claim Frequency = (No. of paid
claims)/(Earned Car Years) x 100 Collision Claim Frequency Gas Prices
7.00
7.0 6.91 $4.00
6.81 6.80 6.78 $3.48
$3.50
6.65
6.59
Avg Gas Price/Gal

$2.84
Paid Claim Freq
$2.62
$3.00
6.5
6.32 $2.31
$2.50
$1.90
$2.00
$1.52 $1.46 $1.60 6.03
6.0 $1.39 5.93
$1.27 $1.24 5.84 $1.50
$1.18 5.82
$1.07
Through Q2 2008, there is 5.71
a small reduction in $1.00
collision claim frequency
due to high gas prices
5.5 $0.50
96 97 98 99 00 01 02 03 04 05 06 07 08*
Sources: Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm); ISO

Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: First Half 2008, published
October 1, 2008 and earlier reports. 2008 figure is for 4 quarters ending Q2 2008.
Do Changes in Miles Driven Affect
Auto Collision Claim Frequency?
Paid Claim Frequency = (No. of paid
claims)/(Earned Car Years) x 100 Collision Claim Frequency
Billions of Vehicle Miles
7.00
7.0 6.91 3100
6.81 6.80 6.78
3000
6.65
6.59
Paid Claim Freq
2900
Billions of Miles Driven

6.5
6.32
2800
6.03 2700
6.0 5.93
5.84 5.82 2600
5.71
2500
5.5 2400
96 97 98 99 00 01 02 03 04 05 06 07 08*
Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08juntvt/08juntvt.pdf;

ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: First Half 2008,
published October 1, 2008 and earlier reports. 2008 figure is for 4 quarters ending Q2 2008.
Auto Insurance: Claim Frequency
Impacts of Energy Crisis of 1973/4
Oct. 17,
1973: Arab March 17,
oil embargo 1974: Arab
begins oil states
announce
Frequency end to
Impacts embargo
Collision: -7.7% Frequency
PD: -9.5% began to
rebound
BI: -13.3% almost
immediately
Driving Stats after the
Gas prices rose embargo
35-40% ended
Miles driven
fell 6.7% in
1974
Source: ISO, US DOT.
Auto Insurance: Claim Severity
Impacts of Energy Crisis of 1973/4
Oct. 17,
1973: Arab March 17,
oil embargo 1974: Arab
begins oil states
announce
end to
Severity embargo
Impacts
Collision: -7.5% Collision
severity began
PD: +15.9% to rebound
BI: N/A* almost
immediately
Driving Stats after the
embargo
Gas prices rose ended; PD
35-40% accelerated as
inflation rose;
Miles driven No discernable
fell 6.7% in trend change
1974 in BI.
Source: ISO.
Cost of PIP Claims by
Vehicle Size*
$6,000
Substitution of more fuel
efficient but lighter
$5,554 vehicles is associated with
$5,500
high more severe and
costly PIP (no-fault)
claim costs
$5,000
$4,859
$4,500
Light Vehicle (Less than 2,771 lbs) Heavy Vehicle (More than 3,726 lbs)
*Claims with payment in 2007. Excludes death and permanent total disability claims.
Source: Auto Injury Insurance Claims: Countrywide Patterns in Treatment, Costs and Compensation,
August 2008; Insurance Information Institute.
Proportion of Claimants Missing
No Work Following a Claim*
50% Substitution of more fuel
efficient but lighter 46%
vehicles is associated with
45% a higher proportion of
claimants missing work
following an accident
40%
38%
Claimants in lighter vehicles
35% were also 12% more likely to
be hospitalized
30%
Light Vehicle (Less than 2,771 lbs) Heavy Vehicle (More than 3,726 lbs)
*Claims with payment in 2007. Excludes death and permanent total disability claims.
Source: Auto Injury Insurance Claims: Countrywide Patterns in Treatment, Costs and Compensation,
August 2008; Insurance Information Institute.
Summary of Impacts of Energy
Crises of 1970s on Auto Insurance
Measure Impact on Auto Insurers
Frequency •Falls initially
•Rebounds almost shortly after shock
passes
•Rises to expected “no-crisis” levels
with 2-3 years
Severity (Avg. Cost •Typically accelerates following
per Claim) surges in oil prices
•Sensitive to inflationary pressures
Loss Cost (dollars of •In general, initial slight decrease
loss per insured vehicle) •Typically rebounds within 1 to 2
years
Source: ISO; Insurance Information Institute

Differences & Similarities Between
Energy Crises of 1970s and Today
• Gas is Available
 In 1973/4 gas supplies were disrupted forcing a
reduction in driving, contributing to the declines in
frequency
• Speed Limits Unlikely to be Reduced
 55 MPH national speed limit imposed in 1974
 Repealed in 1995, returning authority to states
• Ability to Migrate to More Fuel Efficient Fuels is
Greater Today
P/C INSURANCE
PROFITABILITY
In the Midst
of a Cyclical Decline
P/C Net Income After Taxes
1991-2009F ($ Millions)*
2001 ROE = -1.2%
Insurer profits
$65,777
$61,940
2002 ROE = 2.2%
$70,000 2003 ROE = 8.9% peaked in 2006.
2004 ROE = 9.4%
$60,000 2005 ROE= 9.4%
$44,155
2006 ROE = 12.2%
$36,819
$38,501
$50,000 2007 ROAS1 = 12.3%
2008 ROAS = 5.4%*
$30,773
$30,029
$27,866
$40,000
$25,000
$24,404
$21,865
$20,598
$20,559
$19,316
$30,000
$14,178
$10,870
$20,000
$5,840
$3,046
$10,000
$0
-$10,000 -$6,970
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08F
09F
*ROE figures are GAAP; 1Return on avg. surplus. 2008 numbers are annualized based on H1 actual.
Sources: A.M. Best, ISO, Insurance Information Inst.
ROE: P/C vs. All Industries
1987–2010F
20%
Mortgage & Financial
P/C profitability is Guarantee Impact
cyclical and volatile
15%
10%
Sept. 11
5%
Hugo Lowest CAT Katrina,

0% losses in 15 years Rita, Wilma
Andrew Northridge 4 Hurricanes
-5%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F09F10F
US P/C Insurers All US Industries

