Countrywide auto insurance expenditures are expected to fal

1
Turning the Corner How Long Can the Good Times
Last in Texas?

• Independent Insurance Agents of Texas
• 45th Annual Joe Vincent Management Seminar
• Austin, TX
• January 29, 2008

Robert P. Hartwig, Ph.D., CPCU,
President Insurance Information Institute ? 110
William Street ? New York, NY 10038 Tel (212)
346-5520 ? Fax [phone] ? bobh_at_iii.org ?
www.iii.org
2
Presentation Outline

• P/C Insurance Industry Financial Overview
• Texas Profitability Comparative Analysis
• Underwriting Performance
• Reinsurance Markets
• Premium Growth Its Drivers
• Capacity/Policyholder Surplus
• Merger Acquisition Activity
• Financial Strength Ratings
• Catastrophe Risk in Texas
• The Weakening Economy Insurance Impacts
• Q A

3
PROFITABILITYProfits in 2006/07 ReachedTheir
Cyclical PeakROEs Already Falling
4
P/C Net Income After Taxes1991-2007F (
Millions)

• 2001 ROE -1.2
• 2002 ROE 2.2
• 2003 ROE 8.9
• 2004 ROE 9.4
• 2005 ROE 9.6
• 2006 ROE 12.2
• 2007E ROAS1 13.1

Insurer profits peaked in 2006/7
ROE figures are GAAP 1Return on avg. surplus.
2007E figure is annualized actual 9-month net
income of 49.399B Return on Average Surplus
Actual 9-month 2007 result. Sources A.M. Best,
ISO, Insurance Information Inst.
5
ROE P/C vs. All Industries 19872007E
P/C profitability is cyclical, volatile and
vulnerable
Sept. 11
Hugo
Katrina, Rita, Wilma
Lowest CAT losses in 15 years
Andrew
Northridge
4 Hurricanes
2007 is actual 9-month ROAS of 13.1. 2008 P/C
insurer ROE is I.I.I. estimate. Source
Insurance Information Institute Fortune
6
Profitability Peaks Troughs in the P/C
Insurance Industry,1975 2008F
197719.0
198717.3
200612.2
10 Years
199711.6
9 Years
10 Years
1975 2.4
1984 1.8
1992 4.5
2001 -1.2
GAAP ROE for all years except 2007 which is
actual 9-month ROAS of 13.1. 2008 P/C insurer
ROE is I.I.I. estimate. Source Insurance
Information Institute Fortune
7
P/C, L/H Stocks Beat the SP 500 Index in 2007
Total YTD Returns Through December 2007
P/C insurance stocks benefiting from benign
hurricane season, strategic buying as a
countercyclical play
Through Jan. 25, 2008 P/C Insurers Down 5.6,
SP Down 9.4
As of Dec. 28 SP 500 was up 3.53 as 12/31/07.
Includes Financial Guarantee. Source SNL
Securities, Standard Poors, Insurance
Information Inst.
8
Advertising Expenditures by P/C Insurance
Industry, 1999-2006
Ad spending by P/C insurers is at a record high,
signaling increased competition
Source Insurance Information Institute from
consolidated P/C Annual Statement data.
9
TEXASA PROFIT GROWTH COMPARISON
10
ROE US TX P/C vs. All Industries, 19912006
Historically, profitability in TX has lagged the
p/c insurance industry and Fortune 500 and been
more erratic
Source Insurance Information Institute NAIC,
Fortune
11
ROE for Homeowners Insurance in Texas, 1992 - 2006
Texas will need to allow insurers to earn risk
appropriate rates of return that reflect huge
losses in some years
Average ROE in TX 1992 through 2006 was 0.14
Insurers were profitable in 2005, but less so
than the Fortune 500. 2006 was better.
Source NAIC
12
Growth in Direct Written Premiums TX and US
Despite all the rhetoric, premiums collected by
insurers have actually risen slightly less in TX
on an average annual basis than the nation
overall between 1985 and 2006 6.2 in TX vs.
6.5 for the US
Source A.M. Best, Insurance Information
Institute
13
Homeowners Direct Loss Ratios TX vs. US
Loss Ratios in Texas were worse than the US 11
out of past 22 years
Averages 1985-2006 TX 71.4 US 69.0
Source NAIC Insurance Information Institute
14
ROE for Personal Lines in Texas1992 - 2006
15-Year Average 92-06 Auto 7.9 Home 0.14
Despite recent improvements, TX is a very risky
long-run proposition
Source NAIC
15
ROE for Major Commercial Lines in TX, 1991 - 2006
Profits in TX are often inadequate and are well
below the Fortune 500 historical return of 13 to
14
Source NAIC, Insurance Information Institute.
16
ALL LINES 10-yr. Avg. Return on Equity, TX
