S&P Industry Surveys: Property - Casualty

Industry Surveys
Insurance: Property-Casualty

January 24, 2008

Catherine A. Seifert Property & Casualty Insurance Analyst

CURRENT ENVIRONMENT..................................................................1 Solid profits in 2007 could portend softer pricing in 2008
First-half 2007 underwriting results point to a profitable year Surplus also rises Monoline insurers expected to bear the brunt of insurers’ subprime pain

INDUSTRY PROFILE...............................................................................6 Top companies control the lion’s share of premiums INDUSTRY TRENDS .................................................................................6
Significantly lower catastrophe losses aided underwriting results in 2006 Getting a handle on asbestos claims Insurers reexamine catastrophe risks, concede impact of climate change Haggling over TRIA Investigations lead to changes in business practices, high-profile trial M&A update

HOW
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THE INDUSTRY

OPERATES .............................................................14

The money flows in... ...and the money flows out Keep the cash circulating Loss reserves: the financial buffer Surplus funds: capital counts Forms of ownership Lines of coverage Distribution: getting policies to the people Regulation and competition hold insurers in line

KEY INDUSTRY RATIOS AND STATISTICS ...................................................22 HOW TO ANALYZE A PROPERTY-CASUALTY INSURANCE COMPANY .............23
Pricing moves inversely with interest rates Predicting profits Cash flow and liquidity Looking at leverage

GLOSSARY .............................................................................................27 INDUSTRY REFERENCES.....................................................................29 COMPARATIVE COMPANY ANALYSIS .............................................31

THIS ISSUE REPLACES THE ONE DATED JULY 26, 2007. THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR JULY 2008.

Standard & Poor’s Industry Surveys
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VOLUME 176, NO. 4, SECTION 2 THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 3 SECTIONS.

C URRENT E NVIRONMENT

Solid profits in 2007 could portend softer pricing in 2008
Thanks to another benign hurricane season, most property-casualty insurers will likely post an underwriting profit in 2007. This follows a sharp turnaround in profitability that the industry enjoyed in 2006 due to much lower catastrophe losses. Partly offsetting the positive impact from lower catastrophe losses was deterioration in claim trends in certain core lines of business, including personal auto. Nevertheless, some favorable prior-year loss developments in a number of commercial lines of coverage helped cushion that blow for a number of carriers. However, some segments of the insurance market face a challenging environment as they enter 2008. Underwriting trends and capital adequacy concerns that erupted in the aftermath of the subprime mortgage debacle led to a sell-off in the shares of financial guaranty insurers, who provide AAA credit enhancement to many structured credit products linked to mortgages (many of which were subprime). Many of these insurers are now scrambling to bolster their capital bases and preserve their much-needed AAA financial strength ratings. Standard & Poor’s believes the overall property-casualty insurance market will not experience a material, adverse impact from the subprime mortgage
UNDERWRITING PROFITS
(In billions of dollars)
80 60 40 20 0 * (20) (40) 1987 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 2006 *

First-half 2007 underwriting results point to a profitable year
The latest available aggregate industry operating results, released in October 2007 by the Insurance Services Office (ISO), an insurance research and data collection organization, point to underwriting results marked by slowing top-line growth, but improved profitability despite some mixed underwriting trends. For the six months ended June 30, 2007, insurers in the ISO study reported a fractional rise in net written premiums to $223.4 bil-

*1987=-0.3; 1988=-0.38 Source: Standard & Poor’s Ratings Services.

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crisis, though there are some pockets of weakness within the financial guarantee segment of the market. Commercial lines insurers who underwrote directors and officers’ liability for financial institutions may face claims related to the mortgage meltdown, however. Most insurers posted solid investment results in 2006 and into the first half of 2007, bolstering their bottom-line profits. Year-toyear comparisons could become more difficult in 2008, however, amid turmoil in the mortgage-backed securities markets and equity markets. Most insurers’ asset allocation strategies are heavily weighted toward highgrade corporate debt, which should insulate them from much of the downturn in these other areas of the market. Still, the likelihood that the propertycasualty insurance industry is in the midst of a soft patch or a “down market” was not lost on investors, who also shunned the shares of most financial services companies amid concerns over turmoil in the credit markets. As of December 31, 2007, the S&P Property-Casualty Index had declined 15.8% for the year, and the index for the overall Financials sector was down 20.7%; the S&P 500 Stock Index, in contrast, advanced 3.5% during that period.

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PROPERTY-CASUALTY OPERATING RESULTS
(In millions of dollars)
NET UNDERWRITING GAIN (LOSS) NET INVESTMENT INCOME PRETAX OPERATING INCOME

YEAR

*2007 *2006 R2006 2005 2004 2003 2002 2001 2000 1999 1998 1997

14,402 15,021 31,115 (5,612) 4,263 (4,853) (30,840) (52,602) (31,220) (23,076) (16,764) (5,827)

24,505 25,396 52,309 49,729 39,966 38,648 37,225 37,739 40,704 38,855 39,925 41,499

39,070 39,686 84,607 45,145 43,963 33,752 5,581 (13,800) 9,857 14,426 23,354 35,469

*Six months. R-Revised. Source: Insurance Services Office.

Earned premiums for insurers in the ISO study advanced 1.4% to $217.9 billion for the first six months of 2007, up from $214.8 billion in the comparable period in 2006. This rate of growth represented a marked slowdown from the 4.3% premium growth the industry recorded in 2006. The last time the industry recorded a double-digit rise in premiums was in the “hard market” that ensued in the aftermath of the September 11th terrorist attacks: earned premiums advanced 11.9% in 2002 and 10.9% in 2003. Growth has been trending downward ever since. Looking ahead, Standard & Poor’s anticipates that written premium growth for property-casualty insurers will likely be less than 2% in 2008. Earned premium growth is also expected to be less than 2% in 2008, reflecting a continuation of competitive or “soft” market conditions.

lion, from $223.1 billion in the comparable 2006 period. For all of 2006, the propertycasualty industry wrote $443.5 billion in premiums, a 4.2% rise over 2005 levels. Written premiums represent business produced in a given period. Insurers account for this over the life of a policy (typically 12 months). Hence, the general volume and direction of written premiums in one year is usually a good indication of the level of earned premiums (a revenue component on the income statement) the following year. Written premiums in the personal lines sector (the largest, accounting for 40% of year-to-date written premiums) rose 0.5%, year to year, in the first six months of 2007. This group’s business consists primarily of personal auto and homeowners’ coverage, which is highly regulated and not as prone to great pricing swings. Strength in the personal lines sector was offset by deterioration in the commercial lines sector (which accounted for 48% of total industry written premiums) in the first six months of 2007. That group reported a 1.4% year-over-year drop in written premiums, year to date, providing empirical support for anecdotal evidence that the commercial lines market had softened. Balanced lines underwriters, who write a combination of personal and commercial lines coverage, accounted for the remaining 22% of industry written premiums. This group posted a 2.1% rise in written premiums, year over year, in the first half of 2007.

Investment results: an important buffer
Investment income is an important revenue source for insurers, often accounting for 15% to 20% or more of an insurer’s total revenues. Thanks to a generally favorable claims environment, insurers have been able to hold onto their cash and invest it, reaping the rewards of this positive cash flow. In the first six months of 2007, net investment income for property-casualty insurers rose 19.3%, year over year, to $30.3 billion, from $25.4 billion in the comparable yearearlier period. Standard & Poor’s anticipates that the rate of net investment income growth in 2008 will likely be below 2007’s level, reflecting our view that underwriting results may deteriorate slightly (which would drain cash from insurers’ coffers). Although investment income growth may also be restrained somewhat by turmoil in the market for mortgage-backed securities, Standard & Poor’s does not anticipate that insurers will experience any material adverse impact to their financial situation because of their exposure to this asset class. Realized investment gains (the profits made when investments are sold) totaled $4.2 billion in the first half of 2007. This was up significantly from $881 million in the comparable 2006 interim and contributed to insurers’ profitability. Insurers also had unrealized investment gains of more than $6.3 billion in the first half of 2007, also up from the year-earlier total of

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$4.6 billion. (Note: analysts typically exclude the impact of net realized investment gains on insurers’ profits when forecasting earnings. Instead, earnings estimates are based on net operating earnings, which exclude these gains and/or losses.)

AIG’s property-casualty unit reported a 12% year-over-year rise in underwriting profits for the first half of 2007, largely due to “favorable claim trends.”

Combined ratio a key gauge of underwriting performance
The combined ratio is a key measure of underwriting performance. It is the sum of the loss ratio, the expense ratio, and (where applicable) the dividend ratio. A combined ratio under 100% indicates an underwriting profit, while one in excess of 100% means there is an underwriting loss. (For more information on the combined ratio and its implications for insurer profitability, please refer to the “How to Analyze a PropertyCasualty Insurer” and “Key Industry Ratios” sections of this Survey.) Insurers in the ISO study reported a combined ratio of 92.7% in the six months ended June 30, 2007, compared with 92.0% in the similar 2006 period. Underwriting results by type of insurer were mixed, however: commercial lines writers reported improved underwriting results, as evidenced by their combined ratio of 88.8%, versus 90.0% in the comparable year-earlier period. Balanced lines writers (who write both personal and commercial lines of business) reported a slight deterioration in their underwriting results and posted a combined ratio of 95.1% in the first half of 2007, compared with 93.6% in the 2006 interim. Personal lines writers, however, experienced the most significant deterioration in their underwriting results, with a combined ratio of 95.0% reported for the six months ended June 30, 2007, compared with 92.9% in the yearearlier period. In our view, these results reflected the impact of higher catastrophe losses and erosion in a number of personal auto claim trends. Loss ratios for this representative group of insurers (accounting for more than 96% of industry premium volume) improved to 65.6% in the first half of 2007, versus 65.8% a year earlier, and were driven by the commercial lines sector, which posted an impressive 61.3% loss ratio, an improvement over the previous year’s (also decent) 63.8% loss ratio. This was offset by a deterioration in loss trends in both the balanced lines group (which posted a loss ratio of 65.0%, versus 64.7% a year earlier) and the personal

Loss trends reflect a mixed picture
Loss costs and related expenses (commonly referred to as loss adjustment expenses) are often the largest expense item facing an insurer. A change in the direction of these expenses can dramatically affect bottom-line results. Insurers in the ISO survey reported slight erosion in underwriting margins, year over year, in the first six months of 2007. Incurred losses rose 1.2% to $117.4 billion, from $116 billion in the comparable yearearlier period. Loss adjustment expense growth was well contained, and rose only fractionally. Loss adjustment expenses (the costs incurred in settling claims) totaled $25.6 billion in the 2007 interim, compared with $25.4 billion in the year-earlier period. Loss trends varied widely by line of business, with the personal lines area seeing perhaps the sharpest deterioration. We attribute this erosion to a couple of factors. Although there were no “mega-cats” (highprofile catastrophes) reported in the first half of 2007, catastrophe loss claims for a number of personal lines insurers rose during this period. Allstate Corp., the second largest personal lines carrier in the US, reported a 7.2% rise in claims and claim expenses (analogous to loss costs and loss adjustment expenses). Allstate noted that underwriting results were hurt by higher catastrophe losses and by deterioration in some underlying claim trends. One area that has seen some deterioration is personal auto. After several years of favorable year-over-year comparisons of loss costs — thanks to a combination of aggressive loss mitigation and cost control efforts, favorable demographic trends, and driving patterns — the tide has turned, and personal auto loss costs have trended slightly upward. Commercial lines carriers have benefited from favorable prior-year loss developments in a number of core lines. This favorable trend can be seen in the first-half 2007 results of the property-casualty division of American International Group (AIG), leading commercial lines insurer.

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ESTIMATED CHANGES IN POLICYHOLDERS’ SURPLUS
(Total property-casualty industry, in billions of dollars)
FIRST HALF 2006 2007

ITEM

2005

R2006

Policyholders' surplus—beg. of period Operating income Realized capital gains Income taxes Net after-tax income Unrealized capital gains (loss) Stockholder dividends & other New funds Misc. surplus change Policyholders' surplus—end of period
R-Revised. Source: Insurance Services Office.

391.3 425.8 425.8 45.1 84.6 39.7 6.6 3.5 0.9 9.7 (22.4) (11.1) 44.2 65.8 29.5 (3.4) 20.6 4.6 (15.6) (24.7) (12.9) 14.4 3.8 1.1 (5.1) (4.9) (3.2) 425.8 486.2 444.7

486.2 39.1 4.2 (10.6) 32.6 6.3 (11.7) 1.4 (2.1) 512.8

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lines segment (whose aggregate loss ratio advanced to 69.8% in the 2007 interim, from 68.3% in the year-earlier period). These results represent a slight deterioration from the full-year 2006 loss ratio of 65.2% for all lines. However, loss trends have improved rather significantly in recent periods. During the previous five years (which included some record catastrophes like the 2005 hurricanes Katrina, Rita, and Wilma, and the 2001 terrorist attacks), the industry loss ratio averaged 78.4%. Industry expense ratios inched up during the first half of 2007 to end the period at 26.9%, a full percentage point above the year-earlier level of 25.9%. The deterioration (albeit slight) was relatively broad-based, with all areas feeling the impact of a more competitive operating environment (which tends to drive up the cost of writing new business). The dividend ratio was unchanged, year to year, at 0.3%.

Surplus also rises
Surplus, in this instance, refers to capital, or net worth: the amount by which an insurer’s assets exceed its liabilities. Surplus, which is often referred to as statutory surplus under statutory accounting principles (SAP), is analogous to shareholders’ equity under general accepted accounting principles (GAAP). At June 30, 2007, insurers in the ISO study reported a combined surplus of $512.8.4 billion, up 15.3% from surplus of $444.7 billion at June 30, 2006. During 2006, surplus increased by more than 14% and ended the year at $486.2 billion.

Since surplus advanced at a greater rate than written premiums, the industry’s leverage declined. In this instance, leverage refers to the degree to which the industry utilizes its capital (or surplus) to underwrite policies. The ratio used to measure leverage is the ratio of new written premiums to surplus. (For a more detailed explanation of leverage, please refer to the “How to Analyze a Property-Casualty Insurance Company” section of this Survey.) At June 30, 2007, the ratio of net written premiums to surplus equaled 0.87-to-1, down from 0.97-to-1 at June 30, 2006. To put this ratio into some context, in the 12 months ended June 30, 2007, insurers wrote $0.87 worth of premiums for every $1 of surplus, versus $0.97 worth of premiums for every $1 of surplus in the same 2006 period. If we assume a “typical” rate of leverage of 2-to-1 (which is what regulators usually allow), we estimate that the industry had approximately $291 billion of “excess” surplus at June 30, 2007. We arrived at this conclusion by using the following data points: the $443.7 billion in net written premiums in the 12 months ended June 30, 2007, and policyholders’ surplus of $512.8 billion at June 30, 2007. If we assume a 2-to-1 leverage ratio, the amount of surplus required to support the actual level of premium volume is approximately $221.9 billion ($443.7 billion divided by 2). The difference between actual surplus ($512.8 billion) and so-called required surplus ($221.9 billion) is $290.9 billion. Put another way, this excess surplus could theoretically support another $582 million of written premiums, more than the industry is currently writing on an annual basis! Although we need to qualify this exercise as one designed to illustrate the degree to which the industry has excess capital, we do it to make the point that there is an enormous amount of excess capital in the insurance marketplace. Some of this so-called “excess” capital would be absorbed in the event of a number of significant increases to loss reserves and/or a significant catastrophe loss. In addition, rating agency standards for capital adequacy have been tightened, rendering the 2-to-1 leverage of surplus rule of thumb excessive in some cases. Nevertheless, tens (if not hundreds) of billions of dollars in excess capital, or underwriting ca-

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pacity, remain. Standard & Poor’s believes this excess supply will continue to pressure premium rates for most lines of coverage well into 2008.

Monoline insurers expected to bear the brunt of insurers’ subprime pain
Monoline insurers, as their name implies, insure one type of risk — that of third-party debt obligations. Also known as financial guaranty insurers, these companies guarantee the timely payment of principal and interest on the bonds they insure, and collect a premium from the bond issuer. Premium rates are based on a percentage of the spread between a bond’s intrinsic credit quality and a AAA-rated bond. Compared with the general insurance industry, whose roots go back centuries, financial guaranty insurance is relatively new: the first municipal bond insurance policy was issued in 1971. Since then, the industry has grown rapidly: according to data from the Association of Financial Guaranty Insurers, a trade association, the industry insured $574 billion (par value) of municipal bonds and asset-backed securities in 2006. Unlike the general property-casualty insurance industry, where literally hundreds of companies vie for slivers of market share, the financial guaranty insurance industry is more concentrated. The two largest underwriters of municipal bonds are MBIA Inc. and Ambac Assurance Corp. (a subsidiary of Ambac Financial Group Inc.). Both companies have leveraged their strength and market leadership in the municipal bond insurance arena and have expanded into other areas of the financial guaranty market — specifically, insuring structured asset-backed and mortgage-backed obligations. For municipal bond insurers, one of the primary areas of specialization and expansion was insuring pools of residential mortgage-backed securities. These pools, or collateralized debt obligations (CDOs), grew rapidly as the housing and mortgage markets surged amid the favorable interest rate environment of recent years. In the wake of a meltdown in the subprime mortgage market, however, insurers have been feeling the stress, as write-downs in these portfolios pressure their capital bases. Investors are questioning the ability of

these firms to raise enough capital to stave off a downgrade in their much needed toptier financial strength rating. Investor concerns sent the shares of many of these insurers plummeting: during 2007, shares of MBIA plunged nearly 75%, and shares of Ambac Financial Group fell more than 71%.