2008 P/C insurer figure is annualized H1 return on average surplus. Excluding mortgage and financial
guarantee insurers = 7.6%.
Source: ISO, Fortune; Insurance Information Institute.
P/C Insurance Industry ROEs,
1975 – 2010F*
1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2%
25%
20%
10 Years
10 Y
15% ears
9 Years
10%
5%
2008: 5.4% 2010: 5.0%
0% (7.6% excl. M&FG)
-5%
1975: 2.4% 1984: 1.8% 1992: 4.5% 2001: -1.2%
08F
09F
10F
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07*
*GAAP ROE for all years except 2007 and 2008 which are ROAS (statutory Return on Average Surplus).
2008 ROAS is annualized based on H1 2008. Excluding mortgage and financial guarantee insurers = 7.6%
Sources: ISO; Insurance Information Institute.
Personal/Commercial Lines &
Reinsurance ROEs, 2006-2008F*
ROEs are declining
18% 2006 2007E 2008F
16.8% as underwriting
16% results deteriorate
14.0% 13.2%
14% 12.3%
12% 10.7%
9.4% 9.8% 9.8%
10%
8% 6.3%
6%
4%
2%
0%
Personal Commercial Reinsurance
Sources: A.M. Best Review & Preview (historical and forecast).
ROE vs. Equity Cost of Capital:
US P/C Insurance:1991-2008:H1
18%
The p/c insurance industry achieved its cost of
16% capital in 2005/6 for the first time in many years
14%
+2.3 pts
-1.3 pts
12%
10%
-1.7 pts
-9.0 pts
8%
-13.2 pts
6%
4%
US P/C insurers missed their The cost of capital
2% is the rate of return
0%
cost of capital by an average 6.7 insurers need to
attract and retain
points from 1991 to 2002, but on capital to the
-2%
target or better 2003-07 business
-4%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
*Excludes mortgage and financial guarantee insurers.
Source: The Geneva Association, Ins. Information Inst. ROE Cost of Capital
Factors that Will Influence the
Length and Depth of the Cycle
• Capacity: Rapid surplus growth in recent years has left the industry with between $85
billion and $100 billion in excess capital, according to analysts, at end of 2007
 All else equal, rising capital leads to greater price competition and a liberalization of terms
and conditions
• Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which
could extend the depth and length of the cycle
• Investment Gains: With sharp declines in stock prices and falling interest rates,
portfolio yields are certain to fallContributes to discipline and shallower cycle
• Sarbanes-Oxley: Presumably SOX will lead to better and more conservative
management of company finances, including rapid recognition of deficient or
redundant reserves
 With more “eyes” on the industry, the theory is that cyclical swings should shrink
• Ratings Agencies: Focus on Cycle Management; Quicker to downgrade
• Information Systems: Management has more and better tools that allow faster
adjustments to price, underwriting and changing market conditions than it had
during previous soft markets
• Analysts/Investors: Less fixated on growth, more on ROE through soft mkt.
 Management has backing of investors of Wall Street to remain disciplined
• M&A Activity: More consolidation would imply greater discipline

Summary of Economic Risks and
Implications for (Re) Insurers
Economic Concern Risks to Insurers
•Some insurers have some asset risk
Subprime Meltdown/ •D&O/E&O exposure for some insurers
Credit Crunch •Client asset management liability for some
•Bond insurer problems; Muni credit quality
•Mortgage insurers face losses; Also tightening
standards and slowing real estate market
•Banks less able to lend, slowing construction
•Lower investment income
Lower Interest Rates
•Decreased capital gains (which are usually
Stock Market Slump relied upon more heavily as a source of
earnings as underwriting results deteriorate)
•Reduced commercial lines exposure growth
General Economic •Surety slump
Slowdown/Recession •Decreased workers comp frequency due to
drop in high hazard class employment
P/C Stocks: Mirroring the
S&P 500 Index in 2008
Total YTD Returns Through October 17, 2008
Insurance stocks caught in
financial services
downdraft -35.95% S&P 500
Mortgage & -47.26% All Insurers

Financial Guarantee
-19.13% P/C
insurers were down
69% in 2007 -51.08% Life/Health
-82.25% Multiline
-54.89%
Reinsurance
-83.29%
Mortgage*
-15.75%
Brokers
-100.0% -80.0% -60.0% -40.0% -20.0% 0.0%

*Includes Financial Guarantee.
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute.
Top Industries by ROE: P/C Insurers
Still Underperformed in 2007*
Household & Pers. Products 56.0%
Petroleum Refining 26.3%
Hotels, Casinos, Resorts 26.1%
Oil and Gas Equip., Services 24.9% P/C insurer
Food Services 23.9%
Metals 23.0%
profitability in 2007
Food Consumer Prod. 22.0% ranked 31st out of 51
Network & Other Comms. 21.8% industry groups
Aerospace & Defense 20.6%
Medical Prod. & Equip. 20.4% despite renewed
Electronics, Electrical Equip. 20.4% profitability,
Pharmaceuticals 20.3% underperforming the
Industrial & Farm Equip. 20.0%
Wholesalers: Diversified 19.4% All Industry median
Packaging, Containers 19.2% for the 20th
P/C Insurers (Stock)
consecutive year
14.0%
All Industries: 500 Median 15.2%
0% 10% 20% 30% 40% 50% 60%
Source: Fortune, May 5, 2008 edition; Insurance Information Institute
Advertising Expenditures by P/C
Insurance Industry, 1999-2007E
$ Billions
$4.5 Ad spending by P/C insurers $4.323
$4.0
is at a record high, signaling
increased competition $3.695
$3.5
$2.975
$3.0
$2.5
$2.111
$1.882
$2.0 $1.736 $1.737 $1.803 $1.708
$1.5
99 00 01 02 03 04 05 06 07E
Source: Insurance Information Institute from consolidated P/C Annual Statement data.
PREMIUM
GROWTH
At a Virtual Standstill
in 2007, 2008 and
Possibly 2009
Strength of Recent Hard Markets
by NWP Growth
1975-78 1984-87 2000-03
24%
22%
20%
Shaded areas
denote “hard
18% market” periods
16%
In 2007 net written Negative
14% growth in
premiums fell 2008 before
12% 1.0%, the first
decline since 1943 turning
10% positive in
8% 2009
6%
4%
2%
0%
-2%
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008F
2009F
2010F
Sources: A.M. Best, ISO, Insurance Information Institute
Year-to-Year Change in Net
Written Premium, 2000-2010F
P/C insurers are Protracted
15.3% period of
experiencing their negative or
slowest growth rates slow growth
since 1943 is possible
due to soft
10.0% markets and
Slow growth means slow
8.4% retention is critical economy
5.0%
3.9% 4.2%
2.0%
0.5% 1.0%
-1.0% -0.6%
2000 2001 2002 2003 2004 2005 2006 2007 2008F 2009F 2010F
Source: A.M. Best; ISO. 2008F is first half actual figure.