Nearby States
1997-2006
Source NAIC, Insurance Information Institute
17
PP AUTO 10-yr. Avg. Return on Equity, TX
Nearby States
1997-2006
Source NAIC, Insurance Information Institute
18
HOME 10-yr. Avg. Return on Equity, TX Nearby
States
1997-2006
Source NAIC, Insurance Information Institute
19
Comm. M-P 10-yr. Avg. Return on Equity, TX
Nearby States
1997-2006
Source NAIC, Insurance Information Institute
20
WC 10-yr. Avg. Return on Equity, TX Nearby
States
1997-2006
Source NAIC, Insurance Information Institute
21
UNDERWRITING Extremely Strong
2007/2006Momentum for 2008
22
P/C Insurance Combined Ratio, 1970-2007E
Combined Ratios 1970s 100.3 1980s 109.2 1990s
107.8 2000s 101.8
Sources A.M. Best ISO, III
Estimate.
23
P/C Insurance Combined Ratio, 2001-2007E
2007 deterioration due primarily to falling
rates, but results still strong assuming normal
CAT activity
As recently as 2001, insurers were paying out
nearly 1.16 for every dollar they earned in
premiums
2006 produced the best underwriting result since
the 87.6 combined ratio in 1949
2005 figure benefited from heavy use of
reinsurance which lowered net losses
Sources A.M. Best ISO, III. Actual 9-month
result.
24
Ten Lowest P/C Insurance Combined Ratios Since
1920 vs. 2007E
2007 was one of the Top 12 best since 1920
The industrys best underwriting years are
associated with periods of low interest rates
The 2006 combined ratio of 92.5 was the best
since the 87.6 combined in 1949
Sources Insurance Information Institute research
from A.M. Best data. 2007 III Earlybird survey.
25
Underwriting Gain (Loss)1975-2007F
Insurers earned a record underwriting profit of
31.7 billion in 2006, the largest ever but only
the second since 1978. Expected gain for 2007 is
approximately 24 billion. Cumulative
underwriting deficit since 1975 is 417 billion.
Billions
Source A.M. Best, Insurance Information
Institute Actual 20079M underwriting profit
18.146B annualized to 24.192B.
26
Impact of Reserve Changes on Combined Ratio
Reserve adequacy has improved substantially
Source A.M. Best, Lehman Brothers estimates for
years 2007-2009
27
Losses Paid by Property/Casualty Insurers Have
Steadily Increased for Decades
Total losses paid by insurers increased by 146
billion or nearly 100 from 1987 through 2007
Dip in 2006/07 was associated with drop in
catastrophe losses, which is unlikely to persist.
Losses and loss ratios in 2007 rose. During
2006/07, the price of many types of insurance
fell.
Sources A.M. Best 2007 figure is annualized
from 9-month ISO results Insurance Information
Institute.
28
PERSONAL LINES
29
Personal LinesCombined Ratio, 1993-2007E
Recent strong results attributable favorable
frequency trends and low CAT activity
Source A.M. Best Insurance Information
Institute.
30
Homeowners Insurance Combined Ratio
Average 1990 to 2006 111.8 Insurers have paid
out an average of 1.12 in losses for every
dollar earned in premiums over the past 17 years
Sources A.M. Best III
31
Private Passenger Auto (PPA) Combined Ratio
Auto insurers have shown significant improvement
in PPA underwriting performance since mid-2002,
but results are deteriorating.
PPA is the profit juggernaut of the p/c insurance
industry today
Average Combined Ratio for 1993 to 2006 101.0
Sources A.M. Best III
32
Pure Premium Spread Personal Auto PD Liability,
2000-2007Q3
Margin necessary to maintain PPA profitability
Inversion of pure premium spread is a warning
sign that price and costs are out of sync
2000 PPA Combined110
2006 PPA Combined95.5
Source Insurance Information Institute
calculations based ISO Fast Track and US BLS data.
33
Bodily Injury Severity Trend Running Ahead of
Frequency
Medical inflation is a powerful cost driver
Average of 4 quarters ending with 3rd quarter
2007. Source ISO Fast Track data.
34
PD Liability Frequency Trend No Longer Offsets
Severity
Fewer accidents, but more damage when they occur
Higher Deductibles?
Average of 4 quarters ending with 3rd quarter
2007. Source ISO Fast Track data.