P/C insurers have worries as well
Another area of exposure P/C insurers have to the subprime debacle is through the issuance of directors’ and officers’ liability insurance, and errors and omission insurance. Directors’ and officers’ liability policies generally cover the executives (directors and officers) of a company for negligent acts or omissions and for misleading statements that result in lawsuits against the company. Errors and omissions insurance covers losses caused by errors and omissions in professions other than medicine; it is used by banks, real estate companies, escrow companies, etc., to protect against negligent acts that might harm clients. Most commercial lines insurers, including companies like American International Group, Chubb Corp., and The Travelers Companies, Inc., issue these kinds of policies. As of late December 2007, it was too early to accurately quantify the magnitude of claims that are likely to result in the aftermath of the mortgage market’s meltdown. Initial estimates indicate, however, that this will likely be a multibillion-dollar insured event. ■

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I NDUSTRY P ROFILE

Top companies control the lion’s share of premiums
The US property-casualty (P/C) industry comprises thousands of companies, each vying for a share of the multibillion-dollar market for personal and commercial lines insurance coverage. However, a small group of companies dominates the market. According to the latest available data from Standard & Poor’s, the 10 largest P/C insurer groups (based on net written premium volume for P/C insurance) wrote approximately $213.3 billion of premiums in 2006. That accounted for approximately 47.4% of that year’s $450.3 billion in industrywide
TOP 20 PROPERTY-CASUALTY UNDERWRITERS — 2006
(Ranked by net premiums written)
UNDERWRITER NET PREMIUMS WRITTEN† (MIL.$) 2004 2005 2006

written premiums. The five largest insurer groups wrote approximately $144.9 billion in premiums, for a market share of around 32.2%. The two largest P/C insurers, State Farm Group and American International Group Inc. (AIG), had an 18.6% share of the US P/C market. Combined, they wrote some $83.6 billion in premiums in 2006. Some US companies (notably, AIG) have a long-established presence in numerous overseas markets, and several large P/C insurers have sought to increase their presence in certain foreign markets. For the most part, however, US-based P/C insurers operate primarily in the United States.

INDUSTRY TRENDS
An increasingly competitive pricing environment — brought on, ironically, by the industry’s strong profitability in 2006 and 2007, which fueled an oversupply of underwriting capacity — is once again threatening top-line growth in 2008 for the insurance industry. Favorable investment results and relatively benign catastrophe loss trends aided bottom-line results in 2006 and 2007. Another factor helping insurers’ profitability in recent periods was the favorable trend in prior-year losses on certain “long tail” lines of business (where the ultimate cost to settle a claim is not known for many years). Asbestos claims are an example of “long tail” liabilities that were once the scourge of the insurance industry; these appear to be finally coming under control. Despite the relatively mild hurricane seasons in 2006 and 2007, the industry is still grappling with its exposure to catastrophes. In response to the increasing severity of natural disasters, more property-casualty (P/C) companies are acknowledging that changing weather patterns may play a significant role in future losses, and that a greater degree of

1. State Farm 2. American International Group 3. Allstate Insurance Group 4. Travelers Group 5. Nationwide Corp.
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47,762 31,534 25,984 17,654 14,346 13,208 10,972 13,432 NA 9,627 10,275 8,026 7,504 5,956 5,676 NA 4,339 4,527 4,089 4,271

47,924 31,715 26,795 17,883 15,201 13,947 16,860 14,047 12,456 10,590 10,349 8,172 7,282 5,976 5,814 5,202 4,441 4,529 4,441 4,364

48,651 34,970 26,706 18,636 15,953 15,367 15,046 14,089 13,253 10,638 9,976 8,706 7,390 5,905 5,614 5,434 4,822 4,633 4,626 4,355

6. 7. 8. 9. 10.

Liberty Mutual Group Berkshire Hathaway Progressive Group Farmers Insurance Hartford Fire & Casualty Group

11. Chubb & Son Inc. 12. United Services Automobile Asn Group 13. CNA Insurance Group 14. American Family Insurance Group 15. Safeco Insurance Group 16. 17. 18. 19. 20. Zurich Insurance Group Allianz Insurance Group Ace Ltd. W.R. Berkley Corp. Auto Owners Group

†US only. NA-Not available. Source: Standard & Poor’s Ratings Services.

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property is at risk. In response, companies are changing their underwriting and pricing assumptions in an attempt to better incorporate this risk. For risks such as acts of terrorism — for which affordable and available coverage is difficult to find — federal support has been instrumental in addressing market dislocations. Congress is expected to pass another iteration of the Terrorism Risk Insurance Act (TRIA), the federal terrorism backstop insurance program that was enacted in 2002 in the aftermath of the September 11th terrorist attacks and renewed in 2005. Nevertheless, the industry still faces significant coverage gaps for nuclear, biological, and chemical attacks. Finally, while investigations initiated several years ago by state attorneys general, insurance commissioners, and federal authorities into the industry’s business practices have wound down, a high-profile trial is set to start in January 2008 that will likely call noted investor Warren Buffet to the stand. A number of former executives at General Re Corp. (a reinsurer owned by Berkshire Hathaway Inc.) and American International Group, are accused of, among other things, fabricating a fraudulent finite reinsurance scheme that ultimately led to the downfall and resignation of American International Group CEO Maurice “Hank” Greenberg.

You would have to go back more than 55 years to find an underwriting performance that compares with what the propertycasualty (P/C) industry achieved in 2006. Crucial to that performance was the absence of 2005’s record catastrophe losses of $61.9 billion — most directly related to Hurricanes Katrina, Rita, and Wilma. With catastrophe losses of only $9.2 billion in 2006, the industry reported a $31.2 billion net gain from underwriting, compared with a $5.6 billion underwriting loss in 2005, according to the Insurance Services Office (ISO), an industry research group. Contributing to the strong underwriting results were favorable claims trends outside of the catastrophe arena. Total incurred losses for insurers in the ISO survey fell 9.9% to

Getting a handle on asbestos claims
While the main driver of improved insurer profitability in 2006 was the precipitous drop in catastrophe claims, other factors also contributed. One was an improved claim environment for a number of casualty lines of business. Another was an improved environment for asbestos claims. According to A.M. Best, incurred asbestos losses totaled $1.6 billion in 2006, down sharply from $3.6 billion of incurred losses reported in 2005.

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Significantly lower catastrophe losses aided underwriting results in 2006

$231.1 billion in 2006, while loss adjustment expenses (the costs to settle claims) declined 4.5% to $52.6 billion. Given the robust underwriting results and lower losses, the industry’s loss ratio in 2006 fell by 9.5 percentage points to 65.1%, according to ISO. Among casualty business lines, the loss ratio for general liability declined by 12.4 percentage points to 51.6%, its lowest since at least 1979, ISO said. But in a sign that competition to retain and capture new business is raising insurers’ costs, the industry’s expense ratio rose marginally to 26.5% in 2006, up from 25.8% in 2005. Personal lines underwriters reported higher expenses, due, we suspect, to advertising costs in the competitive personal auto business taking a bite out of overall underwriting performance. Indeed, the ISO survey found a 1.1 percentage point jump to 24.4% in the expense ratio for personal lines carriers. Still, overall underwriting strength drove the industry’s combined ratio down by 8.5 percentage points to 92.4%. The combined ratio is the sum of the loss and expense ratios, along with dividend ratios, if applicable; a ratio below 100% demonstrates an underwriting profit, while one in excess of 100% signifies an underwriting loss. (For a further explanation of key industry metrics such as the combined ratio, see the “Key Industry Ratios and Statistics” section of this Survey.) Despite what has been a softer environment for premium pricing, the ISO study found that the industry’s net earned premiums rose 4.3% to $443.8 billion in 2006, up from $425.5 billion in 2005. Profitability surged far beyond top-line growth, thanks to the industry’s underwriting performance. Full-year 2006 net income jumped 44.3% to $63.7 billion, according to ISO.

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Asbestos was used in a variety of commercial and consumer products, including roofing and flooring, fireproofing, and thermal insulation. Because of its widespread use decades ago, millions of people were exposed to this substance, which has been linked to cancer and other diseases. The initial wave of asbestos claims began more than 20 years ago and primarily targeted companies that manufactured asbestos and asbestos-related products. Liability claims in these suits typically came under a portion of a manufacturer’s liability policy that had strict limits on insurers’ liability. These resources were depleted, however, as many asbestos manufacturers filed for bankruptcy. A second, more costly wave of litigation involves companies that used asbestos products. These claims are being filed under a more general area of a company’s liability policy — one that typically has less strict coverage limits. Consequently, insurers’ liabilities for claim costs have escalated. An overall increase in claims being filed has exacerbated the impact on insurers. Many unions and lawyers are urging workers and others who may have had contact with asbestos to file claims, warning that if they later develop an illness, there may not be enough resources left to pay their claims. The lack of meaningful reform in the way cases are settled also prompted more claims. A 1999 US Supreme Court decision ruled that a class action settlement of claims against Fibreboard Corp., a major asbestos producer, could not proceed because funds might be exhausted before all claims were paid. In addition, because the Supreme Court would not give a number of these cases class action status, the number of cases has increased. In recent years, however, the tide has begun to turn, largely due to some meaningful tort reform measures and a backlash (largely on the part of some judges) in response to growing evidence that fraudulent claims are being made.

that the final tab from asbestos could reach $200 billion. Tillinghast estimated that the US insurance industry would bear about 30% of the total cost, or between $55 billion and $65 billion. An estimated 31% would be borne by overseas insurers. Manufacturers, suppliers, and other users of asbestos products would pay out the remaining 39%. According to data obtained from ISO, incurred asbestos losses and loss adjustment expenses rose from $1.0 billion in 1997 to a peak of $7.6 billion in 2002, before falling to $1.6 billion in 2006. According to a report published in late November 2007 by A.M. Best, the US property-casualty insurance industry’s exposure to asbestos claims is nearly fully funded (based on the aforementioned Tillinghast study estimates of ultimate losses). According to A.M. Best, nearly 96% of the industry’s ultimate asbestos loss estimates were funded through year-end 2006, up from approximately 55% in 2001. However, the study also noted that many individual companies are likely to continue incurring charges for asbestos claims, and that approximately 67% of the industry’s asbestos losses were concentrated among five insurer groups.

Insurers reexamine catastrophe risks, concede impact of climate change
After a direct strike on the US Gulf Coast and the city of New Orleans in August 2005, Hurricane Katrina produced insured losses much greater than what the insurance industry had expected. When that storm was quickly followed by Hurricanes Rita and Wilma in September and October 2005, US insurers and the global industry were left with record natural catastrophe losses for the second consecutive year. The industry suffered $61.9 billion in catastrophe losses in 2005, up from $27.5 billion in 2004, according to Property Claims Services, a unit of Insurance Services Office Inc. (ISO), an insurance research and data collection organization. The scope of these losses has led insurers to reexamine their exposure to catastrophes. Rating agencies are requiring insurers to hold more capital in reserves. Computer modeling firms, which provide insurers with products that help them gauge their loss exposures, are changing key assumptions about how wind pushes ocean

Asbestos claim costs still an issue, but a manageable one
Given the level of uncertainty surrounding this litigation, the potential financial impact on insurers is difficult to quantify. Nevertheless, a survey published by Tillinghast-Towers Perrin, an actuarial consulting firm, estimated

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water onshore and the way in which rebuilding costs skyrocket after a hurricane. In the case of Hurricane Katrina, the failure to adequately account for these factors led to much higher losses than the models predicted. The spate of devastating storms in 2005 may have been more than just a statistical anomaly or a run of bad fortune. The theory that is fast becoming an industrywide standard is that higher sea surface temperatures in the North Atlantic are contributing to more frequent and severe storms. According to the National Center for Atmospheric Research (NCAR), there were 25 big storms (i.e., ranked Category 4 or 5 on the Saffir-Simpson Scale of storm intensity) from 1990 through 2004, but only 16 between 1975 and 1989. In research published in September 2005, NCAR reported that the North Atlantic was the only global region that it studied where the total number of hurricanes had risen over the past decade. The region averaged eight to nine hurricanes per year between 1995 and 2004, compared with six to seven before 1995. Another factor is that more storms are making landfall than in the past. Munich Reinsurance Co. notes that, in the current warm phase (since around 1995), the number of storms in Categories 3 to 5 that make landfall has increased about 70% compared with the previous warm phase (dating roughly from 1926 through 1970). Although catastrophe losses have fallen precipitously in recent years — to $9.2 billion for all of 2006 and $4.7 billion for the first nine months of 2007 — insurers have remained mindful of the impact that climate change is having on catastrophes and on their business models in general. Indeed, according to a research study sponsored by Ceres (an environmentally focused institutional investor group), the global insurance industry has “vastly” increased its response to global warming. According to the Ceres study, insurers doubled the climate change–related products and services being offered in 2007. In our view, the insurance industry’s response is multifaceted and reflects steps many companies have taken to be good corporate citizens (i.e., by pledging to reduce their carbon footprint) and to better incorporate climate change as a risk that is integrated into their underwriting processes.

For Swiss Re, one of the world’s leading reinsurers, “climate change is a core issue…and an important element in the company’s long-term strategy. Climate change has the potential to significantly shift global weather patterns, thereby strongly affecting the number and severity of natural catastrophes, and, in turn, the entire insurance industry.” Swiss Re’s chief goal in its climate change activities is perceiving and understanding current and future risks to allow the company to better adapt its business strategy. Further, Swiss Re actively pursues an ongoing risk dialogue to assist clients through sharing knowledge and developing risk solutions. A number of US insurers have also integrated a number of environmentally friendly practices into their underwriting standards. One of the areas of focus for environmental groups is the level of auto emissions and the dangers posed by them. A number of auto insurers have offered incentives and discounts to drivers who adopt “green” habits. Many offer insurance discounts for hybrid vehicles, and a number have structured their auto policies as a “pay as you drive” model, which typically offers discounts to drivers who do not drive a lot.

Haggling over TRIA
Though losses from natural disasters like Hurricane Katrina and the California wildfires have made headlines in recent years, insurers have also had to contend with man-made disasters, including terrorist attacks. Insured losses from the September 11th terrorist attacks (which included property damage, business interruption coverage, commercial liability, and group life insurance claims) totaled $35.9 billion (in 2006 dollars), according to data obtained from the Insurance Information Institute. Approximately two-thirds of these losses were covered by reinsurers. Before September 11th, insurers typically provided terrorism coverage to their commercial insurance policies at essentially no additional cost because the risk of such an event on US soil was considered remote. In the aftermath of the unprecedented losses from the 9/11 attacks, however, many insurers and reinsurers instituted “terrorism exclusions” in a number of their policies. Those insurers who did offer terrorism coverage did so at premium rates that were pro-

JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

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hibitively expensive. The US business community argued that a lack of coverage was hindering the economic recovery and threatening certain business sectors. To alleviate the market dislocation, the Terrorism Risk Insurance Act (TRIA) was passed and signed into law in November 2002. The law set up a federal reinsurance program in which insurers and the federal government would share losses. At the time it was passed, the 2002 law was seen as a transition, until a market-based solution could be created. In December 2005, however, it was extended for another two years amid a continued shortage of available reinsurance for insurers to lay off their risks. TRIA’s extension in 2005, made with the support of an eleventh-hour lobbying campaign from industry groups and other business leaders, left the industry still searching for longer-term alternatives to terrorism coverage. Before the elections in November 2006, the Bush administration said that it would not support another extension of the program. The US Department of the Treasury, the program’s administrator, argued that the program would hinder development of coverage in the private market. Reports published in late 2006 by the US Government Accountability Office and the President’s Working Group on Financial Markets echoed these sentiments and said that the continuation of TRIA would hinder the formation of a meaningful, private market solution to the lack of terrorism insurance.

Also, since there have been very few largescale terrorist attacks, very little data exist from which to draw conclusions as to both severity and frequency trends. There is a general agreement that the establishment and extension of TRIA has helped insurance companies provide some meaningful terrorism protection, largely due to the backstop protection the federal government offers. Indeed, the extension of TRIA in 2005 greatly increased the percentage of losses that private insurers would have to absorb before the government stepped in: the triggering event rose to $50 million from $5 million. In 2007, the triggering event rose to $100 million: only terrorist events that produced losses in excess of $100 million would result in the outlay of federal funds. Moreover, individual insurance companies would have to incur losses equal to 20% of their commercial insurance premiums in 2007 before the federal program kicked in. In return for the federal backstop, commercial insurers were required to make terrorism coverage available and to explicitly state its cost. Policyholders could opt out of the terrorism coverage if they chose.

TRIA expiring again
Now that the TRIA extension is set to expire, both houses of Congress have introduced legislation to extend the Act. The Senate version essentially keeps the major components of TRIA intact. The original version of the House proposal sought to lower the threshold under which the government would contribute payments. The House proposal originally sought to make coverage available for nuclear, biological, chemical, and radiological (NBCR) attacks, but subsequent revisions dropped that proposal. As of early December 2007, the House proposal was still seeking to expand coverage to include group life contracts. Both the House and Senate proposals call for removing the distinction between domestic and foreign-backed terrorism. (The original act only covered foreign-backed acts of terrorism.) Given how close the deadline is, and how vehemently President Bush is vowing to veto any expansion of the TRIA act, Standard & Poor’s believes that the version of TRIA that is finally enacted will closely resemble the version of the Act that was renewed in 2005.

Terrorism insurance poses challenges for P/C industry
The insurance industry’s perspective on insuring terrorism is that this kind of risk is unlike any other for which the industry provides coverage. To be insurable, a risk must first be measurable. To adequately price a risk, insurers must be able to ascertain the probable number of events (i.e., the frequency) likely to result in claims. Next, they must be able to estimate the potential maximum size or cost of these events (i.e., the severity). By calculating the probable frequency and severity of an event, insurers can then better evaluate the cost of insuring a particular risk. A terrorist act, according to the insurance industry, does not possess these characteristics, rendering it impossible to price as a risk.

