Overview & Outlook for the P/C Insurance Industry: 2012 and Beyond 2012 NAMIC Operations Seminar Charleston, SC August 22, 2012 Download at

Overview & Outlook for the P/C Insurance Industry:

2012 and Beyond2012 NAMIC Operations Seminar

Charleston, SCAugust 22, 2012

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

3

Economics 2012:

The World Is Changing2012 Is the First Year Since 2005 Where Economic Perceptions and Reality in the US Will Be Positive

Potentially Significant Benefits for P/C Insurers

3

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

6

Growth Will Expand Workers Comp Payroll Exposure Base

6

America’s Manufacturing Renaissance?Construction Activity Still Depressed?

7

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/12; Insurance Information Institute.

2.7

%0

.5%

3.6

%3

.0%

1.7

%-1

.8%

1.3

%-3

.7%

-5.3

%-0

.3%

1.4

%5

.0%

2.3

%2

.2%

2.6

%2

.4%

0.1

%2

.5%

1.3

%4

.1%

2.0

%1

.5%

1.7

%1

.9%

1.8

%2

.4%

2.7

%2

.9%

-8.9%

4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

2

00

0

2

00

1

2

00

2

2

00

3

2

00

4

2

00

5

2

00

6

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit crunch, housing

slump, labor market contraction has been

severe but modest recovery is underway

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

2012 is expected to see slow and choppy growth

before accelerating modestly in 2013

Percent Change in Real GDPby State, 2011

Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm ;Insurance Information Institute. 8

Growth varied considerably across states

but in total was weak in 2011

with US overall growth at just

1.7%

TX has been an economic

growth leader

74

.4

73

.6

73

.6

72

.2

73

.6 76

67

.8

68

.9

68

.2

67

.7 71

.6 74

.5

74

.2 77

.5

67

.5 69

.8

74

.3

71

.5

63

.7

55

.7 59

.4

60

.9 64

.1

69

.9

75

.0

75

.3

76

.2

76

.4 79

.3

73

.2

72

.3

73

.6

40

45

50

55

60

65

70

75

80

85

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Consumer Sentiment Survey (1966 = 100)

January 2010 through August 2012

Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact

consumers, but improved substantially in late 2011 and early 2012

Source: University of Michigan; Insurance Information Institute

Optimism among consumers Increased in August, and is well above year-ago levels; Suggests concern, but not fear on the part

of consumers.

9

10

16.9

16.5

16.1

13.2

10.4

11.6 12

.7

14.3 14

.7

14.7 15

.1

15.4

15.5

15.4

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 18-22F

(Millions of Units)

Auto/Light Truck Sales, 1999-2022F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 8/12); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector.

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is

still far below 1999-2007 average of 17 million units, but a recovery is underway.

Job growth and improved credit market conditions will boost auto sales in

2012 and beyond

11

Monthly Change* in Auto Insurance Prices, 1991–2012*

*Percentage change from same month in prior year; through July 2012; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-2%

0%

2%

4%

6%

8%

10%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Cyclical peaks in PP Auto tend to occur

approximately every 10 years (early 1990s, early

2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

Pricing peak occurred in 2010 at

5.1%, falling to 2.8% by Mar. 2012

The July 2012 reading of 3.4%

was similar to the 3.3% recorded in

July 2011

12

(Millions of Units)

New Private Housing Starts, 1990-2022F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

1 0.7

5 0.8

9

1.3

4

1.2

3

1.3

2

1.3

81

.42

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F 18-22F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 8/12); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until at least 2014. Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

The plunge and lack of recovery in homebuilding and in construction in general

is holding back payroll exposure growth

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

13

Construction Employment,Jan. 2010—July 2012*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,59

