2. Challenges & Opportunities in the P/C Insurance Industry Focus on Massachusetts Markets Massachusetts Association of Insurance Agents 2006 Annual Convention Boston, MA November 3, 2006 Robert P. Hartwig, Ph.D., CPCU, Executive Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org

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

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

5. P/C Net Income After Taxes 1991-2006E ($ Millions)* *ROE figures are GAAP; 1 Return on avg. surplus. 2005 ROAS = 9.8% after adj. for one-time special dividend paid by the investment subsidiary of one company. 2 Based on H1 results; Sources: A.M. Best, ISO, Insurance Information Inst.  2001 ROE = -1.2%  2002 ROE = 2.2%  2003 ROE = 8.9%  2004 ROE = 9.4%  2005 ROE= 10.5%  2006 ROAS 1,2 = 13.0% 2006 Net Income may shatter previous records

6. ROE: P/C vs. All Industries 1987–2006:H1 *2006 P/C insurer ROE based on annualized H1 results. Source: Insurance Information Institute; Fortune Andrew Northridge Hugo Lowest CAT losses in 15 years Sept. 11 2004/5 ROEs excl. hurricanes 4 Hurricanes Katrina, Rita, Wilma Insurers will outperform only if CAT losses are “normal”

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

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

9. Source: SNL Securities; Insurance Information Institute Change in YTD Stock Performance by Sector Pre- & Post-Katrina/Rita/Wilma P/C & reinsurer stocks hurt but now fully recovered. Brokers rose on expectation of tighter conditions and demand for broker services; closure of Spitzer issues. Katrina: Aug. 29 Rita comes ashore Sept. 24 Wilma landfall Oct. 24

10. P/C Insurance Stocks: Slow Start, Strong Finish in 2006 Source: SNL Securities, Standard & Poor’s, Insurance Information Institute Total YTD Returns Through October 27, 2006 P/C & reinsurer stocks now up in 2006 on low CAT losses, strong earnings Broker stocks hurt by weak earnings

11. MASSACHUSETTS PROFITABILITY KEY LINES & NEARBY STATES

12. All P/C Lines ROE: US vs. MA, 1995–2004 Source: NAIC Profitability in MA insurance markets is on average better than the US (PP Auto is the exception) US = 7.7%MA = 11.1%

13. Private Passenger Auto ROE: US vs. MA, 1995–2004 Source: NAIC Profitability in the MA auto market lags behind the US US = 8.5%MA = 5.9%

14. Homeowners Insurance ROE: US vs. MA, 1995–2004 Source: NAIC Profitability in the MA homeowners market exceeds that of the US due to relatively low CAT losses 1995-2004 Avg. US = 2.4% MA = 13.3%

15. PP Auto: Average Return on Equity: US & MA, RI, CT, NH, VT, NY, NJ 1995-2004 Source: NAIC 1995-2004 MA offers the lowest PP auto profitability of any state in the Northeast

16. Average Return on Equity: US & MA, RI, CT, NH, VT, NY, NJ, Homeowners 1995-2004 Source: NAIC 1995-2004 MA homeowners insurance has been relatively profitable

17. Average Expenditure for HO Ins.: US & Northeast States (2003)* *Latest available. Source: NAIC, Insurance Information Institute (III) MA homeowners insurance expenditures are about average

18. Average Premiums for Auto Insurance US & Northeast States (2003)* *Latest available. Source: NAIC, Insurance Information Institute (III) MA PP auto insurance expenditures are well above the US average

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

20. P/C Industry Combined Ratio Sources: A.M. Best; ISO, III. *III forecasts/estimates for 2006 full year. 2005 figure reflects heavy use of reinsurance which lowered net losses, but still a substantial deterioration from first half 2005 2006 is could produce the best underwriting result since the 94.9 combined ratio in 1955

21. Personal Lines Combined Ratio, 1993-2006E Source: A.M. Best; Insurance Information Institute. A very strong 2006 is order due underwriting innovations and low CAT activity

22. Commercial Lines Combined Ratio, 1993-2006E* Source: A.M. Best; Insurance Information Institute. Outside CAT- affected lines, commercial insurance is doing fairly well. Caution is required in underwriting long- tail commercial lines. 2006 results will benefit from relatively disciplined underwriting and low CAT losses