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Helping homeowners could prove elusive for Congress in 2008
While negotiations over the extension and over certain provisions within TRIA may lead to some spirited debates as the deadline looms, Standard & Poor’s expects passage of TRIA to occur. A renewal of TRIA will help commercial insureds in the event of a terrorist attack. What is less clear is the fate of bills in the House and Senate aimed at aiding homeowners impacted by catastrophes. One of the many unfortunate side effects from a significant catastrophe — in addition to the destruction of property — is the likelihood that insurance rates in storm-prone areas tend to rise, sometimes significantly. Homeowners unlucky to have been in the path of Hurricane Katrina received a doubly rude awakening: not only did many see their insurance premiums surge, some were not even able to get coverage as insurers sought to reduce their exposure to storm-prone areas. Seeking to alleviate this crisis, the House of Representative in November 2007 passed a bill dubbed the Homeowners Defense Act. The bill, which was introduced into the House in August 2007 by a group of Florida representatives, contains two parts. First, it would establish a National Catastrophe Risk Consortium, which would allow states to voluntarily bundle their catastrophic risk programs (like Florida’s Hurricane Catastrophe Fund), then transfer that risk to the private markets through the use of catastrophe bonds sold to investors or through private reinsurance contracts. The second part of the bill proposes establishing a National Homeowners Insurance Stabilization Program, which would allow the US Treasury to make loans to any state that faces a significant financial disaster in the aftermath of a major catastrophe. The bill passed in the House by a relatively wide margin (258 to 155) and has moved to the Senate, where Senators Bill Nelson (DFlorida) and Hillary Rodham Clinton (DNew York) have introduced matching legislation. Support for this legislation is relatively light, and many observers believe its chances of passage in the Senate are slim. Members of the regulatory community are in favor of this proposed legislation, while insurers are mixed in their support. The Bush administration opposes the legislation and said it be-

lieves the private insurance market is working just fine. Some homeowners in Florida would probably disagree!

Investigations lead to changes in business practices, high-profile trial
Since late 2004, the US insurance industry has been embroiled in several investigations into its business practices. Spearheaded by Elliot Spitzer (then the attorney general of New York State; governor, as of January 1, 2007) and joined by other states’ attorneys general and the Securities and Exchange Commission, the probes have examined contingent commissions, bid rigging, finite reinsurance contracts, and other accounting irregularities. The investigations led to numerous multimillion-dollar settlements and earnings restatements. As of May 2006, the New York Attorney General’s office noted that its probe of insurance industry misconduct had led to settlements with six companies and the recovery of about $3 billion in restitution and penalties since late 2004. The results of these probes have been profound. Most insurance brokers have agreed to stop accepting contingent commissions, a standard industry practice that had formed the lion’s share of their revenues. These commissions may involve payments from insurers to brokers based on the profitability of the business placed, the volume of a client’s business placed with an insurer, or even the percentage of a client’s business that the insurer renews. Regulators’ scrutiny of reinsurance transactions under the broad banner of finite reinsurance and alternative risk products has dramatically curtailed premium volume for those firms once active in this segment. It also has led to increased disclosure requirements by state regulators and the NAIC. In April 2006, the Financial Accounting Standards Board (FASB), the private group that sets US standards of financial accounting and reporting, said that it would examine risk transfer in insurance and reinsurance contracts. FASB’s project is expected to develop an accounting standard that separates the finance and insurance aspects of these contracts so that they are appropriately accounted for as liabilities or as risk transfer mechanisms. The Board plans to issue an Ex-

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posure Draft in the second quarter of 2008 that will do three things: clarify the level of insurance risk transfer required for a contract to be accounted for as reinsurance, require non-insurance policyholders to evaluate their contracts to ensure that risk is actually being transferred, and improve insurance and reinsurance disclosure requirements.

Probe set off in 2004
In October 2004, attorney general Spitzer charged Marsh & McLennan Companies Inc. (MMC) with fraud and antitrust violations. The lawsuit pointed to an alleged scheme in which MMC, in collusion with certain insurers, would solicit and obtain fake quotes, or bids, for insurance contracts. The complaint noted that other insurers participated in Marsh & McLennan’s alleged “steering” scheme (in which the company solicited false and inflated bids from underwriters, then determined which would be awarded the insurance contract). A broad range of MMC’s clients were affected by the alleged scheme, including large corporations, mid-sized businesses, and municipal governments. The result of this bid rigging, according to the suit, was to deceive insurers and/or clients into believing that a truly competitive bidding process had taken place for clients’ business. Other insurers mentioned in the lawsuit were American International Group Inc. (AIG), ACE Ltd., Hartford Financial Services Group Inc., and a unit of Munich Re. Shortly after Mr. Spitzer’s office originally filed suit against Marsh & McLennan in October 2004, many insurance brokers stopped accepting contingent commissions. In January 2005, Marsh & McLennan settled with the New York Attorney General and the New York State Department of Insurance. Under the agreement, the company established an $850 million fund to compensate US clients that had retained the firm between January 1, 2001, and December 31, 2004, to place insurance and where contingent commissions were involved. Similar settlement agreements were announced in the following months. In March 2005, Aon Corp., the second largest US broker, agreed to set up a $190 million fund to compensate clients where the placement of insurance business included contingent commissions. The following month, Willis Group

Holdings Ltd. announced a $51 million fund as part of a settlement with attorneys general in New York and Minnesota and with the New York Insurance Department. Insurers and brokers are now guided by model rules set forth by the NAIC. These rules require clients’ acknowledgement and approval before brokers can collect compensation from insurers or other third parties when placing business.

Settlements highlight reinsurance deals
The initial lawsuit against Marsh & McLennan in 2004 quickly spread to other insurers. Zurich Financial Services and ACE Ltd. both settled charges in 2006 regarding bids solicited by brokers as part of an alleged scheme to fix prices for excess casualty insurance, a product that provides coverage for losses above an existing primary insurance policy. Both Zurich and ACE, along with AIG, were alleged to have engaged in improper finite reinsurance agreements that bolstered their financial results and those of their clients. Zurich agreed in March 2006 to pay $171.7 million in restitution and penalties as part of a settlement with attorneys general in nine states and one insurance commissioner. ACE, a Bermuda-based reinsurance firm, agreed in April 2006 to an $80 million settlement with attorneys general in New York, Connecticut, and Illinois, and with the New York State insurance department. The finite and nontraditional reinsurance agreements under scrutiny by regulators generally included similar features. The amount of risk transferred was not sufficient to qualify as reinsurance for accounting purposes and probably should have been listed as a liability, like a loan. Transactions also may have included side agreements that were not disclosed. The nature of these agreements served to cap the reinsurer’s losses, and at times guaranteed the profits the reinsurer could make from the deals, thus eliminating risk. For AIG, the world’s largest insurance group, questionable reinsurance deals and improper accounting ultimately led it in May 2005 to restate earnings downward by nearly $4 billion for the five years from 2000 through 2004. As a result, shareholders’ equity was reduced by $2.26 billion, to $80.61 billion as of year-end 2004. These events

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proved to be the undoing of longtime AIG chairman and CEO Maurice “Hank” Greenberg, who resigned in early 2005. The trial against several General Re Corp. executives accused of devising the fraudulent finite reinsurance scheme with AIG was set to commence on January 7, 2008. Among those on the government’s witness list is famed investor Warren Buffet, chairman of Berkshire Hathaway Inc., the parent company of General Re.

M&A update
The P/C industry ended 2006 with more than $200 billion in excess underwriting capacity, making for a competitive operating environment that is pushing premium rates lower. Although conditions of excess capital, competition, and limited prospects for organic growth generally set the stage for merger and acquisition (M&A) activity within the financial services sector, they were not much of a catalyst for combinations among P/C firms in 2006. In 2006, global M&A volume reached $3.8 trillion, nearly a 38% increase over 2005 levels, according to Thomson Financial. While the financial sector has been among the more active participants, insurers seem content to either sell off nonstrategic assets or buy up books of business, generally to extract income from improved claims management. The overall factor that has limited blockbuster deals in the P/C insurance space, primarily since 2003, may be the difficult nature of gaining industry control through consolidation. In the P/C industry, there are low barriers to entry. Perceived capacity shortages, which would give companies a dominant market position in other industries, only serve to attract even more capital. In the wake of catastrophe losses in 2005, for example, more than $10 billion in capital flowed to Bermuda to form new reinsurance companies. In addition, insurers that want to expand geographically within the United States need only to file with insurance regulators for admittance to a particular state. Then they can begin writing new business. One result of the insurance industry investigations has been to propel acquisition activity among P/C brokers. Deals in 2007 mostly featured private equity players who saw opportu-

nities to extract savings from the brokers’ distribution model. The steady cash flows that stable brokers’ operations provide give these buyers a chance to leverage up the capital structure of the acquired company. In February 2007, an affiliate of Goldman Sachs Group paid $1.4 billion for USI Holdings, the nation’s ninth largest broker (based on 2006 premiums). That was followed in March by the $1.8 billion purchase of Hub International Ltd. by a group led by Apex Partners. In June 2007, Alliant Insurance Services, a mid-sized broker, agreed to be acquired by the Blackstone Group for $1.4 billion.

The changing nature of consolidation activity
To remain competitive in a relatively weak environment for premium rates, insurers have turned to tweaking their business models. Some companies are selling off nonstrategic assets, downsizing, or exiting the business. The capital-intensive nature of the insurance industry pushed corporate giant General Electric Co. (GE) to sell its GE Insurance Solutions unit to Swiss Reinsurance Co. for $6.8 billion in November 2005. GE chipped in $3.4 billion to the unit’s reserves as part of the deal. While the GE transaction was in the reinsurance space, reserve levels for some insurers also may need adjustment, putting some under financial pressure. Some of these insurers could be acquired, if the price were right, though general wariness toward traditional M&A still prevails in the current environment. The cautious stance toward M&A also may relate to the investigations into the industry’s practices, which have shrouded P/C insurers in a regulatory cloud since late 2004. Now that these investigations are winding down, companies may be more inclined to consider shifting or enhancing their business mix or increasing their economies of scale through M&A. An exception, however, is Liberty Mutual. Though still fighting allegations of improper commission payments, among others, the insurer agreed in May 2007 to acquire Ohio Casualty Corp. in a deal valued at $2.7 billion. The transaction should allow Liberty Mutual to strengthen its regional presence and expand the distribution of its products through Ohio Casualty’s independent agents.

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For their part, global insurers and reinsurers continue to engage in strategic transactions. In May 2007, Converium Holding AG, a Switzerland-based reinsurer, agreed to be acquired by Scor SA, a French reinsurer. Converium had rejected Scor’s initial offer, but reconsidered when Scor increased the price. The transaction calls for Scor to pay $2.8 billion for Converium in a stock-andcash deal.

HOW THE INDUSTRY OPERATES
The property-casualty (P/C) insurance industry is essentially a risk-bearing enterprise. In the event of a loss, insurance is a means by which the burden of that loss — whether related to the destruction of property or an incurred liability — is shared. Typical P/C policies include auto coverage, workers’ compensation coverage, homeowners’ coverage, and others. There are two kinds of ownership structures in the P/C industry: mutual and stock. A mutual insurance company is owned by its policyholders, and its capital is called policyholders’ surplus. State Farm Group — the largest P/C insurer in the United States, based on premium volume — is a mutual insurance company. The second largest P/C insurer, American International Group Inc., is a stock insurance company. Investors (that is, shareholders) are issued stock as evidence of their ownership interest, which is represented by shareholders’ equity.

which is listed as a liability on an insurer’s financial statement. There is usually a lag of about 12 months between the time a policy is written and the time the full premium is recognized as revenue. For example, a $600 premium for a year of auto insurance coverage would be “earned” by the insurer at the rate of $50 a month for 12 months. (See the cash flow diagram for details on the flow of funds.) After premiums, the second largest component of insurer revenues is investment income. This is derived from investing the funds set aside for loss reserves and unearned premium reserves and from policyholders’ surplus or shareholders’ equity. The third and usually smallest revenue component is realized investment gains; this component is the most volatile and hardest to predict. Realized investment gains arise from the sale of securities (usually stocks and bonds) in an insurer’s investment portfolio. Because the timing and magnitude of the gains depend on conditions in the securities markets, which are by their nature dynamic, it is difficult to forecast realized investment gains.

...and the money flows out
An insurer’s revenue must cover a variety of expenses. One expense is the commission paid to the insurance broker, agent, or salesperson for selling a policy; this is usually deducted immediately from the collected premium. The insurance company generally accounts for this commission by deducting it from its policyholders’ surplus account and crediting it to the unearned premium reserve. After commissions are paid, premium dollars are used to cover a variety of expenses. The largest expense facing a P/C insurer is losses, also referred to as policyholder claims. Funds also are used to pay claimsrelated expenses and loss adjustment expenses, including insurance adjusters’ fees and litigation expenses. Insurers face other expenses related to the underwriting process, such as salaries for actuarial staff. The underwriting profit (or loss) is determined by subtracting these expenses from earned premiums. Like most other companies, insurers incur various other operating expenses and interest costs. Pretax profits are calculated by subtracting these expenses from underwriting profits. After-tax (or net) income is derived

JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

The money flows in...
Regardless of an insurance company’s ownership structure, the insurance business is one of shared risk. Insurers collect payments in the form of premiums from people who face similar risks. A portion of those payments is set aside to cover policyholders’ losses. Therefore, earned premiums are typically an insurer’s primary revenue source. At the time a policy is issued, it is recorded on the insurer’s books as a written premium. Then, over the life of the policy, the premium is “earned,” or recognized as revenue, on a fractional basis. These premiums are classified as deferred revenues and assigned to an unearned premium reserve,

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CASH FLOW DIAGRAM—PROPERTY-CASUALTY INSURANCE COMPANIES
(A simplified model)
POLICYHOLDER PAYS PREMIUM POLICYHOLDERS’ SURPLUS

1

AGENT WITHHOLDS COMMISSION

COMPANY EARNS PREMIUM OVER TERM OF POLICY

COMPANY PUTS PREMIUM INTO UNEARNED PREMIUM RESERVE

COMPANY ADDS AMOUNT OF COMMISSION TO UNEARNED PREMIUM RESERVES

FULL PREMIUM NOW EARNED

COMPANY REPLACES MONEY TAKEN FROM SURPLUS

COMPANY PAYS CLAIMS OR CREATES LOSS RESERVES TO PAY UNSETTLED CLAIMS

COMPANY PAYS OTHER BUSINESS EXPENSES

2

COMPANY PAYS TAXES AND FEES 3

UNDERWRITING PROFIT (OR LOSS)

PREMIUM RESERVES PRODUCE

LOSS RESERVES PRODUCE

POLICYHOLDERS’ SURPLUS PRODUCES

INVESTMENT INCOME

INVESTMENT INCOME

INVESTMENT INCOME

TOTAL INVESTMENT INCOME

4
DIVIDENDS TO POLICYHOLDERS

6
INVESTMENT EXPENSES

NET INVESTMENT GAIN (OR LOSS)

7
NET OPERATING INCOME (OR LOSS)

DIVIDENDS TO STOCKHOLDERS

8

ADDITIONS TO POLICYHOLDERS‘ SURPLUS TO SUPPORT FUTURE GROWTH

1 2 3 4 5 6 7 8

The excess of assets over liabilities. Overhead costs — rent, salaries, etc. Federal, state, local taxes, licenses, and fees. Includes interest, dividends, rents, and realized capital gains. On certain lines only. Costs of operating the company’s investment program. If underwriting loss exceeds investment gain, there will be a net operating loss. Applies only in the case of capital stock companies.

Source: Insurance Information Institute.

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by taking pretax profits and subtracting shareholder dividends and federal and state income taxes. According to data obtained from Insurance Services Office Inc. (ISO), an industry research and data collection organization, net written premiums for the P/C insurance industry rose approximately 4.3% to $443.8 billion in 2006, from $425.5 billion in 2005. Earned premiums advanced by 4.4% to $435.8 billion in 2006 from $417.6 billion in 2005. Underwriting results in 2006 improved considerably compared with 2005 due to far fewer catastrophe losses. With no hurricanes striking the US in 2006, the industry posted a $31.2 billion net gain on underwriting, reversing the $5.6 million net loss on underwriting in 2005. According to ISO’s Property Claim Services unit, catastrophes in 2006 caused $9.2 billion in direct property losses (before recoveries from reinsurance), compared with $61.9 billion in 2005, the year that Hurricanes Katrina, Rita, and Wilma struck the US. (A catastrophe is defined as an incident or series of incidents causing insured losses of $25 million or more.) The industry’s 2006 underwriting performance benefited from favorable loss developments in most other lines of business, in addition to the sharply lower catastrophe losses. In 2006, total incurred losses fell 9.9% to $231.1 billion, from $256.5 billion in 2005. Loss adjustment expenses (the expenses incurred in settling claims) declined by 4.5% to $52.6 billion, from $55.1 billion in 2005. Incurred losses and loss adjustment decreased by 9.0% to $283.7 million, from $311.4 billion in 2005.
DISTRIBUTION OF ASSETS — 2006
(Total US property-casualty industry, in percent)

Along with the underwriting profits and lower loss costs, investment activities also contributed to insurers’ bottom lines in 2006. Realized gains fell sharply, though, contributing to a decline in overall investment gains. Net investment income rose by 5.2% to $52.3 billion, from $49.7 billion in 2005. Realized capital gains on investments fell 65.4% to $3.4 billion in 2006, versus $9.7 billion in 2005. As a result, total investment gains decreased by 6.4% to $55.7 billion in 2006, from $59.4 billion in 2005. The industry had unrealized capital gains of $20.8 billion in 2006, a reversal from 2005, when it had unrealized capital losses of $3.4 billion, according to ISO. Management of insurance companies may have decided to “bank” some capital gains in 2006 in order to have the option of bolstering profits in the future should underwriting results deteriorate, according to research by the Insurance Information Institute. The sharp swing in underwriting results, lower loss costs, and investment gains resulted in a 44.1% rise in the industry’s net income in 2006. Insurers in the ISO study reported after-tax income of $63.7 billion, versus net income of $44.2 billion in 2005.

