NCREIF Portfolio Strategy Committee

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NCREIF Portfolio Strategy Committee

• Hilton Head, SC
• October 2006
• Presented By
• Marian Ivan/RREEF
• Claire Skinner/AEW

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Hurricane Katrina August 29, 2005
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TODAYS ASSIGNMENT(Where Are We Now?)

• Insurance Market Capacity Crunch EQ and Wind
• Katrita (Katrina, Rita, Wilma) 2005
• Four horsemen (Charley, Frances, Jeanne
  whats-his-name) 2004
• Insurance market statistics worst losses ever
  last 5-10 years

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Top 11 Insured Property Losses Worldwide,
1970-2005
Five of the 11 most expensive disasters in world
history affected the U.S. within the past 5 years.
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Cat reinsurance prices surge in 2006In
hurricane-prone areas, property catastrophe
reinsurance rates are up.
2005, 2006 are estimates
Source Insurance Information Institute
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SYLLABUS(Where Are We Going?)

• Budgets estimated increases vary by state
• CA, FL, WA, non-Cat
• Loss control
• Capital budgets
• Loss prevention
• Potential issues for lenders clients
• Lower limits per program
• SP ratings

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ROE vs. Equity Cost of CapitalUS P/C
Insurance1991-2006E
The p/c insurance industry achieved its cost of
capital in 2005
5.9 pts
-9.0 pts
0.2 pts
1.0 pts
-13.2 pts
US P/C insurers missed their cost of capital by
an average 6.7 points from 1991 to 2002, but on
target 2003-05
Based on 2006Q1E ROAS of 15.4
Source The Geneva Association, Ins.
Information Inst.
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P/C vs. all U.S. industries in return on equity
Sept. 11
Hugo
Katrina, Rita, Wilma
Lowest CAT losses in 15 years
Andrew
Northridge
4 Hurricanes
2006 P/C insurer ROE based on annualized
first-quarter results. Source Insurance
Information Institute
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ROE goalsCombined ratios today must be below
95 to generate Fortune 500 return-on-equity
levels.
2005/06 figures are return
on average statutory surplus.
Source Insurance Information Institute from
A.M. Best and ISO data.
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Tri-Coastal Strategy

• Great from an investors perspective
• Great from an insurers perspective!

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Most of US Population Property Has Major CAT
Exposure
Is Anyplace Safe?
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First Day of School

• CA EQ crunch
• 2005 EQ Blanket Limits available 300M
• 2006 Est. Limits Available
• 4/1 200M
• 6/1 175M
• 9/1 150M tops
• 10/1

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EQ The Other Insurance Crisis

• Factors driving premiums higher
• Higher loss projections from new cat models
• Higher capital requirements imposed by rating
  agencies

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EQ (contd)

• Major cat models badly underestimated Hurricane
  Katrina
• Result underwriters and cat modelers
  reconsidered potential EQ damage
• Estimate CA EQ Worst Hurricane Scenario
• (Cat 5 hurricane striking Miami and FL coast)
• SoCA rupture (San Andreas)
• 300B property damage

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EQ Predictions

• 62 probability of at least one M6.7 EQ in Bay
  Area before 2032
• San Andreas in SoCA
• Rupture at any moment
• M7 EQ
• The California commercial earthquake market has
  become extremely tight, the likes of which I
  dont think anybody has seen ever.
• -Robert Hall,
  CEO, Golden Bear Ins. Co.

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RMS Loss Modeling

• Loss Amplification
• Cascade of far more damaging consequences that
  can follow a catastrophe
• Demand surge
• Sharply higher costs to rebuild
• Scarce building materials and labor
• Function of size of catastrophe
• Larger the impact of the event on the local
  economy, the larger the effect of the demand surge

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Higher Loss Projections Ratings Agencies

• Raising minimum capital for insurers and
  reinsurers
• Average 10 increase
• Est. 40-65 increase specifically needed to
  support cat risks.

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RECESS

• Blanket Programs
• Great news when the market is good
• Even better when the market is great
• Can be limiting in a difficult market
• Good news
• GL, Ex, PLL

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TERM PAPER

• Take care of your house
• Dont depend on insurance to
• Replace your roof
• Fix your chiller
• Use your negotiated credits (at acquisition) for
  your capital improvements

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PTA Meeting

• Large broker refunds Spitzer investigation
• Marsh
• Aon
• Willis
• Gallagher
• Other brokers
• Insurers

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Program Summary

• Rates will increase due to catastrophe exposure
• Loss experience will affect rates
• 2005 rates were low by historical measures
• Your active management will benefit all
• Risk Management is on it!

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QA Thank You!