Personal/Commercial Lines &
Reinsurance NPW Growth, 2006-2008F
30% Net written premium 28.1%

growth is expected to be
25%
slower for commercial
20% insurers and reinsurers
15%
10%
5% 2.0% 3.5% 4.0%
1.0%
0%
-5% -0.4% -1.8%-3.0%
2006 2007 2008F -5.0%
-10%
Personal Commercial Reinsurance
Sources: A.M. Best Review & Preview (historical and revised year-end forecast as of 10/03/08).
All P/C Lines Distribution Channels,
Direct vs. Independent Agents
Direct Independent Agents
70%
60%
50%
40%
30%
Independent agents steadily lost market share
from the early 1980s through the early 2000s
20% across all P/C lines, but have gained in recent
years. Direct channels include exclusive
10% agency companies, direct marketers and
direct sales (e.g., internet)
0%
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Source: Insurance Information Institute; based on data from Conning and A.M. Best.
Personal Lines Distribution Channels,
80%
70%
60%
50%
40%
30%
Independent agents have lost
20% significant personal lines market
share since the early 1970s, but the
10% trend has slowed or even ended.
0%
72
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Commercial P/C Distribution Channels,
90%
80%
70%
60% Independent agents have seen only

50%
modest erosion in commercial lines
market share in recent decades
40%
30%
20%
10%
0%
72
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Channel ClutterDistribution Fusion
• Consumers Will Demonstrate Demand for
Identical Product and Service via Multiple
Distribution Channels
Captive/Exclusive Agent, IAs, Direct Marketing
(incl. Internet) will continue to co-exist for many
years. More channels may be developed in the
future.
Multi-channel distribution is already the norm
Consumers don’t necessarily think about channels
per se; In their minds distribution/service access are
fused and should be seamless
Adds to expense, but produces more customer touch
points, marketing opportunities and improves
retention
PRICING
TRENDS
Under Pressure
Average Expenditures on
Auto Insurance
Countrywide auto insurance
$950 expenditures are expected to
increase about 2.5% in 2008,
$859
$900
highest since 2002/03
$840
$837
$834
$829
$824
$850
$781
$800
$726
$705
$703
$750
$691
$690
$685
$668
$700 Lower underlying

$651
frequency and modest

$650 severity have kept auto
insurance costs in check
$600
94 95 96 97 98 99 00 01 02 03 04 05 06* 07* 08*
*Insurance Information Institute Estimates/Forecasts
Source: NAIC, Insurance Information Institute estimates 2006-2008 based on CPI data.
Average Expenditures on
Homeowners Insurance**
$800 $764$757 $760$775
$750 Countrywide home $729
insurance
$700 expenditures are $668
$650 expected to rise by an
$600
estimated 2% in 2008 $593
$536
$550 $508 Homeowners in non-
$500 $481 $488 CAT zones have seen
$440$455 smaller increases than
$450 $418 those in CAT zones
$400
95 96 97 98 99 00 01 02 03 04 05 06* 07* 08*
*Insurance Information Institute Estimates/Forecasts
**Excludes cost of flood and earthquake coverage.
Source: NAIC, Insurance Information Institute estimates 2006-2008 based on CPI data.
Monthly Change in Auto
Insurance Prices*
3.1%
4%
Auto insurance
3.0%
2.7%
prices have clearly
2.6%
2.6%
3%
3%
begun to rise in
recent months
1.7%
2%
1.3%
1.1%
2%
0.9%
0.8%
0.8%
0.6%
1%
0.5%
0.5%
0.5%
0.5%
0.4%
0.3%
0.3%
0.2%
0.1%
1%
0%
May-08
May-07
Jul-08
Jul-07
Mar-08
Mar-07
Oct-07
Feb-08
Feb-07
Jun-08
Jun-07
Aug-08
Sep-08
Jan-07
Aug-07
Sep-07
Nov-07
Dec-07
Jan-08
Apr-08
Apr-07
*Percentage change from same month in prior year.

Insurance Expenditures as a Percentage
of Total Household Spending
Auto & Home insurance

expenditures account for
2.6% of household spending
Source: Insurance Information Institute 2008 Fact Book; US Bureau of Labor Statistics.
Cost of Risk vs. Commercial
Lines Combined Ratio
125
Commercial 122.3
$14
Combined Ratio
118.8
Commercial Lines Combined Ratio
$13.91
120
$13.50
Cost of Risk
$13.15
$12
Cost of Risk/$1000 Revenue

$11.95
$11.94
115
$11.55
112.5 112.3 $10
110.2 110.2 109.7 111.1 110.2
109.4 109.5
110 107.6 $8
$8.42
$8.30
105.4
$7.70
104.1
105
$7.30
102.5 $6
$6.49
$6.40
102.0
$6.10
$5.71
$5.70
$5.25
$5.20
100 $4
$4.83
95 $2
91.4
90.5
90 $0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: RIMS Benchmark Survey, A.M. Best 2007 Aggregates & Averages; Insurance Information Institute
How the Risk Dollar is Spent (2006)
Total liability costs account for 35% - 40% of the risk dollar
Firms w/Revenues < $1 Billion Firms w/Revenues > $1 Billion
Property Retained Property
Premiums, Property Premiums, Retained
18% Losses, 5% Other Costs, 13% Property
4% Losses, 11%
Other Costs, Liability
4% Premium
Admin Costs,
20% Liabilit
12%
Premium
Admin Costs, 11%
14%
Liability Prof. Liability

Retained Costs, 2%
Losses, 5%
Retained
Prof. Liability Total Mgmt. Retained WC, Liability
Costs, 7% Liab., 5% 21% Losses, 13%
Retained WC WC
Losses, 7% Premiums, WC
Total Mgmt.
14% Premiums,
Liab., 7%
5%
Source: RIMS (2007); Insurance Information Institute

Average Commercial Rate Change,
All Lines, (1Q:2004 – 2Q:2008)
0%
-0.1%
-2% A flattening in the

magnitude of price
-2.7%
-3.0%
-3.2%
-4%
declines is evident
-4.6%
-5.3%
-6%
-5.9%
-7.0%
-8%
-8.2%
-10%
-9.4%
-9.6%
-9.7%
-11.3%
-12%
-11.8%
-12.0%
2Q08 -12.9%
3Q07 -13.3%
-14%
1Q08 -13.5%
KRW Effect
-16%
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
4Q07
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Cumulative Commercial Rate
Change by Line: 4Q99 – 2Q08
Commercial account pricing has been

trending down for 4+ years and is now
on par with prices in late 2001
Source: Council of Insurance Agents & Brokers

Average Commercial Rate Change
by Account Size: 4Q99 – 2Q08
While pricing has moved in

synch across account size,
large accounts have seen the
most pronounced declines

Average Commercial Rate Change
by Line: 4Q99 – 2Q08
Pricing has generally been

negative since early 2004
Post-Katrina property
insurance price impact

Most Layers of Coverage are
Being Challenged/Leaking
Reinsurers losing to
higher retentions,
$100 Million Retro securitization
Excess squeezed by
Reinsurance higher primary
$50 Million retentions, lower
reins. attachments
Excess Lg. deductibles,
$10 Million self insurance,
RRGs, captives
Primary erode primary
$2 Million
$1 Million Retention
Risks are comfortable
Source: Insurance Information Institute from Aon schematic.
taking larger retentions
U.S. Domiciled Captives- Net
Premiums Written ($ Millions)
Following a five-year period of
$10.5 rapid growth, U.S. captive
insurers saw net premiums $10.2
written increase by just 2.7 $9.9
$10.0
percent in 2006, after 6.2
percent growth in 2005.
$ Millions
$9.5 $9.3
$9.0
$9.0
$8.5 $8.4
$8.0
2002 2003 2004 2005 2006
Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review
Risk Retention Group Premiums,
1988 – 2006*
Millions of Dollars
$2,449.1
Risk retention (& self-insurance)
$2,773.7
3,000
$2,197.8
group premiums have risen rapidly
2,500 in recent years and represent a
$1,737.7
form of competition to traditional
$1,265.1
2,000 insurers and captives
$790.5
$944.0
$875.3
1,500
$707.6
$751.9
$775.5
$575.5
$527.2
$585.8
$493.6
$493.7
$358.4
$419.3
1,000
$250.2
500 Could be expanded