Keep the cash circulating
Many property-related insurance claims are settled relatively quickly. They often are referred to as “short-tail” liabilities because the period between the incident causing the loss (such as a storm that damages a home) and the claim settlement is relatively short. Because of this, P/C insurers maintain the majority of their investments in highly liquid securities that can be converted quickly to cash. This liquidity ensures that policyholders can be paid promptly in the event of a loss. Based on the latest available aggregate industry statistics from Standard & Poor’s (which includes both mutual and stock insurance companies in its survey), assets of the P/C industry totaled $1.62 trillion at yearend 2006, up 5.2% from $1.54 trillion at year-end 2005. Of the total assets at year-end 2006, investments constituted 82.3%, or approximately $1.35 trillion. As a portion of invested assets, bonds accounted for more than 61%. Other investments included common stocks (24.9%), preferred stocks (1.2%), and cash and short-term investments

Real estate & mortgage loans 1.0%

Cash & short-term investments 7.3%

Other invested assets 4.4%

Bonds 61.2%

Common stock 24.9%

Preferred stock 1.2%
Source: Standard & Poor’s Ratings Services.

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(7.3%). The remaining 5.4% of the P/C industry’s investments were in mortgage loans, real estate, and other investments. An insurer derives funds for investment from three primary sources: its loss reserves, its unearned premium reserve, and its policyholders’ surplus. Loss reserves, which are the funds set aside to pay claims, are by far the largest component of the P/C industry’s liabilities. For the insurers in the ISO survey, loss and loss adjustment reserves amounted to $514.2 billion at year-end 2006, or about 55% of total liabilities of $941.2 billion. The second largest liability on an insurer’s books, and a principal source of investment income, is the unearned premium reserve. At year-end 2006, unearned premiums for the insurers in the ISO survey equaled $202.7 billion, or 21.5% of total liabilities. The unearned premium reserve represents the liability for that portion of a written premium that has been charged to the policyholder but has not yet been used. Using our earlier example of the $600 annual auto insurance premium, the unearned premium reserve would total $550 at the end of the first month, because $50 (or one-twelfth) of the annual premium had been “earned,” or accounted for as an earned premium on the insurer’s books.

tremely difficult to do accurately. Along with the unpredictability of natural disasters, forecasts of future losses are subject to several other variables, including (but not limited to) real economic growth, inflation, interest rates, sociopolitical trends, judicial rulings, and voter initiatives. The trend in recent years toward a greater proportion of the insurance business being written in casualty lines has made the reserving process even more difficult. It is considerably harder to estimate the ultimate losses from casualty lines than from property lines such as homeowners’ coverage, because casualty lines have “long tails” — that is, the periods between the origination of the policy, the event leading to a claim, and the subsequent payment of that claim may be years or even decades. Inflation can have a highly negative impact on the insurer’s eventual costs as the liability’s “tail” lengthens. On the plus side, however, this characteristic of casualty lines lets the insurer invest those premium dollars for a longer time.

Estimating the losses...
The calculation of loss reserves involves considering four different kinds of losses, each with differing levels of uncertainty. ◆ Losses that have been incurred, reported, and settled, but not yet paid. These losses are the most certain of the four loss types. Because the size of the ultimate loss has been established, setting aside an accurate reserve level is easiest here. ◆ Losses that have been incurred and reported, but not settled. These carry a slightly increased level of uncertainty. Here, the insurer is aware that a loss has occurred, but final payment terms have not yet been established. ◆ Losses that have been incurred and reported, but not settled, due to a liability. Because such losses usually involve longer-tail liabilities, calculating the ultimate cost of settlement is more difficult. ◆ Losses that have been incurred, but not reported (IBNR). These losses carry the most uncertainty. In some cases, insurers know about IBNR losses and try to make preliminary loss estimates. For example, suppose an earthquake hit a certain area on December

Loss reserves: the financial buffer
As the largest component of an insurer’s liabilities, loss reserves have an important bearing on financial results. An insurer’s prosperity depends largely on its ability to quantify accurately the ultimate cost of the losses from the risks it assumes. When reserve levels are too high — that is, when an insurer sets aside too much money to pay future claims — profits appear lower than they actually are. Consequently, premium rates might not appear high enough to cover losses, causing the insurer to raise its rates unnecessarily. Conversely, if reserves are too low, profits will be inflated, leading an insurer to lower its rates inappropriately. In either situation, once losses develop, inaccurate reserve levels ultimately will have to be adjusted. Such erratic accounting adjustments can make an insurer’s financial position seem unstable. Establishing premium and loss reserve levels requires an insurer to estimate the ultimate value of future losses, which is ex-

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30, and a local P/C insurer ends its fiscal year on December 31. In its year-end statements, the insurer could estimate its earthquake-related IBNR loss based on its experience in prior earthquakes. In other cases, however, IBNR losses emerge years after the damage first occurs. Such losses are very difficult to predict. For example, the various asbestos lawsuits that have recently plagued P/C insurers relate to injuries incurred many years ago, but reported much later.

view is then divided by the appropriate percentage, to arrive at the estimated ultimate loss cost. The amount of losses paid to date is subtracted from this figure to produce the estimated loss liability. ◆ Counts and average costs of incurred losses. This method indirectly establishes the liability for losses from loss counts and average costs. The projected number of loss units is obtained from the number of loss units received to date, based on percentages reported in prior years at the same stage of development. The average cost of loss units closed to date is calculated and compared with average closed costs of prior years at the same stage of development. To arrive at the total estimated ultimate loss, the estimated ultimate average cost derived is multiplied by the projected ultimate number of loss units. Losses paid to date are then subtracted to obtain the estimated liability. ◆ Counts and average values of unpaid losses. This method directly establishes the liability from loss counts and average values of unpaid losses. In this case, a selected average value is applied to the number of loss units. If the data are based on reported losses, the selected average value is applied to the number of open loss units, and a separate calculation for IBNR losses is necessary. If the data are based on accidents incurred, the selected average value is based on the total number of open and IBNR losses. ◆ Loss ratio. This method estimates the ultimate loss by using an estimated loss ratio. Selected for whatever period of coverage is involved, the ratio is applied to the applicable earned premiums, producing the estimated ultimate losses incurred for that period. Losses paid to date on accidents occurring during the period are deducted from this total to derive the estimated total loss liability. This overview illustrates the various methods used to quantify an insurer’s estimated liability for losses as of the evaluation date. Obviously, a great deal more detail and considerable judgment are involved in applying these methods. Furthermore, no single method is ideal for all situations: which one a particular insurer chooses will depend on

...and calculating the loss reserves
Most insurance companies assign the task of establishing appropriate loss reserve levels to their actuarial staffs. Actuaries — specialists trained in mathematics, statistics, and accounting — are responsible for calculating premium rates, reserves, and dividends. They use a variety of quantitative methods to establish loss reserves. The five most commonly used methods are the following: ◆ Claim-file estimates plus. This method establishes the estimated liability for reported losses by aggregating pending claim-file estimates (such as estimates being prepared by the claims department), from which payments that have already been made are deducted. Added to this total are formula calculations for additional payments on closed claims that will be reopened for IBNR losses. The sum of the component parts constitutes the full loss liability as of the end of the accounting period. This method, considered the least sophisticated, is appropriate for property lines in which claim frequency is low and the range of loss costs is sizable. Furthermore, its dependence on claims department estimates exposes it to a degree of subjectivity. ◆ Percentage of losses paid to date. Although this method of extrapolating liability from past percentages of losses paid is regarded as simple to apply, its use is limited to coverages where payment patterns are relatively consistent. The percentage of losses paid to ultimate incurred losses is calculated for various stages of development for prior years. From this history, percentages paid are selected for each stage of development. The amount of losses paid to date for the period under re-

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that company’s unique experience and product mix. In fact, many companies use more than one method to ensure a high degree of accuracy and reliability. For a more detailed discussion of the various loss-reserving methods, Standard & Poor’s recommends Property & Casualty Insurance Accounting, published by the Insurance Accounting and Systems Association.

Surplus funds: capital counts
After investment assets and loss reserves, the third largest component of an insurer’s balance sheet is policyholders’ surplus, analogous to shareholders’ equity. At December 31, 2006, the insurers in the ISO study had an aggregate surplus of $487.1 billion, up 14.4% from the year-end 2005 surplus of $425.8 billion. Policyholders’ surplus is one of the indicators that state regulators use to monitor and control insurers’ solvency and growth. Industry surplus (sometimes referred to as capital or equity) appreciates or depreciates through retained earnings or losses, unrealized gains or losses from investment portfolios, and additions to investors’ capital. Typically, regulators permit insurers to leverage their surplus to a certain extent, allowing them to underwrite business equal to two to three times the amount of their surplus. Regulators tend to give insurers more leeway on the short-tail property lines than on the long-tail casualty lines, because of the former’s relatively greater predictability of underwriting performance. Thus, as the industry has increased its exposure to casualty lines, its leverage has declined. Industry leverage also has declined in response to reassessments of risk and because of various factors contributing to overcapacity. (Industry surplus leverage is discussed further in the “How to Analyze a PropertyCasualty Insurance Company” section of this Survey.)

Forms of ownership
A P/C insurer’s ownership structure can take one of two forms: a publicly held stock insurance company or a mutual insurance company owned by its policyholders. In addition, an insurance company can be structured as a hybrid mutual holding company. ◆ Stock insurance companies. As their name implies, stock insurance companies are owned by shareholders, who can buy or sell shares in the public stock market. The capital of a stock insurance company is called shareholders’ equity. Since these companies are publicly held, they are required to file quarterly financial reports with the Securities

Two accounting methods used
P/C insurers generally account for their surplus by using statutory accounting principles (SAP), which require them to expense immediately all costs related to writing business, rather than by using generally accepted accounting principles (GAAP), which attempt to match an insurer’s income and expenses

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by prorating the costs of an insurance policy over its assumed life. Many insurers report their financial results using both accounting systems. They report their results to regulators using SAP; for investors, they use GAAP. (Many analysts, however, also use SAP financial statements when analyzing an insurer.) This difference largely reflects the disparate priorities of shareholders, investors, and regulators. Shareholders and investors are likely to be most interested in a company’s ability to earn a profit, while regulators’ primary concern is the company’s solvency — its ability to meet policyholder obligations. The primary difference between GAAP and SAP lies in an accounting concept known as the matching principle. Under GAAP accounting, an insurer charges expenses to the period in which they were used to generate revenues. Under SAP accounting, expenses are recognized as soon as they occur. For example, when an insurer uses SAP, any expenses associated with writing an insurance policy — such as commissions and other underwriting expenses — are immediately deducted from income. Under GAAP accounting, these same charges are treated as assets — referred to as deferred policy acquisition costs — and are amortized over the insurance policy’s life. Hence, the more conservative SAP emphasizes a company’s solvency. An insurer’s income and surplus tend to be lower under SAP than under GAAP, which emphasizes the firm’s ongoing profitability.

and Exchange Commission (SEC). Thus, obtaining timely financial information about these companies is relatively easy. As publicly owned companies, these insurance companies are obligated to provide the most favorable return on shareholders’ capital. Sometimes, this goal may conflict with the interests of policyholders. For example, a stockholder-owned insurer may be under pressure to keep claim costs in line in order to return a profit to its shareholders. This scrutiny of claims, although certainly legal, may not always be in the best interest of the policyholder, who relies on the insurer to promptly pay his or her claim. ◆ Mutual insurance companies. For mutual insurance companies, in contrast, policyholders are the owners. A mutual insurance company’s capital is called policyholders’ surplus. Because these companies are owned by their policyholders, they are not required to publicly disclose financial information. Although some mutual insurers distribute financial information to policyholders, obtaining financial information about a mutual insurer is more difficult. ◆ Mutual holding companies. In some instances, insurance companies have formed mutual holding companies to combine the benefits of mutual ownership with those of public ownership. In this case, the holding company remains in the hands of the policyholders, while shares in the operating subsidiary are sold to the public. However, this arrangement can lead to conflicting priorities, as management seeks to please both policyholders, who prefer that the company retain its capital to pay claims, as well as shareholders, who prefer that management use its capital to grow the business and pay dividends.

demutualization in January 2000. (Note: Manulife Financial Corp. acquired John Hancock Financial Services on April 28, 2004.) The forces behind these high-profile demutualizations differ from those that drove a number of other companies, including The Equitable, to demutualize in the late 1980s. Back then, insurers needed access to the capital markets to sell equity and debt securities in an attempt to boost their sagging capital bases. At that time, many companies were saddled with illiquid and underperforming real estate loans and assets, which eroded the strength of their capital bases and threatened their solvency. They needed to raise capital in order to survive. The more recent spate of demutualizations was driven by insurers’ need to increase their operating and financial flexibility. One aspect of this is the ability to issue stock. Although the merger and acquisition boom of the late 1990s has slowed considerably, the ability to acquire another company through the issuance of stock (the currency of choice in most deals) is a critical success factor for many companies. Furthermore, in this era of rewarding performance with stock options, many mutual insurers believed they were at a disadvantage in recruiting and retaining top management talent by not being able to offer this benefit to employees.

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Lines of coverage
Although P/C insurance is available on a wide variety of coverages, several lines constitute the bulk of industry premium volume, as shown in the “Property/casualty industry’s product-line distribution” chart. ◆ Automobile coverage. This is the largest P/C line; it covers both physical (property) damage and car owners’ liability. According to Standard & Poor’s, this sector accounted for approximately 37% of the industry’s net written premium volume in 2006. Automobile coverage (both personal and commercial) has long dominated the industry’s product mix. Its growth over the past 20 years has been fueled by the adoption of mandatory automobile insurance in many states and by escalating litigation and medical care costs.

Demutualization
The process by which a mutual insurance company converts to a shareholder-owned structure is called demutualization. In recent years, some of the nation’s largest mutual insurers demutualized. Prudential Financial Inc. completed its initial public offering in December 2001. In April 2000, Metropolitan Life Insurance Co. completed its demutualization on the heels of John Hancock Financial Services Inc., which completed its

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◆ Homeowners’ multi-peril. This is another principal line of business for the P/C insurance industry, accounting for some 12% of written premium volume in 2006. Homeowners’ insurance covers both the physical damage to the insured property and the liability or legal responsibility arising from any injuries and/or property damage that the policyholder may cause to other people. Damage caused by most natural disasters is covered, except that which is caused by floods and earthquakes. A separate policy usually is required to cover earthquake and flood damage. ◆ Workers’ compensation. Another major line of business for the P/C industry is workers’ compensation, which accounted for more than 9% of 2006 premium volume. This business line insures organizations that are required by state laws to compensate employees who are injured or disabled because of an occupational hazard. It also helps compensate families of employees killed on the job. During the 1960s and 1970s, the growth in this business line was helped by changes in certain state laws that increased mandated coverage and by the general upgrading of
PROPERTY/CASUALTY INDUSTRY’S PRODUCT-LINE DISTRIBUTION
(In percent, by net premiums written)

benefit levels. However, in the past several years, this market has contracted as corporations and local governments have sought less costly means of providing this coverage, such as self-insuring. Some insurers have also withdrawn from this line of business in response to poor underwriting results. ◆ Other lines. The remaining 40% or so of the market comprises a variety of types of coverage, including homeowners’ multi-peril coverage, commercial multi-peril coverage, and an array of liability coverages.

Distribution: getting policies to the people
Insurance companies distribute their personal and commercial policies through either direct selling systems or agency systems. In a direct selling distribution system, the insurance company (sometimes referred to as a direct writer) contacts its customers (“insureds”) through its own employees. Within this framework, the insurer sells policies through a number of outlets, including direct mail and company-run agencies. Under an agency system, the insurer contracts outside agents to sell its policies in exchange for a commission. Some agents may sell only a single insurer’s policies (“exclusive agents”), while others (“independent agents”) may offer policies from various insurance companies. While there are advantages and disadvantages to both systems, the tradeoff is between costs and control. A direct selling system can be expensive to establish and operate, but it gives an insurer more control over the distribution process. The agency system reduces the amount of control an insurer has over each aspect of the distribution system, but it usually offers an established network through which the insurer can distribute its products. This is especially helpful to small and regional insurers without the means to establish their own distribution network.

2002
Other premium 30.2% Private passenger auto liability 21.9%

Private passenger auto physical damage 17.4% Other liability/ occurence 5.0% Commercial multiple peril 6.8% Workers’ compensation 8.1% Homeowners multiple peril 10.7%

Other premium 28.1.%

2006
Private passenger auto liability 21.2% Private passenger auto physical damage 16.0%

Other liability/ occurence 5.9% Commercial multiple peril 7.1% Homeowners Workers’ multiple peril 12.3% compensation 9.3%

Regulation and competition hold insurers in line
The insurance industry is regulated on a state-by-state basis. Each of the 50 states and the District of Columbia has an insurance commissioner, who grants insurers operating

Source: Standard & Poor’s Ratings Services.

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CLASSIFICATION OF NET PREMIUMS — LEADING LINES FOR PROPERTY-CASUALTY INSURANCE COMPANIES
(Premiums written, in millions of dollars and as a percentage of total)
PRIVATE PASSENGER AUTO LIABILITY YEAR WRITTEN % AUTO PHYS. DAMAGE WRITTEN % HOMEOWNERS’ MULTIPLE PERIL WRITTEN % WORKERS’ COMPENSATION WRITTEN % COMMERCIAL OTHER MULTIPLE PERIL LIABILITY/OCCURRENCE WRITTEN % WRITTEN % OTHER PREMIUMS WRITTEN % TOTAL NET % CHG IN PREMIUMS PREMIUMS WRITTEN WRITTEN

2006 2005 2004 2003 2002

94,430 94,853 92,954 89,291 82,141

21.2 22.1 21.7 21.8 21.9

71,318 71,880 71,920 69,122 64,991

16.0 16.7 16.8 16.9 17.4

54,781 52,471 49,607 45,768 40,033

12.3 12.2 11.6 11.2 10.7

41,528 39,807 36,710 33,145 30,190

9.3 9.3 8.6 8.1 8.1

31,691 29,643 29,109 27,418 25,420

7.1 6.9 6.8 6.7 6.8

26,440 23,846 24,869 21,999 18,532

5.9 5.6 5.8 5.4 5.0

124,873 116,945 122,211 122,465 113,040

28.1 27.2 28.6 29.9 30.2

445,061 429,446 427,380 409,208 374,347

3.6 0.5 4.4 9.3 NA

NA-Not available. Source: Standard & Poor’s Ratings Services.

licenses to let them conduct business within that state. State regulators serve three primary functions. First, they monitor the financial condition and claims-paying ability of each insurance company operating in their state. Second, they serve as consumer watchdogs, ensuring that policyholders are not overcharged or discriminated against. Finally, regulators try to ensure that essential insurance coverage is readily available to all consumers. The National Association of Insurance Commissioners (NAIC), based in Kansas City, Missouri, coordinates the activities of state insurance commissioners. Founded in 1871 as the National Convention of Insurance Commissioners, the NAIC undertook the formulation of uniform accounting procedures as one of its first actions. Today, one of the NAIC’s main functions is to develop and improve insurance reporting and accounting standards and practices. These actions are intended to improve state regulators’ knowledge of the financial condition of insurers in their jurisdiction. Insurance companies are required to file a set of financial statements each year with regulators in every state in which they operate. These records, called annual statements, use statutory accounting terms to outline the company’s profits, losses, and overall financial condition. Other forms of regulation and control also govern the insurance industry. For instance, publicly held insurance companies — those that issue stock — are subject to regulation by the SEC. Finally, the intense level of competition among industry participants in all lines also usually serves as a measure of control. Com-

petition helps keep pricing in line and prevents any one participant from becoming too powerful.