23. Underwriting Gain (Loss) 1975-2006F* Source: A.M. Best, Insurance Information Institute *2006F of $30.2B is annualized H1 gain of $15.1B $ Billions Insurers sustained a $5.9 billion underwriting loss in 2005. First half 2006 underwriting gain was $15.1B implying a record gain of about $30B for full-year

24. * 2006 figure is return on average statutory surplus. Source: Insurance Information Institute from A.M. Best and ISO data. A 100 Combined Ratio Isn’t What it Used to Be: 95 is Where It’s At Combined ratios today must be below 95 to generate Fortune 500 ROEs

25. Impact of Reserve Changes on Combined Ratio Source: A.M. Best, Lehman Brothers for years 2005E-2007F Reserve adequacy is improving substantially

26. 2004 Prior Year Reserve Development by Line ($ Millions) Source: A.M. Best, Lehman Brothers. Longer-tail casualty coverages have been the source of most reserve problems in recent years Reserve Strengthening Reserve Releases

27. EXPENSES Will Expense Ratio Rise as Premium Growth Slows?

28. Personal Lines Underwriting Expense Ratio,* 1994-2005 *Ratio of expenses incurred to net premiums written. Source: A.M. Best; Insurance Information Institute Expenses ratios will likely rise as premium growth slows

29. Personal vs. Commercial Lines Underwriting Expense Ratio* *Ratio of expenses incurred to net premiums written. Source: A.M. Best; Insurance Information Institute Expenses ratios will likely rise as premium growth slows

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

31. Global Number of Catastrophic Events, 1970–2005 Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006. The number of natural and man-made catastrophes has been increasing on a global scale for 20 years Record 248 man- made CATs & record 149 natural CATs in 2005

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

33. Share of Losses Paid by Reinsurers, by Disaster* *Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005. Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute. Reinsurance is playing an increasingly important role in the financing of mega- CATs; Reins. Costs are skyrocketing

34. Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for 2006. Reinsurance Prices Surged in 2006 Following Record CATs in 2005 US cat reinsurance price index: 1994 = 100 In hurricane-prone areas, property CAT reinsurance prices are up 100-300%+

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

36. UNDERWRITING AFFECTS FINANCIAL STRENGTH Is There Cause for Concern?

37. Reasons for US P/C Insurer Impairments, 1969-2005 *Includes overstatement of assets. Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005; 2003-20051969-2005 Deficient reserves, CAT losses are more important factors in recent years

38. Historical Ratings Distribution, US P/C Insurers, 2000 vs. 2005 Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report, November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings ‘B’ and lower. 20002005 A++/A+ shrinkage Ratings agencies increasing emphasis on multiple events  require more capital

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

40. PRICE & AVAILABILITY Pricing Picture is Mixed

41. Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute Strength of Recent Hard Markets by NWP Growth* 1975-781984-872001-04 *2006-10 figures are III forecasts/estimates. 2005 growth of 0.4% equates to 1.8% after adjustment for a special one-time transaction between one company and its foreign parent. 2006 figure of 2.9% is based on 2006:H1 data. 2006-2010 (post-Katrina) period could resemble 1993-97 (post-Andrew) 2005: biggest real drop in premium since early 1980s

42. Property Catastrophe Price Index* 1994 - 2006 *Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B. Includes primary and reinsurance coverage. Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute. US CAT prices are continue to rise faster than anywhere else in the world

43. Average Expenditures on Auto Insurance *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute Countrywide auto insurance expenditures are expected to rise just 0.5% in 2006 Will the “big guys” stay disciplined? So far, so good. Tiering adopted to avoid adverse selection

44. Average Premiums for HO Insurance US & New England States (2003)* *Latest available. Source: NAIC, Insurance Information Institute (III)

45. Average Expenditures on Homeowners Insurance *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute Countrywide home insurance expenditures are expected to rise 4% in 2006, but much more in hurricane zones Hurricane zone residents can expect increases in the 20%- 100% range, especially if insured by a state entity

46. Average Premiums for Auto Insurance US & New England States (2003)* *Latest available. Source: NAIC, Insurance Information Institute (III)

47. New Private Housing Starts Will Slow Through 2009 Source: US Department of Commerce; Blue Chip Economic Indicators (3/06), Insurance Info. Institute New home construction is expected to fall by 18% from 2005-2009 as interest rates rise. Exposure growth forecast for HO insurers will slow as a result. Millions of Units Homeowners accounts for 12% of Direct Premiums Written

