Florida Property Insurance Markets End of 2007 Hurricane Season Update Robert P. Hartwig, Ph.D., CPCU, President Insurance Information Institute  110 William Street  New York, NY Tel: (212)  Fax: (212)   Insurance Information Institute Media Briefing November 29, 2007

Presentation Outline Insured Catastrophe Loss Review  2007 Season in Historical Context Florida Hurricanes & Insurer Profitability Property/Casualty Insurer Profitability

CATASTROPHIC LOSSES Catastrophic Losses in the US: Upward Trend is Certain and Florida Could Be the Biggest Part of the Increase

Most of US Population & Property Has Major CAT Exposure Florida is the most catastrophe prone state in the US

U.S. Insured Catastrophe Losses* *Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Estimate through 11/28/07. 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 2006/07 were welcome respites. 2004/2005 were the worst years ever for insured hurricane losses, but the worst has yet to come. $100 Billion CAT year will occur eventually, likely involving FL

Global Insured Catastrophe Losses by Region, Notes: figures for N. America include US only figure includes only property losses from 9/11. Source: Insurance Information Institute compiled from Swiss Re sigma issues. North America accounted for 73% of global catastrophe losses Florida accounted for a significant share of global CAT losses in 2004/05

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss, 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 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 (in 2006 dollars). Hurricanes & tropical storms accounted for $137.7 billion of these— near half of the total.

Distribution of US Insured CAT Losses: TX, FL vs US, * Florida accounted for 22% of all US insured CAT losses from : $57B out of $249.3B *All figures (except 2006 loss) have been adjusted to 2005 dollars. Source: PCS division of ISO. $ Billions of 2005 Dollars

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005) Sources: ISO/PCS; Insurance Information Institute. Seven of the 10 most expensive hurricanes in US history impacted Florida: Andrew, Katrina, Wilma, Charley, Ivan, Frances & Jeanne

Historical Hurricane Strikes in Miami-Dade, FL, Source: NOAA Coastal Services Center, Insurance Info. Institute, accessed 11/28/07. Population of Miami- Dade County is 10 times what it was when the last period of intense activity began in the 1930s, lasting 30 years

Historical Hurricane Strikes in Monroe County, FL, Source: NOAA Coastal Services Center, Insurance Info. Institute, accessed 11/28/07. Population of Monroe County is 4 times what it was when the last period of intense activity began in the 1930s, lasting 30 years

With rapid coastal development, $40B+ storms will be more common Source: AIR Worldwide; PCS. (Billions of 2005 Dollars) Majority of worst-case scenarios involve Florida Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels

2007 Hurricane Season: A Welcome Respite Source: accessed 11/27/07; Insurance Information Institutewww.wunderground.com A Sigh of Relief The 2007 season saw 14 named storms (just 1 less than in 2004) including two rare Category 5 storms, that would have been devastating if they had struck the US

2004 Was Another Busy, Destructive & Expensive Hurricane Season Source: accessed 11/27/07; Insurance Information Institute. There were 15 named storms in 2004, the worst in Florida’s history, just one more than in 2007

Total Value of Insured Coastal Exposure (2004, $ Billions) Source: AIR Worldwide Florida leads the way for insured coastal property at more than $1.9 trillion in 2004 and is expected to double by 2014

New Condo Construction in South Miami Beach, Number of New Developments: 15 Number of Individual Units: 2,111 Avg. Price of Cheapest Unit: $940,333 Avg. Price of Most Expensive Unit: $6,460,000 Range: $395,000 - $16,000,000 Overall Average Price per Unit: $3,700,167* Aggregate Property Value: At least $6 Billion *Based on average of high/low value for each of the 15 developments Source: Insurance Information Institute from accessed April 5,

FLORIDA HURRICANES & INSURER PROFITABILITY: Selling Home Insurance in Florida is Challenging

Underwriting Gain (Loss) in Florida Homeowners Insurance, E* *2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL. **Does not include Citizens Property Insurance Corporation results. $ Billions Over the past four years, underwriting losses exceeded premiums in Florida by an estimated $6.7 billion Private Insurers**

Underwriting Gain (Loss) in Florida Homeowners Insurance, E* *2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL. **Does not include Citizens Property Insurance Corporation results. $ Billions Florida’s homeowners insurance market produces small/modest profits in most years and enormous losses in others Private Insurers**

Cumulative Underwriting Gain (Loss) in Florida Homeowners Insurance, E* $ Billions It took insurers 11 years ( ) to erase the UW loss associated with Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits & 2005 deepened the hole. Regulator under US law has duty to allow rates that are “fair,” “not excessive” and “not unduly discriminatory.” Reality is that regulators in CAT-prone states suppress rates. *2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL. **Does not include Citizens Property Insurance Corporation results. Private Insurers**

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida Source: NAIC; 200/6 US and FL estimates from the Insurance Information Institute. Averages: 1990 to 2006E US HO Insurance = -0.9% FL HO Average = -36.5% Andrew 4 Hurricanes Wilma, Dennis, Katrina 1990 – 2006E

