Professional Insurance Wholesalers Association of NYS Surplus Lines

Professional Insurance Wholesalers Association of NYS Surplus Lines Market Review David S. Blades, CPCU Senior Financial Analyst – P/C Ratings September 24, 2009

2008 Surplus Lines Market Highlights Direct Premium Written declined by the largest percentage since 1988. v. The combined ratios rose due to weather-related losses on natural-catastrophe exposed business. v Favorable loss reserve development reduced the combined ratio by 10. 7 points. v Total investment losses of 161. 3 million were generated, after a $2. 38 billion investment gain in 2007. v Policyholder’s surplus for the surplus lines market as a whole declined for the first time since 2001. v Despite the aforementioned negative factors, the surplus lines market generated a profit in 2007, albeit that profit represented a 67% decrease, yearover-year. v

Surplus Lines Composite vs. Total P/C Industry Combined Ratios

Surplus Lines Composite vs. Total P/C Industry Net Loss & LAE Ratios

Surplus Lines vs. Total P/C Industry Pretax Returns on Revenue

Surplus Lines vs. Total P/C Industry Total Return on Surplus

U. S. Surplus Lines – Market Share by Segment CY 2008

Surplus Lines vs. Commercial Lines – DPW (1988, 1998, 2008)

Surplus Lines Specialists – Operating Performance (2008) Group Name Admiral Ins. Group Markel Corp. Alleghany Ins. Hldg. Argo Group RLI Group UAI Group HCC Ins. Group IFG Cos. Western World AXIS Ins. Group Surplus Lines Total P/C Ind. Chg in DPW -14. 6% -9. 5% -14. 9% 5. 1% 8. 3% -34. 2% 4. 4% -27. 2% -17. 5% -4. 0% -12. 7% -2. 6% Loss/LAE Ratio 62. 4% 59. 9% 59. 8% 60. 3% 46. 7% 80. 9% 50. 5% 61. 7% 65. 0% 74. 6% 63. 6% 77. 1% Comb. Ratio 87. 6% 100. 1% 91. 2% 93. 9% 85. 7% 116. 8% 80. 3% 98. 7% 101. 0% 107. 9% 92. 8% 105. 1% Pretax ROR 31. 4% 12. 9% 22. 5% 26. 8% 30. 5% 16. 1% 39. 3% 19. 9% 21. 5% 19. 0% 26. 7% 7. 2%

U. S. Surplus Lines – Top 15 Companies (CY 2008) Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Company Name Group Name Lexington Ins. Co. Amer. Int’l Spec. Steadfast Ins. Co. Scottsdale Ins. Columbia Casualty Evanston Ins. Co. Landmark American AXIS Surpl. Lines Westchester Surpl. Lns. Colony Ins. Co. Illinois Union Ins. Co. Arch Specialty Ins. Co. Admiral Ins. Co. Indian Harbor Ins. Co. Nautilus Ins. Co. AIG Surplus Lines DPW $5, 962, 384 AIG Zurich Fincl. Svcs. Nationwide $1, 095, 157 CNA Ins. Cos. $712, 603 Markel Corp. $615, 722 Alleghany Ins. Hldg. $588, 217 AXIS Ins. Group $538, 352 ACE INA Group $517, 812 Argo Group $517, 599 ACE INA Group $508, 365 Arch Ins. Group $468, 808 W. R. Berkley Group $424, 139 XL America $405, 392 W. R. Berkley Group $378, 438 Surplus Lines Mkt. Share 17. 3% $1, 184, 418 $1, 179, 278 3. 1% 2. 0% 1. 7% 1. 5% 1. 4% 1. 3% 1, 2% 1. 1% 3. 4%

Domestic Professional Surplus Lines Composite Ratings Distribution Level A++ A+ Category Superior Subtotal A Excellent AExcellent Subtotal B++ Very Good B+ Very Good Subtotal Total Secure Ratings Total Vulnerable Ratings # of Rating Units 2 15 17 34 22 56 2 0 2 75 0 Using A. M. Best data as of August 1, 2009 Percentage 2. 6% 20. 0% 22. 6% 45. 3% 29. 3% 74. 6% 2. 6% 0. 0% 2. 6% 100. 0%

Total P/C Industry – Ratings Distribution Level Category A++ Superior A+ Superior Subtotal A Excellent AExcellent Subtotal B++ Very Good B+ Very Good Subtotal Total Secure Ratings B/BFair C++/C+ Marginal C/CWeak D/E/F Poor etc. Total Vulnerable Ratings Total Rating Opinions # of Rating Units Percentage 16 84 100 265 357 622 149 101 250 972 67 14 4 16 101 1, 073 1. 4% 7. 8% 9. 3% 24. 7% 33. 2% 57. 9% 13. 8% 9. 4% 23. 3% 90. 5% 6. 2% 1. 3% 0. 3% 1. 4% 9. 4% 100. 0% Using A. M. Best data as of August 1, 2009