48. Average Commercial Rate Change, All Lines, (1Q:2004 – 3Q:2006) Source: Council of Insurance Agents & Brokers; Insurance Information Institute Magnitude of rate decreases has diminished greatly since mid-2005 but is growing again

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

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

51. Percent of Commercial Accounts Renewing w/Positive Rate Changes, 2 nd Qtr. 2006 Source: Council of Insurance Agents and Brokers Largest increases for Commercial Property & Business Interruption are in the Southeast, smallest in Midwest

52. Commercial Accounts Rate Changes, 2 nd Qtr. 2005 vs. 2 nd Qtr. 2006 Source: Council of Insurance Agents and Brokers Only commercial property is renewing up in 2006

53. Commercial Accounts Rate Changes, 2 nd Qtr. 2006 vs. 3 rd Qtr. 2006 Source: Council of Insurance Agents and Brokers Even commercial property is now renewing down in 2006

54. Average Rate Increase/Decrease by Industry Class Source: MarketScout.com Largest increases are in the energy sector

55. INVESTMENTS Does Investment Performance Affect Discipline?

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

57. US P/C Net Realized Capital Gains, 1990-2006:H1 ($ Millions) Sources: A.M. Best, ISO, Insurance Information Institute. Realized capital gains rebounded strongly in 2004/5 but are trailing through the first half of 2006 due to weak markets. 3 rd qtr. rebound will help.

58. Source: Ibbotson Associates, Insurance Information Institute. *Through November 3, 2006. Total Returns for Large Company Stocks: 1970-2006* S&P 500 is up 9.54% so far in 2006* Markets moving up as energy prices and LT interest rates fall & earnings rise

59. Property/Casualty Insurance Industry Investment Gain * *Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 estimate based on actual annualized 2006:H1 result of $25.375B. **2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute. Investment gains are up but are only now comparable to gains seen in the late 1990s

60. UNDERWRITING CAPACITY Can the Industry Efficiently Employ Its Increasing Capital?

61. U.S. Policyholder Surplus: 1975-2006* Source: A.M. Best, ISO, Insurance Information Institute*As of 3/31/06. $ Billions “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations Capacity TODAY is $445.5B, 4.3% above year-end 2005, 56% above its 2002 trough and 33% above its 1999 peak. Foreign reinsurance and residual market mechanisms absorbed 45% of 2005 CAT losses of $62.1B

62. Announced Insurer Capital Raising* ($ Millions, as of December 1, 2005) *Existing (re) insurers. Announced amounts may differ from sums actually raised. Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute. As of Dec. 1, 19 insurers announced plans to raise $10.35 billion in new capital. Twelve start-ups plan to raise as much as $8.75 billion more for a total of $19.1 billion. Actual total higher as Lloyd’s syndicates have added capacity for 2006.

63. Announced Capital Raising by Insurance Start-Ups ($ Millions, as of April 15, 2006) *Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs. Sources: Investment Bank Reports; Insurance Information Institute. As of April 15, 14 start- ups plan to raise as much as $10 billion.

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

65. U.S. Insured Catastrophe Losses ($ Billions)* *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. ** As of Sept. 30, 2006. 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 $ Billions 2005 was by far the worst year ever for insured catastrophe losses in the US, but the worst has yet to come. $100 Billion CAT year is coming soon

66. With rapid coastal development, $40B+ storms will be more common Source: AIR Worldwide * *ISO/PCS estimate as of June 8, 2006 (Billions of 2005 Dollars) Northeast storms make the Top 10 list Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels

67. With development along major fault lines, the threat of $25B+ quakes looms large Source: AIR Worldwide (Billions of 2005 Dollars) 3 of the Top 10 are not West Coast events Insured Losses from Top 10 Earthquakes Adjusted to 2005 Exposure Levels

68. Insured Loss & Claim Count for Major Storms of 2005* *Property and business interruption losses only. Excludes offshore energy & marine losses. Source: ISO/PCS as of June 8, 2006; Insurance Information Institute. Hurricanes Katrina, Rita, Wilma & Dennis produced a record 3.3 million claims

69. Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005) Sources: ISO/PCS; Insurance Information Institute. Seven of the 10 most expensive hurricanes in US history occurred in the 14 months from Aug. 2004 – Oct. 2005: Katrina, Rita, Wilma, Charley, Ivan, Frances & Jeanne

70. 2005 Was a Busy, Destructive, Deadly & Expensive Hurricane Season Source: WeatherUnderground.com, January 18, 2006. All 21 names were used for the first time ever, so Greek letters were used for the final storms 2005 set a new record for the number of hurricanes & tropical storms at 28, breaking the old record set in 1933.

