Midwest Actuarial Forum
Aon Center
March 26, 2002
I.
Great Time To Be An Actuary
II. Market Overview
III. New World of Risk
IV. Where the Industry is Headed
It Is A Great Time To Be an Actuary
 Companies Looking for Ways To
– Quantify Risk
– Manage Risk/Reduce Volatility
– Price Their Product to Achieve Adequate ROE’s
It Is A Great Time To Be an Actuary
 Companies Looking for Ways To
– Quantify Risk
– Manage Risk/Reduce Volatility
– Price Their Product to Achieve Adequate ROE’s
 Rapid Growth in Model Development and Usage
– DFA
– Catastrophe Models
– Workers Compensation (Overlaid With Property
Exposures)
– Finite Reinsurance Covers
It Is A Great Time To Be an Actuary
 A Focus on
– Innovation
– Solutions
– Is It Commercially Feasible?
– Financial Actuaries
It Is A Great Time To Be an Actuary
 A Focus on
– Innovation
– Solutions
– Is It Commercially Feasible?
– Financial Actuaries
 Capital Management
Catastrophe Risk
and
Capital Management Overview
Underwriting
Strategies
Captives
Traditional
Reinsurance
Alternative
Reinsurance
Exposure
Swaps
Risk Transfer
Securities
Contingent
Capital
Management Overview
 Underwriting Strategy
 Risk Transfer
 Capital Resources
Is Volatility an Issue?
Earnings Volatility Peer Analysis
P&C Large Cap Sector
Actual Results Through Third Quarter, 2001
100%
80%
Earnings Per Share Quarterly Growth (Decline) Rate
Current Quarter versus Same Quarter Prior Year
60%
40%
20%
0%
-20%
P&C Large Cap
Sector Average
-40%
-60%
-80%
-100%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
96
97
98
99
00
01
02
Earnings Volatility Peer Analysis
American International Group
Actual Results Through Third Quarter, 2001
100%
80%
Earnings Per Share Quarterly Growth (Decline) Rate
Current Quarter versus Same Quarter Prior Year
AIG 37
60%
40%
P&C Large Cap
Sector Average
20%
AIG
0%
-20%
-40%
P/E
American International Group
Earnings Volatility
-60%
-80%
-100%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
96
97
98
99
00
01
02
Earnings Volatility Peer Analysis
CNA Financial
Actual Results Through Third Quarter, 2001
100%
80%
Earnings Per Share Quarterly Growth (Decline) Rate
Current Quarter versus Same Quarter Prior Year
CNA 7
60%
40%
20%
P&C Large Cap
Sector Average
CNA
0%
-20%
-40%
P/E
CNA Financial
Earnings Volatility
-60%
-80%
-100%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
96
97
98
99
00
01
02
Earnings Volatility Peer Analysis
200.0%
150.0%
Shareholder Value
100.0%
Five Year
Volatility
50.0%
0.0%
EPS Growth
Rate
-50.0%
-100.0%
P&C Large Cap Sector
-150.0%
-200.0%
AIG
ACE
HIG
XL
PGR
ALL
BRKA
CINF
SPC
CB
CNA
Market Overview
9/11
Pre
WTC
3/31
WTC/Enron
Aftermath
New World
Of Risk
Pre – 9/11
 Worsening Results
– Underwriting
– Investment
Industry Pretax Operating Income
Percent of NPE – Year 1975 - 2000
% of NPE
20
15
10
5
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
0
1 97
1 97
1 97
1 97
1 97
1 98
1 98
1 98
1 98
1 98
1 98
1 98
1 98
1 98
1 98
1 99
1 99
1 99
1 99
1 99
1 99
1 99
1 99
1 99
1 99
2 00
0
-5
-10
-15
-20
Underwriting Gain/Loss
Source: Best’s Aggregates And Averages
Industry Pretax Operating Income
Percent of NPE – Year 1975 - 2000
% of NPE
20
15
10
5
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
0
1 98
1 98
1 98
1 98
1 98
1 98
1 98
1 98
1 99
1 99
1 99
1 99
1 99
1 99
1 99
1 99
1 99
1 99
2 00
9
1 97
1
8
1 97
1 98
7
1 97
0
6
1 97
1 98
5
1 97
0
-5
-10
-15
-20
Underwriting Gain/Loss
Source: Best’s Aggregates And Averages
Net Investment Income
Industry Pretax Operating Income
Percent of NPE – Year 1975 - 2000
% of NPE
20
15
10
5
9
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
0
1 97
1 98
1 98
1 98
1 98
1 98
1 98
1 98
1 98
1 98
1 98
1 99
1 99
1 99
1 99
1 99
1 99
1 99
1 99
1 99
1 99
2 00
7
1 97
8
6
1 97
1 97
5
1 97
0
-5
-10
-15
-20
Underwriting Gain/Loss
Source: Best’s Aggregates And Averages
Net Investment Income
Pretax Operating Income
Pre – 9/11 (Cont’d)
 Worrysome Issues Beginning to Emerge
– Pricing Trends
– Adverse Development of Reserves
– Coverage Issues
– Mold, Cyber, Etc.
– Lower Investment Yields
9/11 Aftermath
 Initial Shock, Disbelief
 Little Immediate Impact for Many Companies
9/11 Aftermath
 Initial Shock, Disbelief
 Little Immediate Impact for Many Companies
 Some Market Segments in Disarray
– Losses Concentrated in Relatively Few Companies
 WTC
 Enron
– Spread Through Reinsurance Mechanism
Effects of Insured Catastrophe Losses on Industry Combined Ratios
Year 1982 - 2001
Combined Ratio
120
Est.
WTC
Andrew
115
Hugo
Northridge
110
105
Without Catastrophes
Source: Best’s Aggregates And Averages
Catastrophes
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
100
9/11 Aftermath
 Initial Shock, Disbelief
 Little Immediate Impact for Many Companies
 Some Market Segments in Disarray
– Losses Concentrated in Relatively Few Companies
 WTC
 Enron
– Spread Through Reinsurance Mechanism
 Dealing With the Terrorism Issue
 New Capital Flows
New Capital Since 9/11
7.5 Billion
10 Billion
7.2 Billion
New Market Entrants
Existing Markets
Additional (Raised & Pending)
9/11 Aftermath
 Increased Focus on Security
– Rating Agencies
– Regulators
– Customers
– Reinsurance
 Attempts to Better Manage Earnings Volatility
 Improved Risk Selection
New World of Risk
 Where Is the Rest of the WTC Loss?
 Deteriorating Reserves
 Ongoing Issues in
– Asbestos and Environmental, Lead, Mold
– Weather Volatility
– Pricing
– Regulation, Rating Agencies, etc.
New World of Risk
 Terrorism
 Permanent Change in
– Evaluation of Risk
– Some Lines of Insurance
 Where Are the Terminated Risks Going?
New World of Risk
 A Look Ahead
– Capital Flows
– Security Thresholds
– Distribution
 Retail
 Reinsurance
– Technology
– Limiting Factors