35
PIP Frequency Trend Now Offsets Rising Claim
Severity
Fraud caused problems from 1999-2001
Is No-Fault living on borrowed time?
Average of 4 quarters ending with 3rd quarter
2007. Source ISO Fast Track data.
36
Collision Frequency and Severity Claim Trend
Adverse
Average of 4 quarters ending with 3rd quarter
2007. Source ISO Fast Track data.
37
Comprehensive Favorable Frequency and Severity
Trends
Weather related claims from Hurricanes Katrina,
Rita Wilma 681,900 claims valued 3.29 billion
Average of 4 quarters ending with 3rd quarter
2007. Source ISO Fast Track data.
38
PREMIUM GROWTH At a Virtual Standstill
39
Strength of Recent Hard Markets by NWP Growth
1975-78
1984-87
2001-04
Post-Katrina period resembles 1993-97
(post-Andrew)
2008 Projected 0 premium growth would be the
first since 1943
Note Shaded areas denote hard market
periods. Source A.M. Best, Insurance
Information Institute
2007 figure is actual 9-month figure.
40
Growth in Net Written Premium, 2000-2007E
P/C insurers could experience their slowest
growth rates since the 1940sbut underwriting
results are expected to remain healthy
2007 figure based on actual 9-month
results. Source A.M. Best Forecasts from the
Insurance Information Institute.
41
Average Expenditures on Auto Insurance
Countrywide auto insurance expenditures are
expected to fall 0.5 in 2007, the first drop
since 1999
Lower underlying frequency and modest severity
are keeping auto insurance costs in check
42
Average Expenditures on Homeowners Insurance
Countrywide home insurance expenditures rose an
estimated 4 in 2007
Homeowners in non-CAT zones have seen smaller
increases than those in CAT zones
43
Homeowners Insurance Expenditures as a of
Median Existing Home Prices, 1995-2008F
Record catastrophe losses and declining home
prices are pushing HO insurance expenditures as a
of median home price up
Source National Association of Realtors, NAIC
Insurance Info. Institute calculations and HO
expenditure estimates/ forecasts for years
2005-2008.
44
Average Commercial Rate Change,All Lines,
(1Q2004 4Q2007)
Magnitude of rate decreases diminished
temporarily after Katrina but have grown again
-0.1
KRW Effect
Source Council of Insurance Agents Brokers
Insurance Information Institute
45
Insurance Premiums Are Shrinking Relative to Size
of Economy
Premium growth is less than GDP growth, meaning
more money in the pockets of consumers
Sources A.M. Best, US Bureau of Economic
Analysis, Blue Chip Economic Indicators
Insurance Information Institute.
46
Cumulative Commercial Rate Change by Line 4Q99
4Q07
Commercial account pricing has been trending down
for 3 years and is now on par with prices in
late 2001, early 2002
Source Council of Insurance Agents Brokers
47
Average Commercial Rate Changes by Line 4Q99
4Q07
Commercial account pricing has been trending down
for 3 years and is now on par with prices in
late 2001, early 2002
Source Council of Insurance Agents Brokers
48
RISING EXPENSESExpense Ratios Will Rise as
Premium Growth Slows
49
Personal vs. Commercial Lines Underwriting
Expense Ratio
Expenses ratios will likely rise as premium
growth slows
Ratio of expenses incurred to net premiums
written. Source A.M. Best Insurance Information
Institute
50
CAPACITY/SURPLUS The Industry in Underleveraged
51
U.S. Policyholder Surplus 1975-2007
Capacity as of 9/30/07 was 521.8B, 5.3 above
year-end 2006, 80 above its 2002 trough and 54
above its 1999 peak.
Capacity exceeded a half trillion dollars for the
first time during the 2nd quarter of 2007
Billions
Premium-to-surplus ratio approached a record low
of 0.841 at year end 2007, suggesting excess
capital
Surplus is a measure of underwriting capacity.
It is analogous to Owners Equity or Net Worth
in non-insurance organizations
Source A.M. Best, ISO, Insurance Information
Institute. As of
September 30, 2007
52
P/C Insurer Share Repurchases,1987- Through Q3
2007 ( Millions)
First 9-months 2007 share buybacks are already
133 of the 2006 record