71. 2006 Hurricane Season: Much Less Active Than Expected Source: WeatherUnderground.com, October 20, 2006. What a difference a year makes! Just 9 named storms through Oct. 20, 2006 vs. 22 as of same date in 2005!

72. 2006 Hurricane Season: Forecasts Repeatedly Scaled Back 2006 hurricane seasons has turned out to be far less severe than anticipated *Average over the period 1950-2000. Source: Insurance Information Institute compilation of forecasts by Dr. William Gray, Colorado State University.

73. Global Number of Catastrophic Events, 1970–2005 Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006. The number of natural and man-made catastrophes has been increasing on a global scale for 20 years Record 248 man- made CATs & record 149 natural CATs in 2005

74. Insured Property Catastrophe Losses as % Net Premiums Earned, 1983–2005E *Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B and insured CAT losses of $57.7B. Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute. US CAT losses were a record 13.8% of net premiums earned in 2005 and were 4.2 times the 1984-2004 average of 3.3%

75. Number of Major (Category 3, 4, 5) Hurricanes Striking the US by Decade *Figure for 2000s is extrapolated based on data for 2000-2005 (6 major storms: Charley, Ivan, Jeanne (2004) & Katrina, Rita, Wilma (2005)). Source: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm. http://www.nhc.noaa.gov/pastint.shtm 10 1930s – mid-1960s: Period of Intense Tropical Cyclone Activity Mid-1990s – 2030s? New Period of Intense Tropical Cyclone Activity Tropical cyclone activity in the mid-1990s entered the active phase of the “multi-decadal signal” that could last into the 2030s Already as many major storms in 2000-2005 as in all of the 1990s

76. Source: AIR Worldwide Insured Losses: $110B Economic Losses: $200B+ Nightmare Scenario: Insured Property Losses for NJ/NY CAT 3/4 Storm Total Insured Property Losses = $110B, nearly 3 times that of Hurricane Katrina Distribution of Insured Property Losses, by State, ($ Billions)

77. Surplus backing Top 10 home insurers in US (and in most states) is much larger than that of MA. This issue is related to peculiarities in the state’s auto market. Source: HighlineData LLC; Insurance Information Institute. (Billions of Dollars) Surplus Backing Top 10 Homeowners in US vs. MA, 2005 Homeowner insurer surplus in tiny RI is 80% larger than MA

78. Hurricane Katrina Claim Status on Storm’s 1 st Anniversary* 95% of the 1.2 million homeowners insurance claims in Louisiana & Mississippi are settled, with just 2% m dispute *Hurricane Katrina made its north Gulf coast landfall August 29, 2005. Source: Insurance Information Institute survey, August 2006.

79. Hurricane Katrina Insured Loss Distribution by State ($ Millions)* *As of June 8, 2006 Source: PCS division of ISO. Louisiana accounted for 62% of the insured losses paid and 56% of the claims filed Total Insured Losses = $40.579 Billion

80. Hurricane Katrina Loss Distribution by Line ($ Billions)* Total insured losses are estimated at $40.579 billion from 1.7438 million claims. Excludes $2- $3B in offshore energy losses *As of June 8, 2006 Source: PCS division of ISO.

81. Hurricane Katrina Claim Count Distribution by State* *As of June 8, 2006 Source: PCS division of ISO. Louisiana accounted for 62%of insured losses paid and 56% of claims filed Total # Claims = 1,743,800

82. Hurricane Rita Claim Count Distribution by State* *As of June 8, 2006 Source: PCS division of ISO. Louisiana accounted for 48.3% of the insured losses, Texas 44.6%. Excludes offshore energy losses of $2-3B Total # Claims = 383,000

83. Hurricane Rita Loss Distribution, by Line ($ Millions)* Total insured losses are estimated at $5.0 billion (excl. offshore energy of $2-$3B) from 383,000 claims. *As of June 8, 2006 Source: PCS division of ISO.

84. Hurricane Wilma Loss Distribution by Line ($ Millions)* Total insured losses are estimated at $10.3 billion from 1.047 million claims *As of June 8, 2006. All losses are in FL. Source: PCS division of ISO.

85. Hurricane Wilma Claim Count Distribution by Line * Total insured losses are estimated at $10.3 billion from 1.047 million claims *As of June 8, 2006. All losses are in FL. Source: PCS division of ISO.

