Industry Overview

Industry OverviewIndustry Overview

Moderator: Moderator: Matthew Dolan, PresidentMatthew Dolan, PresidentOneBeacon Professional PartnersOneBeacon Professional Partners

Panelists: Panelists: Paul F. Sherbine, Managing DirectorPaul F. Sherbine, Managing DirectorMarsh Inc.Marsh Inc.

James D. Hurley, PrincipalJames D. Hurley, PrincipalTillinghast, Towers PerrinTillinghast, Towers Perrin

Daryl Douglas, Hospital Claims ManagerDaryl Douglas, Hospital Claims ManagerEmployers Reinsurance CorporationEmployers Reinsurance Corporation

2003 U.S Insurance2003 U.S InsuranceIndustry ResultsIndustry Results

Its About Time!Its About Time!

Paul F. SherbinePaul F. Sherbine

March 30, 2004March 30, 2004

What has the industry done since What has the industry done since 9/11? 9/11?

Raised CapitalRaised CapitalRaised RatesRaised RatesRaised Loss ReservesRaised Loss ReservesRaised Questions About its ViabilityRaised Questions About its Viability

Net Result 2002* vs. 2001Net Result 2002* vs. 2001An improvement, but...An improvement, but...

Net Underwriting LossNet Underwriting Loss $26 billion $26 billion $53 billion$53 billionNet Income After TaxesNet Income After Taxes $11 billion $11 billion -$7billion-$7billionNet Unrealized Capital LossesNet Unrealized Capital Losses $18 billion $18 billion $18 billion$18 billionPolicyholders’ Surplus Decline**Policyholders’ Surplus Decline** $ 5 billion $ 5 billion $27 billion$27 billionCombined RatioCombined Ratio 106%106% 116%116%– Commercial Lines Commercial Lines 108% 108% 117%117%– U.S. ReinsurersU.S. Reinsurers 123% 123% 146%146%– Personal LinesPersonal Lines 105% 105% 112%112%

** Includes $9.5 billion ($11 billion) in new capital invested into the industry** Includes $9.5 billion ($11 billion) in new capital invested into the industry

2002 2001

Eventually Something Had to Give Eventually Something Had to Give BecauseBecause

Twenty seven months of price increasesTwenty seven months of price increasesInvestment market ralliedInvestment market ralliedCatastrophe losses lowCatastrophe losses lowNew capital In New capital In Bad capital outBad capital outEnd game for 2003 is...End game for 2003 is...

Year end Results 2003 vs. 2002Year end Results 2003 vs. 2002BIG DIFFERENCEBIG DIFFERENCE

Net Underwriting LossNet Underwriting Loss $9.6 billion $9.6 billion $32 billion$32 billionNet Income After TaxesNet Income After Taxes $31 billion $31 billion $9 billion$9 billionNet Unrealized Capital GainsNet Unrealized Capital Gains $13 billion $13 billion -$24 billion-$24 billionPolicyholders’ Surplus Change**Policyholders’ Surplus Change** $39.6 billion $39.6 billion -$4.2 billion-$4.2 billionCombined Ratio Combined Ratio 101.1101.1 107.4%107.4%– Commercial Lines Commercial Lines 104% 104% 108%108%– U.S. ReinsurersU.S. Reinsurers 98% 98% 123%123%– Personal LinesPersonal Lines 99% 99% 105%105%

** ** Includes $8 billion ($18.7 billion) in new capital invested into the industryIncludes $8 billion ($18.7 billion) in new capital invested into the industry

2003 2002

Major Points on 2003 ResultsMajor Points on 2003 Results

Net Income of $31 billion despite nearly $17 billion in loss Net Income of $31 billion despite nearly $17 billion in loss reserve strengtheningreserve strengtheningCombined ratio of 101% is after 3.2 points for cat losses Combined ratio of 101% is after 3.2 points for cat losses and 2.1 points for A&E reserve additionsand 2.1 points for A&E reserve additionsRate increases of 2003 will not show up until 2004 Rate increases of 2003 will not show up until 2004 resultsresultsInvestment yield climate still bad with no end in sightInvestment yield climate still bad with no end in sightUnderwriting results something to write home about for Underwriting results something to write home about for the first time since the eightiesthe first time since the eighties

U.S. P&C Policyholders’ SurplusU.S. P&C Policyholders’ Surplus($ in billions)($ in billions)

94 104 118134 138

159 163182 193

230256

308333 334

317290 285

331

050

100150200250300350400

U.S. P&C Combined RatiosU.S. P&C Combined Ratios

70%80%90%

100%110%120%130%140%150%160%

2001 2002 2003

A Look BackA Look BackSurplus Increase, 2003 ($ in billions)Surplus Increase, 2003 ($ in billions)