to property risks
0
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06*
*2006 Projected
Source: Risk Retention Reporter, Insurance Info. Institute
UNDERWRITING
TRENDS
Extremely Strong 2006/07;
Relying on Momentum &
Discipline for 2008
P/C Insurance Combined Ratio,
1970-2008F*
Combined Ratios
120
1970s: 100.3
1980s: 109.2
115
1990s: 107.8
2000s: 102.0*
110
105
100
95
90
08F
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Sources: A.M. Best; ISO, III *A.M. Best year end estimate of 103.2; Actual H1 result was 102.1.
P/C Insurance Industry Combined
Ratio, 2001-2010F Including
Mortgage
As recently as 2001, insurers & Fin.
Relatively Guarantee
120 paid out nearly $1.16 for every low CAT insurers
$1 in earned premiums
115.8 losses,
reserve
2005 ratio benefited from releases
heavy use of reinsurance Cyclical
which lowered net losses Deterioration
110
107.5 Best combined 107
ratio since 1949 105
(87.6)
103.2
100.8 101.2
100.1
100 98.4
95.7
92.6
90
2001 2002 2003 2004 2005 2006 2007 2008 2008* 2009F 2010F
*Includes Mortgage & Financial Guarantee insurers. Sources: A.M. Best, ISO; III.
Ten Lowest P/C Insurance Combined
Ratios Since 1920 vs. 2007
97 The 2006 combined 2007 was the 20th
95.7
ratio of 92.6 was the best since 1920
95 best since the 87.6
combined in 1949 93.0 93.1 93.1 93.3
93 92.3 92.4 92.6
92.1
91.2
91
The industry’s best
89 underwriting years
87.6 are associated with
87 periods of low
interest rates
85
1949 1948 1943 1937 1935 2006 1950 1939 1953 1936 2007
Sources: Insurance Information Institute research from A.M. Best data.

Underwriting Gain (Loss)
1975-2008:H1*
35 Insurers earned a record underwriting profit of
30 $31.7 billion in 2006, the largest ever but only the
25
20
second since 1978. Cumulative underwriting deficit
15 from 1975 through 2007 is $422 billion.
10
5
$ Billions
0
-5
-10
-15
-20 $5.635 Bill
-25 underwriting
-30 loss in 08:H1
-35 incl. mort. &
-40 FG insurers
-45
-50
-55
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage * finl. guarantee insurers
Impact of Reserve(准备金) Changes
on Combined Ratio
PY Reserve Development
$40 8.6 8.9 Combined Ratio Points 10
$35 9
Reserve Development ($B)
Reserve 8
Combined Ratio Points

$30 6.5 7
$25
adequacy has
6
4.5 improved 5
$36.9
$20 3.5 $33.4
substantially 4
$15
$22.8
$18.9
$10 2
$10.8
0.1 1
$5 -1.2 -1.6 -1.3 -1.1
$0.4 0
$0
(1)
($5) (2)
($5.3) ($7.0)($6.0) ($5.0)
($10) (3)
00 01 02 03 04 05 06 07F 08F 09F
Source: A.M. Best, Lehman Brothers estimates for years 2007-2009
Cumulative Prior Year Reserve
Development by Line (As of 12/31/06)
$1,500 $1,172 $1,176
$1,000
$366
Strengthening
$500
$0
-$48
-$53
-$100
-$100
-$96
$ Billions
-$254
-$500
-$413
-$475
-$1,000 -$779
-$1,116
-$1,174
-$1,500 Reserve redundancies in

-$2,000 most lines have resulted
-$1,886
-$2,500
Release in releases in recent years
-$3,000
-$3,500
-$3,006 but that is ending
y
y
ty
ti
y
p
o
ty
l
op
.
er
PD
e
e
na
lit
al
ab
nt
lit
ut
om
ul
nc
om
ili
re
th
Pr
M
bi
ra
i
M
io
Li
.A
ab
ab
ra
A
Su
sC
O
H
ia
at
ua
ed
PP
lty
al
su
lty
m
Li
Li
.L
y/
rn
r'
.G
ci
M
om
ein
ia
lit
ia
A
er
ke
te
od
er
ec
ec
de
PP
nl
th
In
C
R
m
or
Pr
Sp
Sp
Fi
Fi
O
om
W
C
Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2.
Losses Paid by Property/Casualty Insurers
Have Steadily Increased for Decades
Total losses paid by
insurers increased by $152
$320.6
$350
$314.4
$308.8
$299.7
$298.6
billion or more than 100%
$292.6
$288.1
$280.8
$300 from 1987 through 2007
$242.2
$224.7
$250
$214.2
$209.2
$201.6
$200.4
$198.9
$198.1
$187.2
$180.0
$177.5
$ Billions
$200
$168.9
$156.3
$147.0
$150
Dip in 2006/07 was associated with drop in
catastrophe losses, which is unlikely to
$100 persist. Losses and loss ratios in 2007 rose
and are rising in 2008. During 2006/07, the
$50 price of many types of insurance fell.
$0
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*
Sources: A.M. Best; 2007 figure is from ISO. *2008 is annualized Q1 ISO result; Insurance Information Institute.
EMERGING RISKS
Common Mistake is to
Assume all Emerging Risks
are About Underwriting
Emerging Risks Impacting the
Global (Re)Insurance Industry
Issue Issue
Erosion of Tort Reform Inflation Risk
Bad Faith Litigation Employment Practices Liability
Post-Catastrophe Litigation Energy Sector
Climate Change (liability>property) Nursing Home/Asst. Living
Products Liability (Imports, Food) Currency Risk
Regulatory Risk Economic Shock/Contagion Effects
Securities Litigation Terrorism
Asset Valuation Risk (Mark-to-Market) Nanotechnology
Environmental Liability Pharmaceuticals
Latent Occupational Disease Disintermediation
Socialization of Insurance Markets US Tax Policy
KEY LINES
Commercial Lines Combined
Ratio, 1993-2008F
Commercial coverages Mortgage and financial
guarantee may account for
122.3
have exhibited significant up to 4 points on the
125 variability over time. combined ration in 2008
120
112.5
112.3
111.1
110.3
110.2
110.2
109.7
115
107.6
105.4
110
103.9
102.5
102.0
104
105
100 Recent results benefited from favorable loss

cost trends, improved tort environment,
93.5
low CAT losses, WC reforms and reserve
91.1
95
releases. Most of these trends now reversed
90 and mortgage and financial guarantee
segments have big influence.
85
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F
Sources: A.M. Best (historical and forecasts)
AUTO INSURANCE
Recent Underwriting
Trends by Coverage Type
Personal Lines
Combined Ratio, 1993-2008E
Recent
deterioration
110.9
115
109.9
due to price
competition
and higher
105.3
110
104.9
104.5
104.5
103.9
103.5
CAT losses in
102.7
102.5
105
2008
99.8
98.4
97.6
96.4
100
94.3
93.9
95
Recent strong results
90 attributable favorable frequency
trends and low CAT activity
85
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F
Source: A.M. Best; Insurance Information Institute.
Pvt. Passenger Auto Insurance Net
Premiums Written, 1998-2008E
$ Billions
$170
$160.2 $159.1 $160.5
$160 $157.3 $159.6
$151.2
$150
$139.7
$140 Competition, tight
$130 $128.0 credit and the weak
$120 $117.4
$118.6 $119.7 economy imply
$110
sluggish growth for
auto insurers
$100
98 99 00 01 02 03 04 05* 06 07 08E
Sources: A.M. Best; Insurance Information Institute.
Private Passenger Auto
(PPA) Combined Ratio
110
PPA has been an 109.5 Auto insurers have shown
important source of 107.9 significant improvement in
PPA underwriting
earnings in recent performance since mid-
105 years 104.2 2002, but results are
103.5 deteriorating.
101.7101.3 101.3
101.0 101.1 100.8
100 99.5
98.4 98.3
Average Combined 95.1 95.5

