What Really Keeps Insurance CEOs Awake at Night? An Update & Outlook for the US Property/Casualty Insurance Industry Rocky Mountain Insurance Association Radisson Hotel Denver Denver, CO March 14, 2001 Robert P. Hartwig, Ph.D.  Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY Tel: (212)  Fax: (212)  

Highlights: First 9-Mos ($ Millions; *Year-end 1999) Change Net Written Prem.228,036217, % Loss & LAE176,108164, % Net UW Gain (Loss)(19,447)(13,374)+45.4% Net Inv. Income29,18928, % Net Income (a.t.)16,50217, % Surplus327,268334,348*-2.1% Combined Ratio *+1.2 pts.

Presentation Outline Insomnia: Major Problem Among Insurance CEOs Top 10 Reasons for Losing Sleep CATs: Asleep at the Switch? Q&A

#1 PROFITS

P/C Net Income After Taxes * ($ Millions) *Estimate based on First Nine Months 2000 data. Sources: A.M. Best, ISO, Insurance Information Institute.

Return on Equity 1975 – 2000* * *Estimate Source: Insurance Information Institute

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

1999 Return on Equity (Profitability)DO CO Source: NAIC, Insurance Information Institute 1999

Return on Equity (Profitability)UP *Insurers: ; and Fortune 500: Source: Quicken.com 10-Year Average*

Return on Net Worth, Selected Lines in ColoradoUP Source: NAIC, Insurance Information Institute 10-Year Averages Auto+5.7% Home-18.4% WC+1.1

Return on Net Worth, Selected Lines in ColoradoUP Source: NAIC, Insurance Information Institute 10-Year Averages Auto+5.7% Home-18.4% WC+1.1

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 2.1% in First 9 Months 2000 to $327.3 Billion * First Nine Months 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

Average Price Change of Personal Lines Renewals Source: Conning

Rate On Line Index (1989=100 ) Source: Guy Carpenter, Insurance Information Institute* Estimate

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

States With Highest Auto Insurance Expenditures vs. CO Source: Insurance Information Institute from NAIC Data,

States With Highest Auto Insurance Expenditures vs. CO Source: Insurance Information Institute from NAIC Data,

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

* * * Filings Approved With Effective Dates in 2000 Cumulative change from multiple filings Source: NCCI  Increase  No Change  Decrease  No Filing Approved Countrywide Change = +3.3%

#4 FUNDAMENTALS

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

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

Underwriting Gain (Loss) * *I.I.I. estimate based on First 9 Monthsf 2000 data. Source: A.M. Best, Insurance Information Institute Billions (US$) In 2000, P-C insurers will paid out nearly $26 billion more in claims & expenses than they collected in premiums

U.S. Insured Catastrophe Losses 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 Didn’t lose much sleep over CATs in 2000

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

Growth in Total PIP Claims Costs* *Change in “pure premium” Source: Insurance Information Institute from ISO Fast Track Data PIP Claims Costs PIP Costs in Colorado are growing faster than in most other no-fault states. Four Quarters Ending 2000:3rd

States With Highest PIP Average Loss (4 Qtrs. ending 2000:3 rd ) Source: Insurance Information Institute from ISO Fast Track Data 12345

#5 INVESTMENTS

Net Investment Income Facts 1997 Peak = $41.5B 1998 = $39.9B 1999 = $38.6B 2000 (Forecast)* = $38.9B Source: A.M. Best, Insurance Information Institute Billions (US$) Pricing & underwriting problems were exacerbated by declining investment income * Estimate based on First 9 Months 2000 results.

Stock Markets: Going Nowhere in 2001 Source: Insurance Information Institute YTD Total Return through 2/22/01

Source: A.M. Best, ISO, Insurance Information Institute Treasury Yield Curves Are interest rates too low for a recession?

#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, Insurance Information Institute Growth in Net Premiums Written (All P/C Lines) 2000 est.; 2001 forecast from III Groundhog Survey 1999: 1.9% 2000 Est: 5.2% 2001 Forecast: 7.4% 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

Shifting Distribution Channels: Property/Casualty Insurers Source: Datamonitor

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

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

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

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 Jury Award for Vehicular Liability Cases Source: Jury Verdict Research

Trends in Million Dollar Verdicts* *Verdicts of $1 million or more. Source: Jury Verdict Research; Insurance Information Institute.

Florida Average Severity per GL/PL Claim Source: Aon Risk Consultants. Long-Term Care Facilities

Florida Loss Cost per Occupied Bed Source: Aon Risk Consultants. Long-Term Care Facilities

Asbestos Cumulative Paid Lossesand Reserves Source: A.M. Best.

Paid vs. Incurred Asbestos Losses Source: A.M. Best.

#10 WALL STREET

Performance on Wall Street Highly Erratic Source: SNL Securities; Insurance Information Institute P/C insurers were up 43.4% in 2000; Down 25.7% in 1999; YTD 2001= -7.5%

Insurance Stock Performance: After the Tech Crash * NASDAQ peaked on March 10, 2000 at Source: Insurance Information Institute, SNL Securities Total Return: March 10 through Year End 2000*

Insurance Stock Performance: Off to a Slow StartUP Source: SNL Securities, Insurance Information Institute YTD Total Return through March 8, 2001 CREDIT SENSITIVITY Mortgage Guarantee: % Financial Guarantee: -7.34

BONUS WORRY The Economy

Impact of Recession on P/C Premiums and Profitability ( ) *GAAP return on equity, adjusted for inflation; Bank data ; Div. Fin Source: Insurance Information Institute

Change in Consumer Price Index Source: Bureau of Labor Statistics

Motor Vehicle Retail Sales (Millions of Units) Source: US Department of Commerce; Insurance Information Institute *Seasonally Adjusted Annual Rate (Jan-Nov 2000). New Motor Vehicle Sales Sales in late 2000 fell sharply. There will be an impact on exposure growth in the personal auto line in 2001 Net loss of 2 to 3 million vehicles likely by mid-2001

New Private Housing Starts (Millions of Units) Source: US Department of Commerce; Insurance Information Institute *Annualized 3 rd Quarter 2000 data. New Private Housing Starts Annualized starts in late 2000 were down by 140,000 units compared with 1999, representing an estimated $70 million decrease in new exposure.

Recession & Credit Risk: Impact on Earnings & Surplus Source: Goldman Sachs; 10K/10Q Reports. 4.08% Default Rate All Corporates 10% Default Below Investment Grade 100% Default Below Investment Grade Some Companies with Credit Woes  Xerox  Sunbeam  TWA  PG&E  Edison Intl.  Credit Default Swaps  Debt Guarantees

Anything Else—You Bet? Worries 1-10 The Economy Banks in Insurance Privacy Federal vs. State Regulation Attracting/Retaining Talent

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