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

Highlights: First Half 2000 ($ Millions) Change Net Written Prem.149,301143, % Loss & LAE115,154106, % Net UW Gain (Loss)(14,730)(7,788)+89.1% Net Inv. Income19,40519, % Net Income (a.t.)10,03114, % Surplus326,708334, % Combined Ratio pts.

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

#1 PROFITS

Return on Equity (Profitability) *Insurers: ; and Fortune 500: Source: NAIC, Insurance Information Institute 10-Year Average*

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

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

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

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

#2 CAPITAL/ CAPACITY

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

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

Distribution of Industry Surplus Source: PaineWebber

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

#3 PRICING

Average Price Change of Commercial Insurance Renewals Source: Conning

Policy Renewal Premiums in Standard Commercial Lines Source: Goldman Sachs

Policy Renewal Premiums in Workers’ Compensation Source: Goldman Sachs

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

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

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

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

#4 FUNDAMENTALS

P/C Industry Combined Ratio 1999 = (Est)* = Forecast* = Combined Ratios 1970s: s: s: * Based on III Earlybird Forecast 2001*

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

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

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

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

Auto Claim Cost and Frequency Trends Source: ISO

Auto Claim Cost and Frequency Trends Source: ISO

Auto Claim Cost and Frequency Trends Source: ISO

#5 INVESTMENTS

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

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

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

#6 COMPETITION

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

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

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

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

#7 CONSOLIDATION

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

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

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

#8 DISTRIBUTION

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

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

Shifting Distribution Channels: Property/Casualty Insurers Source: Datamonitor

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

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

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

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

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

Insurers: Tangled in the Web?

#9 CLASS ACTION ABUSE

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

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

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

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

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

#10 WALL STREET

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

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

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

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

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

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

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