Florida Property Insurance Markets

End of 2007 HurricaneSeason Update

Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org www.iii.org

Insurance Information InstituteMedia Briefing

November 29, 2007

Presentation Outline

• Insured Catastrophe Loss Review2007 Season in Historical Context

• Florida Hurricanes & Insurer Profitability

• Property/Casualty Insurer Profitability

CATASTROPHIC LOSSES

Catastrophic Losses in the US: Upward Trend is Certain and Florida Could Be the Biggest

Part of the Increase

Most of US Population & Property Has Major CAT Exposure

Florida is the most catastrophe prone

state in the US

U.S. Insured Catastrophe Losses*$7

.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$7.0

$100

.0

$61.

9

$9.2

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

07**

20??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. **Estimate through 11/28/07. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions

2006/07 were welcome respites. 2004/2005 were the worst years ever for insured

hurricane losses, but the worst has yet to come.

$100 Billion CAT year will occur

eventually, likely involving FL

Global Insured Catastrophe Losses by Region, 2001-2006

0

10

20

30

40

50

60

70

80

90

2001 2002 2003 2004 2005 2006

Seas/Space

Africa

Oceania/Australia

South America

Asia

Europe

North America*

Notes: 2001-03 figures for N. America include US only. 2001 figure includes only property losses from 9/11. Source: Insurance Information Institute compiled from Swiss Re sigma issues.

North America accounted for 73% of global catastrophe

losses 2001-2006

Florida accounted for a significant

share of global CAT losses in 2004/05

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1987-2006¹

Fire, $6.6 , 2.2%

Tornadoes, $77.3 , 26.0%

All Tropical Cyclones, $137.7 ,

46.3%

Civil Disorders, $1.1 , 0.4%

Utility Disruption, $0.2 , 0.1%

Water Damage, $0.4 , 0.1%Wind/Hail/Flood,

$9.3 , 3.1%

Earthquakes, $19.1 , 6.4%

Winter Storms, $23.1 , 7.8%

Terrorism, $22.3 , 7.5%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2006 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.

Insured disaster losses totaled $297.3 billion from

1987-2006 (in 2006 dollars). Hurricanes & tropical storms accounted for

$137.7 billion of these—near half of the total.

Distribution of US Insured CAT Losses: TX, FL vs US, 1980-2006*

Texas, $25.6 , 10%

Florida, $57 , 22%

Rest of US, $176 , 68%

Florida accounted for 22% of all US insured CAT losses from 1980-2006: $57B out of

$249.3B

*All figures (except 2006 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

$ Billions of 2005 Dollars

Top 10 Most Costly Hurricanes in US History, (Insured Losses, $2005)

$3.5 $3.8 $4.8 $5.0$6.6 $7.4 $7.7

$10.3

$21.6

$41.1

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Georges(1998)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Andrew(1992)

Katrina(2005)

$ B

illi

ons

Sources: ISO/PCS; Insurance Information Institute.

Seven of the 10 most expensive hurricanes in US history impacted

Florida:

Andrew, Katrina, Wilma, Charley, Ivan, Frances & Jeanne

Historical Hurricane Strikes in Miami-Dade, FL, 1900-2007

Source: NOAA Coastal Services Center, http://maps.csc.noaa.gov/hurricanes/pop.jsp?PopStormStates=FL&PopStormCounty=; Insurance Info. Institute, accessed 11/28/07.

Population of Miami-Dade County is 10

times what it was when the last period of

intense activity began in the 1930s, lasting 30

years

Historical Hurricane Strikes in Monroe County, FL, 1900-2007

Source: NOAA Coastal Services Center, http://maps.csc.noaa.gov/hurricanes/pop.jsp?PopStormStates=FL&PopStormCounty=; Insurance Info. Institute, accessed 11/28/07.

Population of Monroe County is 4 times what

it was when the last period of intense

activity began in the 1930s, lasting 30 years

$20.0$24.0 $26.0

$33.0 $33.0 $34.0 $35.0$41.1 $42.0

$80.0

$0$10$20

$30$40$50$60

$70$80$90

$ B

illi

ons

With rapid coastal development,

$40B+ storms will be more common

Source: AIR Worldwide; PCS.

