2. 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 10038 Tel: (212) 669- 9214  Fax: (212) 732-1916  bobh@iii.org  www.iii.org

3. Highlights: First 9-Mos. 2000 ($ Millions; *Year-end 1999) 20001999Change Net Written Prem.228,036217,957+4.6% Loss & LAE176,108164,186+7.3% Net UW Gain (Loss)(19,447)(13,374)+45.4% Net Inv. Income29,18928,552+2.2% Net Income (a.t.)16,50217,368-5.0% Surplus327,268334,348*-2.1% Combined Ratio108.9107.7*+1.2 pts.

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

5. #1 PROFITS

6. P/C Net Income After Taxes 1993-2000* ($ Millions) *Estimate based on First Nine Months 2000 data. Sources: A.M. Best, ISO, Insurance Information Institute.

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

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

9. 1999 Return on Equity (Profitability)DO CO Source: NAIC, Insurance Information Institute 1999

10. Return on Equity (Profitability)UP *Insurers: 1989-1998; and Fortune 500: 1990-1999. Source: Quicken.com 10-Year Average*

11. 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

12. 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

13. Sagging Profits are the Symptom, not the Cause Capital/Capacity Pricing Fundamentals Investments Competition Consolidation Distribution Class Action Wall Street

14. #2 CAPITAL/ CAPACITY

15. Policyholder Surplus: 1975-2000* (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

16. Net Premiums Written to Policyholder Surplus Source: A.M. Best, ISO, Insurance Information Institute 1998: 0.84 1999: 0.85 2000 (Forecast): 0.94

17. Distribution of Industry Surplus Source: PaineWebber

18. 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!

19. #3 PRICING

20. Average Price Change of Commercial Insurance Renewals Source: Conning

21. Average Price Change of Personal Lines Renewals Source: Conning

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

23. 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.)

24. States With Highest Auto Insurance Expenditures vs. CO Source: Insurance Information Institute from NAIC Data, 1998. 123 15

25. States With Highest Auto Insurance Expenditures vs. CO Source: Insurance Information Institute from NAIC Data, 1998. 123144

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

27. 0.0 4.3 7.9* 4.9 3.1 7.0 4.4 2.5 3.7* 10.3 1.1 1.2 4.5* 18.4 -2.2 -2.4 -0.5 -22.8 -2.0 -4.5 -2.6 -2.5 -2.7 -3.8 -7.8 -1.7 -4.4 -2.4 -8.9 -0.4 -3.4 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%

28. #4 FUNDAMENTALS

29. P/C Industry Combined Ratio 1999 = 107.9 2000 (Est)* = 109.9 2001 Forecast* = 109.1 Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.7 * Based on III Groundhog Forecast 2001*

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

31. Underwriting Gain (Loss) 1975-2000* *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

32. 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

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

34. 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

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

36. #5 INVESTMENTS

37. 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.

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

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

40. #6 COMPETITION

41. Competition—Still on the Rise: Number of Insurers: 1970-1998 Sources: P/C: A.M. Best; L/H: NAIC.

42. Market Share of Top 5 P/C Insurers Source: Insurance Information Institute Fact Book (annual issues)

43. Market Share of Top 5 Life/Health Insurers Source: Insurance Information Institute Fact Book (annual issues)

44. 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*

45. #7 CONSOLIDATION

46. Insurance Mergers and Acquisitions *First Half 2000 Source: Compiled from Conning & Company reports. 1998: 565 deals valued at $165.4 B

47. Number of Deals: First Half 2000 vs. First Half 1999 Source: Conning 19992000 Total = 161Total = 244

48. Value of Deals: First Half 2000 vs. First Half 1999 Source: Conning 19992000 Total = $11.3BTotal = $30.9B N/A

49. #8 DISTRIBUTION

50. Shifting Distribution Channels: Property/Casualty Insurers Source: Datamonitor 2003 1998

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

52. Projected Online Sales of Auto, Home & Term Life Insurance Source: Forrester Research $ Millions

53. Internet Insurance Sales Forecast, 2003 Source: Conning & Co. (Life), Forrester Group (Auto & Home) (Online-closed sales=Total $4.8 Billion)

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

55. Distribution Channels Continue to Proliferate CustomerInsurer Agent Broker Mail Telephone Bank Internet Dealerships Payroll Plans Stock Exchanges Online Auctions (e.g. Priceline.com) ????

56. Insurers: Tangled in the Web?

57. #9 CLASS ACTION ABUSE

58. 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

59. Average Jury Awards 1993 vs.1999 *Comparison is between 1994 and 1999. Source: Jury Verdict Research; Insurance Information Institute.

60. Median Jury Award for Product Liability Cases Source: Jury Verdict Research

61. Median Jury Award for Vehicular Liability Cases Source: Jury Verdict Research

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

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

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

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

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

67. #10 WALL STREET

68. 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%

69. Insurance Stock Performance: After the Tech Crash * NASDAQ peaked on March 10, 2000 at 5048.62 Source: Insurance Information Institute, SNL Securities Total Return: March 10 through Year End 2000*

70. 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: -15.22% Financial Guarantee: -7.34

71. BONUS WORRY The Economy

72. 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

73. Change in Consumer Price Index Source: Bureau of Labor Statistics

74. 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

75. 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.

76. 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

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

78. Insurance Information Institute On-Line If you would like a copy of this presentation, please give me your business card with e-mail address