86. Hurricane Ophelia Loss Distribution by Line ($ Millions)* Total insured losses are estimated at $35.0 million from 10,600 claims *As of June 8, 2006. All losses are in NC. Source: PCS division of ISO.

87. Hurricane Ophelia Claim Count Distribution by Line * *As of June 8, 2006. All losses are in NC. Source: PCS division of ISO. Total insured losses are estimated at $35.0 million from 10,600 claims

88. 2005 Storms Have Developed Adversely Source: Insurance Information Institute from PCS survey data. Are the models inaccurate? Wilma is the storm with the most extraordinary adverse development +18.0% +54.0% +6.3%

89. Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1986-2005¹ Source: Insurance Services Office (ISO).. 1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2005 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III. 2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires. Insured disaster losses totaled $289.1 billion from 1984-2005 (in 2005 dollars). Tropical systems accounted for nearly half of all CAT losses from 1986-2005, up from 27.1% from 1984-2003.

90. Total Value of Insured Coastal Exposure (2004, $ Billions) Source: AIR Worldwide Massachusetts has the 4 th highest amount of coastal exposure at more than $662 Billion.

91. Insured Coastal Exposure as a % of Statewide Insured Exposure (2004, $ Billions) Source: AIR Worldwide More than half (54.2%) of all insured exposure in MA is coastal

92. Value of Insured Residential Coastal Exposure (2004, $ Billions) Source: AIR Massachusetts has more than $300 billion in insured residential exposure—3 rd highest in the US!

93. Value of Insured Commercial Coastal Exposure (2004, $ Billions) Source: AIR Commercial property exposure in MA is 4 th highest in the US at $356 billion

94. Percentage of California Homeowners with Earthquake Insurance, 1994-2004* *Includes CEA policies beginning in 1996. Source: California Department of Insurance; Insurance Information Institute. The vast majority of California homeowners forego earthquake coverage & play Russian Roulette with their most valuable asset.

95. Property Residual Markets Explosive Growth Due to Rapid Coastal Exposure

96. Major Residual Market Plan Estimated Deficits 2004/2005 (Millions of Dollars) * MWUA est. deficit for 2005 comprises $545m in assessments plus $50m in Federal Aid. Source: Insurance Information Institute Hurricane Katrina pushed all of the residual market property plans in affected states into deficits for 2005, following an already record hurricane loss year in 2004

97. US FAIR Plans Exposure to Loss* (Billions of Dollars) Source: PIPSO; Insurance Information Institute*Hurricane exposed states only. In the 15-year period between 1990 and 2005, total exposure to loss in the FAIR plans has surged by a massive 965 percent, from $40.2bn in 1990 to $387.8bn in 2005! Total exposure to loss in the residual market (FAIR & Beach/Windstorm) Plans has surged from $54.7bn in 1990 to $419.5 billion in 2005.

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

99. Massachusetts FAIR Plan Exposure to Loss ($ Billions) Source: PIPSO; Insurance Information Institute In the 15-year period between 1990 and 2005, total exposure to loss in the MA FAIR Plan has surged by 1317 percent, from $4.1bn in 1990 to $54bn in 2005.

100. Mass. FAIR Plan Habitational Policy Count (1990-2005) Source: PIPSO; Insurance Information Institute In the 15-year period between 1990 and 2005, the MA FAIR plan habitational policy count has shown rapid growth, going from 45,480 policies in 1990 to 191,828 policies in 2005, an increase of 322%

101. MA FAIR Plan Operating Gain or Loss 2000-2005 ($ Millions) Source: PIPSO; Insurance Information Institute In three of the last six years the MA FAIR Plan has incurred an operating deficit.

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

103. Private Passenger Auto

104. Private Passenger Auto is Enormous Part of P/C Industry Source: A.M. Best; Insurance Information Institute Private passenger auto accounted for 34.7% or $162.2B in DPW in 2004 $251.6B $53.2B $95.8B $66.4B

105. Private Passenger Auto Combined Ratio Average Combined 1993 to 2005= 101.4 Most auto insurers have shown sig- nificant improvements in underwriting performance since mid-2002 Sources: A.M. Best; III PPA is the profit juggernaut of the p/c insurance industry today

106. RNW: Private Passenger Auto, United States, 1992-2006F Source: NAIC; Insurance Information Institute Private passenger auto profitability deteriorated throughout the 1990s but has improved dramatically Segmentation should help profitability

107. Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data. Pure Premium Spread: Personal Auto PD Liability, 2000-2006:Q1 Margin necessary to maintain PPA profitability 2000 PPA Combined=110 2004 PPA Combined=94 Inversion of pure premium spread is a warning sign but now in synch

108. Bodily Injury: Severity & Frequency Trends Offset Severity *2 nd quarter 2006 vs. 2 nd quarter 2005. Source: ISO Fast Track data. Medical inflation is a powerful cost driver

109. PD Liability: Frequency Trend Roughly Offsets Severity Fewer accidents, but more damage when they occur: Higher Deductibles? *2 nd quarter 2006 vs. 2 nd quarter 2005. Source: ISO Fast Track data.

110. PIP: Frequency Trend Now Offsets Rising Claim Severity Fraud caused problems from 1999-2001 Is No-Fault living on borrowed time? *2 nd quarter 2006 vs. 2 nd quarter 2005. Source: ISO Fast Track data.

111. Collision: Frequency Trend Offsetting Rising Claim Severity *2 nd quarter 2006 vs. 2 nd quarter 2005. Source: ISO Fast Track data.

112. Comprehensive: Favorable Frequency and Severity Trends Comprehensive severity is up substantially due to weather losses *2 nd quarter 2006 vs. 2 nd quarter 2005. Source: ISO Fast Track data.

113. Homeowners

114. Private Passenger Auto is Enormous Part of P/C Industry Source: A.M. Best; Insurance Information Institute Private passenger auto accounted for 34.7% or $162.2B in DPW in 2004 $251.6B $53.2B $95.8B $66.4B

115. Homeowners Insurance Combined Ratio Average 1990 to 2005= 113.1 Insurers have paid out an average of $1.13 in losses for every dollar earned in premiums over the past 16 years Sources: A.M. Best; III

116. Rates of Return on Net Worth for Homeowners Ins: US *Net of reinsurance; Excludes losses to state residual markets (FAIR, Beach & Wind Plans). Source: NAIC; 2004/5 figures are Insurance Information Institute estimates. Averages: 1993 to 2005E US HO Insurance = +3.8%*

117. Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2005E* *2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B. $ Billions Florida’s homeowners insurance market produces small profits in most years and enormous losses in others

118. Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, 1992-2005E* $ Billions It took insurers 11 years (1993-2003) to erase the UW loss associated with Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits & 2005 deepened the hole. *2005 estimate by Insurance Information Institute based on historical loss and expense data for FL adjusted for estimated 2005 residential windstorm losses of $7.35B.

119. COMMERCIAL MULTI-PERIL COMMERCIAL AUTO

120. Commercial Multi-Peril Combined (Liability vs. Non-Liability Portion) Liab. Combined 1995 to 2005 = 114.6 Non-Liab. Combined = 107.1 Sources: A.M. Best; III CMP- has improved recently

121. Farmowners Multi-Peril Average Combined Ratio 1996 to 2005 = 106.1 Sources: A.M. Best; III FMP- has improved substantially over the past decade

122. Commercial Auto Liability & PD Combined Ratios Average Combined: Liability = 110.2 PD = 97.1 Sources: A.M. Best; III Commercial Auto has improved dramatically

123. INLAND MARINE

124. Inland Marine vs. All P/C Lines Avg. Combined 1996 to 2005 Inland Marine = 92.2 All P/C Lines = 105.5 Sources: A.M. Best; III Inland Marine has consistently outperformed the industry overall

125. WORKERS COMPENSATION OPERATING ENVIRONMENT

126. Percent p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2005 and developed to ultimate Source: Calendar Years 1994-2004, A.M. Best Aggregates & Averages; Calendar Year 2005p and Accident Years 1994-2005pbased on NCCI Annual Statement Analysis. Includes dividends to policyholders Workers Comp Combined Ratios, 1994-2005P

127. Cumulative Change of –45.8% (1991-2004) Accident Year Percent Change Workers Comp Lost-Time Claim Frequency (% Change) 2005p: Preliminary based on data valued as of 12/31/2005 1991-2003: Based on data through 12/31/2004, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI

128. Indemnity Claim Cost (000s) Annual Change 1992–1996: +1.3% Annual Change 1997–2004: +7.4% 2005p: Preliminary based on data valued as of 12/31/2005 1991-2004: Based on data through 12/31/2004, developed to ultimate Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI Accident Year Workers Comp Indemnity Claims Costs Have Accelerated, 1993-2005p Cumulative Change = +103.2% (1993-2005p)