3

5,52

9 5,55

2

5,55

9

5,51

8

5,50

7

5,49

1 5,51

1

5,49

2

5,49

9

5,48

8

5,47

7

5,45

6

5,48

9

5,49

6

5,49

5

5,49

8

5,49

5

5,50

8

5,49

8

5,52

8

5,51

9

5,52

0 5,54

6 5,56

4

5,56

3

5,54

9

5,54

2

5,51

0

5,51

4

5,51

3

5,400

5,450

5,500

5,550

5,600

5,650

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

2/30

/210

2

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Construction employment is still below where it was in

Jan. 2010. In a normal recovery, construction employment would be

growing robustly

(Thousands)

15

Value of Construction Put in Place, June 2012 vs. June 2011*

-3.7%

-27.5%

-2.9%

7.0%

13.1% 12.1% 14.0%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue

Growth (%)

Private sector construction activity is up in both the residential and nonresidential segments

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Private: +13.1% Public: -3.7%

Public sector construction activity remains depressed

16

Value of Private Construction Put in Place, by Segment, June 2012 vs. June 2011*

6.6% 7.0%

18.8%

-10.5%

-5.2%

17.1%

-1.7%

26.5%

19.0%

13.1% 12.1%14.0%

26.3%

6.6%

-15%-10%

-5%0%5%

10%15%20%25%30%

To

tal

Pri

vate

Co

nstr

ucti

on

Resid

en

tial

To

tal

No

nre

sid

en

tial

Lo

dg

ing

Off

ice

Co

mm

erc

ial

Healt

h C

are

Ed

ucati

on

al

Reli

gio

us

Am

usem

en

t &

Rec.

Tra

nsp

ort

ati

on

Co

mm

un

icati

on

Po

wer

Man

ufa

ctu

rin

g

Private Construction Activity is Up in Most Segments, Including Residential Construction but Led by Power

Growth (%) Led by the Power industry, Private sector construction activity is up by double digits in many segments after

plunging during the “Great Recession”

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

58

.3

57

.1

60

.4

59

.6

57

.8

55

.3

55

.1

55

.2

55

.3 56

.9 58

.2

58

.5 60

.8

61

.4

59

.7

59

.7

54

.2 55

.8

51

.4 52

.5

52

.5

51

.8

52

.2 53

.1 54

.1

52

.4 53

.4 54

.8

53

.5

49

.7

49

.8

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through July 2012

The manufacturing sector expanded for 34 consecutive months until June 2012 and added jobs. The question is whether this will continue.

Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.

Manufacturing activity contracted in June for the first time in nearly 3

years, but a resumption of expansion is possible

18

20

Manufacturing Growth for Selected Sectors, 2012 vs. 2011*

11.2%

3.8%

12.1%

3.0% 3.6%5.6%

-0.1%

6.5% 5.3%5.8%9.1%

6.6%

20.9%

6.5%

-5%

0%

5%

10%

15%

20%

25%

All

Ma

nu

fact

uri

ng

Du

rab

le M

fg.

Wo

od

Pro

du

cts

Pri

ma

ryM

eta

ls

Fa

bri

cate

dM

eta

ls

Ma

chin

ery

Ele

ctri

cal

Eq

uip

.

Tra

nsp

ort

atio

nE

qu

ip.

No

n-D

ura

ble

Mfg

.

Fo

od

Pro

du

cts

Pe

tro

leu

m &

Co

al

Ch

em

ica

l

Pla

stic

s &

Ru

bb

er

Te

xtile

Pro

du

cts

Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Energy Demand and Insurable Exposures Including: WC, Commercial Property, Commercial Auto and Many Liability Coverages

Growth (%)

Manufacturing of durable goods has been

especially strong in 2012

*Seasonally adjusted; Date are YTD comparing data through June 2012 to the same period in 2011.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Durables: +9.1% Non-Durables: +3.0%