• Reasons Behind Capital Build-Up Repurchase
  Surge
• Strong underwriting results
• Moderate catastrophe losses
• Reasonable investment performance
• Lack of strategic alternatives (MA, large-scale
  expansion)
• Returning capital owners (shareholders) is one of
  the few options available

2007 repurchases to date equate to 4.4 of
industry surplus, the highest in 20 years
Sources Credit Suisse, Company Reports
Insurance Information Inst.
53
REINSURANCE MARKETSReinsurance Prices are
Stabilizing Falling in Some Areas
54
Share of Losses Paid by Reinsurers, by Disaster
Reinsurance is playing an increasingly important
role in the financing of mega-CATs Reins. Costs
are skyrocketing
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.
55
US Reinsurer Net Income ROE, 1985-2006
Reinsurer profitability has rebounded
Source Reinsurance Association of America.
56
MERGER ACQUISITIONFew Catalysts for Major P/C
Consolidation
57
P/C Insurance-Related MA Activity, 1988-2006
MA activity began to accelerate during the
second half of 2007
No model for successful consolidation has emerged
Source Conning Research Consulting.
58
Distribution Sector Insurance-Related MA
Activity, 1988-2006
No extraordinary trends evident
Source Conning Research Consulting.
59
Distribution Sector MA Activity, 2005 vs. 2006
2005
2006
Number of bank acquisitions is falling years
Source Conning Research Consulting
60
Motivating Factors for Increased P/C Insurer
Consolidation in 2007

• Motivating Factors for P/C MAs
• Slow Growth Growth is at its lowest levels since
  1940s
• NWP growth was 0 in 2007 Appears similarly flat
  in 2008
• Prices are falling or flat in most non-coastal
  markets
• Accumulation of Capital Excess capital depresses
  ROEs
• Policyholder Surplus up 6-7 in 2007 and up 80
  since 2002
• Insurers hard pressed to maintain earnings
  momentum
• Options Share Buybacks, Boost Dividends, Invest
  in Operation, Acquire
• Reserve Adequacy No longer a drag on earnings
• Favorable development in recent years
• Favorable Fundamentals/Drop-Off in CAT Activity
• Underlying claims inflation (frequency and
  severity trends) are benign
• Lower CAT activity took some pressure of capital
  base

Source Insurance Information Institute.
61
INVESTMENT OVERVIEW More Pain, Little Gain
62
Total Returns for Large Company Stocks 1970-2008
SP 500 was up 3.53 in 2007, but down 7.79 so
far in 2008
Markets were up in 2007 for the 5th consecutive
year 2008 off to a rough start
Source Ibbotson Associates, Insurance
Information Institute. Through
January 28, 2008.
63
Property/Casualty Insurance Industry Investment
Gain1
Investment rose in 2007 but are just 9.8 higher
than what they were nearly a decade earlier in
1998
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. Annualized 9-month result of
47.718B. Sources ISO Insurance Information
Institute.
64
FINANCIAL STRENGTH RATINGS Industry Has
Weathered the Storms Well
65
P/C Insurer Impairment Frequency vs. Combined
Ratio, 1969-2007E
Impairment rates are highly correlated
underwriting performance and could reach
near-record low in 2007
2006 impairment rate was 0.43, or 1-in-233
companies, half the 0.86 average since 1969
2007 will be lower Record is 0.24 in 1972
Source A.M. Best Insurance Information
Institute
66
Reasons for US P/C Insurer Impairments, 1969-2005
2003-2005
1969-2005
Deficient reserves, CAT losses are more important
factors in 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
67
CATASTROPHE RISK IN TEXASTexas is Among the
Riskiest Places for Insurers to Operate
68
Most of US Population Property Has Major CAT
Exposure
Texas is among the riskiest places in America for
insurers to operate
Is Anyplace Safe?
69
U.S. Insured Catastrophe Losses
Billions
100 Billion CAT year is coming soon
2006/07 were welcome respites. 2005 was by far
the worst year ever for insured catastrophe
losses in the US, but the worst has yet to come.
Excludes 4B-6b offshore energy losses from
Hurricanes Katrina Rita. 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
70
States With Largest Insured Catastrophe Losses in
2007

• 2007 CAT STATS
• 1.18 million CAT claims across 41 states arising
• 23 catastrophic events
• 6.5 billion in insured losses