95 94.3
Ratio for 1993 to 2007:
100.8
90
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F
Sources: A.M. Best (historical); Insurance Information Institute
Pure Premium Spread: Personal
Auto PD Liability, 2000-2008:Q2
Auto Insurance Component of CPI Personal Auto-PD Pure Premium
10%
Margin necessary A favorable inversion of
8% to maintain PPA the pure premium spread
profitability began in mid-2008
6%
4%
2%
0%
-2% 2000 PPA 2006 PPA

Combined=110 Combined=95.5
-4%
00:Q1
00:Q2
00:Q3
00:Q4
01:Q1
01:Q2
01:Q3
01:Q4
02:Q1
02:Q2
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
03:Q4
04:Q1
04:Q2
04:Q3
04:Q4
05:Q1
05:Q2
05:Q3
05:Q4
06:Q1
06:Q2
06:Q3
06:Q4
07:Q1
07:Q2
07:Q3
07:Q4
08:Q1
08:Q2
Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data.
Bodily Injury: Severity Trend
Running Ahead of Frequency
Medical inflation is a Frequency Severity
8% powerful cost driver
6.0% 5.6%
6%
4.7% 4.8%
3.6% 3.8% 3.4%
4% 3.0% 2.8%
2%
0%
-0.3%
-2% -0.9%
-2.2% -2.6%
-4% -3.3%
-4.0% -3.8%
-6% -5.3% -5.4% -5.0% -5.1%
99 00 01 02 03 04 05 06 07 08*
Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008.
PD Liability: Frequency Trend
No Longer Offsets Severity
Frequency Severity Fewer accidents, but more
8% damage when they occur
6.2%
6%
4.3% 3.9%
3.3% 3.7%
4%
2.8% 2.8%
2.1% 2.0%
2%
0.8% 0.5% 0.6%
0.3% 0.0%
0%
-2% -1.5%
-2.0% -2.3% -2.1% -1.9%
-4%
-3.8%
-6%
99 00 01 02 03 04 05 06 07 08*
PIP: Severity Trend Now Offsets
Smaller Claim Frequency Decline
Frequency Severity
20%
Fraud caused
16.1% problems from
15% 1999-2001
10%
6.3% 6.5% 6.1% 6.7%
4.8%
5% 3.2% 2.3%
1.1% 0.5%
0.0%
0%
-1.1% -0.6%
-1.6%
-5% -4.0% -4.0% -4.8%
-5.4% -5.1%
-7.2%
-10%
99 00 01 02 03 04 05 06 07 08*
Collision: Frequency and
Severity Claim Trend Adverse
8% Frequency Severity
6.8%
6%
4.1% 3.7% 3.7% 3.8%
4% 3.0% 3.1%
2.6% 2.3%
1.9%
0.5%
1.5%
0.7%
2%
0.1%
0%
-0.4%
-2%
-1.7%
-4%
-3.8% -3.7%
-4.6%
-6% -5.1%
99 00 01 02 03 04 05 06 07 08*
Comprehensive: Weather Hurts
Frequency and Severity Trends
Frequency Severity Severe first half
14.9%
20% weather (floods,
Weather related hail, tornadoes)
15% 8.9% claims from
Hurricanes Katrina,
6.9%
10% Rita & Wilma:
681,900 claims
3.3%
3.3%
valued $3.29 billion
0.7%
5%
0%
-1.3%
-1.4%
-1.7%
-2.1%
-2.6%
-2.4%
-3.1%
-5%
-4.1%
-4.7%
-5.7%
-6.5%
-6.9%
-8.0%
-10%
-9.8%
-15%
99 00 01 02 03 04 05 06 07 08*
5 Levels of Underwriting Innovation
• LEVEL I: Traditional Underwriting
 Relies on traditional underwriting tools to determine limited number of risk cells
• Level II: Predictive Modeling, Data Mining
 Has led to quantum leap in matching of risk with price
 Explosion in price points/identifiable and priceable market segments
 Enabled by reduction in computing and data storage costs—trends that will
continue
• Level III: Revealed Risk (Telematics)
 Let the customer reveal to the insurer over time his/her individual risk profile
 Requires continuous monitoring or periodic sampling of individual risk
(policyholder) via “Black Box”
• Level IV: Pavlov Policies
 Provide continuous positive (or negative) reinforcement (feedback)
 Continuously changing and observable insurance premium
 Examples: ING Direct bank accounts; Continuous credit score monitoring;
Zillow, etc.—Idea is to provide continuous feedback in dollar terms
 WhatsMyPremiumToday.com;
• Level V: Experimentation and Behavioral Economics
 Conduct large-scale behavioral experiments to ascertain risk seeking/avoidance
behavior in wide variety of circumstances across wide cross section of customers
relevant to insurance
 Could be based on observation of actual behavior as well
Interactive Insurance Policies
• Emulate Financial/Retirement Planning Engines
 Allow people to “build” and modify policies at any time (goes well beyond Your
Choice Auto)
 Create “What If” scenario capacity with impact on premium; Examples:
 What if I had an at-fault accident?Product reports surcharge and new premium
 What if I bought a new Porshe vs. a used one?
 What if I increased my liability limits?
 What kinds of car would lower my premium by 10%?
 When I move to Mayberry what will my new premium be?
 Can do something similar for home insurance
• The Talking Insurance Policy (Interactive Policy Documentation)
 Most people do not understand and never read their policy—not because they’re
lazy or dumb but because it is often written in impenetrable legalese
 Policy is online in customer’s account. Mouse-overs allow audio/visual pop-ups
that explain policy in plain English and offer tips (e.g., Flood is excluded…call
your Allstate agent to day to arrange flood coverage from the NFIP …)
• Gaming
 Game initializes with insureds parameters (vehicle, location, etc.)
 Policyholder “drives” in game and makes choices that influence premium, which
comtinuously changes based on those choices (e.g., speed, DUI, observe traffic
signals, trade in vehicle for sports car…)
Homeowners Insurance
Homeowners Insurance
Combined Ratio
165
158.4
Average 1990 to 2007= 110.8
155
Insurers have paid out an average of
145
$1.11 in losses for every dollar earned
135
in premiums over the past 18 years
125 121.7 121.7

