AON STUDY REPORTS HOMEOWNERS MARKETPLACE STILL NOT EARNING ITS COST OF CAPITAL

Aon Corporation announced the results of Aon Re Worldwide's comprehensive study of the U.S. homeowners marketplace. The results of the study reveal that the homeowners insurance industry, despite recent rate and underwriting actions, cannot reasonably expect to earn its cost of capital. While the personal lines insurance industry's cost of capital ranges from 11 percent to 13 percent, the homeowners line, after considering rate and underwriting actions filed through May/June 2002, is returning only 4.8 percent on capital. The study also shows that further homeowner rate increases or other underwriting actions may need to be taken by insurers to fully recover the cost of capital. The study is the first of its kind by Aon Re Worldwide and was undertaken to quantify the economic status of the market given the considerable rate increases and other underwriting changes that have occurred recently. The rate increases follow announcements of poor financial results for significant portions of the homeowners insurance industry that has suffered from catastrophes and tough competition among its carriers. The study also showed that homeowners insurers have made substantial progress from the lowest point in the current homeowners insurance crisis. Aon has developed a suite of tools to help insurers cope with the complex analytics that are now associated with the homeowners line. The comprehensive study included a review of the rate filings of the top five homeowners insurers in each state for the states that represent 80 percent of the U.S. population. Aon plans semi-annual updates of the study until the market stabilizes.

A.M. BEST E&S REVIEW REPORTS 35 PERCENT INCREASE IN DIRECT PREMIUM VOLUME

The U.S. excess and surplus lines market reported a 35 percent increase in direct premium volume in 2001, according to the "Annual Review of the Excess & Surplus Lines Industry-September 2002," released by A.M. Best Co. The increase in direct premium volume reflects the hardening primary property/casualty market and the migration of business from the standard market to the surplus lines market as capacity in the standard market continues to shrink. This means that opportunities abound for surplus lines' insurers to further increase premium volume at decidedly higher average rates. However, as business moves into the surplus lines market, loss cost inflation and higher reinsurance costs are expected to mitigate the benefit of the favorable rate increases. Large surplus lines' insurers continue to dominate the market, with the top 25 companies commanding 86 percent of the market. It is expected that many midsize surplus lines' insurers will continue to align with large, diversified organizations that provide greater operating and financial flexibility. Surplus lines' insurers maintain high levels of financial strength and strong operating results supported by sound underwriting guidelines and effective risk-management techniques. For instance, over the past five years, operating results for the surplus lines' market, based on a composite of domestic professional surplus lines insurers, has outperformed the overall property/casualty industry, evidenced by the five-year average pretax operating return on net premium of 19.8 percent, compared with 4.8 percent for the property/casualty industry. However, underwriting results for the surplus lines market have weakened in recent years, a result of competitive pricing pressures and a reduction in the level of favorable loss-reserve development on prior accident years, which was driven by the extended soft market in the 1990s. The median A.M. Best rating for the professional surplus lines composite remains at A (Excellent), vs. the industry's median rating of A- (Excellent).

DESPITE BETTER PRICING, A.M. BEST REPORTS P/C RATING DOWNGRADES OUTPACE UPGRADES

The property/casualty industry saw a gain in the number of rating downgrades issued by A.M. Best Co. for the second consecutive year, according to the special report, "Rating Downgrades Outpace Upgrades Despite Improved Pricing," released by A.M. Best. Rating activity for the property/casualty industry resulted in 1,442 rating actions: 69 percent affirmations, 24 percent rating changes (positive and negative) and 7 percent placed under review during the 12-month period ended July 11. Despite the challenging market conditions, the majority of insurers were able to maintain prior rating levels highlighting the relative capital strength that still exists within the industry. While the property/casualty industry lost a significant amount of capital through insured losses related to the World Trade Center catastrophe, it was not the trigger for the majority of the rating downgrades issued over the period. The leading factor, by far, was the adverse development of prior accident-year loss reserves, especially for commercial-lines insurers and reinsurers exposed to long-tailed liability lines, such as workers' compensation and medical malpractice. Additionally, increased loss costs related to auto-liability claims and the not-yet-realized exposures to mold claims have stretched the reserves of several personal-lines insurers. The magnitude of realized reserve deficiencies is, in some cases, staggering and has led to rapid declines in capitalization and A.M. Best ratings for several insurers. The industry's aggregate reserve deficiencies also highlight the recipe for disaster that existed within the marketplace during the mid-to-late 1990s, as companies lowered rates to either gain or maintain market share while an unforeseen increase in loss-cost trends occurred. Over the past year, the

number of rating units considered secure—rated B+ (Very Good) or higher—decreased from prior-year levels—to 84.3 percent of total ratings in 2002, from 85.6 percent of total ratings in 2001. Additionally, during the recent 12-month period, the number of rating units considered Superior (rated A+ or higher) decreased to account for less than 10 percent of total ratings for the only time in the recent five-year period.

RPNI HOSTS NOV. CONF. ON NAVIGATING THE HARD MARKET

RiskProNet Intl. (RPNI), is holding a conference on "Navigating the Hard Market" at the Scottsdale Conference Resort in Scottsdale, Ariz., Nov. 10-12. According to RPNI executive director Gary Normington, partner/members will examine current conditions and future trends in the market, including insurance legislation relating to terrorism coverage, reinsurance capacity, offshore domiciles, regional and national companies, and new technology. The event will be hosted by Phoenix Arizona RPNI partner/member Wick Pilcher Insurance Inc. and will be chaired by Bill Curtis, Sullivan & Curtis Inc. RPNI will welcome representatives from its network of 27 premier independent brokers located throughout the United States and Canada as well as from its overseas partner, the International Insurance Brokers Association (IBA), a network of 31 leading independent brokers worldwide. The two groups represent a combined force of 57 member companies and more than $8.5 billion premium in 100 countries worldwide to enhance international client services. Established in 1996, RPNI is the sixth largest broker/producer network in the United States. Joint member revenues were $497 million based on $4.8 billion in annual written premiums for its last fiscal year.

NAPSLO PRESENTS ASLI ACADEMIC AWARDS

The National Association of Professional Surplus Lines Offices (NAPSLO) recognized the top four graduates of the Associate in Surplus Lines Insurance (ASLI) program at its annual convention in Boston, Mass. Andrew Frazier, member of the board of directors of the Derek Hughes/NAPSLO Educational Foundation, presented the awards. The top four graduates in ASLI's 2002 class are Matthew Dunaway, underwriter, Burns & Wilcox, Ltd.; Daniel Adorno, ASLI, underwriter, The American Equity Underwriters Inc.; Linda Berryman, ASLI, underwriter, General Star Management Company; and Mark Pond, underwriting specialist, Scottsdale Insurance Company. Dunaway, the Distinguished Graduate, won $500 and a commemorative plaque. Adorno, Berryman, and Pond won Awards for Academic Excellence, which include a cash award of $250 and a commemorative plaque. The Insurance Institute of America (IIA) developed the ASLI program for surplus lines professionals with support from NAPSLO and the Derek Hughes/NAPSLO Educational Foundation. The foundation sponsors and funds the academic awards. The ASLI program consists of four courses and national examinations. The courses cover the purpose, evolution, regulation, and distribution of surplus lines insurance. They also cover surplus lines marketing issues, products, underwriting, and risk financing. Topics include ethics, insurance contract analysis, and insurance operations such as underwriting, loss control, premium auditing, reinsurance, and claims practices.