Welcome to the Equity Risk Partners annual review of the State of the Insurance Market. For the 2007 version, we would like to have you join us for a game of Jeopardy.

Our categories for today’s Jeopardy round will be:

• Market Overview
• Property Insurance
• Terrorism
• Directors’ & Officers’
• Liability
• Workers’ Compensation
• Mystery Question

So, grab your TV tray and your Hungry Man dinner and tune in to the “ERP Network.”

Contestant: “May I have Overview for $200?”
Moderator: “You may. The answer is, “The hills are alive with the Sound of Music.”

Contestant: “What is the famous Julie Andrews movie?”
Moderator: “No”

Contestant: “What is the response of insurance buyers to the 2007 market?”
Moderator: “Correct”

As we suggested last year, 2007 appears to be a lot like 2006 – softening in most places and hard in just a few (kind of like Grandma’s fruit cake). And, also like Grandma’s fruit cake, we can expect to see it again in 2008. After 2008, all bets are off. The uncertainty of future hurricane seasons, an overdue California earthquake, the threat of domestic terrorism, and excess capacity in the market are indicative of the hard market to come.

Year after year, we reiterate the importance of focusing on the process of obtaining your coverage. It is very beneficial to get thorough, well-prepared submissions into the underwriters early. For the harder lines of business (most property, NY workers’ comp, some liability), extra time is imperative to adequately shop the market and negotiate coverage terms. For the softer lines of business, extra time will allow insureds to fully take advantage of the competition among carriers.

The Midwest remains very competitive due to a heavy investment by national carriers (they like the low cat exposure) to compete against the regional carriers (who don’t have to balance cat vs. non-cat losses as much as the nationals). They do have a cat exposure in tornados, flood, and quake, but it isn’t as common or catastrophic in one event as a hurricane.

Lastly, insureds can expect to receive improving terms and conditions as carriers try to slow the decline in rates by looking to non-economic incentives.

Contestant: "Moderator, I’ll take Property Insurance for $600.”
Moderator: “The answer is, “Hannah and her sisters.”

Contestant: “What are the names of the hurricanes that DID NOT hit the US in 2006?”
Moderator: “Correct”

Last year in this space, we discussed the possibility of a $100 billion loss year. Not so fast, Al Gore! Global warming and rising temperatures of the oceans failed to produce a hurricane that hit the US in 2006 and losses were $0. However, Katrina and Rita were such devastating storms that the market is still recovering. Catastrophe prone areas will likely still see rates rise another 15% - 35%. The higher end rate increases will be reflective of “true” cat exposure.

Did you try to buy a PS3 for your kids this Christmas? Well, then you will be prepared for your experience in trying to obtain quality coverage in the coastal/cat prone regions from Texas to the Carolinas.

Think it’s boring living in the Midwest? Well, it might be. But, at least their property insurance rates are low. With very little cat exposure, we expect 5% - 12% rate decreases. That’s good news for the portfolio company heavy rust belt area. It is important to get your renewal submissions in early to take advantage of the softening pricing as underwriting discipline still exists.

California Quake? Premiums remain high and capacity remains limited.

Contestant: “I’ll take Terrorism for $200, please.”
Moderator: “The answer is, “Epic Movie.”

Contestant: “What could be the most terrifying thing to happen in the US in 2006?”
Moderator: “Correct”

While that movie was scary bad, the real threat of domestic terrorism has underwriters focused on most metro areas and “likely” targets. The Terrorism Risk Insurance Act ( TRIA) was extended through the end of 2007 and all signs point toward a renewal/extension at the end of the year. However, the extension is for “certified” acts (9/11 / foreign terrorist(s)) and the definition will likely not be explored until it comes time to pay a claim. The lack of coverage for “non-certified” acts (Oklahoma City / domestic terrorist(s)) and personal lines renders TRIA, at best, an imperfect solution.

Contestant: "Directors’ and Officers’ for $800”
Moderator: “The answer is, “The iPod.”

Contestant: “What is a personal music player?”
Moderator: “Sorry, that’s not the answer we were looking for.”