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Jun 0

1

Sep 0

1

Dec 0

1

Mar

02

Jun 0

2

Sep 0

2

Dec 0

2

Mar

03

Jun 0

3

Sep 0

3

Dec 0

3

Mar

04

Jun 0

4

Sep 0

4

Dec 0

4

Mar

05

Jun 0

5

Sep 0

5

Dec 0

5

Mar

06

Jun 0

6

Sep 0

6

Dec 0

6

Mar

07

Jun 0

7

Sep 0

7

Dec 0

7

Mar

08

Jun 0

8

Sep 0

8

Dec 0

8

Mar

09

Jun 0

9

Sep 0

9

Dec 0

9

Mar

10

Jun 1

0

Sep 1

0

Dec 1

0

Mar

11

Jun 1

1

Sep 1

1

Dec 1

1

Mar

12

Jun 1

2

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 21

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 79.3% of industrial capacity in July

2012, above the June 2009 low of 68.3% and tied for the

highest level since April 2008

December 2007-June 2009 Recession

March 2001 through July 2012

21

22

Manufacturing Employment,Jan. 2010—July 2012*

11,4

58

11,4

62

11,4

70

11,5

02

11,5

36

11,5

46

11,5

66

11,5

49

11,5

51

11,5

51

11,5

60

11,5

75

11,6

27

11,6

64

11,6

90

11,7

18

11,7

26

11,7

38

11,7

68

11,7

71

11,7

68

11,7

77

11,7

80

11,8

08

11,8

60

11,8

90

11,9

32

11,9

42

11,9

55

11,9

65

11,9

90

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

2/30

/210

2

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Manufacturing employment is up by more than 500,000 or 4.6% since Jan. 2010—a

surprising source of strength in the economy

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

(Thousands)

50

.7 52

.7 54

.1

54

.6

54

.8

53

.5

53

.7

52

.8 53

.9

54

.6 56 5

7.1 5

9.4

59

.7

56

.3

54

.4

53

.3

53

.4

53

.8

52

.6

52

.6

52

.6

52

.6

53

.0

56

.8

57

.3

56

.0

53

.5

53

.7

52

.1

52

.6

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through July 2012

Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.

Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.

Optimism among non-manufacturers was

stable in late 2011 and increased in early 2012

23

24

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

5371

,549

70,6

4362

,304

52,3

7451

,959

53,5

4954

,027

44,3

6737

,884

35,4

7240

,099

38,5

4035

,037

34,3

1739

,201

19,6

95 28,3

2243

,546

60,8

3756

,282

47,8

0610

,998

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112

:Q1

Business Bankruptcy Filings,1980-2012: Q1

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline

2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more

than tripled during the financial crisis. Through Q1:2012, filings are down 11.1% vs. Q1:2011

% Change Surrounding Recessions

1980-82 58.6%1980-87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*

24

25

Private Sector Business Starts, 1993:Q2 – 2011:Q3*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

119

219

219

320

1 204

202

210 21

220

921

6 220 22

322

022

021

022

121

220

421

820

920

720

719

919

1 193

172 17

616

918

417

5 179

188

200

183 18

7 191

203

150

160

170

180

190

200

210

220

230

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure, But

Are Recovering Slowly* Data through June 30, 2011 are the latest available as of July 26, 2012; Seasonally adjusted. **Annualized based on data through Q3:2011.Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up 3.5% to 561,000 in the first 9 months of 2011 vs. first 9

months of 2011. 722,000 new business starts were recorded in 2010, up 3.6% from

697,000 in 2009, which was the slowest year for new business starts since 1993

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 748,000**

25

27

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking)

28

Presidential Politics & the P/C Insurance Industry

How Is Profitability Affected by the President’s Political Party?