Share of Losses Paid by Private Reinsurers, by Disaster* *Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute. Reinsurance is playing an increasingly important role in the financing of mega- CATs; Reins. Costs are skyrocketing

The Facts About Homeowner Insurer Profits and Losses in Florida During the period from 1992 through 2007, private home insurers in Florida paid an estimated $6.2 billion more in claims than they received in premiums  This $6.2 billion underwriting loss remains even after including $2.96 billion in profits in 2006 and $3.4 billion in 2007 (est.)  It will take until 2009 for insurers just to get to the breakeven point for the 15 year period even if there no storm losses in 2008 and 2009 Florida Remains a Money-Losing Proposition for Most Home Insurers in Terms of Return  The average annual rate of return on FL homeowners insurance was -36.5% from , despite a profitable 2006  Even if insurers were to earn a 40% rate of return (implying no storm activity) every year, the average return for insurers will not exceed 0% until To reach the current 5% risk-free return on 10-year Treasury bonds would take until 2026 and a 10% return is unachievable until 2033

Florida State-Run Insurer Residual Deficits 2004/2005 (Millions of Dollars) Source: Insurance Information Institute research. The hurricanes seasons of 2004/5 weakened the FL Hurricane CAT Fund and Citizens, producing a gross state-run insurer deficit of $3.7 billion FL’s guarantee fund will also assess for at least $400 million

Florida Citizens Exposure to Loss (Billions of Dollars) Source: PIPSO; FL Citizens; Insurance Information Institute. *As of March 31 Exposure to loss in Florida Citizens more than doubled by Q relative to year end 2005

Pre- vs. Post-Event in FL for 2007 Hurricane Season Billions Total = $20.0 Billion Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in Post-event funding is on a present value basis and does not include financing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.” Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07. $35.0B $25.0B $43.8B $49.5B $55.0B $80.0B There is a very significant likelihood of major, multi- year assessments ahead

Cost of Borrowing for State Could Exceed Expectations Source: Insurance Information Institute; Federal Reserve Board of Governors. If FL were to need to borrow money to fund state insurer deficits, the cost was 11.4% higher ($87.4 million) per billion borrowed in August (midst of credit crunch & hurricane season) than in January when legislation was passed Interest Charge to Borrow $1 Billion at State/Municipal Bond Rates, Amortized Over 30 Years If state/muni bond rates rise to 6%, interest cost would be 51% higher than in January 2007, adding $392 million to the cost of each billion borrowed Millions

Flood Insurance Analysis of Flood Policy Purchase and Lapse Rates Since Katrina in Florida

*Mandatory purchase of flood coverage for structures in floodplains with federally backed mortgages became effective in NFIP National Advertising Campaign began in PIF= Policies In Force. Source: NFIP; Insurance Information Institute Florida: NFIP Flood Policies in Force: July 1993 – July 2007* Surge in Sales: Katrina Effect Hurricane Katrina August 29, 2005

NFIP Flood Policy Growth in Gulf States Since Katrina* *Change from July 2005 through August Sources: NFIP ; Insurance Information Institute. The number of flood insurance policies sold in the Gulf states in the 2 years following Katrina increased by 21.6%

Percentage of NFIP Flood Policies Issued Since Katrina That Are Not Renewed* *Policies issued since July 2005 as of August **US figure is nonrenewal rate for all policies in force, average over 12 month period ending August Sources: NFIP ; Insurance Information Institute. Flood policy nonrenewal rates in Gulf states are surprisingly high

P/C INSURER PROFITABILITY National Perspective

ROE: P/C vs. All Industries 1987–2008E *2007 is actual first half ROAS of 13.1% P/C insurer ROE is I.I.I. estimate. Source: Insurance Information Institute; Fortune Andrew Northridge Hugo Lowest CAT losses in 15 years Sept Hurricanes Katrina, Rita, Wilma P/C profitability is cyclical, volatile and vulnerable

Insurer Financial Strength Benefits Consumers Profits compensate shareholders for the assets they put at risk and encourages new capital to enter Profitable companies can access capital markets under favorable terms after mega-CATs or if market conditions are poor (e.g., post-9/11); Others will fail, are dissolved or acquired Preferred treatment by reinsurers Profits lead directly to increased capacity Profits build contingent capacity for mega-CATs Profitable companies have higher financial strength and credit ratings

Key Messages on Profitability All of the profits earned in 2004 and 2005 and most of the profits in 2006/7 were earned in states and from types of insurance unaffected by the hurricanes 2006and 2007’s respite in hurricane activity provides insurers and reinsurers with the ability to rebuilding their claims paying resources By law, the rates charged for insurance are based exclusively on past and expected losses in that state. Profits in other states or from other types of insurance cannot be used to subsidize losses in the Florida homeowners insurance market. Likewise, losses in other states cannot be subsidized by Floridians

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