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  • Exhibit 14 of Article
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  • Transcript

    • 1. Financial Crisis and the Future of P/C Insurance Challenges Amid the Global Economic and Regulatory Storm Society for Insurance Research Savannah, GA October 21, 2008 Download at: www.iii.org/media/presentations/SIR Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute  110 William Street  New York, NY 10038 Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org
    • 2. Presentation Outline
      • Financial Crisis: Federal Government’s Financial Rescue Package
        • Emergency Economic Stabilization Act of 2008 (w/revisions)
        • Troubled Asset Relief Program (TARP)
        • Impacts for Financial Services and Insurers
      • The Weakening Economy: Insurance Impacts
        • Exposure & Claim Impacts
        • What Accelerating Inflation Means for Insurers
        • Looming Financial Services Regulatory Reform
      • P/C Insurance Industry Overview & Outlook
      • Q & A
    • 3. Federal Government’s Financial Rescue Package* (a.k.a. “The Bailout”) Plan Details & Insurer Implications *Including additional provision of the Emergency Economic Stabilization Act of 2008
    • 4. Federal Government Financial Services Rescue Package Source: US Treasury, CNN Money.com and I.I.I. research.
        • THE SOLUTION: A 5-POINT PLAN
        • Treasury Purchase of Equity Stakes in Banks
          • Treasury will buy up to $250B in senior preferred shares in wide variety of banks (out of $700B in EESA)
          • 9 largest banks get $125B
          • Stakes come in the form of non-voting shares and pay 5% for first 5 years and 9% thereafter
          • Feds get warrants to buy up to 15% more shares
          • Banks can buy back stake from government
          • Must agree to limits on CEO compensation
          • GOAL: Bolster bank capital/liquidity
        • Backing New Debt from Banks
          • FDIC will guarantee new, senior unsecured debt issued by banks, thrifts and bank holding cos. Must mature within 3 years; Banks can opt in until 6/30/2009
          • GOAL: Restore confidence of buyers of bank debt that they will be paid back (no matter what happens to bank)
    • 5. Federal Government Financial Services Rescue Package
        • THE SOLUTION: A 5-POINT PLAN (Cont’d)
        • More Coverage for Bank Deposits
          • FDIC will provide unlimited coverage for all non-interest bearing accounts through 12/31/09. (Such accounts are typically used by businesses to meet short-term expenses such as payrolls)
          • Paid for by fees/premiums paid to FDIC
          • GOAL: Boost liquidity for otherwise healthy banks (esp. regional and local banks that might see nervous depositors withdraw money in favor of bigger banks
        • Buy Short-Term Commercial Paper
          • Federal Reserve will buy until 4/30/09 high-quality 3-month debt issued by businesses in commercial paper market
          • Commercial paper is the prime source of funding to cover op. expenses at many large corps. and financial institutions
          • GOAL: Guarantees there will be a buyer of debt, so private sector buyers will be willing to buy too
      Source: US Treasury, CNN Money.com and I.I.I. research.
    • 6. Federal Government Financial Services Rescue Package
        • THE SOLUTION: A 5-POINT PLAN (cont’d)
        • Buy Troubled Assets: “Troubled Asset Relief Program” (TARP)
          • Up to $450B available (theoretically) available to purchase troubled assets from banks (and others?)
          • Limits on CEO Compensation in Participating Firms
          • Pricing: Debt Sold to Feds via Reverse Auction
          • Reverse auction is one in which sellers bid lowest price it will accept from the government (i.e., rather a traditional auction in which the highest bid from buyer wins). Helps ensure that the Feds (taxpayer) does not overpay for questionable debt
          • Will be sold in multi-billion dollar increments and run by outside asset managers in amounts ranging up to $50 billion
          • Recoupment provision allows government to assess users of program to make taxpayers whole if program loses money
          • GOAL: By removing “toxic” assets with uncertain underlying value from bank balance sheets, banks should be better able to attract capital
      Source: I.I.I. research.
    • 7. Distribution of $700 Billion in Funds Under Emergency Economic Stabilization Act of 2008
      • Shifting Emphasis
      • Original EESA allocated all $700B to Troubled Asset Relief Program
      • View was that TARP would take too long and that liquidity/credit crisis required direct infusion of capital in banks by feds
      Source: US Treasury Department; Insurance Information Institute research. Deals Exceeding $100 Million
    • 8. Stakes Taken by Federal Government in 9 Large US Banks *Includes $5 billion for purchase of Wachovia. Source: USA Today, Oct. 15, 2008, p. 1B.
      • Feds announced a total $125B stake in 9 large banks on Oct. 14.
      • Another $125B will be infused in regional and local banks
      • Sum comes from $700B in Troubled Asset Relief Program in the Emergency Economic Stabilization Act of 2008
    • 9. Top 10 Largest Bank Failures Source: FDIC; Insurance Information Institute research. Resurgent bank failures (13 in 2008 as of Oct. 12) are symptomatic of weakness in the financial system. FDIC says many more may fail Failure of IndyMac was the 4 th largest in history Sept. 25 failure of Washington Mutual was bar far the largest in US history. Sold to JP Morgan Chase by govt. for $1.9B plus WaMu’s loans and deposits
    • 10. Top 10 P/C Insolvencies, Based Upon Guaranty Fund Payments* * Disclaimer: This is not a complete picture. If anything the numbers are understated as some states have not reported in certain years. Source: National Conference of Insurance Guaranty Funds, as of September 17, 2008. $ Millions The 2001 bankruptcy of Reliance Insurance was the largest ever among p/c insurers
    • 11. Top 10 Life Insolvencies, Based On Guaranty Fund Payments and Net Estimated Costs* *As of 2007. Source: National Organization of Life and Health Guaranty Funds $ Millions (Year Indicates Year of Liquidation) The 1991 bankruptcy of Executive Life was by far the largest ever among life insurers
    • 12. Federal Government Financial Services Rescue Package Source: Insurance Info. Inst. research.
        • Other Recent Provisions
        • Fannie/Freddie Will Increase Mortgage Buying
          • Feds step-up buying MBS in open market
        • 10-Day Ban on Short-Selling 829 Financial Stocks
          • Most major public insurers on list
          • Expired Oct. 7
        • Increase FDIC Insurance Limits on Deposits to $250,000 from $100,000
        • Establish Financial Oversight Board
          • Includes Treasury Secretary, Fed Chairman and others TBD
    • 13. Federal Government Financial Services Rescue Package Source: Insurance Info. Inst. research.
        • Conversion of Last 2 Remaining Investment Banks (Goldman Sachs and Morgan Stanley) to Bank Holding Companies
          • Recognition that Wall Street as it existed for decades is dead
          • High leverage investment bank model no longer viable in current market environment
          • New entities will be subject to stringent federal regulation in exchange for more access to federal dollars/liquidity facilities
          • Capital and liquidity requirements will be greatly enhanced
          • Reduced leverage means new entities will be less profitable
        • Other Recent Provisions (cont’d)
    • 14. Liquidity Enhancements Implemented by Fed Due to Crisis
      • Lowered Interest Rates for Direct Loans to Banks
        • Federal funds rate cut from 5.5% in mid-2007 to 1.5% now
        • Most recent cut from 2.0% to 1.5% globally coordinated on Oct. 7
      • Injected Funds Into Money Markets
      • Increased FDIC Insurance Limits to $250,000 from $100,000
      • Coordinated Exchange Transactions w/Foreign Central Banks
      • Injected Cash Directly Into Banks; Will Take Ownership Stake
      • Created New and Expanded Auction & Lending Programs for Banks
        • e.g., Term Auction Facility expanded to $900B
      • Started Direct Lending to Investment Banks for the First Time Ever
      • Authorized Short-Term Lending to Fannie/Freddie, Backstopping a Treasury Credit Line
      Source: Wall Street Journal, 9/22/08, p. A8; Insurance Information Institute research as of Oct. , 2008.
    • 15. Why Have Credit Markets Frozen & Why Are They So Hard to Thaw?
      • CRISIS OF CONFIDENCE : Banks are Fearful of Lending to Each Other as Well as Even Highly-Rated Corporate Risks
        • Lehman and bank bankruptcies have deeply damaged faith in the financial integrity of financial institutions
        • Fear has spread to European banks
        • Concern that US actions are insufficient and Europe’s too uncoordinated
        • CONSEQUENCES: Lending is shriveling and LIBOR is rising
      • DELEVERAGING : Banks & Investors Want to Reduce Debt
        • Issuing new loans, even short term, slows purge of debt from balance sheets
      • TANGLED WEB OF RISK : Financial Innovations Designed to Spread and Hedge Against Risk Obscure Where Risk is Held an in What Amounts  Genesis of the Systemic Risk
        • The packaging, securitization and global sale of collateralized debt obligations (CDOs) such as mortgage backed securities (MBS) has made every financial institution in the world vulnerable
        • Explosive and widespread use of derivative hedges such as credit default swaps create large numbers of potentially vulnerable counterparties
      Source: Wall Street Journal, 10/7/08, p. A2; Insurance Information Institute research.
