Malpractice Loss Trends 2007 Update DRI, March 15, 2007

Kimber J. Lantry, Executive Vice President Hudson Insurance Group 851 Napa Valley Corporate Way, Suite N Napa, CA (707) (707) FAX

Medical Malpractice Industry Combined Ratio Source: Bests Aggregates & Averages, 2005 Property & Casualty edition

Selected Company Results 2005 Source: A. M. Best Statistical Study, August 28, 2006 CompaniesDirect Premiums Written* *$thousands Loss Ratio MLMIC$871,08997% AIG$856,83430% Berkshire Hathaway (Med Pro, GenStar)$710,02157% ProAssurance Group$612,24228% CNA Insurance Companies$516,51760% Doctors Co Ins Group$492,15341% ISMIE$405,42056% Mag Mutual Group$355,94943% ProMutual Group$344,70657% Health Care Indemnity$331,02056% Norcal Group$297,64856% Physicians’ Reciprocal Insurers$290,69877% FPIC Ins Group$279,54046% Fairfax Financial Group$148,70141%

SEVERITY

Sources of Medical Malpractice Data  State by state filings -Little hospital data available as hospitals are written surplus lines - Quality varies by size, state requirements and quality of filing  St. Paul data – no longer available  Aon Study – largest available database -84 hospitals; 63,000 bed equivalents; $250M premium in first $1M layer  Jury Verdicts Research -Countrywide, accurate, but only about 5% of all medical malpractice, skewed towards high severity  National Practitioners Data Base -Physician data only; no hospital data -Only closed claims = 5 year lag -No expense costs included  PIAA Data -Fear of competitors’ use = limited utility

Median Medical Malpractice Jury Verdicts Source: Jury Verdicts Research, 2006 LRP Publications

Mean Medical Malpractice Jury Verdicts Source: Jury Verdicts Research, 2005 LRP Publications

National Practitioners Data Base Severity Analysis Source: National Practitioner Data Bank Public Use File, June 30, 2006

PIAA Data Base Severity Analysis Source: PIAA, 2004

Aon Risk Consultants, Inc., Medical Professional Liability Physician Professional Liability Benchmark HISTORICAL SEVERITY * * Based on non-zero claims only; Individual losses limited to $2M

FREQUENCY

Frequency Per Earned Unit of Exposure Source: PIAA Data

National Practitioners Data Base Frequency Analysis Source: National Practitioners Data Bank public use file, June 30, 2006

Aon Risk Consultants, Inc., Medical Professional Liability Physician Professional Liability Benchmark HISTORICAL FREQUENCY PER CLASS 1 EQUIVALENT * * Number of claims per physician; for example, the 2003 year indicates 7 claims per 100 class 1 physicians.

FREQUENCY AND SEVERITY TREND ANALYSIS

Aon Risk Consultants, Inc., Medical Professional Liability Physician Professional Liability Benchmark HISTORICAL LOSS COSTS PER CLASS 1 EQUIVALENT * * Individual losses limited to $2M

Frequency and Severity  Frequency = number of claims reported  Severity = average cost per claim  Frequency & severity trend factor – General Consensus: 6% - 7%, higher in jurisdictions without tort reform

PHYSICIAN ISSUES

Hospital vs. Physician Loss Costs Source: 2006 Update on U.S. Tort Cost Trends, Towers Perrin Tillinghast

MEDICAL MALPRACTICE INSURANCE COMPANY RESULTS

Medical Malpractice Premium Volume  2005: $9,124,374  Source: 2006 Best’s Aggregates & Averages – Property/Casualty  This doesn’t count: –Self insurance –Captives –Patient compensation funds –Risk retention and risk purchase groups –JUAs –Trusts

Accident Year vs. Calendar Year  Accident Year = Results from all policies written during that year  Calendar Year = Results from all polices written during that year plus any reserve changes made to prior years  Virtually all published data is on a calendar year basis

Loss Ratios for Medical Malpractice Industry Source: 2006 Bests Aggregates & Averages – Property/Casualty

Loss Adjusting Expense Ratios for Medical Malpractice Industry Source: 2006 Bests Aggregates & Averages – Property/Casualty

Incurred Loss Ratios for Medical Malpractice Industry Pure Loss + Allocated Loss Adjusting Expenses (ALAE) = Incurred Losses Source: 2006 Bests Aggregates & Averages – Property/Casualty