117.7 118.4
115 113.0 113.6 112.7
111.4
109.4108.2 109.3
104
105 101.0 100.3
98.3
94.4 95.6
95
88.9
85
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F
Sources: A.M. Best (historical); I.I.I. estimate for 2008.
Homeowners Insurance Net
Premiums Written, 1998-2008E
Competition and $ Billions
$60
the collapse in
housing mean $52.2
$54.6 $54.9 $55.0
$50
little growth for $49.5
home insurers $45.8
$40.0
$40
$35.2
$32.4
$30.7
$29.0
$30
$20
98 99 00 01 02 03 04 05* 06 07 08E
Sources: A.M. Best; Insurance Information Institute.
RISING EXPENSES
Expense Ratios Will Rise as
Premium Growth Slows
Personal vs. Commercial Lines
Underwriting Expense Ratio*
32% 31.1% Personal Commercial
30% 29.4% 30.8% 30.0%

29.9%
29.1%
28% 27.0% 27.5%
26.6% 25.6% 26.4%
26.3%
27.1%
26% 25.0% 25.0% 26.6%
24.3% 24.8%24.5% 26.1%
25.6%25.6%
23.4% 24.7%
24%
24.4% 24.6%
22% Expenses ratios will likely rise

as premium growth slows
20%
96 97 98 99 00 01 02 03 04 05 06 07E 08F
*Ratio of expenses incurred to net premiums written.

Source: A.M. Best; Insurance Information Institute
CAPACITY/
SURPLUS
Capital/ Surplus Falling
from 2007 Peak
U.S. Policyholder Surplus:
1975-2008:H1*
$550
Capacity as of 6/30/08 was $505.0, down 2.5% from
$500 12/31/07 was $517.9B, but 80% above its 2002 trough.
$450
Recent peak was $521.8 as of 9/30/07
$400
$350 The premium-to-surplus

$ Billions
$300 fell to $0.85:$1 at year-

$250 end 2007, approaching
$200 its record low of
$0.84:$1 in 1998 “Surplus” is a measure of
$150 underwriting capacity. It is
$100 analogous to “Owners
Equity” or “Net Worth” in
$50
non-insurance organizations
$0
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Source: A.M. Best, ISO, Insurance Information Institute. *As of June 30, 2008
Policyholder Surplus,
2006:Q4 – 2008:Q2
Capacity peaked at $ Billions
$521.8 as of 9/30/07
$530
$521.8 $517.9
$520 $515.6
$512.8
$510 $505.0
$500 $496.6
$490 $487.1
Surplus is down 3.2% or $16.6
$480
billion since its Q3 2007 peak.
$470 Q3 2008 will record a big drop.
$460
06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2
Source: ISO; Insurance Information Institute.
Annual Catastrophe Bond
Transactions Volume, 1997-2007
Risk Capital Issued Number of Issuances
$8,000 Catastrophe bond issuance has $7,329.6 35

$7,000 soared in the wake of 30
Risk Capital Issues ($ Mill
Hurricanes Katrina and the
Number of Issuances
$6,000 25
hurricane seasons of 2004/2005, $4,693.4
$5,000
despite two quiet CAT years 20
$4,000
15
$3,000
$1,729.8 $1,991.1 10
$2,000
$1,139.0
$846.1$984.8 $966.9
$1,219.5 $1,142.8 5
$1,000 $633.0
$0 0
97 98 99 00 01 02 03 04 05 06 07
Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.
MERGER &
ACQUISITION
Are Catalysts for P/C
Consolidation Growing
in 2008?
P/C Insurer M&A Activity,*
1997-2008**
Transaction Values Number of Transactions
$40,000 $36,407 M&A activity began to accelerated in 16

15 2007. The largest deals in 2008 are
$35,000 Liberty Mutual’s/Safeco for $6.2B; 14
Transaction V alue ($ M ill)
Tokio Marine/Philadelphia
N um ber of Transactions
$30,000 Consolidated for $4.7 B; Allied 12
World/Darwin for $550 million
$25,000 10 10
9
$20,000 $18,289 8
7 $13,808
$15,000 $12,823 6
$11,450
$10,000 $8,683 $9,325 4
$3,318
3
$5,000 2 $599 2 $800 2
1 1
2
$0 0 0 0
97 98 99 00 01 02 03 04 05 06 07 08**
Source: Lehman Brothers. *Deals exceeding $500 million. *Through July 24, 2008.
Distribution of P/C Insurer
Acquisitions, Jan. 2007 – June 2008
Deals Exceeding $100 Million
Personal &
SUMMARY STATS Commercial, 32%,
32%
•22 deals
•$23 billion total
transaction value
Personal, 23%,
•$475 million median 23%
deal value
•Acquirers mostly
p/c insurers and
limited number of
private equity deals Commercial, 45%,
45%
Source: SNL, Lehman Brothers.
Motivating Factors for Increased
P/C Insurer Consolidation
Motivating Factors For P/C M&As
• Slow Growth: Growth is at its lowest levels since the late 1990s
 NWP growth was 0% in 2007; Appears similarly flat in 2008
 Prices are falling or flat in most non-coastal markets
• Accumulation of Capital: Aggregate capitalization is high
 Policyholder Surplus up 6-7%% in 2007 and up 80% since 2002
• Reserve Adequacy: No longer a drag on earnings
 Favorable development in recent years offsets pre-2002 adverse develop.
• Low Share Prices: Acquisitions are “cheap”
 Share prices of most p/c insurers are down 30% - 90%
• Mergers Could Ease Capital Concerns
 Combined operations could require less total capital
• Need to Spin-Off Ops to Raise Cash
 Some insurers looking to shed non-core assets; Refocusing trend
Motivating Factors for Decreased
P/C Insurer Consolidation
Motivating Factors Against P/C M&As
• Credit Crunch: Little financing capital available with current
freeze in credit markets and equity investors on the sidelines
• Soft Market Conditions: Market remains soft (esp. commercial)
 Underwriting results deteriorated significantly in 2008
• Investment Volatilty: Investment volatility makes valuation
more uncertain and deals less attractive
• Limited Number of Players
 Simply not that many companies in play
 Exclude if mutual (though mutuals can acquire), too big, cultural, etc.)
• Regulatory Uncertainty:
• Nature of new regulations to be imposed on financial services in general and
insurers in particular is unclear
• Taxation: Future tax treatments issues unresolved
Distribution Sector: Insurance-
Related M&A Activity, 1988-2006
Transaction Values Number of Transactions
$3,000 $2,720 300

No extraordinary
$2,500 trends evident 250
Transaction Value ($ M ill)
N um ber of Transactions
$1,934
$2,000 200
$1,633
$1,500 150
$944
$1,000 100
$689
$542
$446
$500 50
$212
$60
$7
$0 0
Source: Conning Research & Consulting.
96 97 99 00 01 02 03 04 05 06
Distribution Sector M&A
Activity, 2005 vs. 2006
2005 2006
Other
Other Agency
Insurer 2%
4% Buying Title Agency
Agency Buying 4% Buying
51% Distributor Agency
Title
7% 62%
Insurer 9%
Buying
Distributor
7% Bank Buying
Agency
25%
Number of
Bank Buying bank
Agency acquisitions
29%
is falling
years
Source: Conning Research & Consulting