    • 16. Positive Signs & Silver Linings in the Economy
      • CREDIT THAW : Banks are beginning to lend to each other and to others in unsecured credit markets
        • Key interest rates falling (LIBOR)
      • DELEVERAGING : Banks, Businesses & Consumers reducing debt loads to more manageable levels
      • ENERGY PRICES FALLING : Oil prices are down more than 50% and gas prices down about 33%
        • Falling energy prices are potent economic stimulus and confidence builder
        • Helps all industries
      • INFLATION THREAT WANING : Falling energy, commodities prices will help consumers and cut off price spiral
        • Less erosion in real wages
      • AFFORDABILITY IN HOUSING : Rapidly falling home prices will attract more buyers, more quickly
        • Critical to clear away excess inventory, stem foreclosures
      Source: Insurance Information Institute
    • 17. The Deleveraging of America Economic Downdraft and Regulatory Questions
    • 18. Leverage Ratios for Investment Banks and Traditional Banks* *Based on data for last quarter reported (May or June 2008). Source: “ The Perils of Leverage,” North Coast Investment Research, Sept. 15, 2008
      • Investment bank leverage ratios were extremely high.
      • Lehman filed for bankruptcy 9/15
      • Merrill merged with JP Morgan Chase
      • Goldman and Morgan converted to bank holding companies
    • 19. How Does Leverage Work?
      • Example of Non-Leverage Transaction
        • Buy 1 share of stock for $100
        • Price of share rises to $110
        • RETURN = $10 or 10%
      • Leveraged Transaction
        • Invest $10 and borrow $90
        • Stock rises to $110
        • RETURN = $10 or 100% (less borrowing costs)
      • This Pleasant Arithmetic Works Equally Unpleasantly in the Opposite Direction
      • Declining asset values, seizing of credit markets made such borrowing impossible and the operating model of investment banks nonviable
      Source: Insurance Information Institute. Investment banks and others juiced their returns by making big, bad bets with (mostly) borrowed money on mortgage securities
    • 20. Credit Default Swaps: Notional Value Outstanding, 2002:H2 – 2008:H1* *End of calendar half (H1 = June 30, H2 = December 31). Source: International Swaps and Derivatives Association: http://www.isda.org/statistics/recent.html $ Trillions At year end 2007, the notional value of CDS’s outstanding was $62.2 trillion or 4.5 times US GDP, up nearly 40 fold from 2002. The 12% decline in 08:H1 was the first since 2001.
    • 21. Percent Change in Debt Growth (Quarterly since 2004:Q1, at Annualized Rate) Source: Federal Reserve Board, at http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf Deflation of housing bubble is very evident Corporate deleveraging Consumer desperation?
    • 22. Ratio of Debt Service Payments to Disposable Income , 1980 – 2008:Q2 HOUSEHOLD DELEVERAGING In Q2 2008 13.85% of disposable personal income went to service mortgage and consumer debt, down from a peak of 14.42% in Q4 2006, Long-term ratio of debt service to income is 12.1%, well below where it is today Source: Board of Governors of the Federal Reserve: http://www.federalreserve.gov/releases/housedebt/default.htm ; 08q2 % of Disposable Personal Income
    • 23. Reasons Why Insurers Are Better Risk Managers Than Banks Insurers Will Emerge With Their Risk Management Model Largely Intact
    • 24. 6 Reasons Why P/C Insurers Have Fewer Problems Than Banks
      • Superior Risk Management Model
        • Insurers overall approach to risk focuses on underwriting discipline, pricing accuracy and management of potential loss exposure
        • Banks eventually sought to maximize volume, disregarded risk
      • Low Leverage
        • Insurers do not rely on borrowed money to underwrite insurance
      • Conservative Investment Philosophy
        • High quality portfolio that is relatively less volatile and more liquid
      • Strong Relationship Between Underwriting and Risk Bearing
        • Insurers always maintain a stake in the business they underwrite
        • Banks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with disastrous consequences
      • Tighter Solvency Regulation
        • Insurers are more stringently regulated than banks or investment banks
      • Greater Transparency
        • Insurers are an open book to regulators and the public
      Source: Insurance Information Institute
    • 25. Government Rescue Package of AIG Motivation & Structural Details
    • 26. AIG Rescue Package by the Fed
      • AIG suffered a liquidity crisis due to large positions, mostly associated with Credit Default Swaps, related to mortgage debt through its AIG Financial Products division
      • The losses at AIGFP brought AIG’s holding company to the brink of bankruptcy by Sept. 16 (AIG has 245 divisions, 71 are US domiciled insurers)
        • Efforts to create large credit pool via private banks failed
      • AIG’s separately regulated insurance subsidiaries were solvent at all times and met local capital requirements in all jurisdictions*
      • Federal Reserve Agreed to Lend AIG $85 Billion to Prevent Bankruptcy, of which $70B has been borrowed (as of 10/10)
        • 2-year term @ 850 bps over LIBOR (about 11 to 11.5%); 8% unborrowed
        • Fed gets 79.9% stake in AIG (temporary nationalization)
        • CEO Robert Willumstad replaced by former Allstate CEO Edward Liddy
      • Proceeds from sale of non-core assets will be used to repay loan
      • New CEO says most insurance divisions are “core”
      *Sources: AIG press releases and regulator statements.
    • 27. Expansion of AIG Rescue Package by the Fed on Oct. 8, 2008
      • On Oct. 8 the Federal Reserve Bank of NY agreed to provide liquidity to AIG’s Securities Lending Program
        • Fed will borrow investment grade fixed income securities from AIG’s domestic life insurance companies, on commercial terms and conditions, in exchange for cash
        • Puts Fed into traditional lender of last resort position
      • Problem in the Securities Lending Program (SLP)
        • AIG lent securities to 3 rd parties, receiving collateral in return
        • Invested some of collateral in other assets whose value declined
        • When borrowers of securities returned them, AIG had to make up difference and sometimes couldn’t lend out securities for fresh collateral
      • NY Fed Authorized to Borrow $37.8B
        • AIG’s total securities lending obligations = $37.2B as of Oct. 6
      • Objective is to Provide Liquidity to SLP while Providing Enhanced Credit Protection to NY Fed by Giving them Possession of Third Party Investment Grade Securities*
      *Sources: AIG press releases; Wall Street Jounal and regulator statements.
    • 28. Rational for Federal Reserve’s Rescue Package of AIG
      • “ Too Big to Fail” Doctrine Applied to Insurance for First Time
      • AIG is the Largest Insurer in the US and One of the Top 5 Globally: Internationally Disruptive
        • Disorderly unwinding of CDS positions (which guarantee large amounts of debt) would have had large negative consequences on already fragile credit markets
      • Fear Was that Generally Healthy Insurance Operations Affecting Millions of People and Businesses Would Have to Be Sold at Fire Sale Prices
      • Loan Allowed Time for an Orderly Sale of Assets and a Minimal Disruption on Credit Markets while also Protecting Policyholders
      • New CEO says most insurance divisions are “core”
      Source: Insurance Information Institute research.
    • 29. AIG Actions to Date*
      • On October 3, New CEO Ed Liddy Announced Plan to Sell Assets and Focus on Core Commercial P/C Operations
        • Worldwide P/C premiums totaled approximately $40B in 2007
      • Overall Impact May Be More Transformational for Global Life Industry
      • Will Sell:
        • All of Its US Life Insurance Operations
          • Valued at as much as $24B**
        • Sell some foreign life operations, which collectively generated $64.5B in premiums, deposits and other considerations in 2007 (24.5% in Japan and 37.5% in Europe)
          • Involves sale of American Life Ins. Co. (operates in Japan, Europe and Middle East & elsewhere) as well as other life units operating in Japan and Taiwan
          • Will retain majority stake in another life insurer operating in China and other Asian countries
        • May sell personal lines business (excluding Private Client Group)
          • Accounts for $4.8 billion in premiums ($4.1 billion excluding Private Client Group) and 3% market share in personal auto.
          • AIG's personal lines business (excluding its PCG is 73% direct and 27% agency***
        • Wind down AIG Financial Products (root of AIG’s problems), try to extract value
        • Will sell aircraft leasing and asset management businesses
        • Other, small insurance units and minor assets to be sold as well
      *As of Oct. 5, 2008; **UBS analyst Andrew Klingerman (WSJ, Oct. 4, 2008) * **Barclay’s Capital, Oct. 3, 2008 Sources: AIG, Wall Street Journal (Oct. 4, 2008), Insurance Information Institute research.
