MMC Capital
Casualty Actuarial Society
May 17, 2005
1
Property/Casualty Industry’s ROE is Lower than All
Industries’ ROE
20.0%
15.0%
10.0%
5.0%
20
03
20
04
E
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
19
85
19
84
19
83
19
82
19
81
19
80
0.0%
-5.0%
US P/C Insurers
Source: Insurance Information Institute, Fortune
All US Industries
2
Property/Casualty Industry’s ROE is Lower than Other
Financial Services Industries’ ROEs
17.3%
Asset Management
Investment Banks
16.8%
15.7%
Credit Cards
15.0%
Brokerages
Commercial Banks
14.0%
Life
12.2%
6.2%
P&C
0.0%
5.0%
10.0%
15.0%
20.0%
Source: McKinsey & Company
3
Insurance Industry can be an Attractive Sector for
Investments
• Large, growing and profitable
• Investment opportunities created by market dislocations,
restructuring and outsourcing trends
• Very complex, diversified and highly regulated
• Few private equity investors focus on this sector
• Wide disparity between best and worst performers
4
Performance of Property/Casualty Companies Varies Widely
Top Performing Quintile
20.8%
Second Quintile
13.1%
Third Quintile
9.3%
2.1%
Fourth Quintile
Fifth Quintile -4.5%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Source: McKinsey & Company
5
The Insurance Industry Is Made Up Of Winners And
Losers
Categories
Winners
Losers
Commercial Lines
AIG
Reliance/Kemper
Reinsurance
Renaissance Re
Trenwick/Gerling Re
Personal Lines
Progressive
American Horizon
Start-Ups
AXIS
ESG Re
Services
Sedgwick CMS
MRM
6
Underwriting Performance is the Key to Book Value
Growth
Components of Surplus Growth
Averages by Surplus Growth
Quintile
Average Annual Growth Rate
Top
Quintile
Second
Quintile
Third
Quintile
Fourth
Quintile
Bottom
Quintile
Surplus Growth from Operations
17.1%
8.5%
5.5%
2.0%
-8.9%
Net Income
15.3%
7.6%
4.8%
2.7%
-7.5%
Underwriting Contribution
5.8%
-1.6%
-5.1%
-8.5%
-23.0%
Investment Contribution
14.0%
12.6%
11.9%
13.4%
15.6%
Other Income Contribution
1.9%
0.7%
1.1%
0.3%
0.8%
Dividends to policyholders
-0.6%
-0.8%
-1.0%
-1.3%
-0.9%
-5.7%
-3.3%
-2.1%
-1.3%
0.1%
1.7%
0.9%
0.7%
-0.7%
-1.5%
Income Taxes
Non-income Sources of Generated
Surplus
Source: Dowling & Partners
7
The U.S. P/C Insurance Industry Is Large
U.S. P/C premiums were $423bn in 2004 (3.6% of U.S. GDP)
$450
$400
($ in billions)
$350
$300
$250
$200
$150
$100
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
U.S. P/C NPW (CAGR 6.6% )
Source: A.M. Best.
8
U.S. Property/Casualty Premiums Have Grown Faster
Than The U.S. Economy
U.S. P/C Insurance Premiums were $423bn in 2004
375
350
325
Index (1984 = 100)
300
U.S. Property & Casualty NPW CAGR: 6.6%
U.S. Nominal GDP CAGR:
5.6%
275
250
225
200
175
150
125
100
75
1984
1986
1988
1990
1992
Cumulative U.S. Nominal GDP Growth
Source: Bureau of Economic Analysis, A.M. Best and Insurance Information Institute.
1994
1996
1998
2000
2002
2004
Cumulative U.S. P/C NPW Growth
9
P/C Industry Has Earned $337 Billion In Net Income
Since 1985
U.S. P/C net income
$50
Average ROE = 8.6%
$40
$39
$37
$31
$30
($ in billions)
$30
$24
$19
$20
$13
$14
$15
$22
$21
$21
$14
$12
$11
$11
$10
$6
$3
$2
$0
($7)
($10)
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Source: Insurance Services Office and Insurance Information Institute. Net income includes realized capital gains. Average ROE is represents average ROE for 1986 – 2004 period.
10
P/C Insurance Underwriting Fundamentals Are Not
Correlated With Equity Markets
Change in commercial lines rates versus change in S&P 500
% Change from Previous 6 Months
25%
15%
5%
(5%)
(15%)
(25%)
Dec-87
Jun-89
Dec-90
Jun-92
% Change in S&P 500
Source: Goldman Sachs Research and Bloomberg.
Dec-93
Jun-95
Dec-96
Jun-98
Dec-99
Jun-01
Dec-02
Jun-04
% Change in Commercial Lines Rates Index
11
The Private Equity Industry Is Under-Invested In The
Insurance Industry
($ in billions)
Contribution of Insurance Premiums to GDP
U.S. (1)
Global
(2)
Insurance Premiums
$
890
$ 2,408
GDP
$10,446
$30,757
% of GDP
8.5%
7.8%
Private Equity Capital Invested (’93 – ’02) (3)
Total
Insurance Investments
$
Total Investments
$ 174.5
% of Total
(1)
(2)
(3)
(4)
8.9
5.1%
Ex. 9/11 (4)
$
5.6
$ 171.2
3.3%
Source: A.M. Best and Bureau of Economic Analysis 2002 Data.
Source: Sigma Research 2001 Data.
Source: PricewaterhouseCoopers/Venture Economics/NVCA MoneyTree Survey and MMC Capital.Excludes venture capital investments.
Excludes AXIS, Allied World, Endurance, Montpelier Re, Arch and Olympus.
12
Periodic Market Dislocations
1985
Liability Crisis
ACE, XL
1992-3
Property Catastrophe Reinsurance
Ren Re, Partner Re, etc.
2001
9/11
AXIS, Endurance, etc.
13
Post 9/11 Start-ups have Generated Attractive
Investment Returns
Return to Initial Investors
Return to IPO Investors
Arch
26%
16%
AXIS
25%
16%
Aspen
26%
14%
Endurance
22%
27%
Montpelier
32%
34%
---
13%
Platinum
14
P/C Industry Undergoes Constant Business
Realignments
Consolidation/Entering New Businesses