INVESTMENT
OVERVIEW
More Pain,
Little Gain
Property/Casualty Insurance
Industry Investment Gain1
$ Billions
$63.6
$57.9 $59.4
$60 $56.9 $55.7
$52.3 $51.9
$47.2 $48.9
$50 $44.4 $45.3
$42.8
$40 $35.4 $36.0
$30 $24.8
Investment gains are off in
$20
2008 due to lower yields and
$10 poor equity market conditions.
$0
*
03
04
06
07
01
02
98
99
00
1
96
97
94
95
05
H
08
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.
Sources: ISO; Insurance Information Institute.
P/C Insurer Net Realized
Capital Gains, 1990-2008:H1
$ Billions Realized capital gains
$20
$18.02 exceeded $9 billion in
$18 2004/5 but fell sharply in
$16.21
$16 2006 despite a strong stock
market. Nearly $9 billion
$14 $13.02 again in 2007, but $-1.1
$12
billion in 2008:H1.
$10.81
$9.89 $9.82 $9.70
$10 $9.24 $9.13 $8.97
$8 $6.63 $6.61
$6.00
$6 $4.81
$4 $2.88 $3.52
$1.66
$2
$0
-$2 -$1.21 -$1.07
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08:H1
Sources: A.M. Best, ISO, Insurance Information Institute.
Total Returns for Large
Company Stocks: 1970-2008*
S&P 500 was up 3.53% in 2007, but down 36.0% so far in 2008*
40%
30%
20%
10%
0%
-10%
-20% Markets were up in 2007

-30% for the 5th consecutive year
before the crash of 2008
-40%
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008*
Source: Ibbotson Associates, Insurance Information Institute. *Through October 17, 2008.
P/C Investment Income as a % of Invested
Assets Follows 10-Year US T-Note
P-C Inv Income/Inv Assets 10-Year Treasury Note
9%
Investment yield
8% historically tracks
7% 10-year Treasury
note quite closely
6%
5%
4%
3%
2%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08*
*As of July 2008.
Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.
FINANCIAL
STRENGTH &
RATINGS
Industry Has Weathered
the Storms Well
减值),
1969-2007
The number of impairments varies
significantly over the p/c insurance cycle,
70 with peaks occurring well into hard markets
60
58
60
54
50
49
49
49
49
47
50
41
40 36
35
34
34
31
31
29
30
19
19
18
18
20
16
15
15
15
14
13
13
13
12
12
12
11
9
10
8
4
0
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
P/C Insurer Impairment Frequency
vs. Combined Ratio, 1969-2007
Impairment rates Combined Ratio after Div
are highly P/C Impairment Frequency
correlated
120 underwriting 2
performance and 1.8
115
could reached a
record low in 2007 1.6
1.4
Impairment Rate
Combined Ratio
110
1.2
105 1
0.8
100 0.6
0.4
95
2007 impairment rate was a record low 0.12%,
one-seventh the 0.8% average since 1969; 0.2
Previous record was 0.24% in 1972
90 0
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Reasons for US P/C Insurer
Impairments, 1969-2005
2003-2005 1969-2005
Affiliate Deficient Reinsurance Deficient
Sig. Change
Problems Loss Failure Loss
in Business
8.6% Reserves/In- 3.5% Reserves/In-
4.6%
adequate Misc. adequate
Catastrophe 9.2%
Pricing Pricing
Losses 38.2%
62.8%
8.6%
Investment
Alleged Problems*
Fraud 7.3%
11.4%
Affiliate
Deficient Problems
Rapid reserves, 5.6%
Growth CAT losses Catastrophe
8.6% are more Losses
important 6.5% Alleged Rapid
factors in Fraud Growth
8.6% 16.5%
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;
CATASTROPHIC
LOSS
2008 & Beyond
Most of US Population & Property
Has Major CAT Exposure
Is
Anyplace
Safe?
U.S. Insured Catastrophe Losses*
$ Billions $100 Billion
$100.0
$120 2008 CAT losses already exceed CAT year is
$100
2006/07 combined. 2005 was by coming soon
far the worst year ever for
insured catastrophe losses in the
$61.9
$80
US, but the worst has yet to come.
$60
$27.5
$26.5
$22.9
$22.0
$40
$16.9
$12.9
$10.1
$9.2
$8.3
$8.3
$7.5
$7.4
$6.7
$5.9
$5.5
$20
$4.7
$4.6
$2.7
$2.6
$0
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08**
20??
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.
**Based on preliminary PCS data through June 30. PCS $1.8B loss of for Gustav. $9.8B for Ike of 9/22.
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
Top 12 Most Costly Disasters in
US History, (Insured Losses, $2007)
$50 10 of the 12 most
$43.6
$45 expensive disasters in US
$40
history have occurred
$35
since 2004
$ Billions
$30
$25 $22.0 $22.9
$20
$15
$9.8 $10.9 $10.9
$10 $7.0 $7.8 $8.2
$5.0 $6.0
$4.0
$5
$0
Jeanne Frances Rita Hugo Ivan Charley Ike Wilma Northridge 9/11 Andrew Katrina
(2004) (2004) (2005) (1989) (2004) (2004) (2008)* (2005) (2004) Attacks (1992) (2005)
(2001)
*Based on average of midpoints of range estimates from risk modelers AIR, RMS and Eqecat as of 9/15/08.
Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments.
Inflation-Adjusted U.S. Insured
Catastrophe Losses By Cause of Loss,
1987-2006¹
Fire, $6.6 , 2.2% Civil Disorders, $1.1
, 0.4% Water Damage, $0.4
Wind/Hail/Flood, , 0.1%
$9.3 , 3.1% Utility Disruption,
Earthquakes, $19.1 , $0.2 , 0.1%
6.4%
Tornadoes, $77.3 ,
Winter Storms, 26.0%
$23.1 , 7.8%
Insured disaster losses
totaled $297.3 billion from
1987-2006 (in 2006 dollars).
Terrorism, $22.3 , Wildfires accounted for
7.5% approximately $6.6 billion of
All Tropical these—2.2% of the total.
Cyclones, $137.7 ,
46.3%
1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 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)..
Total Value of Insured
Coastal Exposure (2004, $ Billions)
Florida $1,937.3
New York $1,901.6
Texas $740.0
Massachusetts $662.4
New Jersey $505.8
Connecticut $404.9
Louisiana $209.3 Northeast states have
S. Carolina
Virginia
$148.8
$129.7
significant exposure. In 2004
Maine $117.2 Florida had more insured
North Carolina $105.3
Alabama $75.9 coastal exposure—at nearly $2
Georgia $73.0
Delaware $46.4
trillion than any other state.
New Hampshire
Mississippi
$45.6
$44.7
Future “Mega-Losses” are
Rhode Island $43.8 UNAVOIDABLE.
Maryland $12.1
$0 $500 $1,000 $1,500 $2,000 $2,500