28

15.10%

9.40%

8.93%

8.65%

8.35%

7.98%

7.68%

6.98%

6.97%

6.65%

5.43%

5.03%

4.83%

4.43%

3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Carter

Reagan II

G.W. Bush II

Nixon

Clinton I

G.H.W. Bush

Clinton II

Reagan I

Nixon/Ford

Truman

Obama

Eisenhower I

Eisenhower II

G.W. Bush I

Johnson

Kennedy/Johnson

*Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments.Estimated ROE for 2012 = 7.0%. Source: Insurance Information Institute

OVERALL RECORD: 1950-2012*

Democrats 7.67%Republicans 7.97%

Party of President has marginal bearing on profitability of P/C insurance industry

P/C Insurance Industry ROE by Presidential Administration, 1950- 2012*

-5%

0%

5%

10%

15%

20%

25%

50

52

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

E

BLUE = Democratic President RED = Republican President

Tru

man Nixon/Ford

Ken

ned

y/

Joh

nso

n

Eis

enh

ow

er

Car

ter

Reagan/Bush I Clinton Bush II

P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2012*

*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0%Source: Insurance Information Institute

Ob

ama

31

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

31

32

Unemployment and Underemployment Rates: Stubbornly High in 2012, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 8.3% in

July 2012

Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.

Peak rate in the last 30 years:

10.8% in November -

December 1982

Source: US Bureau of Labor Statistics; Insurance Information Institute.

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 15.0%

in July 2012

January 2000 through July 2012, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving

32

Jun 12

186

7921

365

127

42 15-1

09-1

465

9723

-12

-85 -58

-161

-253 -230

-257

-347

-456

-547

-734 -6

67-8

06-7

07-7

44-6

49-3

34-4

52-2

97-2

15 -186

-262

75-8

316

62

229

51 6111

714

311

2 193

128 16

711

925

726

126

410

810

2 175

5221

613

9 178 23

4 277

254

147

8511

673

172

144

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9S

ep-0

9O

ct-0

9N

ov-0

9D

ec-0

9Ja

n-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Monthly Change in Private Employment

January 2008 through July 2012 (Thousands)

Private Employers Added 4.65 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

172,000 private sector jobs were created in July

33

0.02

30.

011

-0.0

74-0

.132

-0.2

93-0

.546

-0.7

76-1

.033

-1.3

80-1

.836

-2.3

83-3

.117

-3.7

84-4

.590

-5.2

97-6

.041

-6.6

90-7

.024

-7.4

76-7

.773

-7.9

88-8

.174

-8.4

36-8

.361

-8.4

44-8

.428

-8.3

66-8

.222

-7.9

93-7

.942

-7.8

81-7

.764

-7.6

21-7

.509

-7.3

16-7

.188

-7.0

21-6

.902 -6.3

84-6

.120

-6.0

12-5

.910

-5.7

35-5

.683

-5.4

67-5

.328

-5.1

50-4

.916

-4.6

39-4

.385

-4.2

38-4

.153

-4.0

37-3

.964

-3.7

92

-6.6

45

-10

-8

-6

-4

-2

0

2

Dec

-07

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12F

eb-1

2M

ar-1

2A

pr-1

2M

ay-

Jun-

12Ju

l-12

Mill

ion

sCumulative Change in Private Employment: Dec. 2007—July 2012

December 2007 through July 2012 (Millions)

Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Cumulative job losses peaked at 8.444 million

in December 2009

Cumulative job losses as of June 2012 totaled

3.792 million

34

All of the jobs “lost” since

President Obama took office in Jan.

2009 have been recouped

Private Employers Added 4.65 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

0

-8

40

86

518

259

109

-70

-212 -188

-201

-221

-230

-267

-282

-295

-349

-367

-446 -4

13

-427

-454

-475

-486

-488

-483

-487

-491

-520

-529

-538

-700

-500

-300

-100

100

300

500

700

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Cumulative Change in Government Employment: Jan. 2010—July 2012

January 2010 through July 2012* (Millions)

Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

Cumulative job losses through June 2012 totaled 538,000

36

Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the

Financial Crisis, Causing Them to Reduce Staff

Government at all levels has shed more than a half

million jobs since Jan. 2010 even as private employers created 4.65 million jobs.