Loss Triangles Source: Schedule P – Part 3F – Section 2 – Medical Malpractice Claims Made ,406760,9731,560,2192,154,2192,645,4812,929,6053,105,8753,119,2733,176,2623,211, XXX179,905901,2591,758,1172,453,1312,959,9473,294,7663,439,6693,534,4823,597, XXX 186,512954,7991,984,0092,720,6593,310,5983,655,1743,823,3253,942, XXX 162,422993,2152,048,3872,890,3423,326,5533,622,7933,794, XXX 192,8521,026,4142,216,3813,091,8453,409,9773,661, XXX 206,2321,256,6252,487,8023,387,6763,911, XXX 204,0591,145,4532,322,2223,189, XXX 164,1041,007,2251,961, XXX 162,393852, XXX 154,901

Expense Ratio Source: 2006 Bests Aggregates & Averages – Property/Casualty  Consists of: – Costs to run company – Commissions to agents & brokers – Premium taxes

Combined Ratio Source: 2006 Bests Aggregates & Averages – Property/Casualty

Incident Date to Trial Date Medium Number of Months Jury Verdicts Research, 2005 Year of TrialMonths

Occurrence to Settlement Lag (in number of years) Source: National Practitioners Data Bank public use file, June 30, 2006

Filing Date to Trial Date Medium Number of Months Jury Verdicts Research, 2005 Year of TrialMonths

Investment Income Source: 2006 Bests Aggregates & Averages – Property/Casualty  Med Mal companies hold on to each premium dollar for an average of 3 years

Overall Operating Ratio “The Bottom Line” Source: 2006 Bests Aggregates & Averages – Property/Casualty

Malpractice Industry Premium and Losses Medical Malpractice Accident-Year Results ($ in millions)

TORT REFORM

Average Loss per Physician in States With and Without Caps Loss ($) per Physician Source: Richard S. Biondi & Arthur Gurevitch Contingencies November/December 2003 States without caps States with caps

Malpractice Claims per Physician in States With & Without Caps - Claims per 100 Physicians Source: Richard S. Biondi & Arthur Gurevitch Contingencies November/December 2003 States without caps States with caps

Differential in Loss per Physician in States With & Without Caps Capped States % of Uncapped States Source: Richard S. Biondi & Arthur Gurevitch Contingencies November/December 2003

Malpractice Premium per Physician in States With & Without Caps Premium ($) per Physician Source: Richard S. Biondi & Arthur Gurevitch Contingencies November/December 2003 States without caps States with caps

National Practitioners Data Base Frequency Analysis – Michigan NOTE: Michigan enacted caps on non-economic damages in 1994 Source: National Practitioners Data Bank public use June 30, 2006

National Practitioners Data Base Severity Analysis - Michigan Source: National Practitioner Data Bank Public Use File, June 30, 2006

Tort Reform  In , in and in numerous states enacted medical malpractice tort reform.  Five to seven years later ( and ), after court challenges to virtually every element of tort reform, approximately 50% was struck down by the states’ high courts. By that standard, we should start seeing the tort reform start being struck down in 2007.

MT $250k ID $250k WA OR CA $250k AK $400k* HI $375k NV $350k WYWY UT $400k AZ NM $200k* 1 CO $300k ND $500k SD $500k MN NE $500k 1 KS $250k OK $300k TX $250k IA MO $350k AR LA $500k 1 * WI $350k 1 MI $500k* IL IN $250k 1 OH $350 k KY TNTN MS $350k AL GA $350k FL $500k* SCSC VA* WV $250k PA NY ME $400k* VT NH MA - $500k RI CT NJ DE MD - $650k+* DC State by State Tort Reform Initiatives Limits on Noneconomic/Pain and Suffering Damage Awards (as of March 15, 2005) Source – National Conference of State Legislatures (January 13, 2005) None < $250k $ k $ k $500k and up *See notes for additional details 1 Cap is limit of liability for Providers; remainder to PCF NC

THE FUTURE

Medical Malpractice Crisis – What Crisis? HOSPITALS  Soft market has returned. Hospital excess insurance is the most competitive, but insurance bidding wars are increasingly common for primary as well. PHYSICIANS  Rate filing are commonly for modest declines. Large physician groups are enjoying insurance company bidding wars. Numerous carriers are aggressively attempting to expand market share.

Factors Affecting The Market  “Class of 2001” is mostly doing well Arch Capital Ace Gen Star Endurance Specialty Berkeley Medical Excess Underwriters OneBeacon Darwin Underwriters  Availability of reinsurance support for new entrants  A plethora of risk retention groups and admitted physician company startups  Rush to self-insurance and captives is over

The Future  Steadily softening market for the next 5 years or more  Continued new market entrants as industry profitability becomes clearer  Higher limits, broader policies  Likely to be followed by: – Unwinding of captives as commercial insurance market becomes cheaper  Followed by…inexorable rising of severity…and the next malpractice crisis