129. Annual Change 1992–1996: +4.1% Annual Change 1997–2005: +9.5% Accident Year Medical Claim Cost ($000s) 2005p: Preliminary based on data valued as of 12/31/2005 1991-2004: Based on data through 12/31/2004, developed to ultimate Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies Workers Comp Medical Claims Continue to Climb Cumulative Change = +176.8% (1993-2005p)

130. Med Costs Share of Total Costs is Increasing Steadily Source: NCCI (based on states where NCCI provides ratemaking services). 1985 1995 2005p

131. WC Costs Higher Than General Health Due to Price & Utilization Source: NCCI Workers Comp vs. Group Health First Three Months Following Injury, GH = 100%

132. OTHER LIABILITY

133. Other Liability Combined Ratios* Average Combined Ratio 1995-2005 116.1 Sources: A.M. Best; III *Includes Officers’ & Directors’ coverage. Improvements in tort and D&O environment have contributed to performance

134. D&O Premium Index (1974 Average = 100) Source: Tillinghast Towers-Perrin, 2005 Directors and Officers Liability Survey. Average D&O pricing is off 18% since 2003, after rising 146% from 1999-2003

135. POST-KATRINA LITIGATION UPDATE Insurers Are Ahead

136. Post-Katrina Litigation Update 95% of HO claims settled as of One-Year Anniversary About 2% in dispute (mediation/litigation) in LA/MS Insurers have won several major decisions  Leonard v. Nationwide (vindication of agent on allegations of misrepresentation)  Class Actions Contained in MS: Each case tried on its merits  Most cases no longer economical to pursue A.G. Hood Case Still Outstanding  Case substantially weakened, though not bound by Fed court decisions Trial Lawyers will Try Find Better Cases, Refine Classes Agent E&O issues still loom Misc. commercial litigation: coverage disputes, pollution (e.g., Murphy Oil settlement)

137. Cost of U.S. Tort System ($ Billions) Source: Tillinghast-Towers Perrin. Tort costs will consume an estimated 2.25% of GDP in 2006 Per capita “tort tax” was $886 in 2004, up from $680 in 2000 Reducing tort costs relative to GDP by just 0.25% (to about 2%) would produce an economic stimulus of $27.5B

138. Personal, Commercial & Self (Un) Insured Tort Costs Billions Total = $150.6 Billion Source: Tillinghast-Towers Perrin Total = $209.1 Billion Total = $291.0 Billion Total = $309.5 Billion

139. Tort System Costs, 2000-2007F Source: Insurance Information Institute estimates from Tillinghast-Towers Perrin methodology. After a period of rapid escalation, tort system costs as % of GDP appear to be stabilizing

140. Business Leaders Ranking of Liability Systems for 2005 Best States 1.Delaware 2.Nebraska 3.North Dakota 4.Virginia 5.Iowa 6.Indiana 7.Minnesota 8.South Dakota 9.Wyoming 10.Idaho Worst States 41. Hawaii 42. Florida 43. Arkansas 44. Texas 45. California 46. Illinois 47. Louisiana 48. Alabama 49. West Virginia 50. Mississippi Source: US Chamber of Commerce 2005 State Liability Systems Ranking Study; Insurance Info. Institute. New in 2005 ND, IN, SD, WY Drop-Offs ID, UT, NH, KS Newly Notorious HI, FL Rising Above MO, MT LA, AL and MS’s liability systems are ranked among the worst in the country by the US Chamber of Commerce

141. The Nation’s Judicial Hellholes (2005) Source: American Tort Reform Association; Insurance Information Institute TEXAS Rio Grande Valley and Gulf Coast South Florida ILLINOIS Cook County Madison County St. Clair County West Virginia There were notably fewer “Judicial Hellholes” in 2005 Dishonorable Mention WI Supreme Ct. Watch List California Eastern Kentucky Eastern Alabama Philadelphia New Mexico Delaware Oklahoma Orleans Parish, LA Washington, DC

142. Non-Admitted & Reinsurance Reform Act A Step in the Right Direction

143. Summary of Nonadmitted & Reinsurance Reform Act (HR 5637) NRRA Passed by House 9/28/06 by unanimous 417-0 vote; Senate prospects uncertain. Gives exclusive regulatory authority to insured’s home state for placement of nonadmitted insurance Establish uniform system for collection/allocation of premium tax obligations related to nonadmitted insurance Establishes uniform standards for surplus lines eligibility Pre-empts state diligent search requirements for sophisticated commercial buyers Makes ceding insurer’s state of domicile the single point of regulation with respect to credit for reinsurance Prevents states from applying laws in extra-territorial manner Creates uniformity in reinsurer solvency regulation based on NAIC accreditation requirements Source: LeBoeuf, Lamb, Greene & MacRae LLP, Oct. 4, 2006.

