1. Will History Repeat Itself? Stephen Farr- Moderator Gallagher Healthcare Insurance Services, Inc Robert Francis The Doctors Company Jonathan D. Gale Catlin Insurance Co. LTD John Mize Towers Perrin Paul Romano Darwin Professional Underwriters, Inc.

2. OR ….. Said another way: Will the marketplace again bring on.... “IRRATIONAL EXHUBERANCE”

3. According to A.M. Best (6/30/06): U.S. P&C Market results are as follows:  Combined Ratios at 92%  Pre-tax Net Income of $43.2 B  Surplus has grown to $450 B

4. Primary Markets’ Results Source: A.M. Best, ISO, Insurance Information Institute * As of 6/30/06. Capacity TODAY is $450B, 10.1% above year-end 2005, 54% above its 2002 trough and 30% above its 1999 peak. Foreign reinsurance and residual market mechanisms absorbed 50%+ of 2005 CAT losses of $62.1B U.S. Policyholder Surplus 1975-2006 ($ Millions)*

5. According to A.M. Best (6/30/06): U.S. P&C Market results are as follows:  Combined Ratios at 92%  Pre-tax Net Income of $43.2 B  Surplus has grown to $450 B Medmal Sector shows: Combined Ratios well below 100% Operating Ratios well below 80%

6. Q3 and Q4 may deliver …. Record numbers since.... THE WIND DID NOT BLOW!

7. Primary Markets’ Results *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. 2001 ROE = -1.2% 2002 ROE = 2.2% 2003 ROE = 8.9% 2004 ROE = 9.4% 2005 ROAS 1 = 10.5% 2006 ROAS 2 = 15.4% 2005 Net Income only now exceeding levels of mid-1990s P/C Net Income After Taxes 1991-2006: Q1 ($ Millions)* 2 Based on Q1 results; For 12 months ending 3/31/06, ROAS=10.1%. Sources: A.M. Best, ISO, Insurance Information Inst.

8. Agenda Format of Discussion Introduction of Panelists Presentation by Panelists 5 minute for Q&A by moderator following each presenter 10 minutes for Q&A by audience at end

9. Agenda / Topics Do Actuarial Methods Increase the Amplitude of Market Swings? Presented by: John Mize, FCAS, MAAA Tillinghast

11. Agenda / Topics Diversity vs Disaster? Presented by: Jonathan Gale, Director of Underwriting Catlin Bermuda

13. Agenda / Topics Rate over Retention (or Quality over Quantity) Presented by: Paul Romano Darwin

15. Agenda / Topics How do we rate? Rating Actions on Medical Malpractice Companies and Prospects for the Future Presented by: Robert Francis, Chief Operating Officer The Doctors Company

18. Do Actuarial Methods Increase the Amplitude of Market Swings? Presented by: John Mize, FCAS, MAAA Tillinghast

19. Agenda The problem An example Methods of addressing the problem The risks

20. The Problem Actuarial methods use historical development by coverage year to project development of more recent years. Severity shifts often affect all open claims, so that mature years’ development factors are affected. If severity trends flatten, development factors based on higher trend periods can overstate or understate ultimate losses. Occurs in both directions – during surges in severity or during period of unusually low severity trends.

21. Example Professional liability coverage for a large multi-state healthcare system Occurrence basis, but claims are reported very quickly

22. Loss Development Pattern 1996 Year

23. Professional Liability at April 2001

25. Professional Liability at April 2002

26. Professional Liability at April 2003

27. Professional Liability at April 2004

29. Professional Liability at April 2005

30. Professional Liability at April 2006

32. Impact – 2001 Year

33. Impact – 2002 Year

34. Impact – 2004 Year

35. How Can We Address this Problem? Use inflation adjusted actuarial methods – most often used in countries with highly variable inflation rates. Judgmentally select loss development factors – assume future development will be like that observed prior to severity shift.

36. Risks and Issues If severity continues to increase, reserves are inadequate. Auditors may take a mechanical approach. Actuaries tend to be conservative – risk of being low seems higher than risk of being too high.

37. Panelist Q&A

38. Rate over Retention (or Quality over Quantity) Presented by: Paul Romano Darwin

39. Agenda Lots to consider when making choices Logic chain generally leads to retention as the first priority on most classes of business Increasingly insuring the frequency of risk lowers margins

40. Variables Community or manual rated versus experience rated class Deductible or retention Duty to defend or indemnity Severity or frequency oriented class Type of medical risk Geographic influence Panel counsel or client discretion

41. Market Conditions Prevailing ‘skin in the game’ – substantial progress from ’01 – ‘03 Cost of defending frivolous/low impact claims The practical side of the psychological factor – an anecdote

42. Managing the Strategy Segregating the business – where it matters and where it may not There’s a cost to ‘securitizing’ substantial SIRs Establishing guidelines and benchmarking results Under-pricing business even with healthy retentions remains hazardous

43. Panelist Q&A

44. Agenda / Topics Diversity vs Disaster? Presented by: Jonathan Gale, Director of Underwriting Catlin Bermuda

45. Agenda Diversification benefits from a Reinsurer Standpoint (with a few negatives) Monoline benefits from a Specialty Carriers Standpoint (with one positive idea for diversification) Do Natural Disasters affect Professional Liability Pricing?