    • 30. “ Rescue” Treatment of AIG vs. Eight Large Banks *Citigroup, Bank of America (includes Merrill Lynch), JPMorganChase, Wells Fargo, Goldman, MorganStanley, State Street, Bank of New York Mellon. **$25 billion for Citi, BoA, JPMorgan, and Wells; $10 billion for Goldman and Morgan Stanley; $3 billion for BONY; $2 billion for State Street. AIG 8 Large Banks* U.S. Treasury’s ownership 79.9% of common stock Non-voting preferred stock; no dilution of common stock ownership Interest/ Dividends Payable to Treasury
      • 8.5% on unused line of credit up to $85 billion
      • 8.5%+3-month LIBOR on borrowed money (total recently = 12.92%)
      • 2% one-time fee on credit line
      • 5% on preferred stock**, rising to 9% after 5 years
      • Can borrow from the Fed’s discount “window” for as little as 1.75%
      Time limit to pay off credit line 2 years Indefinite “ Toxic” assets Unclear whether can sell to Treasury Can sell to Treasury
    • 31. Leading U.S. Writers of P/C Insurance by DWP, 2007 ($ Billions) 1 1 Before reinsurance transactions, excluding state funds. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC. Direct Written Premiums (DWP) $ Billions AIG is the second largest p/c insurer in the US and the largest commercial insurer (11% markets share)
    • 32. Leading U.S. Writers of Life Insurance By DWP, 2007 ($ Billions) 1 1 Premium and annuity totals, before reinsurance transactions, excluding state funds. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC. Direct Written Premiums (DWP) $ Billions AIG is the largest life insurer in the US in addition to being the second largest p/c insurer
    • 33. AFTERSHOCK: Regulatory Response Could Be Harsh All Financial Segments Including Insurers Will Be Impacted
    • 34. Incurred Liabilities of the Federal Government Due to Financial Crisis *As of October 10, 2008. Amounts reflect maximum losses under terms at time of announcement. Source: Wall Street Journal, 9/22/08, p. A8; Insurance Information Institute research. AIG amount consistent of $85B loan on Sept. 16 and additional $37.8B on Oct. 8. The Fed (and hence taxpayer) are now exposed to as much as $1.047 trillion in new debt tied to the current financial crisis* $ Billions $250B for Bank Stakes
    • 35. From Hubris to the Humbling of American Capitalism?
      • “ Government is not the solution to our problem, government is the problem.”
      -- Ronald Reagan, from his first inaugural address, January 20, 1981
    • 36. From Hubris to the Humbling of American Capitalism? -- President George W. Bush, Sept. 19, 2008, on the $700 billion financial institution bailout “ Given the precarious state of today’s financial markets, and their vital importance to the daily lives of the American people, Government intervention is not Only warranted, it is essential.”
    • 37. Post-Crunch: Fundamental Issues To Be Examined Globally Source: Ins. Info. Inst.
        • Failure of Risk Management, Control & Supervision at Financial Institutions Worldwide: Global Impact
          • Colossal failure of risk management (and regulation)
          • Implications for Enterprise Risk Management (ERM)?
          • Misalignment of management financial incentives
        • Focus Will Be on Risk Controls: Implies More Stringent Capital & Liquidity Requirements; Prevention of Systemic Risks
          • Data reporting requirements also likely to be expanded
          • Non-Depository Financial Institutions in for major regulation
          • Changes likely under US and European regulatory regimes
          • Will new regulations be globally consistent?
          • Can overreactions be avoided?
        • Accounting Rules
          • Problems arose under FAS, IAS
          • Asset Valuation, including Mark-to-Market
          • Structured Finance & Complex Derivatives
        • Ratings on Financial Instruments
          • New approaches to reflect type of asset, nature of risk
    • 38. Post-Crunch: Fundamental Regulatory Issues & Insurance Source: Insurance Information Institute
        • Federal Encroachment on Regulation of Insurance in Certain Amid a Regulatory Tsunami
          • $123 billion in loans to AIG makes increased federal involvement in insurance regulation a certainty
          • States will lose some of their regulatory authority
          • What Feds get/what states lose is unclear
        • Removing the “O” from “OFC”?
          • Treasury in March proposed moving solvency and consumer protection authority to a federal “Office of National Insurance”
          • Moving toward more universal approach for regulation of financial services, perhaps under Fed/Treasury
          • Is European (e.g., FSA) approach in store?
          • Treasury proposed assuming solvency and consumer protection roles while also eliminating rate regulation
          • Expect battle over federal regulatory role to continue to be a divisive issue within the industry
          • States will fight to maximize influence, arguing that segments of the financial services industry under their control had the least problems
    • 39. Post-Crunch: Fundamental Regulatory Issues & Insurance Source: Insurance Information Institute
        • Unclear How Feds Will Approach and Implement New Regulations on Financial Services Industry
          • Option A: Could take “Big Bang” Approach and pass massive, sweeping reform measure that draws little distinction between various segments of the financial services industry
          • Option B: Limited legislation pertaining to all segments with detailed treatment of each segment
        • Removing the “O” from “OFC”?
          • Treasury in March proposed moving solvency and consumer protection authority to a federal “Office of National Insurance”
          • Moving toward more universal approach for regulation of financial services, perhaps under Fed/Treasury
          • Is European (e.g., FSA) approach in store?
          • Treasury proposed assuming solvency and consumer protection roles while also eliminating rate regulation
          • Expect battle over federal regulatory role to continue to be a divisive issue within the industry
          • States will fight to maximize influence, arguing that segments of the financial services industry under their control had the least problems
    • 40. Government Takeover of Fannie Mae & Freddie Mac Beneficial for Insurers
    • 41. Treasury’s Fannie/Freddie Rescue Package Should Help Residential Property Insurers Source: Wall Street Journal Online, 9/7/08; Insurance Information Institute.
        • THE PROBLEM
        • Fannie Mae/ Freddie Mac borrow huge sums to buy mortgages from mortgage lenders and do so with an implicit government guarantee that should these mortgage sour the government will come to the rescue
        • Together the entities own or guarantee $5.4 trillion in mortgages (about 50% of US total)
        • Collectively Fan/Fred have lost about $14 billion over the past 4 quarters and their capital is nearly depleted
        • Loss of confidence in Fannie/Freddie is primary reason why Fed’s slashing of rates since has not lowered interest rates (esp. on mortgages)
    • 42. Treasury’s Fannie/Freddie Rescue Package Should Help Residential Property Insurers Source: Federal Housing Finance Agency; Wall Street Journal Online, 9/7/08; Insurance Information Institute.
        • THE SOLUTION: A 4-POINT PLAN
        • Government seizes Fannie Mae/ Freddie Mac and places them in “conservatorship” under their regulator the Federal Housing Finance Agency (FHFA)
          • Current CEOs ousted. Fannie will be run by Herb Allison (CEO TIAA-CREF) and Freddie by David Moffet (CEO US Bancorp)
        • Treasury purchases senior preferred stock; Govt. gains 79.9% ownership. Could buy up to $100 billion per firm.
        • Treasury will buy mortgage backed securities (MBS) in the open market issued by Fan/Fred in attempt to lower borrowing costs ($ unspecified)
        • Treasury establishing new lending facilities for Fan/Fred
        • Total federal involvement could amount to $200 billion
    • 43. Why Treasury’s Fannie/Freddie Rescue Package Should Help Residential Property Insurers Source: Insurance Information Institute.
        • Crash in housing market is already costing home insurers alone about $1 billion annually in lost premium growth based on 50%+ decline in new home construction (about 1 million fewer homes per year)
          • Plan should lower interest rates, accelerate clearing away existing inventory and stimulate new construction (don’t expect big gains until 2010 at earliest)
          • Mortgage rates fell ½ point day after announcement
        • Home in or headed for foreclosure are likely to suffer worse than average loss experience (neglect, abuse, abandonment, vandalism, theft…). Plan may bring interest rate relief to people who’s mortgages will reset over the next several years, averting some foreclosures.
        • Insurers hold tens of billion in Fan/Fred MBS debt as well as shares in both companies. Both survive.
    • 44. Credit Crisis: Fed Interest Rate Cuts Failed to Reduce Mortgage Rates January 2000 through August 2008 Source: US Bureau of Labor Statistics; Insurance Information Institute. Fed slashes interest rates by 325 basis points (from 5.25% to 2.00 from July 2007 to mid-2008) Mortgage FF spread increased to 4.5% from about 1% pre-crisis Interest rate on conventional mortgages remained high despite Fed rate cuts Aug-08
    • 45. THE ECONOMIC STORM What a Weakening Economy and The Threat of Inflation Mean for the Insurance Industry Exposure & Claim Cost Effects
    • 46. Real Annual GDP Growth, 2000-2009F March 2001-November 2001 recession Recession is likely second half 2008 into first half 2009 * Red bars are actual; Yellow bars are forecasts Sources: US Department of Commerce (actual), Blue Economic Indicators 10/08 (forecasts).