TX CAT losses were 3rd highest in the US in 2007
Source PCS/ISO Insurance Information Institute.
71
TEXAS Insured Catastrophe Losses,1980-2007
(2005, in Millions)
Average Annual CAT Losses 931 Million
Texas has experienced billion dollar-plus CAT
losses in 9 of the past 28 years
Sources ISO/PCS Insurance Info. Inst.
Losses stated in 2005 dollars except 2006/07
figures are unadjusted
72
Distribution of US Insured CAT Losses TX, FL vs
US, 1980-2006
Billions of 2005 Dollars
Texas accounted for 10 of all US insured CAT
losses from 1980-2006 25.6B out of 249.3B
All figures (except 2006 loss) have been
adjusted to 2005 dollars. Source PCS division
of ISO.
73
Top 10 Major Disaster Declaration Totals By
State 1953- 2006
Total Number
From 1953-2006, Texas leads the country in major
disaster declarations
Through July 12, 2006. Source Federal Emergency
Management Agency (FEMA)
74
Inflation-Adjusted U.S. Insured Catastrophe
Losses By Cause of Loss, 1987-2006¹
Insured disaster losses totaled 297.3 billion
from 1987-2006 (in 2006 dollars). Wildfires
accounted for approximately 6.6 billion of
these2.2 of the total.
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)..
75
Number of Tornadoes,1985 2007p
There are usually more than 1,000 confirmed
tornadoes each year in the US. They accounted
for about 25 of catastrophe losses since 1985
Source US Dept. of Commerce, Storm Prediction
Center, National Weather Service Ins. Info. Inst.
76
Flood InsuranceAnalysis of Flood Policy
Purchase and Lapse Rates Since Katrina in Texas
77
NFIP Flood Policy Growth in Gulf States Since
Katrina
The number of flood insurance policies sold in
the Gulf states in the 2 years following Katrina
increased by 21.6
There was a 40.5 increase in the number of flood
policies sold in TX in the year after Katrina/Rita
Change from July 2005 through August
2007. Sources NFIP Insurance Information
Institute.
78
Percentage of NFIP Flood Policies Issued Since
Katrina That Are Not Renewed
Flood policy nonrenewal rates in Gulf states are
surprisingly high
One out of four flood policies sold in TX in the
year after Katrina/Rita was nonrenewed in the
second year
Policies issued since July 2005 as of August
2007. US figure is nonrenewal rate for all
policies in force, average over 12 month period
ending August 2007. Sources NFIP Insurance
Information Institute.
79
Flood Insurance Penetration RatesTop 25
Counties/Parishes in US
Highest flood insurance penetration rates are in
LA and FL
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
80
Flood Insurance Penetration RatesCounties/Parish
es Ranked 26-50
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
81
Flood Insurance Penetration RatesCounties/Parish
es Ranked 51-75
MS coastal counties rank abysmally low
As of 12/31/05. Source New Orleans
Times-Picayune, 3/19/06, from NFIP and US Census
Bureau data.
82
Hurricane Riskin TexasWhere Even theDisasters
are Bigger
83
Total Value of Insured Coastal Exposure (2004,
Billions)
Texas has more insured coastal exposureat nearly
3/4 of a trillion dollars than all but 3 states.
Future Mega-Losses are UNAVOIDABLE.
Source AIR Worldwide
84
Average Annual Tropical Cyclone Insured
Losses(Top 10 States, Millions)
Distribution of Annual Losses
Normalized losses adjusted for inflation,
housing density, wealth and wind insurance
coverage, based on historical data for 100-year
period 1900-1999. Source Tillinghast-Towers
Perrin
85
Top 10 Most Costly Hurricanes in US History,
(Insured Losses, 2005)
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
Sources ISO/PCS Insurance Information
Institute.
86
Top 10 Deadliest Hurricanes to Strike the US
1851-2005
1900 Galveston Hurricane was the deadliest in US
history
Could be as high as 12,000 Could be as high
as 3,000 Midpoint of 1,000 2,000
range Associated Press total as of Dec. 11,
2005. Midpoint of 1,100-1,400
range. Sources NOAA Insurance Information
Institute.
87
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 Hurricane
The p/c insurance industry will likely
experience a 20B event approximately every
10-12 years, on averagemostly associated with
hurricanes
Galveston Storm
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.
88
Historical Hurricane Strikes in Aransas County,
TX, 1900-2007
Source NOAA Coastal Services Center,
http//maps.csc.noaa.gov/hurricanes/pop.jsp/
Insurance Info. Institute.
89
Historical Hurricane Strikes in Brazoria County,
TX, 1900-2007
Source NOAA Coastal Services Center,
http//maps.csc.noaa.gov/hurricanes/pop.jsp/
Insurance Info. Institute.
90
Historical Hurricane Strikes in Galveston County,
TX, 1900-2007
Source NOAA Coastal Services Center,
http//maps.csc.noaa.gov/hurricanes/pop.jsp/
Insurance Info. Institute.
91
Historical Hurricane Strikes in Harris County,
TX, 1900-2007
Source NOAA Coastal Services Center,
http//maps.csc.noaa.gov/hurricanes/pop.jsp/
Insurance Info. Institute.
92
Historical Hurricane Strikes in Jefferson County,
TX, 1900-2007
Source NOAA Coastal Services Center,
http//maps.csc.noaa.gov/hurricanes/pop.jsp/
Insurance Info. Institute.
93
2005 Was a Busy, Destructive, Deadly Expensive
Hurricane Season
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.
Source WeatherUnderground.com, January 18, 2006.
94
2007 Hurricane SeasonNo Big Hits Once Again
A Sigh of Relief The 2007 season saw 15 named
storms (same as devastating 2004 season)
including two rare Category 5 storms, but the US
escaped this year with very little loss
Source www.wunderground.com, accessed 1/11/08
Insurance Information Institute
95
Spotlight on Galveston IslandHoustons Version
ofThe Hamptons orMiami Beach?
96
New Construction in Galveston Will Dreams be
Blown Away?