46. Diversification from a Reinsurer Standpoint? Principal Benefits:  Lower Capital Requirements  Pricing Stability  Business is viewed more favourably by Regulators, Rating Agencies and Investors

47. The Point of Reinsurer Diversification

48. Diversification Overview One Risk Mean Required Capital = 500% of Mean

49. Diversification Overview Many Independent Risks Portfolio Required Capital = 250% of Mean

50. Lower Capital Requirements – What Does it Mean? Example 1 Property Catastrophe Treaty Individual RiskMonolineDiversified Limit 10,000,000 Expected Loss 500,000 Diversification Credit0.00%50.00%75.00% Capital Required9,000,0004,500,0002,250,000 Premium Charged1,000,000 ROC5.55%11.11%22.22%

51. Required Premium for 15% ROC On Same Risks Individual RiskMonolineMulti Line Limit10,000,000 Expected Loss500,000 Premium Charged *1,850,0001,175,000837,500 ROC15.00% * Premium charged is 15% * Capital at Risk + expected Loss Example 2 Property Catastrophe Treaty

52. Pricing Stability and Regulatory, Etc. Line should be priced more technically over the cycle (i.e., more than one line of business to allocate capacity to so no incentive to follow market down in one individual line) Pricing should be lower (see previous slide) to clients over the long term For all of the above reasons Regulators, Rating agencies and Investors consider Diversified Companies to be more secure and reward them (generally) accordingly

53. Negatives Theory is fine – execution is difficult Poor Catastrophe experience in 2005 has led most companies to seek to diversify further All rates worldwide (except for peak Catastrophe Zones) are under pressure including US medical malpractice and US professional lines Management temptation to diversify for the sake of diversification and growth – pricing beneath expected loss only a matter of time and history repeats itself! Our ideas of what is correlated and uncorrelated could be wrong particularly in extreme events– witness 9/11 and Katrina – diversification credit wholly dependent on knowing and forecasting likely accumulations in extreme events

54. Monoline Benefitsfrom a Specialty Insurer Standpoint (With One Positive for Diversification) Success of PIAA/ NABRICO Model speaks for itself  Local underwriting  Local Claims Handling  Local knowledge of good doctors; good hospitals; good lawyers etc.  Attention to detail Diversification in geographical terms (except for a couple of notable exceptions) was unsuccessful Diversification in terms of product line didn’t happen (again with a couple of notable exception) Reinsurance achieves all the diversification you need!

55. Do Natural Disasters Affect Professional Liability Pricing? YES

56. Panelist Q&A

58. How do we rate? Rating Actions on Medical Malpractice Companies and Prospects for the Future Presented by: Robert Francis, Chief Operating Officer The Doctors Company

59. Effects of rating changes on the medical malpractice segment Review of ratings pattern since 1984 Track the key rating variable Postulate near term outlook

60. American Phys Assurance COPIC The Doctors Company FPIC Health Care Indemnity ISMIE LAMMICO MAG Mutual Medical Assurance MIEC (California) MLMIC Medical Mutual of NC Medical Mutual of MD Medical Protective MHA Insurance Company MICA (AZ) PIC Wisconsin Physician Insurance (WA) Preferred Professionals Insurance ProNational SCPIE State Volunteer Mutual Utah Medical Companies Analyzed

61. Average Ratings of Rated Peer Group A++ B B+ B++ A- A A+

62. Medical Malpractice Industry Cycle

63. Initial Ratings Phase 108

64. Stability and Upgrades 1125

65. Downgrades 2516

66. Companies Upgraded in 2006 (for 2005) The Doctors Company American Physicians Assurance Medical Protective

67. Companies Upgraded in 2006 (for 2005) Operating RatioLeverage Ratio The Doctors Company72%3.3 American Phys73%3.6 Med Pro121%2.9 Peer Average89%4.3

68. The Doctors Company Ratings Changes A A+A A- B++ A-

69. Key Elements in Rating Decisions Operating ratio clearly leads the group of key metrics Combined ratio and leverage ratio are also important Current rating Performance relative to the industry Pattern of performance

70. Final Thoughts Medical malpractice carriers are less sensitive to rating changes though sensitivity increases with market softness and account size Few upgrades likely in 2007 Some possible in 2008

71. Questions?