1 NCREIF Portfolio Strategy Committee Hilton Head, SC October 2006 Presented By: Marian Ivan/RREEF Claire Skinner/AEW

2 Hurricane Katrina August 29, 2005

3 TODAY’S ASSIGNMENT (Where Are We Now?) Insurance Market Capacity Crunch: EQ and Wind “Katrita” (Katrina, Rita, Wilma) 2005 Four horsemen (Charley, Frances, Jeanne & what’s-his-name) 2004 Insurance market statistics: worst losses ever last 5-10 years

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5 Top 11 Insured Property Losses Worldwide, Five of the 11 most expensive disasters in world history affected the U.S. within the past 5 years.

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7 Cat reinsurance prices surge in 2006 In hurricane-prone areas, property catastrophe reinsurance rates are up. 2005, 2006 are estimates Source: Insurance Information Institute

8 SYLLABUS (Where Are We Going?) Budgets: estimated increases vary by state: CA, FL, WA, non-Cat Loss control Capital budgets Loss prevention Potential issues for lenders & clients: Lower limits per program S&P ratings

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10 ROE vs. Equity Cost of Capital: US P/C Insurance: E *Based on 2006:Q1E ROAS of 15.4% Source: The Geneva Association, Ins. Information Inst. The p/c insurance industry achieved its cost of capital in pts +0.2 pts US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target pts +5.9 pts -9.0 pts

11 P/C vs. all U.S. industries in return on equity *2006 P/C insurer ROE based on annualized first-quarter results. Source: Insurance Information Institute Andrew Northridge Hugo Lowest CAT losses in 15 years Sept Hurricanes Katrina, Rita, Wilma

12 * 2005/06 figures are return on average statutory surplus. Source: Insurance Information Institute from A.M. Best and ISO data. ROE goals Combined ratios today must be below 95% to generate Fortune 500 return-on-equity levels.

13 Tri-Coastal Strategy Great from an investor’s perspective ~“Great” from an insurer’s perspective!

14 Most of US Population & Property Has Major CAT Exposure Is Anyplace Safe?

15 First Day of School CA EQ crunch 2005 EQ Blanket Limits available: $300M Est. Limits Available 4/1: $200M 6/1: $175M 9/1: $150M “tops” 10/1: <$150M

16 EQ: The Other Insurance Crisis Factors driving premiums higher: Higher loss projections from new cat models Higher capital requirements imposed by rating agencies

17 EQ (cont’d) Major cat models badly underestimated Hurricane Katrina Result: underwriters and cat modelers reconsidered potential EQ damage Estimate: CA EQ = Worst Hurricane Scenario (Cat 5 hurricane striking Miami and FL coast) SoCA rupture (San Andreas) $300B property damage

18 EQ Predictions 62% probability of at least one M6.7+ EQ in Bay Area before 2032 San Andreas in SoCA Rupture “at any moment” M7+ EQ “The California commercial earthquake market has become extremely tight, the likes of which I don’t think anybody has seen – ever.” -Robert Hall, CEO, Golden Bear Ins. Co.

19 RMS Loss Modeling “Loss Amplification” Cascade of far more damaging consequences that can follow a catastrophe Demand surge Sharply higher costs to rebuild Scarce building materials and labor Function of size of catastrophe Larger the impact of the event on the local economy, the larger the effect of the demand surge

20 Higher Loss Projections – Ratings Agencies Raising minimum capital for insurers and reinsurers Average 10% increase Est % increase specifically needed to support cat risks.

21 RECESS Blanket Programs Great news when the market is good Even better when the market is great Can be limiting in a difficult market Good news: GL, Ex, PLL

22 TERM PAPER Take care of your “house” Don’t depend on insurance to: Replace your roof Fix your chiller Use your negotiated credits (at acquisition) for your capital improvements

23 PTA Meeting Large broker refunds: Spitzer investigation: Marsh Aon Willis Gallagher Other brokers Insurers

24 Program Summary Rates will increase due to catastrophe exposure Loss experience will affect rates 2005 rates were low by historical measures Your active management will benefit all Risk Management is on it!

25 Q&A – Thank You!