Homeowners Insurance Profitability-Is the P&C industry taking the right actions

and have we learned anything?

Randall E. Brubaker, FCASAon Re Services, Chicago

Best's Aggregates and AveragesCombined Ratios After Dividends

Homeowners Private Passenger Auto

Combined Ratio Change

Absolute Change

Combined Ratio Change

Absolute Change

1993 113.6 101.7 1994 118.4 4.8 4.8 101.3 (0.4) 0.4 1995 112.7 (5.7) 5.7 101.3 - - 1996 121.7 9.0 9.0 101.0 (0.3) 0.3 1997 101.0 (20.7) 20.7 99.5 (1.5) 1.5 1998 109.4 8.4 8.4 101.1 1.6 1.6 1999 108.2 (1.2) 1.2 103.5 2.4 2.4 2000 111.4 3.2 3.2 109.5 6.0 6.0 2001 121.7 10.3 10.3 107.9 (1.6) 1.6 2002 109.3 (12.4) 12.4 104.2 (3.7) 3.7

Averages 112.7 8.4 103.1 1.9

Best’s Aggregates and AveragesCombined Ratios

Prospective ROE’s at Current Rates

Homeowners Return On Equity Study

Countrywide ROE 6.3%

Based on review of rate filings of top five companies in each of 26 largest states.ROE’s assume equity capital and reinsurance consistent with A. M. Best “A” rating,and allocation of capital and reinsurance cost by state by Aon Re Services, net of FHCF,and excluding Earthquake shake loss.

Homeowners ROE AnalysisInput Data

Wisconsin Homeowner Rate Filings

Effective as of July 2003

Rate Change: Expected Underwriting Ratios:Effective Indicated Filed Loss & Fixed Variable Combined

Date Change Change Difference Expense Ratio Expense Ratio Ratio

Company A Jul-03 16.9 16.1 -0.8 63.8 29.5 93.3Company B Jan-03 20.6 20.6 0.0 84.1 13.9 98.0Company C Nov-02 21.9 11.9 -10.0 73.7 26.5 100.2Company D Dec-02 5.7 3.9 -1.8 65.8 30.2 96.0Company E Sep-02 23.8 23.8 0.0 67.3 24.5 91.8

Homeowners ROE AnalysisIndicated/Filed ROE’s

Wisconsin Homeowner Rate Filings

Effective as of July, 2003

Rate Change: ROE %:Effective Indicated Filed Indicated Filed

Date Change Change Difference ROE % ROE %

Company A Jul-03 16.9 16.1 (0.8) 13.4 13.1Company B Jan-03 20.6 20.6 0.0 10.3 10.3Company C Nov-02 21.9 11.9 (10.0) 7.9 2.5Company D Dec-02 5.7 3.9 (1.8) 11.2 10.3Company E Sep-02 23.8 23.8 0.0 14.9 14.9

Average 10.2

ROE's assume equity capital and catastrophe reinsurance consistent with A. M. Best "A" rating, with state cost allocations by Aon Re Services.

EquityCapital

ReinsuranceCapital

Retention

Catastrophe

Over the Top

Co-

parti

cipa

tion

Reinsured Layers

Equity/Reinsurance Requirements

Reserve Risk

Premium Risk

Non-Catastrophe

Rate Increases for 14% ROE

Homeowners Return On Equity Study

Countrywide Increase 12.9%

Recent Homeowner Rate Filings

Current Filing

Recent Prior Filing

Return on

Equity

Premium Written

to Surplus

Company A 7.0 2.0 12.8 1.54

Company B 9.4 16.6 1.21

Company C 11.1 14.0 0.82

Company D 9.0 7.0 12.9 1.11

Company E 4.9 15.0 2.20

Company F 5.8 -0.5 12.3 1.56

Company G 14.5 15.0 0.86

Company H 11.9 3.0 15.0 1.41

Company I 13.2 15.0 1.25

Underwriting Profit

Casualty Actuarial Society Ratemaking Principle

The rate should include a charge for the risk of random variation from the expected costs. This risk charge should be reflected in the determination of the appropriate total return consistent with the cost of capital and, therefore, influences the underwriting profit provision.

Alternative Charges for Random Variation

Direct Cost Methods - Before Reinsurance

• Capital Allocation Based on Volatility or PML

• Extra Underwriting Margin Based on Volatility

Net Cost Methods - Based on Cost of Reinsurance

• Net Cost of Reinsurance (may be based on judgement and inadequate)

• Total Cost of Reinsurance (combined with losses net of reinsurance) • Capital Allocation Based on Volatility (Net of Reinsurance)

14% ROE Requires:Premium Reinsurance

Underwriting to ExpenseState Profit Surplus Provision

Alaska 7.3% 1.71 0.0%Alabama 8.4% 1.54 3.6%Arkansas 7.4% 1.70 0.1%Arizona 7.3% 1.71 0.0%California 8.0% 1.61 2.6%Colorado 7.3% 1.71 0.0%Connecticut 8.6% 1.52 4.8%DC 7.3% 1.71 0.1%Delaware 7.9% 1.62 2.0%Florida 12.4% 1.15 17.0%Georgia 7.3% 1.70 0.2%

Underwriting Profit/Reinsurance CostRatemaking Provisions

From Aon ROE analysis - for illustration only

Florida Administrative Code4-170.003 Calculation of Investment Income

(And Underwriting Profit Provision)

(7) …(b) Alternatively, the expected rate of return for Florida business is to be considered reasonable if it is commensurate with therate of return anticipated for other industries having corresponding risk and it is sufficient to assure confidence in the financialintegrity of the insurer so as to maintain its credit and, if a stock insurer, to attract capital, or if a mutual or reciprocal insurer, toaccumulate surplus reasonably necessary to support growth in Florida premium volume reasonably expected during the time therates under scrutiny are in effect.

Five Year Homeowners Loss Ratios

Catastrophe Loss as Percent of Property Premium1992-2002

US Aggregate: 17.8%