Beginning surplus, 2002Beginning surplus, 2002Underwriting gain/lossUnderwriting gain/lossInvestment incomeInvestment incomeRealized GainsRealized GainsOtherOtherOperating gain/lossOperating gain/lossUnrealized gain/loss Unrealized gain/loss TaxesTaxes

DividendsDividendsNew CapitalNew Capital

Surplus ChangeSurplus ChangeEnding surplus, 2003Ending surplus, 2003

$291.9(9.6)42.36.5(.5) 32.213.1 (8.3)(10.9)839.6$330.8

Despite 2003 healthy returnsDespite 2003 healthy returnsHistorical industry returns on equity Historical industry returns on equity

remain poorremain poor

Source: ISO, Goldman Sachs Research Estimates

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003E

(Ret

urn

on a

vera

ge e

quity

)

ROAE (ex. realized gain/losses) ROAE (incl. realized gain/losses) S&P 500

Despite Historically Poor Returns Despite Historically Poor Returns Insurance Remains a Magnet For Insurance Remains a Magnet For

New Capital. Why?New Capital. Why?

Alternative investment vehicles available post 2001 not Alternative investment vehicles available post 2001 not appealingappealingVenture capital firms are big player in 2001 and later following Venture capital firms are big player in 2001 and later following success of KKR and others in late 1990’ssuccess of KKR and others in late 1990’sEase of entrance and exit-There’s a sucker born every minute!Ease of entrance and exit-There’s a sucker born every minute!Results of Bermuda companies in this marketplace are Results of Bermuda companies in this marketplace are excellent just like in 1994excellent just like in 1994Consequently;Consequently;$15 billion invested in 2002 in US and Bermuda insurers$15 billion invested in 2002 in US and Bermuda insurers$14.7 billion invested in 2003 in US and Bermuda insurers$14.7 billion invested in 2003 in US and Bermuda insurers

New Insurers, Capitalization and New Insurers, Capitalization and Major Investors 2002 and 2003Major Investors 2002 and 2003

Arch Re-$1 Billion-Warburg Arch Re-$1 Billion-Warburg Pincus-$500 Million,Hellman & Pincus-$500 Million,Hellman & Friedman-$250 Million, Arch Friedman-$250 Million, Arch Capital $250 millionCapital $250 millionAWAC-$1.5 Billion AIG-$291 AWAC-$1.5 Billion AIG-$291 million,Chubb-$250 million,Chubb-$250 million,Goldman Sachs-$250 million,Goldman Sachs-$250 millionmillionAXIS Specialty-$1.65 billion-AXIS Specialty-$1.65 billion-Trident(MMC Capital)-$250 Trident(MMC Capital)-$250 million,MMC- $100 million,J.P. million,MMC- $100 million,J.P. Morgan-$200 million,T.H.Lee Morgan-$200 million,T.H.Lee Prtnrs-$200 million,Blackstone Prtnrs-$200 million,Blackstone Grp-$200 million,CSFB-$200 Grp-$200 million,CSFB-$200 millionmillion

Da Vinci Re-$500 million-State Da Vinci Re-$500 million-State Farm-$200 million,Ren Re-$100 Farm-$200 million,Ren Re-$100 millionmillionEndurance Specialty-$1.2 Endurance Specialty-$1.2 Billion-Aon-$200 million,Zurich-Billion-Aon-$200 million,Zurich-$200 million$200 millionGoshawk Re-$100 million-Goshawk Re-$100 million-Goshawk Ins HoldingsGoshawk Ins HoldingsMontpelier Re-$1 billion-White Montpelier Re-$1 billion-White Mountains-$200 million Mountains-$200 million Olympus Re-$500 million-Olympus Re-$500 million-Leucadia National,Gilbert Global Leucadia National,Gilbert Global Equity Prtnrs,Franklin Mutual Equity Prtnrs,Franklin Mutual AdvisorsAdvisorsQuanta-$500 millionQuanta-$500 million

Established Insurers Also Added Capital Established Insurers Also Added Capital to Replace Losses and Increase Capacityto Replace Losses and Increase Capacity