KEY INDUSTRY RATIOS AND STATISTICS
For purposes of formulating industrywide benchmarks in this portion of the Survey, we define the property-casualty insurance industry as comprising the companies that report their operating statistics to the National Association of Insurance Commissioners; these statistics are then compiled by Standard & Poor’s. There were approximately 1,130 such companies in 2006. Return on assets (ROA). This is a measure of profitability; it is equal to net income divided by average total assets. The ROA for most property-casualty insurers typically ranges from 2.0% to 5.0%. In 2006, property-casualty insurers tracked by Standard & Poor’s posted an average ROA of 4.6%, up from 3.3% in 2005. Return on equity (ROE). Usually considered in tandem with ROA, ROE is another measure of profitability. For a stockholderowned insurance company, ROE is calculated by dividing net income by average shareholders’ equity. To calculate the ROE for the entire property-casualty insurance industry (which includes mutual insurance companies), the denominator in this equation would be policyholders’ surplus. Policyholders’ surplus is a statutory accounting term that is generally analogous to shareholders’ equity. The return

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US PROPERTY/CASUALTY COMBINED RATIOS
140

In other words, the industry wrote $0.91 worth of premiums for every $1.00 in capital. Combined ratio. A key measure of underwriting performance, the combined ratio is calculated by adding three figures: the loss ratio (losses plus loss adjustment expenses, divided by earned premiums), the expense ratio (other underwriting expenses divided by written premiums), and the dividend ratio (policyholder dividends divided by earned premiums). A combined ratio of 100% or less indicates an underwriting profit; in excess of 100%, it signals an underwriting loss. A typical range for combined ratios is 100% to 110%. The loss ratio usually ranges from 60% to 80%, and the expense ratio from 25% to 35%. The dividend ratio usually ranges from 1.0% to 2.0%. Companies strive to earn a profit from underwriting, but only a small percentage of them actually achieve this goal. According to a study by the ISO, between 1952 and 1998, the industry earned a profit from underwriting — and achieved a combined ratio below 100% — in just 15 of those 47 years. Until 2004, the last time this happened was in 1978, when the industry’s combined ratio equaled 97.5%. In 2006, the industry again produced a combined ratio below 100%. For the 12 months ended December 31, 2006, the industry’s combined ratio was 92.4%, according to ISO. This improvement from 100.9% in the year ended December 31, 2005, reflected the steep decline in catastrophe losses. The combined ratio for 2006 consisted of a loss ratio of 65.1% (versus 74.6% in 2005), an expense ratio of 26.5% (25.8% in 2005), and a dividend ratio of 0.8% (0.4% in 2005).

Commercial lines
120

Personal lines
100 80 60 40 20 0 1998 99 00 01 02 03 04 05 2006

Source: Insurance Services Office.

on equity/surplus for property-casualty insurers can range from under 5% to about 18%. Most insurers strive to earn an ROE of 12% to 15%. Net investment yield. This measure of investment performance is typically calculated as net investment income divided by average invested assets. Investment yields typically fall within a range of 4% to 12%, though they can be lower than or well above that range, depending on the mix of invested assets in an insurer’s portfolio. For the property-casualty industry, the average yield on invested assets was 4.6% in 2006, up from 4.4% in 2005, according to figures compiled by Standard & Poor’s. The next two ratios, which measure underwriting performance, are derived from data published quarterly by Insurance Services Office Inc. (ISO), an industry research and data collection organization. Net premiums written to surplus. This ratio measures the extent to which the industry (or an insurer) has leveraged its capital to write business. Sometimes referred to as a measure of capacity utilization, it is equal to net written premiums divided by policyholders’ surplus. Typically, regulators permit an insurer to have a ratio of net written premiums to surplus of 2-to-1. In other words, insurers would be permitted to write $2 in premiums for every $1 in capital. Because premium rates for many lines of business declined in 2006, the industry remained underleveraged. At December 31, 2006, the ratio of net written premiums to policyholders’ surplus was 0.91-to-1.

HOW TO ANALYZE A PROPERTYCASUALTY INSURANCE COMPANY
When analyzing a property-casualty (P/C) insurer, consider three central points: its profitability, or ability to make money; its liquidity, or ability to convert assets into cash to pay claims and meet other expenses; and its leverage, or the extent to which it uses its capital to produce business. As with the markets for most other goods and services, the P/C insurance market functions within supply and demand curves. De-

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PREMIUM VOLUME AND UNDERWRITING RATIOS FOR THE TOTAL US PROPERTY-CASUALTY INDUSTRY
NET PREMIUMS WRITTEN (MIL. $) ‡LOSS RATIO (%) †EXPENSE RATIO (%) COMBINED RATIO (%)

YEAR

2006 2005 2004 2003 2002

445,061 429,446 427,380 409,208 374,347

65.2 74.5 72.8 74.7 81.1

26.4 25.9 25.3 25.0 25.5

92.4 100.8 98.5 100.1 107.1

‡Incurred to premiums earned. †Incurred to premiums written. Source: Standard & Poor’s Ratings Services.

mand for insurance is fairly stable and inelastic: it is influenced by growth in the economy (as measured by gross domestic product), the inflation rate, and the need to protect assets. The supply curve, however, moves primarily with interest rates.

higher level of income will be needed to cover these potentially higher costs in the future. Thus, insurance companies must incorporate estimates of future inflation into their pricing structures. When there is a wide range of inflation expectations, companies with lower-thanaverage estimates of future inflation may offer their products for below-average prices. Of course, insurers often can garner market share when their policies are priced below those of their competitors. Therefore, overall price trends tend to move toward the levels set by companies with a less inflationary outlook.

Predicting profits
Two broad measures of profitability that are applicable to P/C insurance companies are return on assets (ROA) and return on equity (ROE). ROA is net income divided by average total assets. A typical range of ROAs for the P/C insurance industry is somewhere between 0.5% and 2.0%, with the average somewhere around 1.5%. ROE is calculated by dividing the insurer’s net income by average shareholders’ equity. Most insurers strive to achieve an ROE of at least 15%. A P/C insurer’s profitability depends primarily on two components: underwriting income and investment income. Following, we discuss each of these components of an insurer’s operating income.

Pricing moves inversely with interest rates
Theoretically, when interest rates rise, insurers are willing to provide more insurance at the same price, because each premium dollar generates more investment income for the insurer. Thus, insurance prices decline until additional demand is stimulated or until it becomes unprofitable to provide coverage, prompting insurers to withdraw. Either way, supply and demand are brought back into balance. The fundamental relationship between insurance pricing and interest rates, therefore, is that prices increase when interest rates fall, and they decline when interest rates rise. The magnitude of changes in price varies with the magnitude of changes in interest rates. Price and premium growth levels also are influenced by competitive pressures within the industry and by each firm’s capacity to underwrite. The industry is competitive and has relatively few barriers to entry, so companies tend to overreact to interest rate changes, either overpricing or underpricing as situations warrant. In recent years, however, this theory did not match reality. During a period of historically low interest rates, insurance pricing remained competitive. This is largely attributable to an oversupply of underwriting capacity, or capital, that remained within the insurance marketplace. Prospects for inflation also play an important role in insurance prices. If claim costs are expected to rise because of inflation, a

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Principles of underwriting
The first element to consider when analyzing underwriting results is the rate of written premium growth. It should be compared with industry data to judge how a company stacks up against its peers. Pay careful attention to the circumstances surrounding the rate of premium growth. For example, if a company expands its written premium base at 10% a year while the overall industry is growing at 6% a year, that company would appear to be outperforming its peer group. Presumably, the stock market would award that firm a higher valuation than some of its slower-growing counterparts would enjoy. However, if the insurer is achieving premium growth by following risky underwriting standards — such as underpricing policies to gain market share or writing a great deal of business in a high-risk coverage line avoided by other insurers —

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the insurer’s valuation would have to be adjusted downward. Conversely, a company growing its premium base at a rate slower than the overall industry could be doing so because it is limiting its exposure to an unattractive class of business. For example, a number of insurers have reduced their exposure to workers’ compensation insurance in response to that line’s adverse claim trends. These insurers may have posted minimal written premium growth in recent years, but many have seen their profitability improve after purging these loss-laden business lines. Another factor that affects a company’s premium growth rate is the extent to which an insurer uses reinsurance, which is the practice of transferring some of its risk — and premium income — to reinsurance companies. In an attempt to offset slowing premium growth, an insurer might reduce the level of premiums that it cedes to reinsurers. Using less reinsurance lets an insurer keep more of each premium dollar, so a reduced level of reinsurance may enhance year-to-year premium growth comparisons. At the same time, using less reinsurance removes the protection it affords, potentially exposing the primary insurer to a large financial claim. ◆ The combined ratio. To evaluate an insurer’s underwriting performance, many analysts use a statistical measure called the combined ratio. This ratio equals the sum of the loss ratio, the expense ratio, and the dividend ratio, which are described following. A combined ratio below 100% indicates an underwriting profit; one above 100% means an insurer has incurred an underwriting loss. Unless otherwise stated, most companies calculate these ratios using statutory accounting principles. ◆ The loss ratio. The loss ratio measures claims cost experience. It is derived by dividing losses and loss adjustment expenses by earned premiums. It typically ranges from 60% to 80%, but it can soar during a period of heavy catastrophe losses. ◆ The expense ratio. The expense ratio measures how cost-effectively an insurer writes new business. It is derived by dividing

operating expenses by written premiums. It typically ranges from 25% to 35%. ◆ The dividend ratio. The dividend ratio, the smallest component of the combined ratio, is obtained by dividing policyholders’ dividends by earned premiums. It typically ranges from 1% to 2%. (The combined ratio often is presented excluding the dividend ratio. This is the case in the “Underwriting experience” and “Premium volume and underwriting ratios” tables.)

Playing the investment field
Investment income is an important source of profits for P/C insurers. Theoretically, investment income should be used to provide financial protection against unforeseen and unanticipated underwriting losses. Many insurers, however, have come to rely on investment income to remain profitable. When evaluating an insurer’s investment portfolio, analysts review a company’s asset allocation strategy, making sure its mix of invested assets is appropriate for the type of business it writes. For most P/C insurers, this process is fairly straightforward: the typical P/C insurer maintains most of its invested assets in relatively liquid fixed-income or equity securities that are converted easily into cash. This is because most P/C insurance claims are settled in a relatively short amount of time. Within each asset class, such as stocks or bonds, a review of asset quality and diversification is necessary. To help in the analysis of asset quality, insurers usually provide the debt rating of bonds in their portfolio or an average debt rating for their entire portfolio. Two important ratios used in analyzing investment results are the investment yield and the total return on the portfolio. Investment yield is usually calculated as the net investment income during a certain time period, divided by the portfolio’s average value during the same period. Total return is usually calculated as net investment income plus or minus realized and unrealized gains, divided by beginning market value of the portfolio, plus or minus the weighted average of additions or dispositions.

Cash flow and liquidity
Liquidity is another key benchmark for analyzing a P/C insurer, because of the insur-

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er’s need to pay claims promptly. An insurer’s sources of liquidity arise from underwriting cash flow, investment cash flow, and asset liquidation cash flow. All of these are considered internal sources because they are generated by the insurer’s operations. Because of the somewhat unpredictable nature of the P/C insurance business, cash flow from underwriting activities is probably the most volatile element of an insurer’s total cash flow. Nevertheless, the underwriting cash flow for most insurers is usually positive; when combined with the cash flow from investment activities, most insurers end up with a substantial positive cash flow.

information, and the Insurance Services Office, an industry research and data collection organization, the ratio of net written premiums to policyholder surplus was 0.91-to-1 at December 31, 2006, versus 1.00-to-1 at December 31, 2005, and 1.08-to-1 at December 31, 2004 — both of which were down slightly from 1.17-to-1 at December 31, 2003. ■

Looking at leverage
For P/C insurers, leverage refers to how the company uses its surplus, or capital, to write policies. The ratio of net written premiums to policyholders’ surplus is usually a good indicator of the industry’s capacity utilization. Historically, insurers leveraged their surplus by a multiple of two to three, depending on the types of business they underwrote. For example, an insurer with $10 million of surplus could probably write $20 million to $30 million of annual premiums. Regulators tend to give insurers more leeway in surplus leverage on shorter-tail property lines of coverage than on longer-tail liability lines, because the former have greater predictability. (The terms “short-tail” and “long-tail” refer to the time between the occurrence of a claim and its settlement; short-tail claims usually can be settled more quickly than long-tail claims.) Thus, as the industry’s exposure to casualty lines has increased, surplus leverage has decreased. Overcapacity in the insurance business also has caused surplus leverage to decline, as have strong investment returns. Thus, while regulators still may use a 2-to-1 leverage of surplus as a benchmark, this benchmark has to be considered against a backdrop of industrywide “underleverage.” In fact, industry leverage has been less than 1-to-1 for much of the last 15 years. Industry leverage increased somewhat in the aftermath of the September 2001 terrorist attacks and back-to-back record hurricane seasons in 2004 and 2005. Based on data obtained from A.M. Best, a provider of insurance company ratings and

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JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

G LOSSARY

Acquisition cost — The amount of money paid by an insurance company for new policies that it underwrites or for the purchase of another block of business; it includes commissions to agents and brokers and, in some cases, field supervision expenses. Actuary — An insurance professional whose job is to estimate statistical risks, set premium levels, and analyze other technical aspects of insurance. Administrative services only (ASO) agreement — An agreement under which an insurer provides a client with such services as actuarial work, benefit plan design, claims processing, financial advice, and report preparation. The client typically accepts the underwriting risk or self-insures. Agent — A person who sells insurance policies as a representative of the insurer. An independent agent represents two or more underwriters, while an exclusive agent may be an employee or commissioned representative of a single company. Broker — A producer that deals with either agents or underwriting companies to arrange insurance coverage for clients. Legally, a broker represents the buyer of insurance rather than the underwriting company. Capacity — The level of underwriting business an insurer can support, based on its ability or willingness to accept risks, with certain protection limits. Captive insurer — An insurance organization established by an entity to insure its own risks. Catastrophe — An incident or series of related incidents causing insured losses of $25 million or more. Cede — The transfer of part of an insurer’s liability to a reinsurance company. The insurer “cedes” its liability; the reinsurer “assumes” the liability. Combined ratio — A financial measure of underwriting performance used in the insurance industry; it is the sum of the loss ratio, the expense ratio, and the dividend ratio. A combined ratio of less than 100% generally indicates an underwriting profit, while a ratio in excess of 100% indicates an underwriting loss. Convention statement — Documents filed with state insurance departments detailing the financial statistics of individual insurance companies. Convention statements are prepared using statutory accounting principles, rather than generally accepted accounting principles.

Dividend ratio — Policyholders’ dividends as a percentage of earned premiums. It is a component of the combined ratio. Earned premium — Portion of a premium for which the insurer already has provided protection to the policyholder. Expense ratio — Operating expenses as a percentage of premiums written, calculated on a statutory basis. It measures an insurer’s efficiency in writing new business and is a component of the combined ratio. Finite reinsurance — A broad term used to describe reinsurance transactions that include limited transfer of risk; can also refer to financial reinsurance, or the transfer of a known loss, with the only uncertainty being the timing of the loss payment. Generally accepted accounting principles (GAAP) — An accounting method that, among other things, attempts to match income and expenses by prorating costs over the assumed life of an insurance policy. The GAAP method is used in the audited financial statements of publicly held companies. (See Statutory accounting principles.) Insurance examiner — A state insurance department representative assigned to participate in the official audit and examination of insurance companies. Insurance in force — The potential maximum claim against an insurer. Loss ratio — An insurer’s loss and loss adjustment expenses as a percentage of premiums earned, calculated on a statutory basis. A component of the combined ratio, it is a measure of an insurer’s claims cost experience. Managing general agent (MGA) — A special type of producer that, unlike other persons or firms selling insurance, often has “binding authority” in certain insurance and reinsurance markets. MGAs have contractual agreements whereby they can accept entire books of business on behalf of insurance and reinsurance underwriters. Mutual insurance company — An incorporated insurance organization with a governing body elected by policyholders. Mutual insurance companies generally issue participating policies. Net operating income — After-tax income before net realized investment gains or losses. Analysts most commonly use this measure of insurer profitability when modeling future earnings of an insurer.