(Billions of 2005 Dollars) Majority of worst-case scenarios

involve Florida

Insured Losses from Top 10 Hurricanes Adjusted to 2005 Exposure Levels

2007 Hurricane Season:A Welcome Respite

Source: www.wunderground.com, accessed 11/27/07; Insurance Information Institute

A Sigh of Relief

The 2007 season saw 14 named storms (just 1 less than in

2004) including two rare Category 5

storms, that would have been

devastating if they had struck the US

2004 Was Another Busy, Destructive & Expensive Hurricane Season

Source: www.wunderground.com, accessed 11/27/07; Insurance Information Institute.

There were 15 named storms in 2004, the worst in Florida’s

history, just one more than in 2007

Total Value of Insured Coastal Exposure (2004, $ Billions)

$1,901.6$740.0

$662.4$505.8

$404.9$209.3

$148.8$129.7$117.2$105.3

$75.9$73.0

$46.4$45.6$44.7$43.8

$12.1

$1,937.3

$0 $500 $1,000 $1,500 $2,000 $2,500

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide

Florida leads the way for insured coastal

property at more than $1.9 trillion in 2004 and is expected to

double by 2014

New Condo Construction inSouth Miami Beach, 2007-2009

• Number of New Developments: 15

• Number of Individual Units: 2,111

• Avg. Price of Cheapest Unit: $940,333

• Avg. Price of Most Expensive Unit: $6,460,000

• Range: $395,000 - $16,000,000

• Overall Average Price per Unit: $3,700,167*

• Aggregate Property Value: At least $6 Billion*Based on average of high/low value for each of the 15 developments

Source: Insurance Information Institute from www.miamicondolifestyle.com accessed April 5, 2007.

FLORIDA HURRICANES & INSURER

PROFITABILITY:

Selling Home Insurance in Florida is Challenging

($9.30)

($3.77)

$2.96 $3.40

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

$6

2004 2005 2006 2007E

Underwriting Gain (Loss) in Florida Homeowners Insurance,

2004 - 2007E*

*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.

$ B

illi

ons

Over the past four years, underwriting losses

exceeded premiums in Florida by an estimated

$6.7 billion

Private Insurers**

($10.60)

($0.21)

$0.69 $0.43$0.86 $1.08 $1.23 $1.28 $1.43 $1.15 $1.38 $1.76

($9.30)

($3.77)

$2.96 $3.40

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

$4

$6

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E

Underwriting Gain (Loss) in Florida Homeowners Insurance,

1992-2007E*

*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.

$ B

illi

ons

Florida’s homeowners insurance market produces small/modest

profits in most years and enormous losses in others

Private Insurers**

-$10.6-$10.8-$10.1-$9.7

-$8.8-$7.7

-$6.5

-$5.2

-$3.8-$2.7

-$1.3

$0.5

-$8.8

-$12.6

-$9.6

-$6.2

($14)

($12)

($10)

($8)

($6)

($4)

($2)

$0

$2

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E

Cumulative Underwriting Gain (Loss) in Florida Homeowners

Insurance, 1992-2007E*

$ B

illi

ons

It took insurers 11 years (1993-2003) to erase the UW loss

associated with Andrew, but the 4 hurricanes of 2004 erased the prior 7 years of profits &

2005 deepened the hole.

Regulator under US law has duty to allow rates

that are “fair,” “not excessive” and “not

unduly discriminatory.”Reality is that regulators

in CAT-prone states suppress rates.

*2007 estimate by Insurance Information Inst. based on historical loss, expense and premium data for FL.**Does not include Citizens Property Insurance Corporation results.

Private Insurers**

Rates of Return on Net Worth for Homeowners Ins: US vs. Florida

Source: NAIC; 200/6 US and FL estimates from the Insurance Information Institute.