Contestant: “What is Steve Jobs known for in addition to back-dating stock options?”
Moderator: “Correct”

A couple of years ago, in the wake of the Enron, et al scandals, we commented that another scandal would rock the D&O market at some point. Well, here it comes (by the way, I’d like to “restate” my prediction from last year re: property losses). The impact has yet to be felt on the D&O market. 2004 and 2005 were very profitable years for D&O. 2006 is expected to be profitable also.

Capacity is not an issue and the list of carriers offering competitive D&O coverage is expanding. Carriers continue to diversify their books of business and are reducing limits on a per policy basis. However, there is more than enough capacity to round out just about any program. (Programming Note: go back and read our comment about getting your submission in early)

Premium decreases of 5% - 20% continue to be seen in many sectors. Private D&O and small-cap public D&O placements are seeing greater decreases than the larger cap public companies. As with most coverages in a soft market, policy language continues to be broadened for most insureds.

Contestant: “I’ll take Mystery Question for $1000 Moderator”
Moderator: “The answer is, Barry Bonds' "On Field Play" and Grand Jury Testimony”

Contestant: “What is Errors and Omissions?”
Moderator: “Correct”

The E&O market is still playing catch up to the rest of the softening market. While most renewals are flat to 10% decrease, the rates are still higher than they were 5-6 years ago. Our presumption is that the market as a whole will harden before E&O rates get to 2001 levels. Underwriters are aggressively looking to expand product offerings in this arena. Capacity is strong and specialty underwriters are actively pursuing new insureds with tailored solutions to unique exposure issues.

Contestant: “I’d like Liability for $500.”
Moderator: “The answer is, “The Good, The Bad, and The Ugly”

Contestant: “What are the highlights of Rex Grossman’s 2006 season?”
Moderator: “Sorry”

Contestant: “What is the current state of the Liability market?”
Moderator: “Correct.”

“The Good” – Significant rate decreases. 10% is the norm, with some very good risks seeing up to 30% decreases. It is an especially competitive market for retail and manufacturing accounts. In fact, some accounts previously banished to the “spaghetti western” version of insurance, the non-admitted market, are now eligible for standard markets due to the increased appetites by those carriers.

“The Bad” – Many buyers did not purchase higher limits in response to the rate decreases. Even those who previously reduced limits to offset the rate increases in the early 2000’s opted against increasing limits. We do not know how long this option will be available.

Also, while rates are down, the market is not necessarily “soft”. There appears to be pretty strict underwriting discipline among most standard markets.

“The Ugly” – We are seeing rate increases for insureds with poor loss history, poor loss control, and tougher classes of business (most notable are residential construction and transportation).

Contestant: “Workers’ Compensation for $1200, please.”
Moderator: “The answer is, Right Down the Middle”

Contestant: “What is a description of a Michael Marcon tee shot?”
Moderator: “Sorry, no.”

Contestant: “What is the 2008 Presidential Race?”
Moderator: “Nice try.”

Contestant: “What is the current status of the workers’ compensation market?”
Moderator: “Correct.”

Renewals are nearly flat to a 10% decrease. Most insureds are seeing a 5% decrease. The market remains stable due to less loss frequency (focus on loss control and safety) and modest insurer profitability.

Larger “risk management” accounts are experiencing reduced collateral requirements if they are deemed to be a good credit risk. Macro trends are leading more accounts to fall into that category.

The two major workers’ comp markets are California and New York. California reforms from a few years ago have led to a more competitive market and buyers are reaping the benefits. New York continues to be a tough environment for workers’ comp carriers and we envision 2007 – 2008 to be more of the same.

“And now, our Final Jeopardy answer – Equity Risk Partners”

Contestant: “Who is the only full service insurance brokerage and employee benefits consulting firm focusing exclusively on the needs of the private equity industry and its portfolio companies?”
Moderator: “Correct.”

Contestant: “Who is headquartered in San Francisco and has offices in Houston, Chicago, and New York?”
Moderator: “Correct.”

Contestant: “Who has had a meaningful impact on hundreds of private equity transactions, is uniquely staffed with insurance and investment professionals, and provides a seamless, consistent team to its clients from diligence through divestiture?”
Moderator: “Correct, as well.”

Thank you for tuning in. As always, thank you for your continued consideration of Equity Risk Partners. Our firm relies on the support of Viewers Like You.