Stamping Office Statistics – 2008 vs. 2007 State AZ CA FL ID IL MS MT NV NY OR PA TX UT WA TOTAL Premium (millions) 2008 2007 $444. 5 $540. 0 $5, 723. 5 $5, 864 $4, 400. 3 $4, 780. 3 $75. 8 $86. 3 $1, 062. 0 $1, 089. 9 $352. 3 $387. 5 $54. 2 $68. 8 $293. 1 $360. 2 $3, 416. 2 $4, 042. 4 $300. 03 $250. 2 $989. 0 $973. 7 $3, 282. 6 $3, 726. 2 $178. 5 $176. 3 $595. 1 $711. 4 $21, 168. 5 $23, 057. 2 % Chg -17. 5% -2. 4% -7. 9% -1. 0% -2. 6% -9. 1% -21. 2% -18. 6% -15. 5% 20. 0% 1. 6% -11. 9% 1. 2% -16. 3% -8. 2% Number of Items 2008 2007 69, 325 66, 554 466, 397 489, 998 1, 140, 124 1, 213, 651 14, 598 14, 747 102, 353 109, 294 86, 194 69, 614 13, 174 16, 261 28, 676 29, 878 215, 698 218, 566 38, 877 35, 378 170, 803 159, 076 850, 757 890, 105 19, 154 17, 829 93, 795 100, 893 3, 309, 925 3, 431, 844 % Chg 4. 2% -4. 8% -6. 1% -1. 0% -6. 4% 23. 8% -19. 0% -4. 0% -1. 3% 9. 9% 7. 4% -4. 4% 7. 4% -7. 0% -3. 6%

Stamping Office Statistics – First Half of 2009 vs. 2008 State AZ CA FL ID IL MN MS MT NV NY OR PA TX UT WA TOTAL Premium (millions) 2009 2008 $205. 2 $249. 3 $2, 252. 9 $3, 116. 8 $2, 351. 4 $2, 585. 8 $29. 2 $38. 9 $526. 5 $608. 4 $114. 0 N/A $171. 2 $156. 9 $34. 6 $24. 0 $116. 5 $360. 0 $1, 811. 3 $1, 841. 0 $105. 1 $148. 5 $453. 5 $504. 2 $1, 770. 9 $1, 577. 8 $90. 6 $88. 2 $595. 1 $711. 4 $10, 300. 0 $11, 373. 8 % Chg -17. 7% -27. 7% -9. 1% -24. 9% -13. 5% N/A 9. 1% 44. 2% -27. 2% -1. 6% -29. 2% -10. 1% 12. 2% 2. 7% -2. 5% -9. 4% Number of Items 2009 2008 34, 055 36, 059 217, 842 232, 638 550, 116 586, 476 6, 784 7, 386 57, 816 51, 854 11, 507 N/A 46, 586 40, 857 7, 130 5, 412 13, 212 14, 686 102, 059 111, 305 18, 230 19, 553 86, 231 88, 894 420, 852 426, 494 10, 023 9, 479 42, 170 43, 360 1, 625, 153 1, 673, 453 % Chg -5. 6% -6. 4% -6. 2% -8. 2% 11. 5% N/A 14. 0% -31. 7% -10. 0% -7. 5% -6. 8% -3. 0% -1. 3% 5. 7% -1. 5% -2. 9%

Key Federal Legislation Impacting the Surplus Lines Market n Non-admitted and Reinsurance Reform Act n n National Association of Registered Agents and Brokers Reform Act (NARAB II) n n Rep. Paul Kanjorski, D-Pa, introduced the bill in May of 2009 Insurance Industry Competition Act of 2009 n n Reintroduced in the House of Representatives in 2009 Insurance Information Act of 2009 n n Passed by the House on 9/9/09; Expected to be voted on in the Senate Reintroduced in the House of Representatives in March of 2009 National Insurance Consumer Protection Act n Introduced in the House of Representatives in April of 2009; the Senate has yet to introduce a companion bill

Current Distribution Issues Impacting the Surplus Lines Market n n n The Impact of the Recession Submission Activity has Increased but Revenue is Down The Admitted Market is still Competing Aggressively on Some traditional Surplus Lines Business Mergers and Acquisitions Utilizing Current Market Conditions to Spark Innovation Outlook (Near-term)

U. S. Admitted Companies vs. Surplus Lines – Annual Impairment Count (1977 -2008)

Primary Causes of Impairments – Surplus Lines, Admitted & Total Industry Primary Cause Affiliate Problems Alleged Fraud Catastrophe Losses Deficient Reserves Investment Problems Miscellaneous Rapid Growth Reinsurance Failure Significant Chg. In Business 26 Subtotal Unidentified 314 TOTAL Source: A. M. Best Total Industry # of Cos. 54 53 48 241 41 46 77 24 4% 610 924 % of Total 9% 9% 8% 40% 7% 85 13% 4% 1 100% 9 Surplus Lines # of Cos. 8 7 2 19 5 2 4 2 2% 50 59 % of Total 16% 14% 4% 38% 10% 4% 8% 4% 25 100% 305 Admitted Mkt. # of Cos. 46 46 46 222 36 44 73 22 % of Total 8% 8% 8% 40% 6% 8% 13% 4% 4% 560 100% 865

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