October 4, 2007 Proprietary & Confidential Overview of Professional Liability PLUS – Southwest Chapter Meeting

Agenda Section 1Key drivers of market changes Section 2Softening reinsurance market Section 3Summary

Section 1 Key Drivers of Market Changes

Proprietary & Confidential 4 Man-made losses Nat Cat losses Global P&C Combined Ratio WTC property loss (per III) Katrina loss Legend Rita loss Wilma loss North Atlantic Hurricane frequency trend line ‘70 to ‘06 Historical factors that have influenced dramatic changes in the market AndrewHugo Bart, Floyd, sydney Hailstorm, Lothar, Martin FranGeorges Charley, Frances, Ivan, Jeanne, Songda IsabelDennis, Katrina, Rita, Wilma87JVivian, Daria (Europe)California fires, Typhoon MireilleMississippi floodsEuro floods, Kobe EQNorthridge EQPiper Alpha 100

Proprietary & Confidential 5 Lack of Significant Catastrophe Losses Source: Property Claims Service/ISO; Insurance Information Institute

Proprietary & Confidential 6 Industry Combined Ratio and Premium Growth Source: Combined Ratio Premium Growth

Proprietary & Confidential 7 Combined Ratios 1970s: s: s: s: 102.4* Sources: A.M. Best; ISO, III *Through 2008E; through 2006 actual. P/C Insurance Combined Ratio, F

Proprietary & Confidential 8 Ten Lowest P/C Insurance Combined Ratios Since 1920 (& 2007:Q1) Sources: Insurance Information Institute research from A.M. Best data. *2007:Q1 actual off to a great start The industry’s best underwriting years are associated with periods of low interest rates The 2006 combined ratio of 92.4 was the best since the 87.6 combined in 1949

Proprietary & Confidential 9 Underwriting Gain (Loss) F* Source: A.M. Best, Insurance Information Institute *Actual 2007:Q1 underwriting profit = $8.281B. $ Billions Insurers earned a record underwriting profit of $31.2 billion in 2006, the largest ever but only the second since Expect figure near $30 billion in 2007 assuming “normal” CAT losses. Cumulative underwriting deficit since 1975 is $390 billion.

Section 2 Softening Reinsurance Market

Proprietary & Confidential 11 Significant Capital Inflows Insurers & Reinsurers raised $33.7 billion in the wake of Katrina, Rita, Wilma Source: Lane Financial Trade Notes, January 31, $ Billions

Proprietary & Confidential 12 US Reinsurer Net Income & ROE Source: Reinsurance Association of America.

Proprietary & Confidential 13 Softening Reinsurance Market  Significant capital inflows:  Over $30b since Katrina, Rita & Wilma in 2005  In several forms: Insurance Linked Securities Sidecars New & existing companies  Loss trends:  Frequency – continues to decrease  Severity – single digit increases

Proprietary & Confidential 14 Impact to Industry  Better capitalized insurance companies  More upgrades than downgrades from the rating agencies  Softening market:  Primary pricing softening  Reinsurers attempting to maintain discipline – softening as well  Insurance companies buying less reinsurance:  Increasing attachment points – i.e., higher retentions  Larger co-participations  Risk management:  Better understanding  Implementation of tools to measure  Risk accumulations

Proprietary & Confidential 15 Reinsurers’ Perspective  D&O:  Public Cos: Reinsurers more selective Aggregation issues important  Non-Public Cos: More reinsurers willing to write – more capacity available  E&O:  Reinsurers looking to write small misc. E&O  Lawyers:  Reinsurers seeking to increase writings  Reinsurance pricing aggressive  Medical Malpractice:  Reinsurers’ appetite for this line has returned  London long-time supporter

Proprietary & Confidential 16 Reinsurance Placements  Movement to more detail data continues  Driven more by actuarial and financial analysis  Better and more transparency viewed as yielding pricing that is reflective of actual exposure/risk  Emphasis on company specific data rather than industry data  Reinsurers trying to identify niches or certain clients to ride soft market

Section 3 Summary

Proprietary & Confidential 18 Summary  Well capitalized market  Trying to maintain discipline –lower margins vs business with high loss potential  Insurance companies more comfortable with higher retentions – not buying down as in past  Challenge will be deployment of capital over next couple of years  Hedge funds money treteching  Stock buy backs  Dividends higher  Consolidation