-54.3%

-2.8%

-183.3%

-714.9%

-53.4%

36.0%

-800%

-700%

-600%

-500%

-400%

-300%

-200%

-100%

0%

100%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06E

US Florida

Averages: 1990 to 2006E

US HO Insurance = -0.9%

FL HO Average = -36.5%

Andrew

4 Hurricanes

Wilma, Dennis, Katrina

1990 – 2006E

Share of Losses Paid by Private Reinsurers, by Disaster*

30%25%

60%

20%

45%

0%

10%

20%

30%

40%

50%

60%

70%

Hurricane Hugo(1989)

Hurricane Andrew(1992)

Sept. 11 TerrorAttack (2001)

2004 HurricaneLosses

2005 HurricaneLosses

*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.

Reinsurance is playing an increasingly

important role in the financing of mega-CATs; Reins. Costs

are skyrocketing

The Facts About Homeowner Insurer Profits and Losses in Florida

• During the period from 1992 through 2007, private home insurers in Florida paid an estimated $6.2 billion more in claims than they received in premiumsThis $6.2 billion underwriting loss remains even after including

$2.96 billion in profits in 2006 and $3.4 billion in 2007 (est.) It will take until 2009 for insurers just to get to the breakeven point

for the 15 year period 1992-2009 even if there no storm losses in 2008 and 2009

• Florida Remains a Money-Losing Proposition for Most Home Insurers in Terms of ReturnThe average annual rate of return on FL homeowners insurance

was -36.5% from 1990-2006, despite a profitable 2006Even if insurers were to earn a 40% rate of return (implying no

storm activity) every year, the average return for insurers will not exceed 0% until 2022. To reach the current 5% risk-free return on 10-year Treasury bonds would take until 2026 and a 10% return is unachievable until 2033

Florida State-Run Insurer Residual Deficits 2004/2005 (Millions of Dollars)

Source: Insurance Information Institute research.

-$516

-$1,425

-$1,770-$2,000

-$1,800

-$1,600

-$1,400

-$1,200

-$1,000

-$800

-$600

-$400

-$200

$0Florida Hurricane Catastrophe Fund (FHCF) Florida Citizens

2004 2005

The hurricanes seasons of 2004/5 weakened the FL Hurricane CAT

Fund and Citizens, producing a gross state-run insurer deficit of $3.7 billion

FL’s guarantee fund will also assess for at

least $400 million

Florida Citizens Exposure to Loss (Billions of Dollars)

Source: PIPSO; FL Citizens; Insurance Information Institute. *As of March 31

$408.8$434.3

$210.6$206.7$195.5$154.6

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

2002 2003 2004 2005 2006 Q1 2007*

Exposure to loss in Florida Citizens more than doubled by Q1 2007 relative to year

end 2005

Pre- vs. Post-Event in FL for 2007 Hurricane Season

$12.

4

$15.

0

$17.

6

$25.

8

$9.9

$14.

6

$24.

1

$31.

4

$34.

5

$37.

4

$54.

2

$10.9$10.4$10.1$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

1-in-20 1-in-30 1-in-50 1-in-70 1-in-85 1-in-100 1-in-250

Pre-Event Funding Post-Event Funding (Assessments & Bonds)

Bil

lion

s

Total = $20.0 Billion

Notes: Pre-event funding includes funds available to Citizens, FHCF and private carriers plus contingent funding available through private reinsurance to pay claims in 2007. Post-event funding is on a present value basis and does not includefinancing costs. Probabilities are expressed as “odds of a single storm of this magnitude or greater happening in 2007.”Source: Tillinghast Towers Perrin, Study of Recent Legislative Changes to Florida’s Property Insurance Mechanisms, 3/07.

$35.0B

$25.0B

$43.8B $49.5B

$55.0B

$80.0BThere is a very significant likelihood of major, multi-

year assessments ahead

Cost of Borrowing for State Could Exceed Expectations

Source: Insurance Information Institute; Federal Reserve Board of Governors.

