2. 0 State Of The Market March 7, 2008 Carol L. Murphy Managing Director Aon Risk Services

3. 1 Overall State of the P/C Market

4. 2 Property/Casualty Insurance Industry Investment Gain 1 1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B. **Annualized 9-month result of $47.718B. Sources: ISO; Insurance Information Institute. Source: Insurance Information Institute Investment rose in 2007 but are just 9.8% higher than what they were nearly a decade earlier in 1998

5. 3 Overall State of the P/C Market U.S. P/C policyholder surplus decreased $60B from 1999 through 2002 but increased $270B from 2002 through 2007.

6. 4 Overall State of the P/C Market

7. 5 Note: Shaded areas denote hard market periods. Source: A.M. Best, Insurance Information Institute Strength of Recent Hard Markets by NWP Growth* 1975-78 1984-87 2001-04 2006-2010 (post-Katrina) period could resemble 1993-97 (post-Andrew) 2005: biggest real drop in premium since early 1980s

8. 6 ROE vs. Equity Cost of Capital: US P/C Insurance:1991-2007E Source: The Geneva Association, Ins. Information Inst. Insurance Information Institute The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years -13.2 pts +0.2 pts US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on target or better 2003-07 -0.1 pts +1.7 pts -9.0 pts The cost of capital is the rate of return insurers need to attract and retain capital to the business +3.1 pts

9. 7 P/C Insurance Combined Ratio, 2001-2007E Sources: A.M. Best; ISO, III. *Actual 9-month result; Insurance Information Institute 2005 figure benefited from heavy use of reinsurance which lowered net losses 2006 produced the best underwriting result since the 87.6 combined ratio in 1949 As recently as 2001, insurers were paying out nearly $1.16 for every dollar they earned in premiums 2007 deterioration due primarily to falling rates, but results still strong assuming normal CAT activity

10. 8 Reinsurance Marketplace Reinsurance markets remained stable in 2007. January 1, 2008 renewal rates continued in softening mode. Barring any major catastrophe, soft conditions are expected to continue throughout 2008. Catastrophe bond issuance has soared since the hurricane seasons of 2004/2005.

11. 9 US Reinsurer Net Income & ROE, 1985-2006 Source: Reinsurance Association of America, Insurance Information Institute Reinsurer profitability has rebounded

12. 10 State of the Property Marketplace In 2007, there was significant softening of the property marketplace with increased market competition. Most clients can expect favorable renewals in 2008 including significant rate decreases, increased capacity, and improved terms. Incumbent markets are responding to competitive pressures to retain quality insureds. Insurers continue to differentiate between insureds with difficult catastrophe exposures and those without in terms of their underwriting aggressiveness. The Terrorism Risk Insurance Act (TRIA) was extended for seven more years. Pricing and capacity are expected to remain stable for terrorism insurance.

13. 11 State of the Casualty Market Capacity –Abundant choice of markets for most risks. –Excess capacity has remained fairly stable since 2001 –Currently, there is approximately $2 billion of total available capacity with about $1 billion for US risks Pricing –Financial responsibility (fronting) – very competitive –Risk transfer rates above client loss retentions for WC, GL and Auto continue to decrease –Underwriting scrutiny continues, especially as respects concentration of employees in major metropolitan areas. –Umbrella excess liability rates continued to decline throughout 2007 and into 2008.

14. 12 Umbrella/Excess Market Umbrella/Excess Liability Average Year Over Year Rate Change (07 vs. 06 & Jan. 07 vs. 08)

15. 13 Umbrella/Excess Market

16. 14 Cost of US Tort System ($ Billions) Tort costs consumed 1.87% of GDP in 2006, down from 2.24% in 2003 Per capita “tort tax” was $825 in 2006, up from $680 in 2000 Reducing tort costs relative to GDP by just 0.25% (to 1.84%) would produce an economic stimulus of $31.1B Source: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends; Insurance Information Institute

17. 15 State of the Casualty Market Loss Retentions –In general, retentions have not retreated, however in some cases, we are obtaining reduced retentions with little or no cost impact. Coverage Issues –Areas of concern include: silica, mold, electromagnetic fields (EMF), bovine spongiform encephalopathy (BSE), genetically modified food and labeling, nutraceuticals and avian flu. Collateral –Credit rating of insured impacts level of collateral required for a “fronted” program.

18. 16 State of the Casualty Market WC Pass Through Costs - State Assessments & Surcharges - Boards & Bureaus - Premium taxes - Assigned Risk Charges - 2 nd Injury Funds - NY, GA, SC have closed

19. 17 Med Costs Share of Total WC Costs is Increasing Steadily Source: NCCI (based on states where NCCI provides ratemaking services). Insurance Information Institute 1986 1996 2006p

20. 18 Summary Strong P/C Industry results in 2007 with overall profitability at its highest point since 1988. Underwriting results are aided by lack of CAT’s and favorable loss trends, including tort system improvements. Premium growth rates are slowing considerably. Investment returns are insufficient to support deep soft market in terms of price, terms & conditions. Major challenges: –Slow Growth Environment (Economy and market driven) –Maintaining price / underwriting discipline –Managing variability / volatility of results –Widening impact of credit crunch on major insurers / reinsurers. Source: Insurance Information Institute