ACE-$1.1 Billion- ACE-$1.1 Billion- AIG-$1 BillionAIG-$1 BillionAlea-$150 Million- KKR Alea-$150 Million- KKR InvestmentInvestmentAmerican Re-$1 BillionAmerican Re-$1 BillionAVIVA-$1.43 BillionAVIVA-$1.43 BillionChubb-$600 MillionChubb-$600 MillionCNA-$1.4 BillionCNA-$1.4 BillionEverest Re-$575 MillionEverest Re-$575 MillionFairfax Fin’l -$150 Million-Fairfax Fin’l -$150 Million-Private PlacementPrivate PlacementHannover Re- $700 MillionHannover Re- $700 MillionHartford-$2.4 BillionHartford-$2.4 BillionIPC Re-$547 MillionIPC Re-$547 Million

Markel-$220 MillionMarkel-$220 MillionPartner Re-$400 MillionPartner Re-$400 MillionPMA-$158 MillionPMA-$158 MillionPX Re-$150 MillionPX Re-$150 MillionQBE- $323 MillionQBE- $323 MillionRen Re-$233 MillionRen Re-$233 MillionSCOR - $1.4 BillionSCOR - $1.4 BillionSwiss Re- $3.3 BillionSwiss Re- $3.3 BillionW.R. Berkley-$175 MillionW.R. Berkley-$175 MillionXL- $1.5 BillionXL- $1.5 BillionWhite Mountain- $1 BillionWhite Mountain- $1 Billion

New Capital, Both for New Ventures And New Capital, Both for New Ventures And Existing Insurers was Substantial But...Existing Insurers was Substantial But...

Capital Lost Since 1999 is $49 Billion In US Alone Capital Lost Since 1999 is $49 Billion In US Alone Capital Lost Since 2000 is $32 Billion In US AloneCapital Lost Since 2000 is $32 Billion In US Alone2003 results takes capital back to about 1998 levels2003 results takes capital back to about 1998 levelsHard market leveling off despite many tough issues facing the Hard market leveling off despite many tough issues facing the industry including:industry including:Loss Reserve Strengthening for Recent Losses and Old A&E Loss Reserve Strengthening for Recent Losses and Old A&E Issues Issues Other Legacy Issues Other Legacy Issues Investment portfolio problemsInvestment portfolio problemsRatings still fallRatings still fall

Rating Changes Since 9-11Rating Changes Since 9-11(Through 02/29/04)(Through 02/29/04)

Major insurer groups used by Marsh which maintained their Major insurer groups used by Marsh which maintained their rating by all rating agenciesrating by all rating agencies– ACE, AIG, Berkshire Hathaway, FM, Old Republic ACE, AIG, Berkshire Hathaway, FM, Old Republic

Major group upgradesMajor group upgrades– A.M. Best: 4A.M. Best: 4– Standard & Poor’s: 4Standard & Poor’s: 4

Major group downgradesMajor group downgrades– A.M. Best: 30A.M. Best: 30– Standard & Poor’s: 40Standard & Poor’s: 40

2004- Negative outlook2004- Negative outlook

Major Reserve Additions 2003Major Reserve Additions 2003

Chubb-$625 MillionChubb-$625 MillionCNA- $2.3 billionCNA- $2.3 billionEmployers Re-$540 Employers Re-$540 millionmillionEquitas -$666 millionEquitas -$666 millionGulf-$252 millionGulf-$252 millionHartford- $2.6 billionHartford- $2.6 billion

Liberty-$331 millionLiberty-$331 millionPMA- $160 millionPMA- $160 millionRoyal Sun Alliance-$1 Royal Sun Alliance-$1 billionbillionSCOR-$421 millionSCOR-$421 millionSt Paul-$350 millionSt Paul-$350 millionXL-$694 million XL-$694 million

Current Operating EnvironmentCurrent Operating EnvironmentEstimated reserve deficienciesEstimated reserve deficienciesStandard & Poors - $60 billion -Excluding asbestos Standard & Poors - $60 billion -Excluding asbestos A.M. Best - $65 billion at year end 2003 with $36.6 billion for A&E A.M. Best - $65 billion at year end 2003 with $36.6 billion for A&E and $24 billion for Commercial lines businessand $24 billion for Commercial lines businessFitch- $45-$77 Billion under reserved at year end 2002 includes $9 Fitch- $45-$77 Billion under reserved at year end 2002 includes $9 billion to $29 billion in asbestosbillion to $29 billion in asbestosMoody’s-$30 billion as of September 2003Moody’s-$30 billion as of September 200390% of these deficiencies are in commercial lines and reinsurance90% of these deficiencies are in commercial lines and reinsuranceEstimated 2003 PHS of commercial insurers and reinsurers: $180 Estimated 2003 PHS of commercial insurers and reinsurers: $180 billionbillionDespite good year in 2003 old problems will not go away.Not the Despite good year in 2003 old problems will not go away.Not the time to fight for market sharetime to fight for market share

What is a buyer to do in 2004?What is a buyer to do in 2004?