Travelers – Aetna P/C
AIG – Sun America, American General
Chubb – Executive Risk, Hiscox
St. Paul – USF&G, MMI
Berkshire Hathaway – General Re
ACE – Tempest Re, CIGNA P/C
XL – Mid Ocean, NAC Re
Fairfax Financial – Crum & Forster, Seneca, Odyssey Re
Divestitures/Exiting Businesses





Outsourcing
Market Dislocations




Liability crisis – ACE, XL
Property Catastrophe reinsurance – Mid Ocean, Partner Re,
Renaissance Re, IPC Holdings, LaSalle Re
9/11 – AXIS, Arch, Allied World, Endurance, Montpelier Re
Citigroup – Travelers
Zurich – Converium
St. Paul – Platinum
CNA – personal lines
Multi-lines:
– Aetna – P/C, Reinsurance
– Cigna – P/C
– Lincoln Financial – P/C





Claims Administration – CMS, Gallager Basset,
Crawford, Cambridge
Warranty Servicing – Signal, Asurion, Lock/line, NEW
Software & Information Services – AMS, Applied,
A.M. Best, ISO
Run-off Management – Castlewood, East Gate,
Resolution Group (Fairfax)
Investment management – Wellington, BlackRock,
New England, PIMCO
HR / Benefits – Hewitt, Towers Perrin
15
Ownership Changes – Top 50 Property/Casualty
Groups in 1985
Number of Ownership
Charges
Year of
1985-1990
Change in
1991-1995
Ownership
1996-2004
23
2
6
15
16
MMC Capital Investment Considerations
• Market Size
• Supply / demand imbalance
• Rate adequacy
• Historical profitability
• Management track record
• Key success factors
• Distribution
• Capital/rating
• Exit
17
Trident Has Invested Successfully In A Variety of
Underwriting Situations
Situation
Investment
Cost
Total Return
Multiple
IRR
$24.1
24.7
$232.8
414.9
9.9x
16.8x
NM
NM
62.3
234.2
3.8x
34.1%
Liability Crisis
- ACE (’85)
- XL (’86)
Property Catastrophe Crisis
- Mid Ocean (’92)
Post 9/11
- AXIS (’01)
- Arch (’01)
250.0
35.0
877.8
57.8
3.5x
1.7x
49.4%
49.5%
Company Restructuring
- Terra Nova (’93)
- Travelers (’96)
- Gulf (’02)
9.3
75.1
124.6
63.8
181.6
136.3
6.9x
2.4x
1.1x
47.6%
68.7%
5.3%
Market Restructuring / Lloyd's R&R
- Hiscox (’94)
- Venton (’94)
72.5
128.5
152.5
223.1
2.1x
1.7x
28.0%
113.4%
New Lines of Business
- Centre Re (’88)
- Castlewood (’01)
6.4
40.7
69.7
Unrealized
Distressed Seller
- SenTech (’96)
21.9
42.4
1.9x
$834.4
$40.7
$875.1
$2,686.9
3.2x
Total Realized
Total Unrealized
Total Realized & Unrealized
Valuations as of 3/31/2005
10.9x
Unrealized
NM
16.5%
18