Temporary Census hiring distorted 2010

figures

37

Net Change in Government Employment: Jan. 2010—June 2012*

-536

-405

-72 -59

-600

-500

-400

-300

-200

-100

0

Total Local State Federal

(Thousands)

Local government employment shrank by 405,000 from Jan.

2010 through June 2012, accounting for 76% of all government job losses,

negatively impacting WC exposures for those cities and counties that insure privately

*Cumulative change from prior month; Base employment date is Dec. 2009.Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

State government employment fell by 1.4% since the end of 2009 while

Federal employment is down by 2.1%

38

Unemployment Rates by State, July 2012:Highest 25 States*

12

.0

10

.8

10

.7

9.8

9.6

9.6

9.3

9.1

9.1

9.0

8.9

8.9

8.8

8.7

8.5

8.5

8.4

8.3

8.3

8.3

8.3

8.3

8.2

7.9

7.7

7.6

0

2

4

6

8

10

12

14

NV RI CA NJ NC SC GA MS NY MI DC IL FL OR CT WA TN AL AZ CO KY US IN PA AK LA

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for July 2012, seasonally adjusted.

Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In July, 44 states reported over-the-month unemployment rate increases, 2 states and the District of Columbia had decreases, and 4 states had no change.

39

7.6

7.5

7.4

7.3

7.3

7.2

7.2

7.2

7.0

6.8

6.6

6.4

6.4

6.3

6.1

6.0

5.9

5.8

5.6

5.4

5.3

5.0

4.9

4.4

4.0

3.0

0

2

4

6

8

ME ID WV AR WI MO OH TX MD DE NM HI MT KS MA UT VA MN WY NH IA VT OK SD NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, July 2012: Lowest 25 States*

*Provisional figures for July 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In July, 44 states reported over-the-month unemployment rate increases, 2 states and the District of Columbia had

decreases, and 4 states had no change.

40

US Unemployment Rate Forecast

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

% 6.1

%

6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

9.7

%

9.6

%

9.6

%

8.9

%

9.1

%

9.1

%

8.7

%

8.3

%

8.2

%

8.2

%

8.1

%

8.0

%

8.0

%

7.9

%

7.7

%

9.6

%4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

Rising unemployment eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10% in

late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (8/12 edition); Insurance Information Institute.

2007:Q1 to 2013:Q4F*

Unemployment forecasts have been revised slightly

upwards for 2012 and 2013. Optimistic scenarios put the

unemployment as low as 8.0% by Q4 of this year.

Jobless figures have been revised

slightly upwards for 2012/13

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

43

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2012E

*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2012 is I.I.I. estimate based YTD 2012 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005

7/90-3/91 3/01-11/0112/07-6/09

$Billions $Billions

WC premium volume dropped two years before

the recession began

WC net premiums written were down $14B or 29.3% to

$33.8B in 2010 after peaking at $47.8B

in 2005

+9% in 2012E

Insurance Industry Employment Trends: 1990-2012

Insurance Information Institute August 2012

Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

57

Overview of Insurance Sector Employment Changes*

*Data are through June 2012 and are preliminary (i.e., subject to later revision); not seasonally adjusted.

Insurance Subsector May 2012 Employment

June 2012Employment

Change

P-C Direct 528,000 529,000 +1,000

Reinsurers 27,700 28,100 +400

Claims Adjusters 48,200 48,700 +500

Agents/Brokers 653,000 656,100 +3,100

Life Direct 336,400 337,900 +1,500

Health/Medical Direct 428,500 429,300 +800

Title & other Direct 70,900 70,500 -400

3rd-Party Administration 137,300 137,600 +300

All other insurance-related activities

54,400 54,500 +100

Net Total 2,284,400 2,291,700 +7,300

58

July 2012 Report:1-Month and 12-Month Changes*

P-C Insurers Employment up by 1,000 (+0.2%) vs. May 2012 Employment down by 3,800 (-0.7%) vs. June 2011