    • 47. Real GDP Growth* *Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators. Source: US Department of Commerce, Blue Economic Indicators 10/08; Insurance Information Institute. Recession likely began Q2:08. Economic toll of credit crunch, housing slump, labor market contraction and high energy prices is growing
    • 48. Unemployment Rate: On the Rise January 2000 through August 2008 Unemployment will likely continue to approach 6% during this cycle, impacting payroll sensitive p/c and non-life exposures Source: US Bureau of Labor Statistics; Insurance Information Institute. August 2008 unemployment jumped to 6.1%, its highest level since Sept. 2003 Average unemployment rate since 2000 is 5.0% Previous Peak: 6.3% in June 2003 Trough: 4.4% in March 2007 Aug-08
    • 49. U.S. Unemployment Rate, ( 2007:Q1 to 2009:Q4F)* * Blue bars are actual; Yellow bars are forecasts Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/08); Insurance Info. Inst. Rising unemployment will erode payrolls and workers comp’s exposure base. Unemployment is expected to peak at about 7% in the second half of 2009.
    • 50. Total Private Employment* Grew by 25½ Million Workers from 1991 to 2008 *seasonally adjusted at mid-year Source: U.S. Bureau of Labor Statistics, at http://data.bls.gov/cgi-bin/surveymost Millions The US economy added 25.5 million jobs between 1991 and 2008, but job growth has recently stagnated, impacted payrolls and the workers comp exposure base
    • 51. Monthly Change Employment* (Thousands) Job losses now total 760,000 (from January through September 2008) Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm ; Insurance Info. Institute
    • 52. Average Weekly Real Earnings in Private Employment Were Flat from 1999 to 2008 Sources: U.S. Bureau of Labor Statistics; I.I.I. (at mid-year) Constant 1982 dollars Virtually all of the real wage growth occurred between 1995 and 1999 and has now stagnated
    • 53. New Private Housing Starts, 1990-2019F (Millions of Units) Exposure growth forecast for HO insurers is dim for 2008/09 Impacts also for comml. insurers with construction risk exposure New home starts plunged 34% from 2005-2007; Drop through 2009 trough is 57% (est.)—a net annual decline of 1.17 million 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 about $1 billion. Source: US Department of Commerce; Blue Chip Economic Indicators (10/08); Insurance Information Inst.
    • 54. Auto/Light Truck Sales, 1999-2019F (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 3.3 million units annually by 2008 compared with 2005, a decline of 18.3% 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 (10/08); Insurance Information Inst.
    • 55. Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums *Average of quarterly figures. Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books 7/90-3/91 Shaded areas indicate recessions 3/01-11/01 Wage & Salary Disbursement (Private Employment) vs. WC NWP $ Billions $ Billions Weakening wage and salary growth is expected to cause a deceleration in workers comp exposure growth
    • 56. p Preliminary Source: US Department of Labor, Bureau of Labor Statistics (BLS), National Bureau of Economic Research; NCCI Frequency and Severity Analysis Workplace Injury Incidence Rates Declined in Last 4 Economic Downturns
    • 57. Nonresidential Fixed Investment,* 2003 – 2009F (Billions of 2000 $) Sharp dip in business investment growth in 2007-2009 will slow commercial exposure growth. Investment is projected to fall by 2.8% in 2009 *Nonresidential fixed investment consists of structures, equipment and software. Sources: US Bureau of Economic Analysis (Historical), Blue Chip Economic Indicators (10/08) for forecasts. Nonresidential Fixed Investment ($ Bill)
    • 58. Total Industrial Production, ( 2007:Q1 to 2009:Q4F) Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/08); Insurance Info. Inst. Industrial production contracted sharply during Q2 2008 and is expected to shrink through early 2009 Industrial production affects exposure both directly and indirectly
    • 59. Real GDP Growth vs. Real P/C Premium Growth: Modest Association P/C insurance industry’s growth is influenced modestly by growth in the overall economy Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 8/08; Insurance Information Inst.
    • 60. Summary of Economic Risks and Implications for (Re) Insurers Economic Concern Risks to Insurers Subprime Meltdown/ Credit Crunch
      • Some insurers have some asset risk
      • D&O/E&O exposure for some insurers
      • Client asset management liability for some
      • Bond insurer problems; Muni credit quality
      • Mortgage insurers face losses; Also tightening standards and slowing real estate market
      • Banks less able to lend, slowing construction
      Lower Interest Rates
      • Lower investment income
      Stock Market Slump
      • Decreased capital gains (which are usually relied upon more heavily as a source of earnings as underwriting results deteriorate)
      General Economic Slowdown/Recession
      • Reduced commercial lines exposure growth
      • Surety slump
      • Decreased workers comp frequency due to drop in high hazard class employment
    • 61. The Housing Crash Collapse of Home Price Bubble Will Influence Auto & Home Purchases and Slow Insurer Exposure Growth
    • 62. Case-Schiller Home Price Index: 20 City Composite January 2000 = 100 Peak in July 2006 at 206.52, meaning home prices had more than doubled between Jan. 2000 and July 2006 July 2008 index value was 166.23, meaning home prices were 19.5% below their July 2006 peak Home prices are approximately where they were in mid 2004 Source: Standardandpoors.com (SPCS20R Index); Insurance Info. Institute Jul-08 Loss of home equity is hurting car sales
    • 63. Change in Home Values from July 2006 Housing Bubble Peak, by City* Home prices are falling across the country, down 19.5% on average in July 2008 *Calculated as of July 2008 (latest available) by III from monthly Case-Schiller price index data. Date of maximum price varies by city (July 2006 for 20-city composite: SPCS20R Index). Source: Case-Schiller Home Price Index at Standardandpoors.com; Insurance Info. Institute Home equity is a common source of wealth used to fund car purchases
    • 64. Home Price History: Anatomy of a Bubble Annual Change on a Monthly Basis: Jan. 1988 – Jul. 2008 Source: Standardandpoors.com (CSXR series); Insurance Info. Institute Jan. 1988 Early stages of S&L fallout; Credit tightens post-Oct. 1987 crash April 1991 Max pace of decline. S&L bank shakeout; Recession, Gulf War, Energy price spike Aug. 1990 Price decline begins. Gulf War, Energy price spike, Recession March 1996 House price recovery begins after 6 years of falling or flat prices. Feb. 2002 Home price increases slow post 9/11 and tech bubble collapse; recession ends late 2001. Stock markets down; Lowest interest rates in 40 years begin to fuel massive real estate and credit bubble Jul. 2004 Peak annual increase reached: 20.5%; Credit standards deteriorate rapidly; Explosion in subprime loans, MBS, CDS Jan. 2007 Home prices begin to fall Jul. 2008 Home prices plunge 17.5% vs. July 2007
    • 65. New Private Housing Starts, 1990-2019F (Millions of Units) Exposure growth forecast for HO insurers is dim for 2008/09 Impacts also for comml. insurers with construction risk exposure New home starts plunged 34% from 2005-2007; Drop through 2009 trough is 57% (est.)—a net annual decline of 1.17 million 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 about $1 billion. Source: US Department of Commerce; Blue Chip Economic Indicators (10/08); Insurance Information Inst.
    • 66. Inflation Overview Pressures Claim Costs, Expands Probable & Possible Max Losses
    • 67. Annual Inflation Rates (CPI-U, %), 1990-2009F *12-month change September 2008 vs. September 2007 Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, October 10, 2008. (forecasts) In September 2008, on a year-over-year basis inflation was 4.9% -- still high but down from its peak of 5.6% in August
    • 68. Inflation: Important Economic Risks and Implications for Insurers Effects of Inflation Risks to Insurers & Buyers Claim Severity Increase
      • Claims (property and liability) costs may rise as the price of goods and services increase
      • PMLs could be (much) higher
      Rate Inadequacy
      • Accelerating inflation historically contributed to rate inadequacy because ratemaking is largely a retrospective process
      • Many types of loss trends are sensitive to the pace of inflation: medical cost, tort, etc.
