2. The Economic Slump: What it Means for P/C Insurers An Update & Outlook for the US Property/Casualty Insurance Industry for 2001 and Beyond June 2001 Robert P. Hartwig, Ph.D.  Vice President & Chief Economist Insurance Information Institute  110 William Street  New York, NY 10038 Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org

3. Presentation Outline Financial highlights and 2001 forecasts; Wall Street Review Scope of the economic slowdown P/C industry performance during recessions Threats to specific lines Other “Big Money” Issues

4. INDUSTRY HIGHLIGHTS & FORECASTS

5. Highlights: Full-Year 2000 ($ Millions) 20001999Change Net Written Prem.301,559286,934+5.1% Loss & LAE241,602222,270+8.7% Net UW Gain (Loss)(28,634)(19,729)+45.1% Net Inv. Income40,83638,855+5.1% Net Income (a.t.)20,22321,865-7.5% Surplus319,399334,348-4.5% Combined Ratio110.5107.8+2.7 pts.

6. EPS Growth Strong; P/E Falling Source: Merrill Lynch. Recommendations: 4 Buy 9 Accumulate 7 Neutral

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

8. Source: A.M. Best, Insurance Information Institute Growth in Net Premiums Written (All P/C Lines) 1999: 1.9% 2000: 5.1% 2001 Forecast: 7.4% The underwriting cycle went AWOL in the 1990s. Is it Back? 2001*

9. P/C Industry Combined Ratio 1999 = 107.8 2000 = 110.5 2001 Forecast* = 109.1 Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.7 * Based on III Groundhog Forecast 2001*

10. U.S. Insured Catastrophe Losses *Estimate for first half 2001. Source: Property Claims Service, Insurance Information Institute $ Billions First Quarter 2001: $705MM; 2 nd Quarter up to $1.7 billion TS Alison: 44 th CAT of 2001

11. WALL STREET PERSPECTIVE

12. Insurance Stock Performance: Off to a Slow Start in 2001 Source: SNL Securities, Insurance Information Institute Total Return YTD through June 15, 2001

13. But Still Looking Good Over Past 12 Months Source: SNL Securities, Insurance Information Institute Total Return Past 52 Weeks (through June 15, 2001)

14. Insurance IPO Boomlet 3 Insurance IPOs scheduled for June could raise as much as $1.44 billion (there were only 3 insurance IPOs in all of 2000)  Odyssey Re: Expected to raise $274.3 - $325.7MM  Willis Group: Expected to raise as much as $276MM  The Phoenix Cos.: Expected to raise as much as $836.2MM Why Insurance? Why Now?  Sector outperforming S&P, NASDAQ (Tech)  Good counter-cyclical play; Hancock/MET success  Overall market more hospitable to IPOs

15. THE ECONOMIC SLOWDOWN SCOPE OF THE PROBLEM

16. Real GDP Growth Source: US Department of Commerce; Insurance Information Institute. *Forecasts: Blue Chip Economic Indicators.

17. Real GDP Growth Source: US Department of Commerce; Insurance Information Institute. *Preliminary. Economy is experiencing negative G-forces after several quarters of unsustainably high real growth

18. Unemployment Rate (%) Source: US Bureau of Labor Statistics; Insurance Information Institute. Unemployment Holding Steady Despite the economic slowdown, the unemployment rate remains at generational lows. But layoffs are up.

19. Source: Federal Reserve, Insurance Information Institute Federal Funds Rate Not much maneuvering room left. Next FOMC meeting June 25-26.

20. Source: Federal Reserve, Insurance Information Institute Treasury Yield Curves Low interest rates are keeping the economy out of recession

21. Net Investment Income Facts 1997 Peak = $41.5B 1998 = $39.9B 1999 = $38.9B 2000 = $40.8B Source: A.M. Best, Insurance Information Institute Billions (US$) Pricing & underwriting problems were exacerbated by declining investment income

22. THE ECONOMIC SLOWDOWN HISTORICAL IMPACTS ON PROFITABILITY

23. Impact of Recession on P/C Premiums and Profitability (1970-1999) *GAAP return on equity, adjusted for inflation; Bank data 1952-99; Div. Fin. 1987-99 Source: Insurance Information Institute

24. Impact of Recession on P/C Premiums and Profitability (1950-1999) *GAAP return on equity, adjusted for inflation; Bank data 1952-99; Div. Fin. 1987-99 Source: Insurance Information Institute

25. Impact of Energy Price Shocks on P/C Premiums and Profitability *GAAP return on equity, adjusted for inflation. Source: Insurance Information Institute

26. THE ECONOMIC SLOWDOWN SELECTED IMPACTS ON EXPOSURE

27. Motor Vehicle Retail Sales (Millions of Units) Source: US Department of Commerce; Insurance Information Institute *Annualized, based on data through May 2001. New Motor Vehicle Sales Sales so far in 2001 are down modestly from 2000’s record pace. Impact on exposure growth this year is marginal. Decrease of 1 to 1.5 million new vehicles likely in 2001

28. Source: Energy Information Administration, Insurance Information Institute But Will Soaring Gas Prices Push Drivers Out of Their SUVs?

29. New Private Housing Starts (Millions of Units) Source: US Department of Commerce; Insurance Information Institute *Annualized April 2001 data. New Private Housing Starts Annualized starts in early 2001 were surprisingly strong: Virtually no exposure impact for insurers

30. Source: Insurance Information Institute, US Department of Commerce, NCCI. Workers Comp Claim Frequency & Costs vs. Real GDP 1/80-7/807/81-11/82 7/90-3/91 Shaded areas represent recessions

31. Exposure: Employment, Wages & Salaries Source: U.S. Bureau of Labor Statistics, Insurance Information Institute. Disbursements ($Billions) Employment (Millions)

32. Exposure: Employment Base Shrinking Source: U.S. Bureau of Labor Statistics, Insurance Information Institute. Employment (Millions)

33. Surety: Construction Activity is Holding its Own Source: US Department of Commerce; Insurance Information Institute. *April 2001 over April 2000, from annualized data. Telecom: +35.9% Industrial: + 19.1% Office: +11.0% Hotels/Motels: -10.1% Water Supply: 19.0% Educational: +12.2% Other Public Bldgs: + 8.4% Highways & Streets: -8.9%

34. OTHER “BIG MONEY” ISSUES

35. 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 New York are growing faster than in any other no-fault state—by far. Four Quarters Ending 2000:3rd

36. Asbestos: Reserve Deficiency and Ultimate Costs Growing Source: A.M. Best. Reserve Deficiency = $33.1 Billion

37. Insurance Information Institute On-Line This presentation is available by e-mail upon request.