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JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

Net premiums written — Premium income brought in by insurance companies, directly or through reinsurance, minus payments made for business reinsured. Nonparticipating policy — An insurance policy in which the insurer does not distribute any part of its surplus to policyholders. Premiums are usually lower for nonparticipating policies than for comparable participating policies. Participating policy — An insurance policy under which the insurer agrees to distribute to its policyholders the portion of its surplus that management does not deem necessary to retain. Such a distribution serves to reduce the premiums that each policyholder has paid during the year. Policy reserves — The funds that an insurer holds specifically for the fulfillment of its policy obligations. Premium — The payment, or one of the periodic payments, that a policyholder agrees to make for an insurance policy. Premium loan — A policy loan made for the purpose of paying premiums. Primary insurer — An insurance company that, either through an independent insurance agent or a broker, provides coverage in the outside market. The buyers of primary insurance are consumers. Producer — A person or firm that sells insurance. A producer may be an agent or a broker. Reinsurance — Coverage that a primary insurer (or “reinsured”) purchases from another company to protect itself from losses beyond a dollar amount it feels can be safely carried. This amount is normally called the reinsured’s “net line.” The reinsurance company can, in turn, reinsure through a process known as retrocession. Reserves — Funds that an insurer sets aside to cover obligations to policyholders; the amount may represent both actual and potential liabilities. Rider — A special provision or group of provisions that may be added to a policy to expand or limit the benefits otherwise payable. Statutory accounting principles (SAP) — An accounting format used by state insurance regulators. As opposed to the generally accepted accounting principles (GAAP) method, statutory accounting is essentially cash-oriented (rather than accrual) and has such requirements as immediately expensing all costs related to writing business. More conservative than GAAP, SAP focuses on a firm’s ability to meet its obligations (its solvency), whereas GAAP focuses on profit growth.

Stock insurance company — An insurance company owned by its stockholders, who elect a board to direct the firm’s management. In general, stock companies issue nonparticipating insurance, but they may also issue participating policies. Surplus lines — Generally, a risk for which no normal insurance market exists. Terrorist insurance — Coverage that can be added to a property insurance program to provide protection against destruction of property by terrorists. Underwriting profit/loss — Profits or losses of an insurance company that result from insurance activities, calculated on a statutory basis. A net underwriting profit or loss represents underwriting results after policyholder dividends are deducted. War risks insurance — Coverage on ships or cargo against loss or damage by enemy action and against damages sustained in fighting such an action. The perils of war are excluded from most policies.

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JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

I NDUSTRY R EFERENCES

PERIODICALS

COMPANY REPORTS

Aggregates & Averages: Property-Casualty Best’s Review BestWeek A.M. Best Co. Inc. Ambest Rd., Oldwick, NJ 08858 (908) 439-2200 Web site: http://www.ambest.com The first is an annual that provides financial and underwriting data on the entire property-casualty insurance industry; the other two are monthly and weekly publications, respectively, that cover topics and issues in the property-casualty insurance industry. Business Insurance Crain Communications Inc. 360 N. Michigan Ave., Chicago, IL 60601 (312) 649-5200 Web site: http://www.businessinsurance.com Weekly; covers corporate risk, employee benefit, and managed healthcare news. National Underwriter (Property/Casualty edition) The National Underwriter Co. 33-41 Newark St., 2nd Fl., Hoboken, NJ 07030 (201) 526-1230 Web site: http://www.nunews.com/pandc Weekly newspaper; covers issues related to the property-casualty insurance market.
BOOKS

ACE Limited Web site: http://www.acelimited.com Allstate Corp. Web site: http://www.allstate.com Ambac Financial Group Inc. Web site: http://www.ambac.com American International Group Web site: http://www.aig.com The Chubb Corp. Web site: http://www.chubb.com Cincinnati Financial Corp. Web site: http://www.cinfin.com CNA Financial Corp. Web site: http://www.cna.com Hartford Financial Services Group Web site: http://www.thehartford.com MBIA Inc. Web site: http://www.mbia.com Progressive Corp. Web site: http://www.progressive.com SAFECO Corp. Web site: http://www.safeco.com The Travelers Companies Inc. Web site: http://www.travelers.com XL Capital Ltd. Web site: http://www.xlcapital.com

Glossary of Insurance Terms, 2nd Ed. Richard V. Rupp, CPCU Chatsworth, Calif.: NILS Publishing Co., 1996 Property & Casualty Insurance Accounting, 8th Ed. Insurance Accounting & Systems Association, 2003 3511 Shannon Rd., Ste. 160, Durham, NC 27707 (919) 489-0991 Web site: http://www.iasa.org
TRADE ASSOCIATIONS

Insurance Information Institute (III) 110 William St., New York, NY 10038 (212) 346-5500 Web site: http://www.iii.org Nonprofit, industry-supported organization that provides information about the property-casualty insurance industry. Insurance Services Office Inc. (ISO) 545 Washington Blvd., Jersey City, NJ 07310 (800) 888-4476; (201) 469-2000 Web site: http://www.iso.com Trade organization and publisher of aggregate industry underwriting statistics.

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JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

D EFINITIONS

FOR

C OMPARATIVE C OMPANY A NALYSIS TABLES

Operating revenues Net sales and other operating revenues. Excludes interest income if such income is “nonoperating.” Includes franchised/leased department income for retailers and royalties for publishers and oil and mining companies. Excludes excise taxes for tobacco, liquor, and oil companies. Net income Profits derived from all sources, after deductions of expenses, taxes, and fixed charges, but before any discontinued operations, extraordinary items, and dividend payments (preferred and common). Return on revenues Net income divided by operating revenues. Return on assets Net income divided by average total assets. Used in industry analysis and as a measure of asset-use efficiency. Return on equity Net income, less preferred dividend requirements, divided by average common shareholder‘s equity. Generally used to measure performance and to make industry comparisons. Price/earnings ratio The ratio of market price to earnings, obtained by dividing the stock’s high and low market price for the year by earnings per share (before extraordinary items). It essentially indicates the value investors place on a company’s earnings. Dividend payout ratio This is the percentage of earnings paid out in dividends. It is calculated by dividing the annual dividend by the earnings. Dividends are generally total cash payments per share over a 12-month period. Although payments are usually calculated from the ex-dividend dates, they may also be reported on a declared basis where this has been established to be a company’s payout policy. Dividend yield The total cash dividend payments divided by the year’s high and low market prices for the stock. Earnings per share The amount a company reports as having been earned for the year (based on generally accepted accounting standards), divided by the number of shares outstanding. Amounts reported in Industry Surveys exclude extraordinary items.

Tangible book value per share This measure indicates the theoretical dollar amount per common share one might expect to receive should liquidation take place. Generally, book value is determined by adding the stated (or par) value of the common stock, paid-in capital, and retained earnings, then subtracting intangible assets, preferred stock at liquidating value, and unamortized debt discount. This amount is divided by the number of outstanding shares to get book value per common share. Share price This shows the calendar-year high and low of a stock’s market price. In addition to the footnotes that appear at the bottom of each page, you will notice some or all of the following: NA—Not available. NM—Not meaningful. NR—Not reported. AF—Annual figure. Data are presented on an annual basis. CF—Combined figure. In this case, data are not available because one or more components are combined with other items.

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JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

C OMPARATIVE C OMPANY A NALYSIS — I NSURANCE : P ROPERTY-C ASUALTY
Operating Revenues
Million $ Yr. End DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC 4,226.5 D 113,489.0 F 7,963.2 11,029.0 A 26,500.0 4,038.3 108,340.0 C,F 7,455.2 10,504.0 27,083.0 3,906.3 96,831.0 7,355.1 11,017.0 A 22,693.0 4,517.3 4,555.1 5,008.7 4,106.7 2,557.6 25,048.0 635.6 9,564.2 1,063.9 24,365.0 D 619.6 11,130.6 1,280.1 22,934.0 A 608.1 9,904.5 1,044.9 15,139.2 573.3 7,883.1 849.3 D 14,269.7 510.9 6,513.4 602.2 D 12,231.0 473.0 3,976.2 A 622.0 1,801.5 680.7 143.9 F 1,807.9 2,467.1 299.3 671.5 151.5 F 1,671.0 D 2,423.6 219.8 636.4 157.3 F 1,571.5 2,176.1 107.7 591.8 187.0 F 1,356.1 2,236.7 74.7 529.3 338.5 1,178.9 1,776.3 62.7 483.3 A 278.4 1,059.0 D 1,270.2 NA NA 173.4 799.0 343.1 NA 8,197.0 A 300.3 922.7 556.4 A 1,169.3 3,923.6 4,132.4 62,402.0 A,C 28,105.9 6,056.9 A NA NA NA 15,147.0 A 12,473.0 505.5 A,F 182.5 A 804.5 703.8 D 18,799.1 F 19,964.8 F 1,971.7 1,523.1 9,810.0 D 1,289.5 A 551.0 A 563.6 A 11,588.0 A 8,774.0 1,120.8 455.7 452.7 10,440.0 1,253.8 1,051.4 818.9 737.6 A,C 645.3 A,C 794.6 14,774.5 F 14,291.3 F 13,768.2 F 616.5 569.3 578.8 6,121.2 6,351.1 6,195.4 D 619.6 709.6 11,880.5 F 519.9 7,503.7 456.2 555.8 9,282.9 F 382.2 7,065.1 332.5 382.6 7,475.5 F 309.4 6,862.5 D 80.5 139.4 3,472.3 155.4 C 3,965.4 31.6 18.1 15.6 14.8 4.4 NA (1.8) 8.5 21.8 NA 11.8 7.8 26.3 6.7 14.5 0.2 15.0 NA NA 7.8 27.5 2.2 (1.5) 7.3 30.4 14.0 14.6 14.8 (2.3) 7.1 (12.4) 11.3 14.2 NA 15.4 6.1 19.2 11.3 20.2 1.5 12.7 5.6 NA 11.8 32.6 1.7 (1.8) 9.3 1,021.3 4,015.9 A 2,680.5 D 3,168.7 3,794.2 1,053.3 3,959.6 2,265.5 2,991.9 3,805.9 950.9 3,522.1 2,049.8 D 2,668.2 3,491.6 762.3 3,406.0 A 1,760.5 2,265.5 3,285.7 704.5 2,586.6 1,223.4 1,786.3 2,756.4 990.0 2,170.5 1,137.8 1,507.0 2,373.4 NA 594.2 545.5 F 825.0 A 1,803.9 NA 21.1 17.3 14.4 7.7 0.6 13.1 18.7 16.0 9.8 (3.0) 1.4 18.3 5.9 (0.3) 19.2 14.3 3.4 8.3 (3.6) 1.4 (5.0) 8.2 1.8 36.2 2.8 2.6 (14.1) (16.9) (0.8) 4.7 4.8 6.8 5.0 (2.2) 26.3 0.5 13.1 0.9 3,903.0 1,949.5 9,436.1 A 8,459.7 2,644.1 D 3,767.0 1,884.4 6,315.9 7,999.4 2,624.3 D 3,614.0 1,806.6 5,889.4 6,660.2 3,111.0 3,181.0 1,640.8 5,970.7 6,140.8 3,263.6 2,843.0 1,257.1 NA 4,660.9 3,316.6 C 2,561.0 1,153.8 NA 3,750.7 F 3,311.8 1,808.7 748.3 NA 1,596.5 A 3,279.5 8.0 10.0 NA 18.1 (2.1) 8.8 11.1 NA 17.7 (4.4) 3.6 3.5 49.4 5.8 0.8 216 261 ** 530 81 ** 676 491 384 210 1,557 529 425 397 154 ** 83 226 719 ** 306 212 1,037 191 386 102 404 ** ** 212 1,137 124 86 202 208 252 ** 501 80 ** 666 415 363 211 1,306 463 412 366 160 ** 87 209 706 ** 297 206 1,206 230 390 98 385 ** ** 217 900 124 76 200 13,351.0 A 35,796.0 1,811.0 C 5,394.8 13,969.0 13,088.0 35,383.0 1,652.1 4,996.8 14,053.1 12,320.6 33,936.0 1,398.5 4,512.2 C 13,152.5 10,689.7 32,149.0 1,256.2 D 3,630.1 11,461.0 7,123.0 29,579.0 965.3 2,566.1 9,115.6 6,644.7 28,865.0 A 724.5 1,941.8 7,739.9 849.0 A 24,299.0 288.7 1,225.2 5,668.1 D,F 31.7 4.0 20.2 16.0 9.4 15.0 4.4 20.1 22.7 12.5 2.0 1.2 9.6 8.0 (0.6) 1,573 147 627 440 246 1,542 146 572 408 248 2006 2005 2004 2003 2002 2001 1996 10-Yr. 5-Yr. 1-Yr. 2006 2005 2004 1,451 140 484 368 232 200 241 ** 417 95 ** 593 376 323 194 1,017 570 397 373 156 ** 91 197 634 ** 280 203 1,073 188 428 95 345 ** ** 182 703 125 76 200 Compound Growth Rate (%) Index Basis (1996 = 100) 2003 1,259 132 435 296 202 176 219 ** 385 100 ** 573 323 275 182 770 509 342 335 189 ** 108 170 652 ** 185 191 854 153 351 81 289 ** ** 150 516 123 79 193 2002 839 122 334 209 161 157 168 NA 292 101 NA 435 224 217 153 567 399 267 246 178 NA 195 148 518 NA 174 170 706 108 219 91 240 NA NA 128 367 110 84 151

Ticker

Company

PROPERTY CASUALTY‡ ACE * ACE LTD ALL * ALLSTATE CORP ABK * AMBAC FINANCIAL GP BER † BERKLEY (W R) CORP CB * CHUBB CORP

CINF CGI FNF FAF THG

* † † † †

CINCINNATI FINANCIAL CORP COMMERCE GROUP INC/MA FIDELITY NATIONAL FINANCIAL FIRST AMERICAN CORP/CA HANOVER INSURANCE GROUP INC

IPCC LFG MBI MCY ORI

§ § * † †

INFINITY PROPERTY & CAS CORP LANDAMERICA FINANCIAL GP MBIA INC MERCURY GENERAL CORP OLD REPUBLIC INTL CORP

PHLY PRA PGR RLI SAF

§ § * § *

PHILADELPHIA CONS HLDG CORP PROASSURANCE CORP PROGRESSIVE CORP-OHIO RLI CORP SAFECO CORP

SAFT SKP SIGI STC TWGP

§ § § § §

SAFETY INSURANCE GROUP INC SCPIE HOLDINGS INC SELECTIVE INS GROUP INC STEWART INFORMATION SERVICES TOWER GROUP INC

TRV UFCS XL ZNT

* § * §

TRAVELERS COS INC UNITED FIRE & CAS CO XL CAPITAL LTD ZENITH NATIONAL INSURANCE CP

REINSURANCE‡ RE † EVEREST RE GROUP LTD

MULTI-LINE GROUP‡ AFG † AMERICAN FINANCIAL GROUP INC AIG * AMERICAN INTERNATIONAL GROUP AIZ * ASSURANT INC GNW * GENWORTH FINANCIAL INC HIG * HARTFORD FINANCIAL SERVICES

3,339.8 D 3,751.1 81,303.0 67,482.0 6,997.9 6,441.7 11,671.0 A,C NA 18,733.0 15,907.0

HCC HMN LTR UTR

† † * †

HCC INSURANCE HOLDINGS INC HORACE MANN EDUCATORS CORP LOEWS CORP UNITRIN INC

2,075.3 A,F 1,642.7 A,F 1,283.2 A,F 942.0 D,F 669.4 A,F 873.8 869.4 878.3 866.2 771.9 17,203.5 F 15,205.2 F 15,209.0 A,F 15,809.6 A,C 16,827.8 D,F 3,074.2 3,048.1 3,040.8 2,943.8 2,298.2 A 8,954.0 C,D 9,837.0 D 10,172.0 D 1,536.4 A 1,483.9 A,C 1,480.3 A 878.0 A 785.8 A 646.9 A 710.8 A 673.9 A 619.6 A 11,921.0 A,C 11,652.0 A,C 12,121.0 A

INSURANCE BROKERS‡ AOC * AON CORP AJG † ARTHUR J GALLAGHER & CO BRO † BROWN & BROWN INC HRH § HILB ROGAL & HOBBS CO MMC * MARSH & MCLENNAN COS

A A A,C A

7,676.0 A 903.9 A 365.0 A 330.3 A 9,943.0 A

3,888.2 D 456.7 A 117.6 158.2 A 4,115.8 A

8.7 12.9 22.3 16.2 11.2

3.1 11.2 19.2 16.6 3.7

(9.0) 3.5 11.7 5.5 2.3

230 336 747 449 290

253 325 668 426 283

262 324 550 392 294

252 282 469 356 282

226 245 388 286 254

Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.