      • Historical loss cost trends could be biased predictors of future loss if inflation accelerates
    • 69. Inflation: Important Economic Risks and Implications for Insurers (cont’d) Effects of Inflation Risks to Insurers Reserve Deficiency
      • Reserves are established using certain assumptions about future development and discounting factors
      • If inflation accelerates, development could be more rapid and/or be more substantial (in dollar terms) than assumed and discount factors may be too low
      Inadequate Insurance Limits
      • Policyholders could find themselves inadequately insured as claims costs escalate
      Inadequate Reinsurance
      • Inflation can lead to a more rapid and unexpected exhaustion of reinsurance because losses are higher than expected
    • 70. Comparative 2007 Inflation Statistics Important to Insurers ( %) *Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs. Source: US Bureau of Labor Statistics; Insurance Information Institute. CPI and “Core” CPI are not representative of many of the costs insurers face Medical/Legal costs typically run well ahead of inflation
    • 71. Medical & Tort Cost Inflation Amplifiers of Inflation, Major Insurance Cost Driver
    • 72. Consumer Price Index for Medical Care vs. All Items, 1960-2007 Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute. (Base: 1982-84=100) Inflation for Medical Care has been surging ahead of general inflation (CPI) for 25 years. Since 1982-84, the cost of medical care has more than tripled Soaring medical inflation is among the most serious long-term challenges facing casualty, disability and LTC insurers
    • 73. Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2008* *Medical cost and CPI-U through April 2008 from BLS. Tort figure is for full-year 2008 from Tillinghast. Tort System is an Inflation Amplifier Avg. Ann. Change: 1961-2008* Torts Costs: +8.4% Med Costs: +6.0% Overall Inflation: +4.2% Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst. Tort costs move with inflation but at twice the rate
    • 74. WC Medical Severity Rising Far Faster than Medical CPI Sources: NCCI; Med CPI from Economy.com; WC med severity from NCCI based on NCCI states. 1.6 pts WC medical severity rose more than twice as fast as the medical CPI (8.3% vs. 4.0%) from 1995 through 2007p
    • 75. Annual Change 1991–1993: +1.9% Annual Change 1994–2001: +8.9% Annual Change 2002-2006: +7.8% Accident Year Medical Claim Cost ($000s) 2007p: Preliminary based on data valued as of 12/31/2007 1991-2006: Based on data through 12/31/2006, developed to ultimate Based on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies Workers Comp Medical Claims Costs Continue to Climb Cumulative Change = +200% (1993-2007p)
    • 76. Med Costs Share of Total Costs is Increasing Steadily Source: NCCI (based on states where NCCI provides ratemaking services). 1987 1997 2007p Med cost inflation is one factor to high WC severity. Med cost are now nearly 60% of all lost time claim costs
    • 77. WC Med Cost Will Equal 70% of Total by 2017 if Trends Hold Source: Insurance Information Institute. 2017 Estimate This trend will likely be supported by the increased labor force participation of workers age 55 and older.
    • 78. Rising Energy Costs Driving Patterns and Auto Claiming Behavior
    • 79. Miles Driven vs. Gas Prices in Recent Months Sources: Energy Information Administration ( http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm ); Federal Highway Administration ( http://www.fhwa.dot.gov/ohim/tvtw/08juntvt/index.cfm ). Miles Driven Gas Price/ Gallon 2007 2008 Miles driven in June were down 4.7% vs. June 2008; Between Nov. 2007 and June 2008 Americans drove 53.2B fewer miles As gas prices fall, willing people drive more?
    • 80. Retail Gas Price* and Percent Change In Miles Driven, 1970 – 2008:H1 *1970-1977 retail gas prices based on leaded only. 1970-2007 adjusted to 2007 dollars. Sources: Energy Highway Administration, Federal Highway Administration. There is a strong association between gas prices and miles driven. Until 2007/8 miles driven had not declined since the energy crises of the 1970s
    • 81. Do Increases in Gas Prices Affect Auto Collision Claim Frequency? Sources: Energy Information Administration ( http://tonto.eia.doe.gov/dnav/pet/hist/mg_tt_usA.htm ); ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data : First Half 2008, published October 1, 2008 and earlier reports. 2008 figure is for 4 quarters ending Q2 2008. Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100 Through Q2 2008, there is a small reduction in collision claim frequency due to high gas prices
    • 82. Do Changes in Miles Driven Affect Auto Collision Claim Frequency? Sources: Federal Highway Administration ( http://www.fhwa.dot.gov/ohim/tvtw/08juntvt/08juntvt.pdf ; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data : First Half 2008, published October 1, 2008 and earlier reports. 2008 figure is for 4 quarters ending Q2 2008. Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100
    • 83. Auto Insurance: Claim Frequency Impacts of Energy Crisis of 1973/4 Source: ISO, US DOT. Oct. 17, 1973: Arab oil embargo begins Frequency Impacts Collision: -7.7% PD: -9.5% BI: -13.3% March 17, 1974: Arab oil states announce end to embargo
      • Driving Stats
      • Gas prices rose 35-40%
      • Miles driven fell 6.7% in 1974
      Frequency began to rebound almost immediately after the embargo ended
    • 84. Auto Insurance: Claim Severity Impacts of Energy Crisis of 1973/4 Source: ISO. Severity Impacts Collision: -7.5% PD: +15.9% BI: N/A*
      • Driving Stats
      • Gas prices rose 35-40%
      • Miles driven fell 6.7% in 1974
      Oct. 17, 1973: Arab oil embargo begins March 17, 1974: Arab oil states announce end to embargo Collision severity began to rebound almost immediately after the embargo ended; PD accelerated as inflation rose; No discernable trend change in BI.
    • 85. Cost of PIP Claims by Vehicle Size* Substitution of more fuel efficient but lighter vehicles is associated with high more severe and costly PIP (no-fault) claim costs *Claims with payment in 2007. Excludes death and permanent total disability claims. Source: Auto Injury Insurance Claims: Countrywide Patterns in Treatment, Costs and Compensation, August 2008; Insurance Information Institute.
    • 86. Proportion of Claimants Missing No Work Following a Claim* *Claims with payment in 2007. Excludes death and permanent total disability claims. Source: Auto Injury Insurance Claims: Countrywide Patterns in Treatment, Costs and Compensation, August 2008; Insurance Information Institute. Substitution of more fuel efficient but lighter vehicles is associated with a higher proportion of claimants missing work following an accident Claimants in lighter vehicles were also 12% more likely to be hospitalized
    • 87. Summary of Impacts of Energy Crises of 1970s on Auto Insurance Source: ISO; Insurance Information Institute Measure Impact on Auto Insurers Frequency
      • Falls initially
      • Rebounds almost shortly after shock passes
      • Rises to expected “no-crisis” levels with 2-3 years
      Severity (Avg. Cost per Claim)
      • Typically accelerates following surges in oil prices
      • Sensitive to inflationary pressures
      Loss Cost (dollars of loss per insured vehicle)
      • In general, initial slight decrease
      • Typically rebounds within 1 to 2 years
    • 88. Differences & Similarities Between Energy Crises of 1970s and Today
      • Gas is Available
        • In 1973/4 gas supplies were disrupted forcing a reduction in driving, contributing to the declines in frequency
      • Speed Limits Unlikely to be Reduced
        • 55 MPH national speed limit imposed in 1974
        • Repealed in 1995, returning authority to states
      • Ability to Migrate to More Fuel Efficient Fuels is Greater Today
    • 89. P/C INSURANCE PROFITABILITY In the Midst of a Cyclical Decline
    • 90. P/C Net Income After Taxes 1991-2009F ($ Millions)* *ROE figures are GAAP; 1 Return on avg. surplus. 2008 numbers are annualized based on H1 actual. 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= 9.4%
      • 2006 ROE = 12.2%
      • 2007 ROAS 1 = 12.3%
      • 2008 ROAS = 5.4%*
      Insurer profits peaked in 2006.
    • 91. ROE: P/C vs. All Industries 1987–2010F 2008 P/C insurer figure is annualized H1 return on average surplus. Excluding mortgage and financial guarantee insurers = 7.6%. Source: ISO, Fortune; Insurance Information Institute. Andrew Northridge Hugo Lowest CAT losses in 15 years Sept. 11 4 Hurricanes Katrina, Rita, Wilma P/C profitability is cyclical and volatile Mortgage & Financial Guarantee Impact
    • 92. 1975: 2.4% 1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2% 1984: 1.8% 1992: 4.5% 2001: -1.2% 10 Years 10 Years 9 Years *GAAP ROE for all years except 2007 and 2008 which are ROAS (statutory Return on Average Surplus). 2008 ROAS is annualized based on H1 2008. Excluding mortgage and financial guarantee insurers = 7.6% Sources: ISO; Insurance Information Institute. 2008: 5.4% (7.6% excl. M&FG) P/C Insurance Industry ROEs, 1975 – 2010F* 2010: 5.0%
    • 93. Personal/Commercial Lines & Reinsurance ROEs, 2006-2008F* Sources: A.M. Best Review & Preview (historical and forecast). ROEs are declining as underwriting results deteriorate
    • 94. ROE vs. Equity Cost of Capital: US P/C Insurance:1991-2008:H1 *Excludes mortgage and financial guarantee insurers. Source: The Geneva Association, Ins. Information Inst. The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years -13.2 pts US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target or better 2003-07 -1.7 pts +2.3 pts -9.0 pts The cost of capital is the rate of return insurers need to attract and retain capital to the business -1.3 pts
    • 95. Factors that Will Influence the Length and Depth of the Cycle
      • Capacity : Rapid surplus growth in recent years has left the industry with between $85 billion and $100 billion in excess capital, according to analysts, at end of 2007
        • All else equal, rising capital leads to greater price competition and a liberalization of terms and conditions
      • Reserves : Reserves are in the best shape (in terms of adequacy) in decades, which could extend the depth and length of the cycle
      • Investment Gains : With sharp declines in stock prices and falling interest rates, portfolio yields are certain to fall  Contributes to discipline and shallower cycle
      • Sarbanes-Oxley : Presumably SOX will lead to better and more conservative management of company finances, including rapid recognition of deficient or redundant reserves
        • With more “eyes” on the industry, the theory is that cyclical swings should shrink
      • Ratings Agencies : Focus on Cycle Management; Quicker to downgrade
      • Information Systems : Management has more and better tools that allow faster adjustments to price, underwriting and changing market conditions than it had during previous soft markets
      • Analysts/Investors : Less fixated on growth, more on ROE through soft mkt.