Another cycle like the last one will kill a lot more Another cycle like the last one will kill a lot more companies-Solvency matterscompanies-Solvency mattersLegacy issues will not go away.New ones will emerge. Legacy issues will not go away.New ones will emerge. Which companies are best suited to survive these Which companies are best suited to survive these issues?issues?New companies have no legacy issues but do have New companies have no legacy issues but do have ownership issues. What are the venture capital firms exit ownership issues. What are the venture capital firms exit strategy?Pick your partners well.strategy?Pick your partners well.Follow your markets carefully- Use Marsh’s My Insurer Follow your markets carefully- Use Marsh’s My Insurer MonitorMonitor

Medical MalpracticeMedical Malpractice

Financial OverviewFinancial Overview

James D. HurleyJames D. Hurley

Industry Medical Malpractice Ratios

0%20%40%60%80%

100%120%140%160%180%

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Loss & LAE

21

Medical Malpractice - Financial Medical Malpractice - Financial OverviewOverview

Source: Best’s Aggregates and Averages

22


33.7%

26.3%

7.5%

-6.2%

-19.4% -17.1%

-25%-20%-15%-10%-5%0%5%

10%15%20%25%30%35%

1997 1998 1999 2000 2001 2002

One Year Loss Reserve Development To Premium

23



0%20%40%60%80%

100%120%140%160%180%

Loss & LAE U/W Expense Dividend


24



0%20%40%60%80%

100%120%140%160%180%

Loss & LAE U/W Expense Dividend Combined


25



0%20%40%60%80%

100%120%140%160%180%

Combined Investment Gain



26



0%20%40%60%80%

100%120%140%160%180%

Combined Investment Gain Operating

Medical Malpractice – Financial Medical Malpractice – Financial OverviewOverview

OBSERVATIONSOBSERVATIONSRatiosRatios– CombinedCombined – improve to sub 130%– improve to sub 130%– Operating Operating – improve to sub 110%– improve to sub 110%TrendsTrends– FrequencyFrequency– SeveritySeverity

Medical Malpractice – Financial Medical Malpractice – Financial OverviewOverview

OBSERVATIONS (cont’d)OBSERVATIONS (cont’d)Investment IncomeInvestment Income– 2003 helps, but...2003 helps, but...– Interest rates still lowInterest rates still low– Impact growsImpact growsRatesRates– Still up, but slowedStill up, but slowed

Medical Malpractice Claims Medical Malpractice Claims Trends – A View From the Trends – A View From the

TrenchesTrenches

Daryl DouglasDaryl DouglasMarch 30, 2004March 30, 2004

•Good News

•Tort Reform Successes

•Public Awareness of Med Mal Crisis

•Bad News – Severity is Still Rising

•National and Regional Loss Data

•Trend Drivers

•What Can We Do?

Discussion Discussion

•Texas – Meaningful reforms likely to be upheld – for now

•OH (caps, j/s), FL (caps), PA, AR– also enacted reform

•Many others considering reforms

•NJ, OK, W.VA, IL, WA, NC, KY, AZ, MD

•Campbell v. State Farm – limits punitive awards

•Ohio – docs suing plaintiffs for frivolous lawsuits

•Debates are raising public’s awareness of crisis

Tort Reform Successes and Legal Victories

Importance of the ProblemImportance of the Problem

In Jan 03, three-quarters In Jan 03, three-quarters (74%) said the issue of med (74%) said the issue of med malpractice insurance was malpractice insurance was at least a major problemat least a major problem

Source: Gallup Poll – Jan 22, 2003

56%

22%

2%

18%2%

Major ProblemMinor ProblemNo OpinionCrisisNo Problem

Support for Limiting Jury AwardsSupport for Limiting Jury Awards

Nearly three-quarters (72%) Nearly three-quarters (72%) of the public say they would of the public say they would favor putting limits on favor putting limits on amount patients can recover amount patients can recover for emotional pain and for emotional pain and suffering.suffering.

Source: Jan 2003 Kaiser Family Foundation Health Poll Report

72

25

3

FavorOpposeNo Opinion

Despite Some In-Roads with Tort Reform and Legal Opinions, Severity and Loss Costs Are Still Rising in Claims against

•Doctors

•Hospitals

•Nursing Home Cases

The Bad News

Physician Professional LiabilityPhysician Professional LiabilityHistorical Loss Costs Per Class One Physician

Limited to $2 Million per Occurrence

Source: Aon Risk Services – 2003 Benchmark Analysis

– Based on the annual physician liability loss costs for years 1995 through 2002, Based on the annual physician liability loss costs for years 1995 through 2002, the annual loss cost trend rate is 9.7%.the annual loss cost trend rate is 9.7%.