Reinsurers Employment up by 400 (+1.4%) vs. May 2012 Employment up by 1,900 (+7.3%) vs. June 2011

Claims Adjusters Employment up by 500 (+1.0%) vs. May 2012 Employment down by 1,500 (-3.0%) vs. June 2011

Insurance Agents & Brokers Employment up by 3,100 (+0.5%) vs. May 2012 Employment up by 7,000 (+1.1%) vs. June 2011

Life Insurers Employment up by 1,500 (+0.4%) vs. May 2012 Employment down by 3,200 (-0.9%) vs. June 2011

Health/Medical Insurers Employment up by 800 (+0.2%) vs. May 2012 Employment up by 800 (+0.2%) vs. June 2011

*Data are through June 2012 and are preliminary (i.e., subject to later revision).

62

Insurance Industry Employment Trends

Soft Market, Difficult Economy, Outsourcing, Productivity

Enhancements and Consolidation Have Contributed

to Industry’s Job Losses

63

U.S. Employment in the DirectP/C Insurance Industry: 1990–2012*

*As of June 2012; Not seasonally adjusted; Does not including agents & brokers.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Thousands

440

460

480

500

520

540

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

This spurt results from 2010 census data and revised industry counts. BLS adjusted data for

March 2010 through March 2011 but did not revise pre-March 2010 counts. Employment numbers prior

to March 2011 are not comparable to subsequent data.

64

U.S. Employment in the DirectLife Insurance Industry: 1990–2012*


Thousands

300

325

350

375

400

425

450

475

500

525

550

575

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

As of June 2012, Life insurance industry employment was down by 16,400 (-

4.6%) to 337,900 since the recession began in Dec. 2007 (vs. overall US

employment decline of 3.5%).

Every 4-5 years BLS reconciles its data with census data; sometimes this

reclassifies employment within industries. This drop, spread over

March 2004-March 2005, moved some people to the Health/Medical Expense

sector.

65

U.S. Employment in the Direct Health-Medical Insurance Industry: 1990–2012*


Thousands

175

200

225

250

275

300

325

350

375

400

425

450

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

As of June 2012, Health-Medical insurance industry employment was down by 12,600 or 2.9% to 429,300 since the recession began in Dec. 2007 (vs. overall US employment

decline of 3.5%).

66

U.S. Employment in the Reinsurance Industry: 1990–2012*

Thousands

24

28

32

36

40

44

48

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12*As of June 2012; Not seasonally adjusted; Does not including agents & brokers.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

As of June 2012, US employment in the reinsurance industry was up by

1,200 or 4.5% to 28,100 since the recession began in Dec. 2007 (vs. overall US employment decline of

3.5%).

67

U.S. Employment in Insurance Agencies & Brokerages: 1990–2012*

Thousands

500

550

600

650

700

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12*As of June 2012; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

As of June 2012, employment at insurance agencies and brokerages

was down by 23,500 or 3.5% to 656,100 since the recession began in

Dec. 2007 (vs. overall US employment decline of 3.5%).

68

U.S. Employment in Insurance Claims Adjusting: 1990–2012*

Thousands

40

45

50

55

60

Jan

-90

Oct

-90

Jul-

91

Ap

r-9

2

Jan

-93

Oct

-93

Jul-

94

Ap

r-9

5

Jan

-96

Oct

-96

Jul-

97

Ap

r-9

8

Jan

-99

Oct

-99

Jul-

00

Ap

r-0

1

Jan

-02

Oct

-02

Jul-

03

Ap

r-0

4

Jan

-05

Oct

-05

Jul-

06

Ap

r-0

7

Jan

-08

Oct

-08

Jul-

09

Ap

r-1

0

Jan

-11

Oct

-11

*As of June 2012; Not seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

As of June 2012, claims adjusting employment was down by 3,300 or 6.3% to 48,700 since the recession began in Dec. 2007 (vs. overall US employment

decline of 3.5%).

