Kiessling, Ed Dec 0704

Presented By: Ed Kiessling President & COO, Commerce Insurance Services

INSURANCE BEFORE 9/11 -THE PERFECT STORM • The Profit Formula and Operating Measures: – Profit

(Premium + Return On Invested Assets) - (Losses + Operating Expenses) – Combined Ratio

Losses + Underwriting Expenses Written Premium

INSURANCE BEFORE 9/11 -THE PERFECT STORM • So, What Does This Mean?

– Combined Ratio for 2002 is 107.4 – The Industry Combined Ratio Has Not Been Below 100 Since 1979 – Returns Are Delivered Through Investment Activities

INSURANCE BEFORE 9/11 -THE PERFECT STORM • The Soft Market – From The Late 80’s, to 2000: • • • • • •

Increasing Investment Returns Growing Economy Increasing Globalization More Diverse Investment Opportunities Cheap Reinsurance Lead to …

– More Than a Decade of Declining Premiums

INSURANCE BEFORE 9/11 -THE PERFECT STORM • 1999/2000 -- The Tropical Storm Begins – Combined Ratios Deteriorate • 1998 - 106 • 2000 - 110.4

– Investment Returns Decline (Return on Invested Assets) • 1998 - 9% • 2000 - 4.9%

INSURANCE BEFORE 9/11 -THE PERFECT STORM • 1999/2000 -- The Tropical Storm Begins (continued) ...

– Undereserving From Past Years Becomes Apparent (Percentage of Original Loss Estimates Undereserved) • 1998 - 1.4% • 2000 - 8.9%

– Policyholders Surplus Declines for the First Time Since 1984 • 1998 - $338 Billion • 2000 - $322 Billion

INSURANCE BEFORE 9/11 -THE PERFECT STORM • Back To Basics (Prior to 9/11) – Firming Prices – Underwriters Actually Started Underwriting Again – Companies Limited Their Participation in Certain Lines of Business

9/11 -- TROPICAL STORM TO HURRICANE • The Immediate Impact – Thousands of Lives Lost – Approximately $50 Billion In Insured Losses • • • • • • • •

Life Insurance - $5 Billion Commercial Property - $17 Billion Personal Property - $2 Billion Autos - $90 Million Airline Liability - $6 Billion Aircraft Hull - $434 Million Workers’ Compensation - $2 Billion Business Interruption - $17 Billion

9/11 -- TROPICAL STORM TO HURRICANE • The Collateral Damage Continues – Investment Market Collapse – Slowing Economy

Total Return on Invested Assets 9.0 8.0 Percent

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

1998

1999

2000

2001

2002

9/11 -- TROPICAL STORM TO HURRICANE • The Post 9/11 Insurance World – Rapidly Increasing Prices for the Last Two Years • 15% to 100%

– Severe Limitations in Reinsurance Capacity and Dramatic Price Increases for Reinsurance

Industry Price Increases

By Percent Percent Increase

16 14 12 10 8 6 4 2 0

1998

1999

2000

2001

2002

9/11 -- TROPICAL STORM TO HURRICANE • The Post 9/11 Insurance World – Industry Focus on Underwriting for the First Time in Over a Decade

Industry Underwriting Results Combined Ratios 116.0 114.0 112.0 110.0 108.0 106.0 104.0 102.0 100.0

1998

1999

2000

2001

2002

9/11 -- TROPICAL STORM TO HURRICANE • The Post 9/11 Insurance World – Many Companies Came Into 2002 With Serious Balance Sheet Problems; Balance Sheet Repair Became a Priority

Industry Surplus Deterioration Millions of Dollars 340,000 330,000 320,000 310,000 300,000 290,000 280,000 270,000 260,000

1998

1999

2000

2001

2002

9/11 -- TROPICAL STORM TO HURRICANE • The Post 9/11 Insurance World – Industry Reserve Strengthening Grew Dramatically as Asbestos and Other Liabilities From the Past Were Recognized

Industry Loss Reserve Increases In Millions 420,000 410,000 400,000 390,000 380,000 370,000 360,000 350,000

1998

1999

Original Estimates

2000

2001

2002

Subsequent Increases

9/11 -- TROPICAL STORM TO HURRICANE • The Post 9/11 Insurance World – Many Insurance Companies Have Failed; Scores of Others Have Received Lower Agency Ratings – Many Carriers Have Entered the Markets to Raise Additional Capital, But Many Have Not – New Capital Has Come Into the Market, Particularly Offshore

9/11 -- TROPICAL STORM TO HURRICANE • The Post 9/11 Insurance World – The US Government Passes the Terrorism Risk Insurance Act (TRIA) of 2002 – Severe Limitations on Some Coverages and Concentrations of Exposures

PROGNOSIS FOR THE FUTURE • Positive – – – – – – –

Underwriting Discipline Has Been Re-Established 2003 Combined Ratios May Reach Below 100 Investment Market Gains Are Increasing Balance Sheets Are Getting Healthier Weaker Players Are Being Weeded Out Some Coverage Limitations Are Being Eased Prices In Some Lines of Coverage are Stabilizing (Although Not All)

PROGNOSIS FOR THE FUTURE • Negative – More Companies Will Fail In The Next Few Years – Reinsurance Company Balance Sheets Are Still Weak – More Reserve Strengthening is Inevitable (Estimates Are the Industry is Between $40 Billion to $120 Billion Undereserved)

PROGNOSIS FOR THE FUTURE • Negative – The Industry as a Whole Will Have Much Higher Financial Leverage Than In The Past – There is a Possibility that as the Investment Markets Return, a “Soft” Cycle Could Re-Emerge with Uncertain Industry Consequences