• More than 2.3 Billion Residential, Commercial
  and Public Construction is Under Way in 2007
• More than 6,500 Residential Units Under
  Construction
• Mostly condos, including several towers up to 27
  stories high
• One development by Centex Homes will consist of
  2,300 condos and houses on 1,000 acres
• The Average Home Price Rose 89 to 232,800 over
  the 4 Years Ending Jan. 2007
• Typical Price Range for Newer Condos 400,000
  Up to 1.5 Million
• An undeveloped waterview lot can go for as much
  as 300,000
• Most will be insured via TWIA?Limits up to 1.6
  million contents
• Inconvenient Truth Galveston is Site of the
  Deadliest Natural Disaster in US History
• At least 8,000 people were killed in a 1900
  hurricane
• 3,600 homes were destroyed
• The current seawall is only 15.6 ft. high
  Katrinas storm surge was nearly 30 feet.
• Insured Losses Today from Repeat of 1900 Storm
  Would Exceed 21 Billion
• Would become the 3rd most expensive hurricane in
  US history (after Katrina and Andrew)

Source Insurance Information Institute from A
Texas-Sized Hunger for Gulf Coast Homes, New
York Times, March 18, 2007 and www.1900storm.com
and www.twia.org accessed July 9, 2007.
97
Texas Windstorm Insurance AssociationA Big
Financial Risk for Texas Residents
98
TWIA Growth In Exposure to Loss (Building
Contents Only, Billions)
TWIAs liability in-force for building contents
has surged by 362 percent in the last 7 years
from 12.1bn in 2000 to 55.9bn as of 09/30/07
Source TWIA Insurance Information Institute
As of 11/30/06 As of
09/30/07.
99
Shifting Legal Liability Tort EnvironmentIs
the Pendulum SwingingAgainst Insurers?
100
Personal, Commercial Self (Un) Insured Tort
Costs
Total 216.7 Billion
Total 159.6 Billion
Billions
Total 121.0 Billion
Total 39.3 Billion
Excludes medical malpractice Source
Tillinghast-Towers Perrin, 2007 Update on US Tort
Cost Trends.
101
Tort System Costs and Tort Costs as a Share of
GDP, 2000-2009F
After a period of rapid escalation, tort system
costs as of GDP are now falling
Source Tillinghast-Towers Perrin, 2007 Update
on US Tort Cost Trends.
102
The Nations Judicial Hellholes (2007)
Watch List Madison County, IL St. Clair County,
IL Northern New Mexico Hillsborough County,
FL Delaware California Dishonorable
Mentions District of Columbia MO Supreme Court MI
Legislature GA Supreme Court Oklahoma
Some improvement in Judicial Hellholes in 2007
NEW JERSEY Atlantic County (Atlantic City)
NEVADA Clark County (Las Vegas)
ILLINOIS Cook County
West Virginia
South Florida
Source American Tort Reform Association
Insurance Information Institute
103
Business Leaders Ranking of Liability Systems for
2007
New in 2007 ME, NH, TN, UT, WI Drop-Offs ND, VA,
SD, WY, ID