Katrina, Rita, Wilma

69

U.S. Employment in Third-Party Administration of Insurance Funds: 1990–2012*

Thousands

85

95

105

115

125

135

145

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12*As of June 2012; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

70

P/C Insurance Industry Financial Overview

Profit Recovery Was Set Back in 2011 by High Catastrophe

Loss & Other Factors

70

P/C Net Income After Taxes1991–2012:Q1 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,1

50

$1

0,1

41

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12:Q1

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012:Q1 ROAS1 = 7.2%

P-C Industry 2012:Q1 profits were up 29% from 2011:Q1, due primarily to lower catastrophe losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for 2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q1 combined ratio including M&FG insurers is 99.0, ROAS = 7.2%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.099.3

100.9

97.6

106.4

95.78.2%

4.6%

7.6%7.4%4.4%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012:Q10%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~6.7% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Year Ago

2011:Q1 = 102.2, 6.1% ROE

-5%

0%

5%

10%

15%

20%

25%

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

04

05

06

07

08

09

10

11

*1

2:

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:Q1*

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:Q1 ROAS = 7.2% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years9 Years

2011:4.6%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2012:Q8.2%

76

Personal Lines Profitability Analysis

Significant Variability Over Time and Across States

77

18.5

14.5

14.3

14.1

13.5

12.4

12.1

11.8

11.7

11.6

11.3

11.2

11.1

11.0

10.8

10.7

10.7

10.5

10.4

10.2

9.8

9.7

9.6

9.2

9.1

02468

10121416182022

HI VT ME ID DC NH ND MN SD OH KS NM CT IA RI OR WY VA AZ WI CA UT IN AL AK

RN

W P

PA

*Latest available.

Sources: NAIC.

Hawaii was the most profitable state for auto insurers from 2001-2010

Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*)

Top 25 States(Percent)

78

9.0

8.9

8.8

8.8

8.5

8.4

8.0

7.8

7.7

7.6

7.5

7.4

7.4

7.4

7.4

7.1

7.1

7.1

7.0

6.8

5.4

5.3

5.1

4.2

3.4

2.7

-1.2-2

0

2

4

6

8

10

CO NY

SC

WA

NE IL

MD

TN MO US

MT

AR

GA

TX WV

NJ

OK PA

NC

MA

KY

MS

DE

NV FL LA MI

RN

W A

uto

Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2001-2010*)

*Latest avaiiable.Sources: NAIC

Michigan was the least profitable state, in

large part due to fraud in its no-fault system

(Percent) Bottom 25 States

80

45.5

22.3

20.6

20.3

19.5

18.6

18.4

18.1

17.6

16.5

15.4

15.3

14.6

13.1

12.7

12.7

12.5

12.5

12.2

11.2

10.5

9.4

19.0

18.0

14.0

0

5

10

15

20

25

30

35

40

45

50

HI SC RI AK CT DC NV DE NY UT MA OR NC CA WA NM VT ME PA ID NJ VA WY AZ MD

RN

W H

O

*Latest available.

Sources: NAIC.

Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*)

(Percent) Top 25 States

Hawaii was the most profitable state for home insurers from 2001-2010

81

9.2

8.0

6.4

5.0

4.8

4.5

3.4

3.4

0.9

-29

.2

8.0

1.0

-4.4

-5.9

-7.1

-7.1

-7.2

-7.3

-8.3

-8.6

-10

.6

-11

.1

-25

.4

-3.8

-2.6-0

.3

0.4

-40-35-30-25-20-15-10-505

1015

NH CO MT MI US WV KS SD WI IL IA TX FL IN OH AR TN GA KY AL ND OK NE MN MO LA MS

RN

W H

O

*Latest available.Sources: NAIC

Bottom 25 States(Percent)

Return on Net Worth: Homeowners Insurance, 10-Year Average (2001-2010*)

Home insurance profitability in

catastrophe prone states suffered

the most over the past decade

96

Top 16 Most Costly World Insurance Losses, 1970-2011**

(Insured Losses, 2011 Dollars, $ Billions)

*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.**Figures do not include federally insured flood losses.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.