        • Management has backing of investors of Wall Street to remain disciplined
      • M&A Activity : More consolidation would imply greater discipline
      Source: Insurance Information Institute.
    • 96. Summary of Economic Risks and Implications for (Re) Insurers Economic Concern Risks to Insurers Subprime Meltdown/ Credit Crunch
      • Some insurers have some asset risk
      • D&O/E&O exposure for some insurers
      • Client asset management liability for some
      • Bond insurer problems; Muni credit quality
      • Mortgage insurers face losses; Also tightening standards and slowing real estate market
      • Banks less able to lend, slowing construction
      Lower Interest Rates
      • Lower investment income
      Stock Market Slump
      • Decreased capital gains (which are usually relied upon more heavily as a source of earnings as underwriting results deteriorate)
      General Economic Slowdown/Recession
      • Reduced commercial lines exposure growth
      • Surety slump
      • Decreased workers comp frequency due to drop in high hazard class employment
    • 97. P/C Stocks: Mirroring the S&P 500 Index in 2008 *Includes Financial Guarantee. Source: SNL Securities, Standard & Poor’s, Insurance Information Institute. Total YTD Returns Through October 17, 2008 Insurance stocks caught in financial services downdraft Mortgage & Financial Guarantee insurers were down 69% in 2007
    • 98. Top Industries by ROE: P/C Insurers Still Underperformed in 2007* Source: Fortune, May 5, 2008 edition; Insurance Information Institute P/C insurer profitability in 2007 ranked 31 st out of 51 industry groups despite renewed profitability, underperforming the All Industry median for the 20 th consecutive year
    • 99. Advertising Expenditures by P/C Insurance Industry, 1999-2007E Source: Insurance Information Institute from consolidated P/C Annual Statement data. Ad spending by P/C insurers is at a record high, signaling increased competition
    • 100. PREMIUM GROWTH At a Virtual Standstill in 2007, 2008 and Possibly 2009
    • 101. Strength of Recent Hard Markets by NWP Growth Sources: A.M. Best, ISO, Insurance Information Institute 1975-78 1984-87 2000-03 Shaded areas denote “hard market” periods Negative growth in 2008 before turning positive in 2009 In 2007 net written premiums fell 1.0%, the first decline since 1943
    • 102. Year-to-Year Change in Net Written Premium, 2000-2010F Source: A.M. Best; ISO. 2008F is first half actual figure. P/C insurers are experiencing their slowest growth rates since 1943 Slow growth means retention is critical Protracted period of negative or slow growth is possible due to soft markets and slow economy
    • 103. Personal/Commercial Lines & Reinsurance NPW Growth, 2006-2008F Sources: A.M. Best Review & Preview (historical and revised year-end forecast as of 10/03/08). Net written premium growth is expected to be slower for commercial insurers and reinsurers
    • 104. All P/C Lines Distribution Channels, Direct vs. Independent Agents Source: Insurance Information Institute; based on data from Conning and A.M. Best. Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained in recent years. Direct channels include exclusive agency companies, direct marketers and direct sales (e.g., internet)
    • 105. Personal Lines Distribution Channels, Direct vs. Independent Agents Source: Insurance Information Institute; based on data from Conning and A.M. Best. Independent agents have lost significant personal lines market share since the early 1970s, but the trend has slowed or even ended.
    • 106. Commercial P/C Distribution Channels, Direct vs. Independent Agents Source: Insurance Information Institute; based on data from Conning and A.M. Best. Independent agents have seen only modest erosion in commercial lines market share in recent decades
    • 107. Channel Clutter  Distribution Fusion
      • Consumers Will Demonstrate Demand for Identical Product and Service via Multiple Distribution Channels
        • Captive/Exclusive Agent, IAs, Direct Marketing (incl. Internet) will continue to co-exist for many years. More channels may be developed in the future.
        • Multi-channel distribution is already the norm
        • Consumers don’t necessarily think about channels per se ; In their minds distribution/service access are fused and should be seamless
        • Adds to expense, but produces more customer touch points, marketing opportunities and improves retention
    • 108. PRICING TRENDS Under Pressure
    • 109. Average Expenditures on Auto Insurance Countrywide auto insurance expenditures are expected to increase about 2.5% in 2008, highest since 2002/03 Lower underlying frequency and modest severity have kept auto insurance costs in check *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute estimates 2006-2008 based on CPI data.
    • 110. Average Expenditures on Homeowners Insurance** Countrywide home insurance expenditures are expected to rise by an estimated 2% in 2008 Homeowners in non-CAT zones have seen smaller increases than those in CAT zones *Insurance Information Institute Estimates/Forecasts **Excludes cost of flood and earthquake coverage. Source: NAIC, Insurance Information Institute estimates 2006-2008 based on CPI data.
    • 111. Monthly Change in Auto Insurance Prices* *Percentage change from same month in prior year. Source: US Bureau of Labor Statistics; Insurance Information Institute. Auto insurance prices have clearly begun to rise in recent months
    • 112. Insurance Expenditures as a Percentage of Total Household Spending Source: Insurance Information Institute 2008 Fact Book; US Bureau of Labor Statistics. Auto & Home insurance expenditures account for 2.6% of household spending
    • 113. Cost of Risk vs. Commercial Lines Combined Ratio Source: RIMS Benchmark Survey, A.M. Best 2007 Aggregates & Averages; Insurance Information Institute
    • 114. How the Risk Dollar is Spent (2006) Source: RIMS (2007); Insurance Information Institute Firms w/Revenues < $1 Billion Firms w/Revenues > $1 Billion Total liability costs account for 35% - 40% of the risk dollar
    • 115. Average Commercial Rate Change, All Lines, (1Q:2004 – 2Q:2008) Source: Council of Insurance Agents & Brokers; Insurance Information Institute KRW Effect -0.1% A flattening in the magnitude of price declines is evident
    • 116. Cumulative Commercial Rate Change by Line: 4Q99 – 2Q08 Source: Council of Insurance Agents & Brokers Commercial account pricing has been trending down for 4+ years and is now on par with prices in late 2001
    • 117. Average Commercial Rate Change by Account Size: 4Q99 – 2Q08 Source: Council of Insurance Agents & Brokers While pricing has moved in synch across account size, large accounts have seen the most pronounced declines
    • 118. Average Commercial Rate Change by Line: 4Q99 – 2Q08 Source: Council of Insurance Agents & Brokers Pricing has generally been negative since early 2004 Post-Katrina property insurance price impact
    • 119. Most Layers of Coverage are Being Challenged/Leaking Retention $1 Million $2 Million Primary Excess Reinsurance Retro $10 Million $50 Million $100 Million Risks are comfortable taking larger retentions Lg. deductibles, self insurance, RRGs, captives erode primary Excess squeezed by higher primary retentions, lower reins. attachments Reinsurers losing to higher retentions, securitization Source: Insurance Information Institute from Aon schematic.
    • 120. U.S. Domiciled Captives- Net Premiums Written ($ Millions) Source: A.M. Best, 2007 Special Report: U.S. Captive Insurers – 2006 Market Review Following a five-year period of rapid growth, U.S. captive insurers saw net premiums written increase by just 2.7 percent in 2006, after 6.2 percent growth in 2005.
    • 121. Risk Retention Group Premiums, 1988 – 2006* *2006 Projected Source: Risk Retention Reporter, Insurance Info. Institute Millions of Dollars Risk retention (& self-insurance) group premiums have risen rapidly in recent years and represent a form of competition to traditional insurers and captives Could be expanded to property risks
    • 122. UNDERWRITING TRENDS Extremely Strong 2006/07; Relying on Momentum & Discipline for 2008
    • 123. P/C Insurance Combined Ratio, 1970-2008F* Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.8 2000s: 102.0* Sources: A.M. Best; ISO, III *A.M. Best year end estimate of 103.2; Actual H1 result was 102.1.
