Emerson Cammack Lecture Series

September 7, 2007

Insurance what is it?

Insurance . . . its cringe factor ranks right up there with such joys as filling out your income tax return. Or balancing your checkbook when the bank says youre $500 overdrawn. Or perhaps shopping for your own cemetery plot.

Insurance allows individuals or organizations to exchange the risk of a large loss for the certainty of smaller periodic payments, known as premiums. The exchange (or transfer) of risk is laid out in a legal contract called the insurance policy, which spells out the coverage, compensation, and/or other benefits.
Source: Insurance Information Institute

Commercial insurance
Most commonly used organizational risk management tool Worldwide, insurance premiums exceed $3 trillion ($1 trillion in the US)

More than 2 million US workers are employed in the insurance industry (2.1% of the overall workforce)
100 billion in payroll 13 billion in state taxes

Source: Insurance Information Institute 5

History

A history lesson (albeit brief) . . .

Marine insurance in the late middle ages
Merchants / bankers concerned with loss due to piracy and storms Bankers provided guarantees against loss; merchants paid the bankers in exchange for protection

Fire insurance
Evolved after great London fire of 1666 First US insurance company started by Ben Franklin in 1752
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RLIs Rich History

1961 founded a contact lens insurance agency, Replacement Lens Inc. 1965 private holding company formed and acquired United Founders, Ins. Co. (formerly Main Mutual) 1969 private holding company renamed RLI Corp. 1971 RLI common stock first traded on NASDAQ 1975 became Peoria's first Employee Stock Ownership Company

RLIs Rich History

1977 began underwriting specialty commercial property and casualty coverages 1987 - RLI common stock moved to NYSE; opened commercial casualty division 1992 established surety division 1997 opened transportation division 2005 opened marine division

Whats the score?

The premium dollar (industry)

32
Underwriting Expense / Commissions

10
Claims Expense

53
Claims

5
Profit

The premium dollar (RLI YE 2006)

25
Underwriting Expense / Commissions

10
Claims Expense

38
Claims

27
Profit

P&C Industry Combined Ratio

120

2001 = 115.7 2002 = 107.2

Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.7 2000s: 111.0

115

2003F = 103.2* 2003:Q1 Actual = 99.5

110

105

100

95

Sources: A.M. Best; III

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

RLI Historical Combined Ratio

120 115

110

105

100

95
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

RLI
89.1 90.4 88.4 90.1 95.8 95.8 92.4 93.1

Products

Primary Commercial Products

Property

Marine (Inland / Ocean)

General Liability

Surety

Automobile

Umbrella

Workers Compensatio n

Primary Personal Products

Home

Dwelling Fire Umbrella Boat Motorcycle RV Auto

RLI Q1 2007 Product Summary

Vision UW Method Geographical Spread

As a leading provider of specialized insurance and financial services, RLI is focused on building and managing a portfolio of innovative products and solutions that meet and surpass the expectations of our shareholders.
Segmentation
Surety 10% Property 25%

Underwriter eCommerce

85.1% 14.9%

California New York Florida Texas

18.6% 16.4% 14.7% 7.7%

Major Product Groups

% of GWP by Product Group General Liability Surety E&S Property (less DIC) Personal Umbrella Transportation DIC 27.5% 10.4% 9.6% 8.2% 7.8% 7.4% Executive Products Commercial Umbrella Marine Programs Hawaii Homeowners eXS 6.2% 5.4% 5.1% 4.2% 1.9% 1.2%
% of GWP by

Casualty 65%

Strategy Company Grow core business by expanding geographic coverage and UW capacity Leverage information technology to increase productivity and reduce expense ratio Grow underwriting profits while improving risk management techniques

Key Producers

Millions CRC Ins. Services Swett & Crawford Program Brokerage Colemont Ins. Marsh & McLennan

15.1 6.3 5.8 5.5 4.8

Mt. Hawley Ins. Co. RLI Ins. Co. RLI Indemnity Co.

54.8% 43.3% 1.9%

Insurance product distribution

Direct Distribution

Insurance Company

Insured

20

Independent (Retail) Agent

Insurance Company

Insurance Company

Insurance Company

Retail Agent

Insured

21

Wholesale Agent
Insurance Company Insurance Company Insurance Company

Wholesale Agent

Retail Agent

Insured

22

Roles and careers

The transaction . . .
Primary roles
Agent Underwriter Underwriting Assistant Claims Representative Risk Control Representative Actuary

24

Commercial Lines Underwriting . . .

Overall underwriting process
Gather information Evaluate information Identify appropriate program terms/conditions Implement program Monitor program and take additional action if appropriate

In addition to insurance applications . . .

Financial status of applicant Character / reputation of applicant Past losses incurred by applicant Other sources of data

25

My personal journey . . .

From broadcast journalism . . .

Bowling Green State University 94
B.S. in Journalism

Westfield Group
Trainee Marketing Manager in Bowling Green and Cleveland Corporate Instructor Underwriting Practices Manager

Selective Insurance Group

Agency Management Specialist

RLI
Assistant Vice President, Home Office Underwriting
27