• Best States
• Delaware
• Minnesota
• Nebraska
• Iowa
• Maine
• New Hampshire
• Tennessee
• Indiana
• Utah
• Wisconsin

• Worst States
• Arkansas
• Hawaii
• Alaska
• Texas
• California
• Illinois
• Alabama
• Louisiana
• Mississippi
• West Virginia

Newly Notorious AK Rising Above FL
Midwest/West has mix of good and bad states
Source US Chamber of Commerce 2007 State
Liability Systems Ranking Study Insurance Info.
Institute.
104
REGULATORY LEGISLATIVE ISSUESA Busy Couple
ofYears for Insurers
105
Federal Legislative Update

• Optional Federal Charter (OFC)
• Large PC and life insurers are the major
  supporters of OFC. Supporters argue that the
  current patchwork of 50 state regulators reduces
  competition, redundant, slows new product
  introductions and adds cost to the system.
• In general, global P/C insurers , reinsurers and
  large brokers mostly support the concept, while
  regulators (state insurance commissioners), small
  single-state and regional insurers, and
  independent agency groups largely oppose the
  idea. An optional federal charter is more
  favorable for global PC insurers, because an
  insurer that operates in multiple states could
  opt to be regulated under federal rules rather
  than multiple state regulations. As a result,
  this could increase innovation in the industry.
• Currently appears to be more momentum for OFC for
  life than for PC insurers based on the
  homogeneous nature of many life products.  The
  debate should intensify and although passage may
  not occur in the current session of Congress, it
  may lay the groundwork for passage in the
  2009-2010 session.

Sources Lehman Brothers, Insurance Information
Institute
106
Federal Legislative Update

• McCarran-Ferguson Insurance Antitrust Exemption
• Under McCarran-Ferguson Act of 1945, insurers
  have limited immunity under federal anti-trust
  laws allowing insurers to pool past claims
  information to develop accurate (actuarially
  credible) rates.
• Very low level of understanding of M-F in
  Washington
• Certain legislators threaten to revoke
  McCarran-Ferguson because of alleged collusion in
  the wake of Hurricane Katrina.  However, the view
  among some Washington insiders is that such a
  move would hurt small insurers with less
  resources rather than the large insurers perhaps
  being targeted.  The current bills designed to
  revoke McCarran-Ferguson are S.618 and H.R. 1081.
• The government appointed Antitrust Modernization
  Commission in an April 2007 report strongly
  encouraged Congress to re-examine the
  McCarran-Ferguson Act.  Notably, 4 of the
  commissions 12 members called for a full repeal
  of the law.

Sources Lehman Brothers, Insurance Info.
Institute
107
Federal Legislative Update

• Natural Disaster Coverage
• Some insurers are pushing for federal
  catastrophic risk fund coverage in the wake of
  billions of dollars of losses suffered by
  insurers from the 2004-2005 hurricane seasons.
• Legislative relief addressing property/casualty
  insurers exposure to natural catastrophes, such
  as the creation of state and federal catastrophe
  funds, has been advocated by insurers include
  Allstate and State Farm recently.  However, there
  is active opposition many other insurers and all
  reinsurers.
• There are supporters in Congress, mostly from
  CAT-prone states. Skeptics in Congress believe
  such a plan would be a burden on taxpayers like
  the NFIP and that the private sector can do a
  better job. Unlike TRIA, the industry is not
  unified on this issue.
• Allowing insurers to establish tax free reserves
  for future catastrophe losses has also been
  proposed, but Congress has not yet indicated much
  support.