– Projected loss costs for 2003 and 2004 are $12,230 and $13,600, respectively.Projected loss costs for 2003 and 2004 are $12,230 and $13,600, respectively.

0

200

400

600

800

91 92 93 94 95 96 97 98 99 00 01 020

10

20

30

40

# Pa

ymen

ts

Source: National Practitioners Data Bank Public Use Files; AON HealthLine Special Edition 2003

Cla im

s P er 1,0 00 Ho spi tal B

e ds

Claims Per 1K Hospital Beds

Payments

More than 800 paymentsover $1MM in 2002

Hospital Severity Takes Major Up-TickHospital Severity Takes Major Up-Tick

•Florida (Palm Beach) – 63mm verdict in forceps delivery case (1/04)

•Wash D.C. – 50mm verdict in nicked sphincter (8/03)

•New York – 48mm settlement of impaired infant case (03)

•Detroit – 35mm verdict for paralysis (2/04)

•Chicago – 35mm settlement impaired infant case (2/04)

•Texas (Dallas) – 31mm verdict impaired infant (7.7mm punitives) (11/03)

•Chicago – 30mm wrongful death (2/04)

•Philadelphia – 20mm (abdominal pain) and 15mm (bad ankle) verdicts (2/04)

•Ohio – 6.7mm verdict in wrongful death case

Sample Large Losses (03-04)

Long Term Care TrendsLong Term Care Trends

Source: Aon Risk Services - Long Term Care General Liability and Professional Liability Actuarial Analysis

Note: Conclusions are based on actuarial analysis of long term care industry data available to Aon. This data set represents 26% of the U.S. market.

Countrywide Loss Cost Per Occupied Bed

Cost per occupied bed of GL/PL losses increasing at annual rate of 24% a year

Loss

0

1000

2000

3000

4000

91 92 93 94 95 96 97 98 99 00 01 02

Loss

Long Term Care TrendsLong Term Care Trends

Source: Aon Risk Services - Long Term Care General Liability and Professional Liability Actuarial Analysis

Note: Conclusions are based on actuarial analysis of long term care industry data available to Aon. This data set represents 26% of the U.S. market.

Countrywide Severity of Claim

Average size of claim increasing in recent years at annual rate of 9%

Current claim sizes are triple the average size at beginning of 90’s

Loss

0

50

100

150

200

250

91 92 93 94 95 96 97 98 99 00 01 02

Loss

•Expanding reach of best plaintiffs’ counsel

•Illinois, Pennsylvania, Maryland, Ohio

•Plaintiffs more effective and creative

•Difficulty settling cases – “pigs at a trough”

•Jury Selection - pro-tort reform jurors identified

•Creative attacks around reform

•Negligent Credentialing (TX); Multiple caps (MO)

•Doctors cutting deals with plaintiffs

•Other issues – Aggregate erosion; Bankruptcies

Trend Drivers – Why is Severity Still on the Rise?

Impact of Malpractice LawsuitsImpact of Malpractice Lawsuits

In 2002, over half the public In 2002, over half the public (54%) thought that having (54%) thought that having more malpractice lawsuits more malpractice lawsuits would be at least somewhat would be at least somewhat effective in reducing effective in reducing preventable medical errorspreventable medical errors

Source: Jan 2003 Kaiser Family Foundation Health Poll Report

31

2517

5

23

SomewhatEffectiveNot VeryEffectiveNot at AllEffectiveDon't Know

Very Effective

Personal Experience With Medical Personal Experience With Medical ErrorsErrors

In 2002, 42% reported that In 2002, 42% reported that they have been personally they have been personally involved in a situation where involved in a situation where a preventable medical error a preventable medical error was made in their own care was made in their own care of that of a family memberof that of a family member

Source: Harvard School of Public Health/Kaiser Family Foundation. Survey conducted April-July 2002

42

57

1

YesNoDon't Know

•Support Tort Reform Efforts at State Level

•Use Texas Model – need caps, annuity, J & S

•Hire Best Defense Lawyers

•Aggressively Defend Cases – jury research

•Consider Arbitration Provisions and Mediation

•Hire Experienced and Skilled Claims Consultants

•Do not outsource

•Increase Claims Input on Front End Underwriting

What Can We Do – From a Legal/Claims Perspective?

Industry Overview

Documents

Industry Overview