Source: AIR Worldwide
Total Value of Insured
Coastal Exposure (2007, $ Billions)
Florida $2,458.6
New York $2,378.9
Texas $895.1
$522B increase
Massachusetts $772.8 since 2004, up 27%
New Jersey $635.5
Connecticut $479.9
Louisiana $224.4 In 2007, Florida still ranked as the
S. Carolina $191.9 #1 most exposed state to hurricane
Virginia $158.8
Maine $146.9
loss, with $2.459 trillion exposure,
North Carolina $132.8 an increase of $522B or 27% from
Alabama
Georgia
$92.5
$85.6
$1.937 trillion in 2004.
Delaware $60.6
New Hampshire $55.7
The insured value of all coastal
Mississippi $51.8 property was $8.9 trillion in 2007,
Rhode Island
Maryland
$54.1
$14.9
up 24% from $7.2 trillion in 2004.
$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000
Source: AIR Worldwide
Insured Losses from Top 10 Hurricanes Since 1900 &
Katrina Adjusted for Inflation, Growth in Coastal
Properties, Real Growth in Property Values &
Increased Property Insurance Coverage
(Billions of 2005 Dollars) Great Miami
$70 Hurricane $65.3
$60 The p/c insurance industry

Galveston
will likely experience a $20B+ Storm
$50
event approximately every 10- $41.1
$ Billions
$40 12 years, on average—mostly

$31.3
$30 associated with hurricanes
$20.8 $21.1
$20 $14.5
$12.4 $12.6 $13.1
$10.1 $11.0
$10
$0
Number 9 Hazel Number 4 Number 2 Number 4 Bestsy Number 2 Number 1 Andrew Katrina Number 6
(1909, (1954, (1938, (1919, (1928, (1965, (1915, (1900, (1992, (2005, (1926, FL)
FL) NC) NY) FL) FL) LA) TX) TX) FL) LA)*
*ISO/PCS estimate as of June 8, 2006.

Source: Hurricane Katrina: Analysis of the Impact on the Insurance Industry, Tillinghast, October 2005; Insurance Info. Institute.
Shifting Legal
Liability & Tort
Environment
Is the Tort Pendulum
Swinging Against Insurers?
The Nation’s Judicial
Hellholes (2007)
Watch List Some improvement
Madison County, IL
in “Judicial
St. Clair County, IL NEW JERSEY
Hellholes” in 2007 Atlantic County
Northern New (Atlantic City)
Mexico NEVADA ILLINOIS
Hillsborough Clark County Cook County West Virginia
(Las Vegas)
County, FL
Delaware
California
Dishonorable
Mentions
TEXAS
District of Rio Grande
Columbia Valley and
South Florida
MO Supreme Court Gulf Coast
MI Legislature
GA Supreme Court
Oklahoma
Source: American Tort Reform Association; Insurance Information Institute
Business Leaders Ranking of
Liability Systems for 2007
Best States New in 2007 Worst States
Newly
1. Delaware ME, NH, TN, 41. Arkansas Notorious
2. Minnesota UT, WI 42. Hawaii
AK
3. Nebraska Drop-Offs 43. Alaska
4. Iowa 44.Texas Rising
ND, VA, SD, Above
5. Maine WY, ID 45. California
6. New Hampshire FL
46. Illinois
7. Tennessee 47. Alabama
8. Indiana 48. Louisiana
9. Utah Midwest/West 49. Mississippi
10. Wisconsin has mix of good
and bad states 50. West Virginia
Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.
REGULATORY &
LEGISLATIVE
ENVIRONMENT
Isolated Improvements,
Mounting Zealoutry
Rating of Auto/Home Insurance
Regulatory & Operating Environment*
Most states (25) get a “B”, but 7 got A’s, 10 got
C’s (including DC), 5 earned D’s and 4 got F’s
AK
AL
WA ME
MT ND VT
MN NH
OR MA
NY
WI CT
SD
=A ID MI RI
=B WY PA NJ
IA
=C OH DC
NE DE
=D NV IL IN MD
WV
=F UT VA
CO
KS MO KY
CA NC
TN
OK SC
AZ NM AR
HI
Source: James Madison Institute, FebruaryAL2008.
MS GA
LA
TX
FL
*Criteria considered were auto/home residual mkts.,

auto/home mkt. concentration, loss ratio stability,
reg. env.,form regulation, credit scores, territorial
restrictions Source: James Madison Institute, Feb. 2008
Insurance Information
Institute On-Line
THANK YOU FOR YOUR TIME AND

YOUR ATTENTION!
Download at: www.iii.org/media/presentations/SIR

金融危机下的美国非寿险

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

金融危机下的美国非寿险

Uploaded by

Copyright:

Available Formats

Financial Crisis and the

Future of P/C Insurance

Robert P. Hartwig, Ph.D., CPCU, President

$200 more may fail plus WaMu’s loans

Source: FDIC; Insurance Information Institute research.

Source: National Conference of Insurance Guaranty Funds, as of September 17, 2008.

$2,000 The 1991 bankruptcy

Source: Insurance Info. Inst. research.

5. Conversion of Last 2 Remaining Investment Banks

Source: Insurance Info. Inst. research.

*End of calendar half (H1 = June 30, H2 = December 31).

15% Home Mortgage Consumer Credit Business Corporate

$400 the current financial crisis*

“Government is not the

• Crash in housing market is already costing home

*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.

4.5 Trough: 4.4% in March 2007

4.0 Unemployment will likely continue to

The US economy added 25.5

million jobs between 1991 and

90 2008, but job growth has recently

-140 Job losses now total 760,000

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Info. Institute

Claims per 100,000 Workers

-1.0% Industrial production

Real GDP Growth

Real NWP Growth Real GDP

Home equity is a common

source of wealth used to

-40% fund car purchases

10% Price decline begins.

Effects of Inflation Risks to Insurers & Buyers

Effects of Inflation Risks to Insurers

300 cost of medical care has

and LTC insurers

All Items Medical Care

14% Tort costs move with Tort System is an

Source: NCCI (based on states where NCCI provides ratemaking services).

Source: Insurance Information Institute.

Driving Patterns and

Until 2007/8 miles driven

% Change Miles Driven

Avg Gas Price/Gal

Sources: Energy Information Administration (http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm); ISO

Billions of Miles Driven

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/08juntvt/08juntvt.pdf;

Source: ISO; Insurance Information Institute

Hugo Lowest CAT Katrina,

US P/C Insurers All US Industries

Source: Insurance Information Institute.

Mortgage & -47.26% All Insurers

-100.0% -80.0% -60.0% -40.0% -20.0% 0.0%

Source: A.M. Best; ISO. 2008F is first half actual figure.

30% Net written premium 28.1%

60% Independent agents have seen only

$700 Lower underlying

frequency and modest

*Percentage change from same month in prior year.

Auto & Home insurance

Cost of Risk/$1000 Revenue

Liability Prof. Liability

Source: RIMS (2007); Insurance Information Institute

-2% A flattening in the