31

JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

32

JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

Net Income
Million $ Yr. End DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC 626.0 128.5 172.4 87.0 818.0 642.0 28.6 150.6 56.2 369.0 577.0 188.5 128.8 81.4 176.0 342.3 98.7 2,517.0 283.1 188.4 77.3 1,192.9 255.5 159.0 56.3 1,235.3 240.2 106.9 19.0 (666.1) 123.6 663.0 146.2 110.3 75.0 1,540.0 428.2 14,014.0 715.9 1,324.0 2,745.0 207.8 10,477.0 479.4 1,221.0 2,274.0 367.9 9,983.0 350.6 1,145.0 2,138.0 321.2 9,265.0 185.7 969.0 (91.0) 125.0 5,519.0 259.7 NA 1,000.0 105.8 11.3 982.6 (8.2) 466.0 129.7 83.1 61.2 1,365.0 840.8 (218.7) 494.9 426.0 231.3 99.0 (4.8) 5,499.0 98.1 NA 549.0 30.2 25.6 (535.8) 380.9 147.0 125.3 53.9 32.3 974.0 4,208.0 88.1 1,762.8 258.7 2,061.0 9.0 (1,252.0) 156.4 955.0 78.8 1,166.6 117.7 1,696.0 55.6 412.0 65.8 215.6 20.8 405.6 1.0 1,062.0 24.1 (576.1) (23.8) 391.0 22.0 494.3 37.6 112.0 262.0 2,897.3 NA NA (99.0) 29.3 73.8 1,383.9 132.5 291.8 45.8 16.5 11.4 459.3 111.9 12.3 163.6 43.3 36.8 95.2 3.5 147.5 88.8 20.8 45.0 (7.9) 128.6 82.5 9.0 28.5 (12.8) 66.3 123.8 6.3 10.5 (38.4) 42.1 94.5 5.6 0.0 (58.0) 26.3 48.7 NA NA 30.2 55.6 14.4 NA NA (8.6) 11.4 11.6 NA 26.8 14.9 13.6 21.3 22.3 5.0 17.1 NA NA NM 27.9 3.0 6.2 7.9 7.9 10.9 26.4 22.5 5.9 NM NM 44.1 (2.3) NA 31.7 29.6 NM NM 53.4 NM 20.6 48.8 NA 38.0 62.5 31.0 NM (5.8) 33.6 0.5 26.2 21.9 (3.4) 288.8 127.0 1,647.5 134.6 880.0 156.7 80.0 1,393.9 107.1 691.1 83.7 72.8 1,648.7 73.0 620.2 62.2 38.7 1,255.4 71.3 339.2 36.0 10.5 667.3 35.9 301.1 30.6 12.4 411.4 30.2 (1,045.3) 13.4 31.1 313.7 25.7 439.0 36.0 15.1 18.0 18.0 7.2 56.7 59.1 32.0 34.8 NM 84.3 58.7 18.2 25.7 27.3 17.6 254.1 10.9 (51.3) 77.1 104.2 874.0 NM 65.4 NM 106.0 33.8 49.3 8.4 20.7 81.6 27.7 111.0 10.8 (2.5) 349.3 14.5 54.9 121.7 87.3 98.8 813.2 214.8 464.8 106.3 165.6 712.1 253.3 551.4 96.4 146.3 840.5 286.2 435.0 58.2 192.1 813.6 184.3 459.8 45.9 149.4 586.8 66.1 392.9 9.7 60.3 583.2 105.3 346.9 NA 36.5 322.2 105.8 234.7 NA 10.5 9.7 7.3 7.1 55.1 10.4 6.9 15.3 6.0 (17.9) (40.3) 14.2 (15.2) (15.7) ** 271 252 203 198 2,160 408 525 524 200 ** 41 294 300 ** 1,076 401 357 688 751 163 484 ** ** NM 1,168 134 182 214 215 281 1,045 763 178 930.0 241.5 437.8 287.7 191.7 602.0 243.9 539.0 485.3 76.5 584.0 214.4 558.2 349.1 182.5 374.0 160.9 683.3 451.0 86.9 238.0 35.5 NA 234.4 (302.4) 193.0 93.1 NA 167.3 0.1 223.8 74.0 NA 53.6 181.9 15.3 12.6 NA 18.3 0.5 37.0 21.0 NA 11.5 NM 54.5 (1.0) (18.8) (40.7) 150.6 416 327 ** 537 105 269 330 ** 906 42 ** 453 221 239 235 1,172 257 444 417 157 ** 11 265 615 ** 527 41 (253) 416 (195) 79 362 ** ** NM 643 105 86 193 220 62 913 493 80 2,301.0 4,993.0 875.9 699.5 2,528.0 1,028.0 1,765.0 751.0 544.9 1,825.9 1,152.7 3,356.0 725.8 438.8 1,548.4 1,417.5 2,720.0 628.1 337.2 808.8 76.5 1,465.0 432.6 175.0 222.9 (123.7) 1,167.0 432.9 (91.5) 111.5 289.7 2,075.0 276.3 90.3 486.2 23.0 9.2 12.2 22.7 17.9 NM 33.7 15.1 NM 86.7 123.8 182.9 16.6 28.4 38.5 794 241 317 775 520 355 85 272 604 376 398 162 263 486 318 261 290 ** 651 100 ** 401 261 271 185 626 234 526 284 141 ** (26) 232 572 ** 244 359 236 313 442 140 345 ** ** NM 543 76 89 181 198 412 781 714 38 2006 2005 2004 2003 2002 2001 1996 10-Yr. 5-Yr. 1-Yr. 2006 2005 2004 2003 489 131 227 374 166 167 218 ** 842 48 ** 526 253 174 196 465 124 400 277 77 ** (42) 119 857 ** 434 253 83 175 380 123 320 ** ** NM 365 26 (48) 93 227 319 669 657 335 Compound Growth Rate (%) Index Basis (1996 = 100) 2002 26 71 157 194 46 106 48 NA 437 (166) NA 409 182 63 167 269 34 213 140 69 NA (127) 76 654 NA 55 95 82 3 206 48 190 NA NA NM 361 15 71 (6) 160 283 504 536 297

Ticker

Company

PROPERTY CASUALTY‡ ACE * ACE LTD ALL * ALLSTATE CORP ABK * AMBAC FINANCIAL GP BER † BERKLEY (W R) CORP CB * CHUBB CORP

CINF CGI FNF FAF THG

* † † † †

CINCINNATI FINANCIAL CORP COMMERCE GROUP INC/MA FIDELITY NATIONAL FINANCIAL FIRST AMERICAN CORP/CA HANOVER INSURANCE GROUP INC

IPCC LFG MBI MCY ORI

§ § * † †

INFINITY PROPERTY & CAS CORP LANDAMERICA FINANCIAL GP MBIA INC MERCURY GENERAL CORP OLD REPUBLIC INTL CORP

PHLY PRA PGR RLI SAF

§ § * § *

PHILADELPHIA CONS HLDG CORP PROASSURANCE CORP PROGRESSIVE CORP-OHIO RLI CORP SAFECO CORP

SAFT SKP SIGI STC TWGP

§ § § § §

SAFETY INSURANCE GROUP INC SCPIE HOLDINGS INC SELECTIVE INS GROUP INC STEWART INFORMATION SERVICES TOWER GROUP INC

TRV UFCS XL ZNT

* § * §

TRAVELERS COS INC UNITED FIRE & CAS CO XL CAPITAL LTD ZENITH NATIONAL INSURANCE CP

REINSURANCE‡ RE † EVEREST RE GROUP LTD

MULTI-LINE GROUP‡ AFG † AMERICAN FINANCIAL GROUP INC AIG * AMERICAN INTERNATIONAL GROUP AIZ * ASSURANT INC GNW * GENWORTH FINANCIAL INC HIG * HARTFORD FINANCIAL SERVICES

HCC HMN LTR UTR

† † * †

HCC INSURANCE HOLDINGS INC HORACE MANN EDUCATORS CORP LOEWS CORP UNITRIN INC

INSURANCE BROKERS‡ AOC * AON CORP AJG † ARTHUR J GALLAGHER & CO BRO † BROWN & BROWN INC HRH § HILB ROGAL & HOBBS CO MMC * MARSH & MCLENNAN COS

Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available.

Return on Revenues (%)
Yr. End DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC 7.0 8.4 19.6 12.2 6.9 6.5 1.9 19.2 8.3 3.2 5.7 12.7 19.9 13.1 1.5 16.5 11.3 14.6 9.2 11.5 8.9 7.8 8.4 12.4 6.4 8.1 7.9 11.3 2.2 NM 4.2 6.8 11.3 20.0 13.3 13.3 10.1 12.3 9.0 12.0 10.4 5.1 9.7 6.4 11.6 8.4 9.4 10.3 4.8 10.4 9.4 9.6 11.4 2.7 8.3 NM 3.3 8.2 4.0 NA 6.3 15.8 1.5 5.8 NM 5.3 11.6 18.2 13.5 13.1 18.6 NM 9.9 10.4 9.0 5.0 1.8 1.5 2.8 1.2 0.9 4.7 1.6 3.4 3.1 2.4 3.8 10.1 6.3 4.5 16.8 13.9 18.4 24.3 8.5 1.5 NM 12.2 4.2 13.0 11.8 11.3 11.2 9.7 5.2 7.8 1.5 4.1 6.2 0.2 3.7 3.2 2.9 9.4 1.8 0.2 NM 6.1 NM 0.9 1.3 1.9 1.2 0.8 2.9 1.4 1.7 2.8 2.3 0.9 10.5 4.3 2.0 16.4 8.5 9.0 1.8 12.3 14.2 2.3 8.8 3.7 9.4 7.1 NM 8.2 3.8 8.4 4.8 NM 4.9 5.5 8.4 2.0 NM 3.6 5.3 9.0 8.6 1.8 3.6 3.1 4.6 7.7 0.4 3.5 6.9 3.6 3.9 NM 3.5 7.4 2.3 1.1 3.0 2.5 5.3 3.6 1.7 1.3 1.5 1.1 0.9 2.9 1.1 1.6 2.8 2.1 6.1 12.2 7.0 1.1 23.0 17.2 11.2 21.8 14.4 14.9 12.4 9.8 18.8 10.9 10.2 9.2 12.0 12.6 10.0 10.0 5.5 10.6 13.7 4.5 7.9 1.9 7.2 9.4 4.3 9.1 3.1 8.6 4.9 6.1 5.8 2.2 7.7 4.1 4.7 3.8 2.4 9.9 3.2 2.5 3.9 1.4 8.4 3.7 1.0 2.8 NM 2.1 13.2 2.6 2.6 2.2 1.0 3.6 3.8 1.6 1.5 0.8 NA NM 2.5 0.4 NM 1.5 2.5 5.4 13.6 8.0 10.7 3.0 0.4 5.4 2.3 0.9 1.0 NM 1.5 12.4 NA 0.4 0.9 1.2 0.1 2.6 0.7 1.0 1.1 NA 0.6 3.1 0.3 1.3 NM 1.9 6.6 13.4 9.2 10.1 8.5 2.5 30.3 6.8 12.3 10.1 4.2 31.4 8.5 14.5 10.1 4.2 41.0 10.7 12.5 7.6 5.6 46.2 8.1 14.0 6.5 5.8 48.0 3.7 14.3 4.4 2.5 2.2 5.1 3.8 5.4 4.7 2.1 6.6 5.0 5.0 4.9 2.7 8.5 4.3 3.4 8.3 3.3 6.4 5.0 2.8 8.3 3.3 2.7 4.7 13.5 7.4 11.8 12.9 11.1 29.1 13.5 25.4 18.6 21.9 25.3 6.2 15.9 5.5 22.3 17.8 14.9 18.5 31.3 18.2 15.9 14.9 19.0 9.9 16.1 18.3 16.0 17.0 12.7 11.9 15.7 20.4 15.1 14.6 23.8 12.4 4.6 3.4 7.3 16.0 12.9 8.5 6.1 2.9 16.2 11.9 9.5 5.2 5.9 11.8 9.8 11.4 7.3 2.7 8.4 2.8 NA 5.0 NM 5.6 6.0 6.7 3.6 1.9 3.7 6.5 9.8 7.0 0.4 3.7 6.3 11.3 6.3 0.7 2.5 5.8 NA 10.9 0.3 1.7 1.6 NA 7.5 NM 14.4 17.2 14.7 9.3 9.7 9.8 20.1 20.9 17.7 3.6 18.1 13.6 10.8 16.5 14.0 21.5 11.6 24.8 16.3 17.2 27.5 1.8 15.8 12.1 15.1 9.5 1.0 NM 25.8 NM 8.5 12.6 13.1 9.3 15.4 12.5 13.4 9.4 12.2 12.3 3.7 21.7 10.7 7.1 17.2 13.9 48.4 13.0 18.1 7.9 5.0 45.5 10.9 13.0 9.4 9.9 51.9 9.7 11.8 13.3 8.5 50.0 9.3 7.1 1.1 5.0 44.8 6.8 2.4 3.5 3.2 4.4 4.7 5.1 1.7 1.2 3.9 4.3 4.0 2.1 2.4 4.1 4.2 3.7 3.0 2.2 3.9 4.1 2.2 0.1 1.3 3.1 2.8 0.7 17.3 23.8 15.2 23.7 19.2 9.1 8.4 14.4 23.3 16.2 11.9 15.8 15.6 23.1 16.6 9.4 21.1 21.7 16.1 8.0 19.2 13.3 13.1 21.1 11.7 14.1 12.6 32.4 12.4 13.9 15.7 NM 15.8 12.5 12.7 5.8 17.9 15.3 26.6 14.4 16.3 13.2 11.2 8.0 16.5 13.4 10.2 10.6 12.5 12.0 27.3 23.0 17.3 3.4 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 2006 2005 2004 2003 18.2 14.3 15.9 22.3 10.5 6.3 18.9 NA 27.8 4.0 13.8 20.1 13.8 15.7 13.7 12.2 7.4 28.5 14.1 7.2 11.1 NM 9.5 22.2 55.3 15.3 15.3 5.5 18.8 15.4 16.9 14.2 7.2 NA NM 11.1 3.6 NM 6.8 15.7 25.5 24.8 20.1 29.4

Return on Assets (%)

Return on Equity (%)
2002 0.8 8.5 13.1 15.4 3.3 4.1 4.4 NA 19.0 NM 9.7 18.8 11.4 6.1 13.2 7.9 2.3 19.0 9.1 7.5 5.2 NM 6.8 21.3 NA 2.1 6.2 6.6 0.3 11.3 7.8 9.9 8.6 NA 10.1 12.9 2.3 9.4 NM 12.6 28.8 29.3 27.0 26.8

Ticker

Company

PROPERTY CASUALTY‡ ACE * ACE LTD ALL * ALLSTATE CORP ABK * AMBAC FINANCIAL GP BER † BERKLEY (W R) CORP CB * CHUBB CORP

CINF CGI FNF FAF THG

* † † † †

CINCINNATI FINANCIAL CORP COMMERCE GROUP INC/MA FIDELITY NATIONAL FINANCIAL FIRST AMERICAN CORP/CA HANOVER INSURANCE GROUP INC

IPCC LFG MBI MCY ORI

§ § * † †

INFINITY PROPERTY & CAS CORP LANDAMERICA FINANCIAL GP MBIA INC MERCURY GENERAL CORP OLD REPUBLIC INTL CORP

PHLY PRA PGR RLI SAF

§ § * § *

PHILADELPHIA CONS HLDG CORP PROASSURANCE CORP PROGRESSIVE CORP-OHIO RLI CORP SAFECO CORP

SAFT SKP SIGI STC TWGP

§ § § § §

SAFETY INSURANCE GROUP INC SCPIE HOLDINGS INC SELECTIVE INS GROUP INC STEWART INFORMATION SERVICES TOWER GROUP INC

TRV UFCS XL ZNT

* § * §

TRAVELERS COS INC UNITED FIRE & CAS CO XL CAPITAL LTD ZENITH NATIONAL INSURANCE CP

REINSURANCE‡ RE † EVEREST RE GROUP LTD

MULTI-LINE GROUP‡ AFG † AMERICAN FINANCIAL GROUP INC AIG * AMERICAN INTERNATIONAL GROUP AIZ * ASSURANT INC GNW * GENWORTH FINANCIAL INC HIG * HARTFORD FINANCIAL SERVICES

HCC HMN LTR UTR

† † * †

HCC INSURANCE HOLDINGS INC HORACE MANN EDUCATORS CORP LOEWS CORP UNITRIN INC

INSURANCE BROKERS‡ AOC * AON CORP AJG † ARTHUR J GALLAGHER & CO BRO † BROWN & BROWN INC HRH § HILB ROGAL & HOBBS CO MMC * MARSH & MCLENNAN COS

Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year.