Sources Lehman Brothers, Insurance Information
Institute
108
How the Homeowners Defense Act of 2007 Would
Operate
Source Zurich Technical Center, Federal
Legislative Series Report, November 13, 2007.
109
Homeowners Defense Act of 2007 How it Works
Rationale

• The Act has Three Main Components
• 1. Establishment of Consortium to encourage state
  facilities to cede risk into the private markets,
  particularly the catastrophe bond markets
• 2. Creation of a Federal loan program to provide
  pre-event liquidity and post-event long term
  financing for state residual markets and
  catastrophe funds
• 3. Creation of a Federal catastrophe fund to
  back-stop state catastrophe funds

Source Zurich Technical Center, Federal
Legislative Series Report, November 13, 2007.
110
Homeowners Defense Act of 2007 How it Works
Rationale

• With the back-drop of frequently poor financial
  conditions within State property residual markets
  in certain states, the objectives of the Bill
  appear to be
• 1. Transfer of catastrophic risk from
  under-capitalized state facilities into the
  global reinsurance network and capital markets
• 2. Ensuring the ability of these State facilities
  to make good on their commitments in the weeks
  after a storm and to spread over-time the
  potentially massive state taxpayer burden caused
  by under-capitalization and unsound pricing
• 3. Transfer high layer cat risk to the Federal
  taxpayer

Source Zurich Technical Center, Federal
Legislative Series Report, November 13, 2007.
111
Homeowners Defense Act of 2007 How it Works
Rationale

• The Main Questions Appear to be Whether
• 1. The Bill would lead to the structural changes
  necessary to bring these facilities into
  financial health over time or simply enable
  further fiscal deterioration
• 2. The State facilities could be otherwise
  motivated to purchase reinsurance and explore
  capital market solutions without the need for
  Federal involvement
• 3. Adequate private capital can be mustered to
  meet the borrowing needs of the State catastrophe
  funds and residual markets

Source Zurich Technical Center, Federal
Legislative Series Report, August 31, 2007.
112
ECONOMIC OUTLOOKWhat the Weakening Economy
Means for Exposure Growth Insurer Performance
113
Real GDP Growth
Economic growth has slowed dramatically
Yellow bars are Estimates/Forecasts. Source US
Department of Commerce, Blue Economic Indicators
1/08 Insurance Information Institute.
114
Fed is Now Pushing Rates Downward Aggressively to
Avert Recession
Fed rate cuts will blunt economic downturn, but
will further weaken US dollar unless other
central banks do the same
As of week ending January 25, 2008. Source
Board of Governors, Federal Reserve System
Insurance Information Institute.
115
Real GDP Growth vs. Real Premium Growth Modest
Association
P/C insurance industrys growth is influenced
modestly by growth in the overall economy
Sources A.M. Best, US Bureau of Economic
Analysis, Blue Chip Economic Indicators
Insurance Information Institute.
116
New Private Housing Starts,1990-2013F (Millions
of Units)
Exposure growth forecast for HO insurers is dim
for 2008, climbing slowly though 2013
New home starts plunged 34 from 2005-2007 Drop
through 2008 trough is 43 (est.)a net annual
decline of 880,000 units
I.I.I. estimates that each incremental 100,000
decline in housing starts costs home insurers
87.5 million in new exposure (gross premium).
The net exposure loss in 2008 vs. 2005 is
estimated at 770 million.
Source US Department of Commerce Blue Chip
Economic Indicators (10/07), Insurance Info.
Institute
117
Auto/Light Truck Sales,1999-2013F (Millions of
Units)
Weakening economy, credit crunch and high gas
prices are hurting auto sales
New auto/light trick sales are expected to
experience a net drop of 900,000 units annually
by 2008 compared with 2005, a decline of 5.3
Impacts of falling auto sales will have a less
pronounced effect on auto insurance exposure
growth than problems in the housing market will
on home insurers
Source US Department of Commerce Blue Chip
Economic Indicators (10/07), Insurance Info.
Institute
118
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
Weakening wage and salary growth is expected to
cause a deceleration in workers comp exposure
growth
Shaded areas indicate recessions
As of 7/1/07 (latest available). Source US
Bureau of Economic Analysis Federal Reserve Bank
of St. Louis at http//research.stlouisfed.org/fre
d2/series/WASCUR I.I.I. Fact Books
119
Summary

• Personal Commercial lines results were strong
  in 2007 Overall profitability in 2007/2006
  reached its highest level since 1988. Strong
  momentum into 2008
• TX has been strong too
• Underwriting results are aided by lack of CATs
  favorable underlying loss trends, including tort
  system improvements
• Premium growth rates are slowing to their levels
  since the late 1940s Commercial leads decreases
• Rising investment returns insufficient to support
  deep soft market (large underwriting losses) in
  terms of price, terms conditions
• How/where to deploy/redeploy capital??
• Major Challenges
• Slow Growth Environment Ahead (Market/Economy
  Driven)
• Maintaining price/underwriting discipline
• Managing variability/volatility of results

120
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