2. What Will Keep Insurance CEOs Awake at Night in 2001? An Update & Outlook for the US & Pennsylvania Property/Casualty Insurance Industry for 2001 and Beyond Pennsylvania Association of Mutual Insurance Companies Underwriting & Loss Prevention Seminar Harrisburg Hilton & Towers Hotel Harrisburg, PA November 15, 2000 Robert P. Hartwig, Ph.D.  Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: (212) 669- 9214  Fax: (212) 732-1916  bobh@iii.org  www.iii.org

3. Highlights: First Half 2000 ($ Millions) 20001999Change Net Written Prem.149,301143,335+4.2% Loss & LAE115,154106,065+8.6% Net UW Gain (Loss)(14,730)(7,788)+89.1% Net Inv. Income19,40519,114+1.5% Net Income (a.t.)10,03114,865-32.5% Surplus326,708334,348-2.3% Combined Ratio109.2104.8+4.4 pts.

4. Presentation Outline Insomnia: Major Problem Among Insurance CEOs Top 10 Reasons for Losing Sleep Q&A

5. #1 PROFITS

6. Return on Equity (Profitability) *Insurers: 1989-1998; and Fortune 500: 1990-1999. Source: NAIC, Insurance Information Institute 10-Year Average*

7. P/C Net Income After Taxes 1993-2000* ($ Billions) *Estimate based on First Half 2000 data. Sources: A.M. Best, ISO.

8. ROE: Financial Services Industry Segments, 1987–2000* * 2000 figures are estimates. Source: Insurance Information Institute

9. Return on Net Worth, Selected Lines in Pennsylvania Source: NAIC, Insurance Information Institute 10-Year Averages Auto+10.5% Home-2.1% WC+7.7

10. Sagging Profits are the Symptom, not the Cause Capital/Capacity Pricing Fundamentals Investments Competition Consolidation Distribution Class Action Wall Street

11. #2 CAPITAL/ CAPACITY

12. Policyholder Surplus: 1975-2000* (Capital, Total P/C) Source: A.M. Best, Insurance Information Institute Billions (US$) 1999 Surplus = $336.3 Billion Is it a Peak? Increase of 0.9% over 1998, smallest gain since 1984 Surplus decreased 2.3% in First Half 2000 to $326.7 Billion * First Half 2000

13. Net Premiums Written to Policyholder Surplus Source: A.M. Best, ISO, Insurance Information Institute 1998: 0.84 1999: 0.85 2000 (Forecast): 0.94

14. Distribution of Industry Surplus Source: PaineWebber

15. Excess Capital: What to Do? CEOs: Buy It, Build It--They Will Come Policyholders: Lower my rates! Pay my dividend! Shareholders: Show me the money! Regulators: Keep your hands off of it! Rating Agencies: Keep your hands off of it and give it back!

16. #3 PRICING

17. Average Price Change of Commercial Insurance Renewals Source: Conning

18. Policy Renewal Premiums in Standard Commercial Lines Source: Goldman Sachs

19. Policy Renewal Premiums in Workers’ Compensation Source: Goldman Sachs

20. Cumulative Workers Comp Rate/Loss Cost Changes* Source: NCCI *Advisory Loss Costs

21. Average Expenditures on Auto Insurance: US vs. PA * III estimates; Sources: NAIC, Insurance Information Institute Countrywide rates fell by 2.8% in 1998, 3.2% in 1999 (est.)

22. Nearby States’ Auto Insurance Expenditures & Rank, 1998 Source: NAIC (March 2000 release), Insurance Information Institute 12141937

23. Nearby States’ Average Homeowners Insurance Premium, 1997 Source: NAIC (March 2000 release), Insurance Information Institute 1118343850

24. #4 FUNDAMENTALS

25. P/C Industry Combined Ratio 1999 = 107.9 2000 (Est)* = 109.6 2001 Forecast* = 108.7 Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.7 * Based on III Earlybird Forecast 2001*

26. Direct Loss Ratio Trends, Selected Lines, Pennsylvania Source: NAIC, Insurance Information Institute

27. Underwriting Gain (Loss) 1975-2000* *I.I.I. estimate based on First Half 2000 data. Source: A.M. Best, Insurance Information Institute Billions (US$) In 2000, P-C insurers will pay out nearly $30 billion more in claims and expenses than they collected in premiums

28. U.S. Insured Catastrophe Losses * First Half 2000. Source: Property Claims Service, Insurance Information Institute CATs in 1990s caused $90B in insured losses $ Billions CATs cost insurers $750 million per month during the 1990s

29. Lost-Time Claim Frequency Per Worker: On the Rise? Source: NCCI

30. Auto Claim Cost and Frequency Trends Source: ISO

31. Auto Claim Cost and Frequency Trends Source: ISO

32. Auto Claim Cost and Frequency Trends Source: ISO

33. #5 INVESTMENTS

34. Net Investment Income Facts 1997 Peak = $41.5B 1998 = $39.9B 1999 = $38.6B 2000 (Forecast)* = $39.2B Source: A.M. Best, Insurance Information Institute Billions (US$) Pricing & underwriting problems were exacerbated by declining investment income * Estimate based on First Half 2000 results.