144. Gross Surplus Lines Premiums Written (Non-Admitted GPW) Source: Business Insurance, Sept. 11, 2006; Insurance Information Institute. The importance of Surplus Lines is demonstrated by much faster growth than for the overall P/C insurance industry +$4.4B +21.4% +$1.7B +5.3%

145. Optional Federal Charter (OFC) A Divisive Issue

146. Optional Federal Charter Legislation introduced in the House (National Insurance Act) in Sept. 2006 by Rep. Edward Royce (R-CA); Similar legislation introduced earlier in 2006 Senate by John Sununu (R-NH) and Tim Johnson (D- SD) General agreement that current system is inefficient, expensive, duplicative and stifles innovation OFC appears to be gaining some traction, but new Congress and change in party in House implies need for a great deal of education as general awareness of industry issues remains low OFC still probably 2+ years away Source: Insurance Information Institute.

147. TRIA EXTENSION The Burden Grows, and the Clock is Ticking

148. Terrorism Coverage Take-Up Rate Continues to Rise Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute Terrorism take-up rate for non-WC risk rose steadily through 2003, 2004 and 2005 TAKE UP RATE FOR WC COMP TERROR COVERAGE IS 100%!!

149. Terrorism Insurance Take-Up Rates by Region The Northeast has the highest take-up rate of any region Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute

150. Terrorism Premium as a Percent of Property Premium by Region Northeast pricing is higher, reflecting risk Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute

151. Insurance Industry Retention Under TRIA ($ Billions) Source: Insurance Information Institute Individual company retentions rise to 17.5% in 2006, 20% in 2007 Above the retention, federal govt. pays 90% in 2006, 85% in 2007 Extension Congress & Administration want TRIA dead

152. Insured Loss Estimates: Large CNBR Terrorist Attack ($ Bill) Type of CoverageNew YorkWashington San Francisco Des Moines Group Life $82.0$22.5$21.5$3.4 General Liability 14.42.93.20.4 Workers Comp 483.7126.787.531.4 Residential Prop. 38.712.722.62.6 Commercial Prop. 158.331.535.54.1 Auto 1.00.60.80.4 TOTAL$778.1$196.8$171.2$42.3 Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.

153. Insured Loss Estimates: Medium CNBR Terrorist Attack ($ Bill) Type of CoverageNew YorkWashington San Francisco Des Moines Group Life $37.7$22.5$21.5$3.4 General Liability 7.32.93.20.4 Workers Comp 313.2126.787.531.4 Residential Prop. 10.312.722.62.6 Commercial Prop. 77.831.535.54.1 Auto 0.20.60.80.4 TOTAL$446.5$106.2$92.2$27.3 Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.

154. Insured Loss Estimates: Truck Bomb Terrorist Attack ($ Bill) Type of CoverageNew YorkWashington San Francisco Des Moines Group Life $0.3$0.2$0.3$0.1 General Liability 1.20.40.70.2 Workers Comp 3.52.83.91.5 Residential Prop. 0.0 Commercial Prop. 6.82.13.91.2 Auto 0.0 TOTAL$11.8$5.5$8.8$3.0 Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April 26, 2006.

155. Shrinkage in 2006 (-11%) surplus is due to elimination of several lines covered under TRIA though 2005 but dropped under the Act’s extension effective 1/1/06 *2006 figure uses 2005 estimated year-end surplus and premiums by line as basis for calculations. Source: Insurance Information Institute. (Billions of Dollars) Surplus Under TRIA/TRIEA Covered Lines

156. Summary Personal & Commercial lines picture is very bright for 2006, assuming “normal” CAT loss activity Concern about pricing discipline in some some commercial lines, including casualty segments Rising investment returns insufficient to support deep soft market in terms of price, terms & conditions Clear need to remain underwriting focused How/where to deploy/redeploy capital?? Major Challenges:  Slow Growth Environment Ahead  Maintaining price/underwriting discipline  Managing variability/volatility of results

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