33

JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

34

JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

Price / Earnings Ratio (High-Low)
Yr. End DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC 22-16 24-18 29-22 19-15 22-16 19-10 NM-88 29-19 25-20 50-39 16-10 17-12 25-17 17-14 NM-67 11-9 9-7 11-8 12-9 19-12 12-9 19-13 15-11 14-11 15-11 13-9 14-10 19-13 39-28 NM-NM 23-12 13-8 20-14 23-17 20-13 19-13 10-7 14-11 10-8 13-11 11-9 15-10 18-12 13-8 14-10 12-9 7-5 20-14 12-9 12-8 10-7 6-4 19-12 NA-NA NA-NA NM-NM 8-7 NM-NM 10-8 11-6 17-9 17-10 38-23 NA-NA NA-NA 18-9 17-11 86-49 14-8 NM-NM 24-8 25-15 30-19 22-13 23-14 5 10 12 7 11 19 12 18 6 42 30 91 17 20 46 9-7 13-8 8-6 8-5 15-11 NM-NM NM-NM 11-7 28-19 10-5 10-8 8-5 10-8 8-6 33-23 9-5 92-51 22-16 34-20 NM-NM 17 15 16 17 30 218 NM 19 NM 19 14 9 11 15 19 23 12 46 30 373 16 29 99 8-5 22-16 10-8 23-14 20-9 7-4 58-25 11-8 11-7 22-9 11-6 NM-NM 10-7 10-7 10-7 10-7 NM-NM 13-9 6-3 NA-NA 11-8 NM-NM 19-12 4-3 NA-NA 12 0 15 32 5 10 0 15 15 9 15 NM 15 10 2 68 11 24 18 5 10 7 8 3 15 13 32 11 47 33 49 16 18 291 18 NM 24 7 NA 17 15 71 29 5 11 6 0 0 NM 17 95 NM 91 29 44 15 17 52 11-7 13-12 14-10 11-8 9-6 15-10 20-14 18-11 13-9 11-8 18-12 16-12 13-9 15-11 11-8 19-10 25-15 15-8 13-9 16-13 29-16 53-35 20-15 17-12 16-11 0 0 2 14 15 0 0 2 15 17 0 0 1 18 17 0 0 2 14 30 0 0 3 19 32 0 NM 36 0 NA NA 41 64 NM 7 27 8 NA NA 26 15 150 13 NM 50 40 16 17 43 12-8 12-10 12-9 15-12 12-10 7-6 7-5 12-9 13-11 9-7 8-6 7-4 11-9 11-9 12-9 12-5 5-3 11-6 15-10 10-6 NA-NA 5-3 15-9 42-31 11-7 7 14 20 49 29 5 7 21 37 55 5 6 16 28 21 6 3 14 39 44 NA 3 17 98 19 0.8-0.6 1.4-1.1 2.2-1.7 3.9-3.2 2.9-2.5 0.0-0.0 0.0-0.0 0.1-0.1 1.7-1.3 2.2-1.7 2.3-1.5 0.0-0.0 1.8-1.5 2.3-1.4 0.6-0.3 2.5-1.8 1.8-1.2 2.5-2.1 3.2-2.1 0.7-0.6 1.5-1.0 1.1-0.9 0.9-0.7 1.0-0.9 2.1-1.8 1.3-1.1 2.6-2.0 0.8-0.6 4.5-3.4 1.9-1.4 4.9-3.8 0.8-0.6 1.3-1.0 2.8-2.1 9-8 9-7 11-7 16-12 15-11 13-11 10-7 8-6 10-6 30-21 13-11 10-6 NA-NA 9-6 11-7 18-14 8-6 NA-NA 5-4 19-6 32-22 39-27 NA-NA 7-5 NM-NM 25 27 49 24 8 35 20 8 14 17 31 20 NA 15 0 43 25 NA 8 0 61 114 NA 10 NM 3.3-2.7 3.8-3.0 6.5-4.5 2.0-1.5 0.7-0.6 3.1-2.6 2.8-2.1 1.3-1.0 2.4-1.5 0.8-0.6 0.8-0.6 1.4-0.9 2.3-1.8 3.4-2.8 7.4-5.8 0.0-0.0 0.0-0.0 0.1-0.1 1.6-1.1 2.1-1.6 2.3-1.4 0.0-0.0 1.9-1.3 2.2-1.4 1.0-0.4 2.7-1.9 1.7-1.0 3.3-2.5 2.9-1.8 0.5-0.4 1.8-1.3 1.1-0.7 1.0-0.7 1.0-0.8 1.8-1.3 1.6-1.0 2.6-2.0 0.9-0.6 4.2-3.1 2.9-1.6 4.2-3.4 0.8-0.5 1.4-1.1 2.5-2.0 9-7 8-6 11-9 11-8 9-8 17-11 24-19 12-9 11-7 11-8 12-8 11-9 13-10 9-7 10-8 8-5 11-8 12-7 9-6 15-9 NM-NM 20-15 17-12 12-9 60-40 14 18 8 4 16 27 48 8 4 19 21 23 7 5 19 15 24 7 7 32 347 41 9 10 107 2.0-1.6 2.8-2.1 0.9-0.7 0.5-0.4 2.1-1.8 2.3-1.6 2.6-2.0 0.9-0.7 0.6-0.4 2.4-1.7 2.6-1.8 2.6-2.2 0.7-0.6 0.8-0.6 2.5-2.0 2.8-2.4 3.3-2.1 NA-NA 2.5-1.7 0.0-0.0 0.8-0.6 1.4-0.9 1.8-1.4 3.2-2.5 2.4-1.8 0.0-0.0 0.0-0.0 0.2-0.1 1.5-1.2 2.0-1.5 2.6-1.4 0.0-0.0 2.2-1.5 1.5-1.0 0.3-0.2 3.5-2.4 2.1-1.2 2.9-2.4 3.4-2.1 0.6-0.4 1.9-1.5 0.5-0.4 0.9-0.7 0.3-0.2 2.1-1.6 1.2-0.9 3.0-2.2 1.2-0.8 4.5-3.3 3.3-2.0 3.9-2.9 0.9-0.6 1.3-1.0 4.4-2.0 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 2006 2005 2004 2003 3.1-1.7 3.1-2.1 1.0-0.6 1.1-0.7 3.4-2.1 3.0-2.4 4.0-3.1 NA-NA 2.3-1.6 0.0-0.0 1.1-0.5 1.0-0.6 2.3-1.3 3.9-2.6 6.8-4.3 0.0-0.0 0.0-0.0 0.2-0.1 1.6-1.0 2.3-1.9 2.6-1.8 7.0-2.5 2.8-1.9 2.2-1.1 NA-NA 2.2-1.6 2.7-1.9 3.0-2.2 5.2-3.0 0.8-0.4 2.8-1.9 0.5-0.3 NA-NA NA-NA 3.4-1.8 1.3-0.9 3.4-2.5 1.6-1.2 7.7-3.9 3.4-2.2 3.1-2.2 0.9-0.6 1.4-0.8 3.9-2.7

Dividend Payout Ratio (%)

Dividend Yield (High-Low, %)
2002 3.0-1.5 2.7-2.0 0.8-0.5 1.2-0.9 2.7-1.8 2.7-1.9 4.2-2.9 NA-NA 2.1-1.5 0.0-0.0 NA-NA 1.0-0.6 1.9-1.1 3.2-2.3 2.6-1.8 0.0-0.0 0.0-0.0 0.2-0.2 1.6-1.1 3.0-1.9 0.0-0.0 10.7-1.4 3.1-1.9 0.0-0.0 NA-NA NA-NA 2.6-1.8 3.2-1.9 4.5-3.1 0.8-0.4 2.8-1.7 0.4-0.2 NA-NA NA-NA 2.8-1.5 1.3-0.9 3.1-1.7 1.6-1.0 6.0-3.9 6.2-2.1 2.8-1.6 0.8-0.5 1.3-0.8 3.1-1.9

Ticker

Company

PROPERTY CASUALTY‡ ACE * ACE LTD ALL * ALLSTATE CORP ABK * AMBAC FINANCIAL GP BER † BERKLEY (W R) CORP CB * CHUBB CORP

CINF CGI FNF FAF THG

* † † † †

CINCINNATI FINANCIAL CORP COMMERCE GROUP INC/MA FIDELITY NATIONAL FINANCIAL FIRST AMERICAN CORP/CA HANOVER INSURANCE GROUP INC

IPCC LFG MBI MCY ORI

§ § * † †

INFINITY PROPERTY & CAS CORP LANDAMERICA FINANCIAL GP MBIA INC MERCURY GENERAL CORP OLD REPUBLIC INTL CORP

PHLY PRA PGR RLI SAF

§ § * § *

PHILADELPHIA CONS HLDG CORP PROASSURANCE CORP PROGRESSIVE CORP-OHIO RLI CORP SAFECO CORP

SAFT SKP SIGI STC TWGP

§ § § § §

SAFETY INSURANCE GROUP INC SCPIE HOLDINGS INC SELECTIVE INS GROUP INC STEWART INFORMATION SERVICES TOWER GROUP INC

TRV UFCS XL ZNT

* § * §

TRAVELERS COS INC UNITED FIRE & CAS CO XL CAPITAL LTD ZENITH NATIONAL INSURANCE CP

REINSURANCE‡ RE † EVEREST RE GROUP LTD

MULTI-LINE GROUP‡ AFG † AMERICAN FINANCIAL GROUP INC AIG * AMERICAN INTERNATIONAL GROUP AIZ * ASSURANT INC GNW * GENWORTH FINANCIAL INC HIG * HARTFORD FINANCIAL SERVICES

HCC HMN LTR UTR

† † * †

HCC INSURANCE HOLDINGS INC HORACE MANN EDUCATORS CORP LOEWS CORP UNITRIN INC

INSURANCE BROKERS‡ AOC * AON CORP AJG † ARTHUR J GALLAGHER & CO BRO † BROWN & BROWN INC HRH § HILB ROGAL & HOBBS CO MMC * MARSH & MCLENNAN COS

Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year.

Earnings per Share ($)
Yr. End DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC 1.98 1.32 1.23 2.42 1.49 1.99 0.30 1.09 1.57 0.69 1.80 2.06 0.94 2.27 0.34 2.08 1.63 0.81 2.17 2.89 1.65 1.49 0.62 2.09 2.52 3.08 2.29 3.80 4.17 1.78 1.80 1.69 3.70 1.63 1.32 1.89 3.51 1.13 0.44 (1.40) 1.83 1.13 0.28 1.50 (0.12) 11.64 13.90 29.77 28.95 1.80 3.40 (1.08) (5.02) (3.34) 10.45 12.03 22.95 26.46 2.48 3.67 (1.17) (6.04) (4.20) 3.63 5.38 5.65 2.90 8.89 1.80 4.03 3.53 2.57 7.63 3.33 3.83 2.53 2.34 7.32 3.02 3.55 1.70 1.98 (0.33) 1.21 2.11 31.29 NA 4.01 23.14 35.77 23.71 24.53 53.07 19.56 30.13 21.01 23.68 45.03 19.70 27.39 20.04 21.85 42.55 8.42 11.84 21.31 24.61 0.76 4.20 (0.21) (6.99) (5.85) 12.99 (3.79) 8.85 7.89 4.60 78.57 64.07 66.07 56.84 17.41 24.39 16.35 NA 35.00 6.68 10.67 19.29 21.75 (0.60) 4.40 0.20 (5.08) (0.66) 6.12 3.37 9.63 7.00 3.04 0.22 (9.14) 4.66 1.56 3.68 8.17 4.09 3.90 2.53 2.71 2.33 0.53 0.88 2.92 0.03 30.67 24.62 J 45.93 24.84 25.66 21.20 J 37.08 18.57 20.93 22.42 42.54 16.56 21.00 18.55 37.07 12.77 17.76 14.36 36.13 10.52 47.00 14.25 20.32 207.34 NA 35.31 5.70 10.53 19.88 21.56 (1.41) 4.44 0.08 (3.92) (0.72) 7.07 1.29 2.97 2.37 1.85 6.11 0.37 2.71 4.89 1.06 2.94 (0.84) 2.40 4.56 1.23 1.87 (1.37) 1.27 6.93 1.37 1.44 (4.12) 0.83 5.33 1.18 30.84 21.63 18.22 31.95 8.95 24.57 20.05 16.74 32.80 7.00 19.70 20.68 J 15.01 30.67 6.31 17.56 21.20 12.94 30.08 2.96 16.07 24.34 J 11.45 24.07 2.01 57.79-37.10 28.97-20.11 29.18-24.89 54.85-32.42 36.49-16.80 55.00-40.23 42.33-27.50 72.90-59.82 55.30-36.14 103.26-85.63 36.71-24.70 72.97-57.52 56.78-42.72 36.47-31.00 94.03-79.24 35.15-28.51 21.01-16.05 42.18-30.42 51.45-39.33 42.76-31.01 31.77-24.42 35.25-27.06 45.44-35.60 32.73-24.00 4.14 3.96 2.13 5.40 7.56 2.29 2.66 1.77 4.21 5.49 1.26 2.50 1.93 2.90 4.62 0.95 1.34 1.45 2.84 2.45 0.56 0.40 0.76 1.80 2.33 16.27 33.61 9.15 30.08 37.30 11.79 24.59 7.74 26.07 33.37 9.25 20.92 6.43 23.60 30.88 7.87 18.77 5.81 20.98 34.92 6.89 17.49 4.32 17.37 30.69 45.99-29.82 53.40-45.73 30.09-22.18 57.50-44.77 64.85-49.09 34.13-21.77 52.32-36.06 31.23-20.34 56.50-39.96 58.35-45.18 44.34-26.20 21.38-9.34 29.64-20.88 53.01-34.70 23.45-10.05 46.97-33.70 47.72-27.75 79.80-60.03 49.20-30.65 108.49-80.20 26.33-18.64 73.46-49.91 44.68-29.70 35.25-25.72 89.49-65.35 32.95-21.31 20.80-15.86 32.90-22.35 54.13-40.80 37.14-20.64 32.85-26.48 31.90-21.00 39.93-31.75 34.25-26.67 4.30 5.80 6.12 3.93 2.01 5.15 9.45 5.31 4.64 2.40 4.69 8.07 5.92 5.25 1.90 2.86 10.43 5.67 3.39 2.02 2.25 8.10 4.00 1.22 1.74 30.04 27.11 52.84 31.54 18.91 J 26.64 31.11 48.95 29.22 17.53 J 22.84 20.58 46.48 26.54 16.94 J 18.56 24.51 42.88 22.84 15.65 J NA 36.08 37.32 20.21 13.96 J 50.00-36.08 71.04-58.75 73.49-56.00 59.90-48.75 23.65-20.08 38.47-29.90 70.09-46.50 64.00-49.07 60.45-51.16 22.60-17.64 38.29-26.24 57.73-35.51 67.34-52.55 60.26-46.29 22.04-16.90 22.95-15.23 40.58-29.84 24.32-18.27 43.70-33.00 52.65-37.95 32.33-17.00 11.00-7.05 22.98-15.86 47.60-31.10 12.55-8.50 43.31-30.23 35.76-20.13 82.00-66.70 34.19-21.38 90.67-69.20 21.72-17.52 77.36-54.28 31.29-23.09 27.84-18.75 69.57-52.73 23.17-18.35 19.30-13.94 23.67-16.36 49.99-36.72 29.44-18.15 34.25-25.42 23.38-16.00 38.92-30.77 49.69-22.75 5.36 3.57 2.40 2.99 3.72 3.44 3.63 3.11 5.14 1.43 3.30 3.27 3.22 4.04 3.43 2.11 2.52 3.95 5.89 1.64 1.33 0.54 NA 3.27 (5.72) 39.35 22.53 10.05 6.41 36.75 34.98 19.39 7.57 6.95 33.95 35.64 16.73 NA 7.81 41.57 35.17 14.20 NA 6.51 39.47 31.34 12.27 NA 10.46 36.69 49.19-41.21 32.00-25.77 25.73-17.92 47.32-35.80 54.43-40.72 45.95-38.38 35.00-26.63 24.55-19.50 49.50-30.00 43.30-30.15 43.52-36.57 31.34-19.60 NA-NA 35.36-24.29 38.32-24.35 38.01-30.00 20.62-15.85 NA-NA 31.24-21.60 31.35-9.82 34.82-15.42 53.18-35.50 60.72-34.14 50.30-33.50 20.85-13.12 17.58-9.52 33.30-20.00 21.17-11.56 38.15-24.50 39.79-31.79 18.46-12.88 15.90-5.71 16.50-10.90 41.45-20.76 NA-NA 40.19-29.95 20.45-14.20 88.87-63.49 21.90-12.77 85.25-47.90 17.80-12.00 66.35-42.92 NA-NA NA-NA 59.27-31.64 21.39-14.87 16.95-12.43 16.49-12.75 42.50-21.50 26.79-17.41 32.74-23.28 18.83-13.38 43.89-27.16 54.97-38.27 7.01 7.89 8.22 3.65 6.13 3.36 2.67 6.94 2.86 4.61 3.95 4.82 6.62 2.32 4.07 5.10 3.87 5.90 1.80 2.26 0.19 2.07 4.08 1.02 0.65 35.36 33.80 58.49 16.95 32.57 28.17 29.97 50.85 13.08 28.56 25.11 30.73 46.13 10.82 25.07 21.87 27.89 39.71 8.64 21.43 13.98 23.52 34.20 6.85 18.67 61.90-47.81 66.14-50.22 90.75-73.74 40.95-30.61 54.73-46.60 56.85-38.36 63.22-49.66 82.92-62.20 32.86-20.58 49.72-36.51 45.98-31.80 51.99-42.55 84.73-63.80 21.07-15.53 38.73-31.50 42.80-23.59 43.27-30.05 72.21-43.79 16.41-10.84 34.65-20.89 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 44.98-22.01 41.95-31.03 71.25-49.86 12.09-8.86 39.32-25.95 42.90-29.41 21.06-14.73 NA-NA 23.20-16.14 50.80-7.04 NA-NA 38.30-25.25 60.11-34.93 51.15-37.25 18.67-13.01 16.05-8.75 21.24-14.10 15.12-11.19 30.20-22.23 38.00-24.99 15.40-12.00 29.60-3.73 15.74-9.68 22.50-15.05 NA-NA 48.57-27.11 19.68-13.75 98.48-58.45 21.50-14.67 76.50-42.59 20.20-11.93 80.00-47.61 NA-NA NA-NA 70.24-37.25 19.30-12.74 24.08-13.61 20.77-12.50 42.80-27.85 39.63-13.30 37.24-21.70 18.50-12.00 46.15-26.65 57.30-34.61

Tangible Book Value per Share ($)

Share Price (High-Low, $)

Ticker

Company

PROPERTY CASUALTY‡ ACE * ACE LTD ALL * ALLSTATE CORP ABK * AMBAC FINANCIAL GP BER † BERKLEY (W R) CORP CB * CHUBB CORP

CINF CGI FNF FAF THG

* † † † †

CINCINNATI FINANCIAL CORP COMMERCE GROUP INC/MA FIDELITY NATIONAL FINANCIAL FIRST AMERICAN CORP/CA HANOVER INSURANCE GROUP INC

IPCC LFG MBI MCY ORI

§ § * † †

INFINITY PROPERTY & CAS CORP LANDAMERICA FINANCIAL GP MBIA INC MERCURY GENERAL CORP OLD REPUBLIC INTL CORP

PHLY PRA PGR RLI SAF

§ § * § *

PHILADELPHIA CONS HLDG CORP PROASSURANCE CORP PROGRESSIVE CORP-OHIO RLI CORP SAFECO CORP

SAFT SKP SIGI STC TWGP

§ § § § §

SAFETY INSURANCE GROUP INC SCPIE HOLDINGS INC SELECTIVE INS GROUP INC STEWART INFORMATION SERVICES TOWER GROUP INC

TRV UFCS XL ZNT

* § * §

TRAVELERS COS INC UNITED FIRE & CAS CO XL CAPITAL LTD ZENITH NATIONAL INSURANCE CP

REINSURANCE‡ RE † EVEREST RE GROUP LTD

MULTI-LINE GROUP‡ AFG † AMERICAN FINANCIAL GROUP INC AIG * AMERICAN INTERNATIONAL GROUP AIZ * ASSURANT INC GNW * GENWORTH FINANCIAL INC HIG * HARTFORD FINANCIAL SERVICES

HCC HMN LTR UTR

† † * †

HCC INSURANCE HOLDINGS INC HORACE MANN EDUCATORS CORP LOEWS CORP UNITRIN INC

INSURANCE BROKERS‡ AOC * AON CORP AJG † ARTHUR J GALLAGHER & CO BRO † BROWN & BROWN INC HRH § HILB ROGAL & HOBBS CO MMC * MARSH & MCLENNAN COS

Note: Data as originally reported. ‡ S&P 1500 Index group. * Company included in the S&P 500. † Company included in the S&P MidCap. § Company included in the S&P SmallCap. # Of the following calendar year. J-This amount includes intangibles that cannot be identified.

The analysis and opinion set forth in this publication are provided by Standard & Poor’s Equity Research Services and are prepared separately from any other analytic activity of Standard & Poor’s. In this regard, Standard & Poor’s Equity Research Services has no access to nonpublic information received by other units of Standard & Poor’s. The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.

35

JANUARY 24, 2008 / INSURANCE: PROPERTY-CASUALTY INDUSTRY SURVEY

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