35. Interest Rates: Up, Up, But Not Away **Forecast Source: Federal Reserve Board of Governors. Rising interest rates reduced the market value of the industry’s bond portfolio by $55 billion in 1999

36. Stock Markets: Going Nowhere Fast in 2000 Source: Insurance Information Institute YTD Total Return through 11/13/00

37. #6 COMPETITION

38. Competition—Still on the Rise: Number of Insurers: 1970-1998 Sources: P/C: A.M. Best; L/H: NAIC.

39. Market Share of Top 5 P/C Insurers Source: Insurance Information Institute Fact Book (annual issues)

40. Market Share of Top 5 Life/Health Insurers Source: Insurance Information Institute Fact Book (annual issues)

41. Source: A.M. Best, ISO, Insurance Information Institute Growth in Net Premiums Written (All P/C Lines) 2000 est.; 2001 forecast from III Earlybird Survey 1999: 1.9% 2000 Est: 5.2% 2001 Forecast: 7.0% The underwriting cycle went AWOL in the 1990s. Is it Back? 2001*

42. #7 CONSOLIDATION

43. Insurance Mergers and Acquisitions *First Half 2000 Source: Compiled from Conning & Company reports. 1998: 565 deals valued at $165.4 B

44. Number of Deals: First Half 2000 vs. First Half 1999 Source: Conning 19992000 Total = 161Total = 244

45. Value of Deals: First Half 2000 vs. First Half 1999 Source: Conning 19992000 Total = $11.3BTotal = $30.9B N/A

46. #8 DISTRIBUTION

47. Small Insurance Firms Lag in Web Access and Exposure Source:The Industry Standard, Summer 2000

48. Web Presence of the Nation's 250 Largest P/C Companies Source: John P. Franzis, PricewaterhouseCoopers Management

49. Shifting Distribution Channels: Property/Casualty Insurers Source: Datamonitor 2003 1998

50. Projected Online Sales of Auto, Home & Term Life Insurance Source: Forrester Research $ Millions

51. Internet Insurance Sales Forecast, 2003 Source: Conning & Co. (Life), Forrester Group (Auto & Home) (Online-closed sales=Total $4.8 Billion)

52. Small-Commercial Market’s Internet Potential Source: Connings MarketStance Total Written Premium ($50.2 Billion)

53. Internet Ready Small-Commercial Market Written Premium Potential Source: Connings MarketStance Total Written Premium ($8.4 Billion)

54. Distribution Channels Continue to Proliferate CustomerInsurer Agent Broker Mail Telephone Bank Internet Dealerships Payroll Plans Stock Exchanges Online Auctions (e.g. Priceline.com) ????

55. Insurers: Tangled in the Web?

56. #9 CLASS ACTION ABUSE

57. TORT-ure Aftermarket Parts Medical Claims Review Totaled Cars (CCC/ADP) Guns Genetically Modified Foods (Corn) Y2K Sue & Labor HMOs Nursing Homes/Med Mal Tobacco Technology (Toshiba/Microsoft) Redlining Toxic Mold

58. Median Jury Award for Personal Injury Cases Source: Jury Verdict Research

59. Average Jury Awards 1993 vs.1999 *Comparison is between 1994 and 1999. Source: Jury Verdict Research; Insurance Information Institute.

60. Median Jury Award for Product Liability Cases Source: Jury Verdict Research

61. Median Punitive Damage Award by Case Type Source: Jury Verdict Research

62. #10 WALL STREET

63. Insurer 1999 Stock Performance Source: SNL Securities, Insurance Information Institute Total Return

64. IPO Champs Source: Hoover’s Biggest First-Day Jumps from Offer Price to Close $145 3  16 10/29/99 $97 ½ 1/15/99 $128 1  8 11/5/99 $280 12/10/99 $156 ¼ 9/28/99 $63 ½ 11/13/99 $239 ¼ 12/9/99 1 st Day Close Date

65. Insurance Stock Performance: What a Difference a Year Makes Source: SNL Securities, Insurance Information Institute YTD Total Return through November 10, 2000

66. Insurance Stock Performance: Since Tech Crash Began * NASDAQ peaked on March 10, 2000 at 5048.62 Source: Insurance Information Institute, SNL Securities Total Return: March 10 through November 10, 2000*

67. Insurance Stock Performance: Since Tech Crash Began * NASDAQ peaked on March 10, 2000 at 5048.62 Source: Insurance Information Institute, SNL Securities Total Return: March 10 through July 28, 2000*

68. Dot-Com to Dot-Gone? Source: Stockpoint.com, Insurance Information Institute. Price: June 852-Week High Low QUOT: $2.91 $13.63$2.91 INSW: $3.00$44.00$2.09

69. Insurance Information Institute On-Line Download this presentation at: http://www.iii.org/media/pennsylvania/index.htm http://www.iii.org/media/pennsylvania/index.htm