$766.7$854.1

$932.6$1,044.0

$1,158.4

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

4.23% (Jan2007 Rate)

4.64% (Aug2007 Rate)

5.00% 5.50% 6.00%

If FL were to need to borrow money to fund state insurer deficits, the cost was 11.4% higher ($87.4 million) per billion

borrowed in August (midst of credit crunch & hurricane season) than in January when legislation was passed

Interest Charge to Borrow $1 Billion at State/Municipal Bond Rates, Amortized Over 30 Years

If state/muni bond rates rise to 6%, interest cost would be 51% higher than in January 2007, adding $392 million to the cost of each billion borrowed

Mill

ion

s

Flood Insurance

Analysis of Flood Policy Purchase and Lapse Rates Since Katrina in Florida

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000JU

L 9

3 P

IF

JA

N 9

4 P

IF

JU

LY

94 P

IF

JA

N 9

5 P

IF

JU

L 9

5 P

IF

JA

N 9

6 P

IF

JU

L 9

6 P

IF

JA

N 9

7 P

IF

JU

L 9

7 P

IF

JA

N 9

8 P

IF

JU

L 1

998 P

IF

JA

N 1

999 P

IF

JU

L 1

999 P

IF

JA

N 2

000 P

IF

JU

L 2

000 P

IF

JA

N 2

001 P

IF

JU

L 2

001 P

IF

JA

N 2

002 P

IF

JU

L 2

002 P

IF

JA

N 2

003 P

IF

JU

L 2

003 P

IF

JA

N 2

004 P

IF

JU

L 2

004 P

IF

JA

N 2

005 P

IF

JU

L 2

005 P

IF

JA

N 2

006 P

IF

JU

L 2

006 P

IF

JA

N 2

007 P

IF

JU

L 2

007 P

IF

*Mandatory purchase of flood coverage for structures in floodplains with federally backed mortgagesbecame effective in 1993. NFIP National Advertising Campaign began in 1993. PIF= Policies In Force.Source: NFIP; Insurance Information Institute

Florida: NFIP Flood Policies in Force: July 1993 – July 2007*

Surge in Sales: Katrina Effect

Hu

rric

ane

Kat

rina

Au

gust

29,

200

5

NFIP Flood Policy Growth in Gulf States Since Katrina*

26.69%

14.15%

29.04%

80.24%

40.54%

21.62%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Alabama Florida Louisiana Mississippi Texas Total GulfStates

*Change from July 2005 through August 2007.Sources: NFIP ; Insurance Information Institute.

The number of flood insurance policies sold in the Gulf

states in the 2 years following Katrina

increased by 21.6%

Percentage of NFIP Flood Policies Issued Since Katrina That Are Not Renewed*

23%

32%

17%19%

25%

8.6%

0%

5%

10%

15%

20%

25%

30%

35%

Alabama Florida Louisiana Mississippi Texas US***Policies issued since July 2005 as of August 2007. **US figure is nonrenewal rate for all policies in force, average over 12 month period ending August 2007.Sources: NFIP ; Insurance Information Institute.

Flood policy nonrenewal rates in Gulf states are surprisingly high

P/C INSURER PROFITABILITY

National Perspective

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

07F

08F

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2008E

*2007 is actual first half ROAS of 13.1%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

4 Hurricanes

Katrina, Rita, Wilma

P/C profitability is cyclical, volatile and vulnerable

Insurer Financial Strength Benefits Consumers

• Profits compensate shareholders for the assets they put at risk and encourages new capital to enter

• Profitable companies can access capital markets under favorable terms after mega-CATs or if market conditions are poor (e.g., post-9/11); Others will fail, are dissolved or acquired

• Preferred treatment by reinsurers• Profits lead directly to increased capacity• Profits build contingent capacity for mega-CATs• Profitable companies have higher financial strength and

credit ratings

Key Messages on Profitability

• All of the profits earned in 2004 and 2005 and most of the profits

in 2006/7 were earned in states and from types of insurance

unaffected by the hurricanes

• 2006and 2007’s respite in hurricane activity provides insurers and

reinsurers with the ability to rebuilding their claims paying

resources

• By law, the rates charged for insurance are based exclusively on

past and expected losses in that state. Profits in other states or

from other types of insurance cannot be used to subsidize losses in

the Florida homeowners insurance market. Likewise, losses in

other states cannot be subsidized by Floridians

Insurance Information Institute On-Line

If you would like a copy of this presentation, please email me at bobh@iii.org