    • 124. P/C Insurance Industry Combined Ratio, 2001-2010F *Includes Mortgage & Financial Guarantee insurers. Sources: A.M. Best, ISO; III. 2005 ratio benefited from heavy use of reinsurance which lowered net losses Best combined ratio since 1949 (87.6) As recently as 2001, insurers paid out nearly $1.16 for every $1 in earned premiums Relatively low CAT losses, reserve releases Including Mortgage & Fin. Guarantee insurers Cyclical Deterioration
    • 125. Ten Lowest P/C Insurance Combined Ratios Since 1920 vs. 2007 Sources: Insurance Information Institute research from A.M. Best data. 2007 was the 20 th best since 1920 The industry’s best underwriting years are associated with periods of low interest rates The 2006 combined ratio of 92.6 was the best since the 87.6 combined in 1949
    • 126. Underwriting Gain (Loss) 1975-2008:H1* Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage * finl. guarantee insurers $ Billions Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the second since 1978. Cumulative underwriting deficit from 1975 through 2007 is $422 billion. $5.635 Bill underwriting loss in 08:H1 incl. mort. & FG insurers
    • 127. Impact of Reserve Changes on Combined Ratio Source: A.M. Best, Lehman Brothers estimates for years 2007-2009 Reserve adequacy has improved substantially
    • 128. Cumulative Prior Year Reserve Development by Line (As of 12/31/06) Sources: Lehman Brothers; A.M. Best’s Aggregates & Averages Schedule P, Part 2. Reserve redundancies in most lines have resulted in releases in recent years but that is ending Release Strengthening
    • 129. Losses Paid by Property/Casualty Insurers Have Steadily Increased for Decades Total losses paid by insurers increased by $152 billion or more than 100% from 1987 through 2007 Sources: A.M. Best; 2007 figure is from ISO. *2008 is annualized Q1 ISO result; Insurance Information Institute. Dip in 2006/07 was associated with drop in catastrophe losses, which is unlikely to persist. Losses and loss ratios in 2007 rose and are rising in 2008. During 2006/07, the price of many types of insurance fell.
    • 130. EMERGING RISKS Common Mistake is to Assume all Emerging Risks are About Underwriting
    • 131. Emerging Risks Impacting the Global (Re)Insurance Industry Source: Insurance Information Institute Issue Issue Erosion of Tort Reform Inflation Risk Bad Faith Litigation Employment Practices Liability Post-Catastrophe Litigation Energy Sector Climate Change (liability>property) Nursing Home/Asst. Living Products Liability (Imports, Food) Currency Risk Regulatory Risk Economic Shock/Contagion Effects Securities Litigation Terrorism Asset Valuation Risk (Mark-to-Market) Nanotechnology Environmental Liability Pharmaceuticals Latent Occupational Disease Disintermediation Socialization of Insurance Markets US Tax Policy
    • 132. KEY LINES
    • 133. Commercial Lines Combined Ratio, 1993-2008F Recent results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases. Most of these trends now reversed and mortgage and financial guarantee segments have big influence. Commercial coverages have exhibited significant variability over time. Mortgage and financial guarantee may account for up to 4 points on the combined ration in 2008 Sources: A.M. Best (historical and forecasts)
    • 134. AUTO INSURANCE Recent Underwriting Trends by Coverage Type
    • 135. Personal Lines Combined Ratio, 1993-2008E Source: A.M. Best; Insurance Information Institute. Recent strong results attributable favorable frequency trends and low CAT activity Recent deterioration due to price competition and higher CAT losses in 2008
    • 136. Pvt. Passenger Auto Insurance Net Premiums Written, 1998-2008E Sources: A.M. Best; Insurance Information Institute. Competition, tight credit and the weak economy imply sluggish growth for auto insurers
    • 137. Private Passenger Auto (PPA) Combined Ratio Average Combined Ratio for 1993 to 2007: 100.8 Sources: A.M. Best (historical); Insurance Information Institute PPA has been an important source of earnings in recent years Auto insurers have shown significant improvement in PPA underwriting performance since mid-2002, but results are deteriorating.
    • 138. Pure Premium Spread: Personal Auto PD Liability, 2000-2008:Q2 Source: Insurance Information Institute calculations based ISO Fast Track and US BLS data. Margin necessary to maintain PPA profitability 2000 PPA Combined=110 A favorable inversion of the pure premium spread began in mid-2008 2006 PPA Combined=95.5
    • 139. Bodily Injury: Severity Trend Running Ahead of Frequency Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008. Medical inflation is a powerful cost driver
    • 140. PD Liability: Frequency Trend No Longer Offsets Severity Fewer accidents, but more damage when they occur Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008.
    • 141. PIP: Severity Trend Now Offsets Smaller Claim Frequency Decline Fraud caused problems from 1999-2001 Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008.
    • 142. Collision: Frequency and Severity Claim Trend Adverse Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008.
    • 143. Comprehensive: Weather Hurts Frequency and Severity Trends Weather related claims from Hurricanes Katrina, Rita & Wilma: 681,900 claims valued $3.29 billion Source: ISO Fast Track data. *Result for 4 quarters ending with Q2 2008. Severe first half weather (floods, hail, tornadoes)
    • 144. 5 Levels of Underwriting Innovation
      • LEVEL I: Traditional Underwriting
        • Relies on traditional underwriting tools to determine limited number of risk cells
      • Level II: Predictive Modeling, Data Mining
        • Has led to quantum leap in matching of risk with price
        • Explosion in price points/identifiable and priceable market segments
        • Enabled by reduction in computing and data storage costs—trends that will continue
      • Level III: Revealed Risk (Telematics)
        • Let the customer reveal to the insurer over time his/her individual risk profile
        • Requires continuous monitoring or periodic sampling of individual risk (policyholder) via “Black Box”
      • Level IV: Pavlov Policies
        • Provide continuous positive (or negative) reinforcement (feedback)
        • Continuously changing and observable insurance premium
        • Examples: ING Direct bank accounts; Continuous credit score monitoring; Zillow, etc.—Idea is to provide continuous feedback in dollar terms
        • WhatsMyPremiumToday.com;
      • Level V: Experimentation and Behavioral Economics
        • Conduct large-scale behavioral experiments to ascertain risk seeking/avoidance behavior in wide variety of circumstances across wide cross section of customers relevant to insurance
        • Could be based on observation of actual behavior as well
    • 145. Interactive Insurance Policies
      • Emulate Financial/Retirement Planning Engines
        • Allow people to “build” and modify policies at any time (goes well beyond Your Choice Auto)
        • Create “What If” scenario capacity with impact on premium; Examples:
          • What if I had an at-fault accident?  Product reports surcharge and new premium
          • What if I bought a new Porshe vs. a used one?
          • What if I increased my liability limits?
          • What kinds of car would lower my premium by 10%?
          • When I move to Mayberry what will my new premium be?
        • Can do something similar for home insurance
      • The Talking Insurance Policy (Interactive Policy Documentation)
        • Most people do not understand and never read their policy—not because they’re lazy or dumb but because it is often written in impenetrable legalese
        • Policy is online in customer’s account. Mouse-overs allow audio/visual pop-ups that explain policy in plain English and offer tips (e.g., Flood is excluded…call your Allstate agent to day to arrange flood coverage from the NFIP …)
      • Gaming
        • Game initializes with insureds parameters (vehicle, location, etc.)
        • Policyholder “drives” in game and makes choices that influence premium, which comtinuously changes based on those choices (e.g., speed, DUI, observe traffic signals, trade in vehicle for sports car…)
    • 146. Homeowners Insurance
    • 147. Homeowners Insurance Combined Ratio Average 1990 to 2007= 110.8 Insurers have paid out an average of $1.11 in losses for every dollar earned in premiums over the past 18 years Sources: A.M. Best (historical); I.I.I. estimate for 2008.
    • 148. Homeowners Insurance Net Premiums Written, 1998-2008E Sources: A.M. Best; Insurance Information Institute. Competition and the collapse in housing mean little growth for home insurers
    • 149. RISING EXPENSES Expense Ratios Will Rise as Premium Growth Slows
    • 150. 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
    • 151. CAPACITY/ SURPLUS Capital/ Surplus Falling from 2007 Peak
    • 152. U.S. Policyholder Surplus: 1975-2008:H1* Source: A.M. Best, ISO, Insurance Information Institute. *As of June 30, 2008 $ Billions “ Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations Capacity as of 6/30/08 was $505.0, down 2.5% from 12/31/07 was $517.9B, but 80% above its 2002 trough. Recent peak was $521.8 as of 9/30/07 The premium-to-surplus fell to $0.85:$1 at year-end 2007, approaching its record low of $0.84:$1 in 1998
    • 153. Policyholder Surplus, 2006:Q4 – 2008:Q2 Source: ISO; Insurance Information Institute. Surplus is down 3.2% or $16.6 billion since its Q3 2007 peak. Q3 2008 will record a big drop. Capacity peaked at $521.8 as of 9/30/07
    • 154. Annual Catastrophe Bond Transactions Volume, 1997-2007 Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute. Catastrophe bond issuance has soared in the wake of Hurricanes Katrina and the hurricane seasons of 2004/2005, despite two quiet CAT years
    • 155. MERGER & ACQUISITION Are Catalysts for P/C Consolidation Growing in 2008?
    • 156. P/C Insurer M&A Activity,* 1997-2008** Source: Lehman Brothers. *Deals exceeding $500 million. *Through July 24, 2008. M&A activity began to accelerated in 2007. The largest deals in 2008 are Liberty Mutual’s/Safeco for $6.2B; Tokio Marine/Philadelphia Consolidated for $4.7 B; Allied World/Darwin for $550 million
    • 157. Distribution of P/C Insurer Acquisitions, Jan. 2007 – June 2008
      • SUMMARY STATS
      • 22 deals
      • $23 billion total transaction value
      • $475 million median deal value
      • Acquirers mostly p/c insurers and limited number of private equity deals
      Source: SNL, Lehman Brothers. Deals Exceeding $100 Million
    • 158. Motivating Factors for Increased P/C Insurer Consolidation
      • Motivating Factors For P/C M&As
      • Slow Growth : Growth is at its lowest levels since the late 1990s
        • NWP growth was 0% in 2007; Appears similarly flat in 2008
        • Prices are falling or flat in most non-coastal markets
      • Accumulation of Capital : Aggregate capitalization is high
        • Policyholder Surplus up 6-7%% in 2007 and up 80% since 2002
      • Reserve Adequacy : No longer a drag on earnings
        • Favorable development in recent years offsets pre-2002 adverse develop.
      • Low Share Prices : Acquisitions are “cheap”
        • Share prices of most p/c insurers are down 30% - 90%
      • Mergers Could Ease Capital Concerns
        • Combined operations could require less total capital
      • Need to Spin-Off Ops to Raise Cash
        • Some insurers looking to shed non-core assets; Refocusing trend
      Source: Insurance Information Institute.
    • 159.  
    • 160. Motivating Factors for Decreased P/C Insurer Consolidation
      • Motivating Factors Against P/C M&As
      • Credit Crunch : Little financing capital available with current freeze in credit markets and equity investors on the sidelines
      • Soft Market Conditions : Market remains soft (esp. commercial)
        • Underwriting results deteriorated significantly in 2008
      • Investment Volatilty : Investment volatility makes valuation more uncertain and deals less attractive
      • Limited Number of Players
        • Simply not that many companies in play
        • Exclude if mutual (though mutuals can acquire), too big, cultural, etc.)
      • Regulatory Uncertainty :
      • Nature of new regulations to be imposed on financial services in general and insurers in particular is unclear
      • Taxation : Future tax treatments issues unresolved
      Source: Insurance Information Institute.
    • 161. Distribution Sector: Insurance-Related M&A Activity, 1988-2006 Source: Conning Research & Consulting. No extraordinary trends evident
    • 162. Distribution Sector M&A Activity, 2005 vs. 2006 Source: Conning Research & Consulting 2005 2006 Number of bank acquisitions is falling years
    • 163. INVESTMENT OVERVIEW More Pain, Little Gain
    • 164. Property/Casualty Insurance Industry Investment Gain 1 1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute. Investment gains are off in 2008 due to lower yields and poor equity market conditions.
    • 165. P/C Insurer Net Realized Capital Gains, 1990-2008:H1 Sources: A.M. Best, ISO, Insurance Information Institute. Realized capital gains exceeded $9 billion in 2004/5 but fell sharply in 2006 despite a strong stock market. Nearly $9 billion again in 2007, but $-1.1 billion in 2008:H1 . $ Billions
    • 166. Total Returns for Large Company Stocks: 1970-2008* Source: Ibbotson Associates, Insurance Information Institute. *Through October 17, 2008. S&P 500 was up 3.53% in 2007, but down 36.0% so far in 2008* Markets were up in 2007 for the 5 th consecutive year before the crash of 2008
    • 167. P/C Investment Income as a % of Invested Assets Follows 10-Year US T-Note *As of July 2008. Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute. Investment yield historically tracks 10-year Treasury note quite closely
    • 168. FINANCIAL STRENGTH & RATINGS Industry Has Weathered the Storms Well
    • 169. P/C Insurer Impairments, 1969-2007 The number of impairments varies significantly over the p/c insurance cycle, with peaks occurring well into hard markets Source: A.M. Best; Insurance Information Institute
    • 170. P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007 Impairment rates are highly correlated underwriting performance and could reached a record low in 2007 Source: A.M. Best; Insurance Information Institute 2007 impairment rate was a record low 0.12%, one-seventh the 0.8% average since 1969; Previous record was 0.24% in 1972
    • 171. 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; 2003-2005 1969-2005 Deficient reserves, CAT losses are more important factors in recent years
    • 172. CATASTROPHICLOSS 2008 & Beyond
    • 173. Most of US Population & Property Has Major CAT Exposure Is Anyplace Safe?
    • 174. U.S. Insured Catastrophe Losses* *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Based on preliminary PCS data through June 30. PCS $1.8B loss of for Gustav. $9.8B for Ike of 9/22. Note : 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B. Source: Property Claims Service/ISO; Insurance Information Institute $ Billions 2008 CAT losses already exceed 2006/07 combined. 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
    • 175. Top 12 Most Costly Disasters in US History, (Insured Losses, $2007) *Based on average of midpoints of range estimates from risk modelers AIR, RMS and Eqecat as of 9/15/08. Sources: ISO/PCS; AIR Worldwide, RMS, Eqecat; Insurance Information Institute inflation adjustments. 10 of the 12 most expensive disasters in US history have occurred since 2004
    • 176. Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 1987-2006 ¹ Source: Insurance Services Office (ISO).. 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. Insured disaster losses totaled $297.3 billion from 1987-2006 (in 2006 dollars). Wildfires accounted for approximately $6.6 billion of these—2.2% of the total.
    • 177. Total Value of Insured Coastal Exposure (2004, $ Billions) Source: AIR Worldwide Northeast states have significant exposure. In 2004 Florida had more insured coastal exposure—at nearly $2 trillion than any other state. Future “Mega-Losses” are UNAVOIDABLE.
    • 178. Total Value of Insured Coastal Exposure (2007, $ Billions) Source: AIR Worldwide In 2007, Florida still ranked as the #1 most exposed state to hurricane loss, with $2.459 trillion exposure, an increase of $522B or 27% from $1.937 trillion in 2004. The insured value of all coastal property was $8.9 trillion in 2007, up 24% from $7.2 trillion in 2004. $522B increase since 2004, up 27%
    • 179. 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 The p/c insurance industry will likely experience a $20B+ event approximately every 10-12 years, on average—mostly associated with hurricanes *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. (Billions of 2005 Dollars) Great Miami Hurricane Galveston Storm
    • 180. Shifting Legal Liability & Tort Environment Is the Tort Pendulum Swinging Against Insurers?
    • 181. The Nation’s Judicial Hellholes (2007) Source: American Tort Reform Association; Insurance Information Institute South Florida ILLINOIS Cook County West Virginia Some improvement in “Judicial Hellholes” in 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 NEVADA Clark County (Las Vegas) NEW JERSEY Atlantic County (Atlantic City) TEXAS Rio Grande Valley and Gulf Coast
    • 182. Business Leaders Ranking of Liability Systems for 2007
      • 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
      Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute. New in 2007 ME, NH, TN, UT, WI Drop-Offs ND, VA, SD, WY, ID Newly Notorious AK Rising Above FL Midwest/West has mix of good and bad states
    • 183. REGULATORY & LEGISLATIVE ENVIRONMENT Isolated Improvements, Mounting Zealoutry
    • 184. Rating of Auto/Home Insurance Regulatory & Operating Environment* Source: James Madison Institute, February 2008. ME NH MA CT PA WV VA NC LA TX OK NE ND MN MI IL IA ID WA OR AZ HI NJ RI MD DE AL VT NY DC SC GA TN AL FL MS AR NM KY MO KS SD WI IN OH MT CA NV UT WY CO AK Most states (25) get a “B”, but 7 got A’s, 10 got C’s (including DC), 5 earned D’s and 4 got F’s *Criteria considered were auto/home residual mkts., auto/home mkt. concentration, loss ratio stability, reg. env.,form regulation, credit scores, territorial restrictions = A = B = C = D = F Source: James Madison Institute, Feb. 2008
    • 185. Insurance Information Institute On-Line WWW.III.ORG THANK YOU FOR YOUR TIME AND YOUR ATTENTION! Download at: www.iii.org/media/presentations/SIR