$11.9$13.0 $13.0$13.1

$19.1$21.3

$24.0$25.0

$37.5

$47.6

$7.7 $8.1 $8.3 $8.5 $9.3 $9.7

$0$5

$10$15$20$25$30$35$40$45$50

Hugo (1989)

WinterStormDaria(1991)

ChileQuake(2010)

Ivan (2004)

TyphoonMirielle(1991)

Charley(2004)

Wilma(2005)

ThailandFloods(2011)

NewZealandQuake(2011)

Ike (2008)

Northridge(1994)

SpringTornadoes/

Storms(2011)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

5 of the top 14 most expensive

catastrophes in world history have occurred within the past 2 years

Taken as a single event, the Spring 2011 tornado and

thunderstorm season would likely become the 5th

costliest event in global insurance history

99

U.S. Insured Catastrophe Loss Update

2012 Catastrophe Losses Were Close to “Average” in the First Half of 2012

2011 Was the 5th Most Expensive Year on Record

99

100

US Catastrophe Loss Summary: First Half 2012 $9.3 Billion in Insured Losses in the US Arising from 90 CAT Events

Down 62% from $24.4B in 2011:H1; Loss is close to long-term average

Represents 80%+ of global total

Mild winter helped keep first half losses down

Thunderstorm (includes tornado, hail and wind damage) accounted for $8.8B or 95% of first half insured losses and represent the 3rd most expensive spring t-storm season ever

$14.6 Billion in Economic Losses in the US Down from approximately $75B in 2011:H1

Mild Winter Helped Keep First Half Insured Losses Down Lack of heavy precipitation limited spring flood but exacerbated drought conditions

Severe Droughts Now Impacting Central and Southwest Parts of US Two major wildfires in Colorado in June caused record $500 mill damage in the state

Largest wildfire in New Mexico history occurred in May

Insured crop losses could be high in 2012

Active Early Hurricane Season Tropical Storms Beryl and Debby caused minor wind damage and extensive flooding in FL

Source: Munich Re; Insurance Information Institute.

Natural Disaster Losses in the United States: First Half 2012

101Source: MR NatCatSERVICE

102

Top 14 Most Costly Disastersin U.S. History

(Insured Losses, 2011 Dollars, $ Billions)

*Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30.Sources: PCS; Insurance Information Institute inflation adjustments.

$9.0$11.9 $13.1

$19.1$21.3

$24.0 $25.0

$47.6

$8.5$7.7$6.5$5.5$4.4$4.3

$0$5

$10$15$20$25$30$35$40$45$50

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

SpringTornadoes& Storms*

(2011)

9/11Attack(2001)

Andrew(1992)

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and storm season are

is the 4th costliest event in US insurance history

Hurricane Irene became the 11th most expense

hurricane in US history

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2012:H1Number of Events (Annual Totals 1980 – 2011 and First Half 2012)

Source: MR NatCatSERVICE 103

22

6

61

1

50

100

150

200

250

300

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

There were 90 natural disaster events in the first

half of 2012

105

$1

2.3

$1

0.7

$3

.7

$1

4.0

$1

1.3

$6

.0

$3

3.9

$7

.4 $1

5.9

$3

2.9

$7

1.7

$1

0.3

$7

.3

$2

8.5

$1

1.2

$1

4.1

$3

2.3

$9

.3$1

3.7

$4

.7

$7

.8

$3

6.9

$8

.6

$2

5.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

US Insured Catastrophe Losses

*Munich Re figure for H1 2012.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

US CAT Losses in 2011 Were the 5th Highest in US History on An Inflation-Adjusted Basis

H1 2012 CAT losses were down $15.1B or 62% from

$24.4B in H1 2011

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2011 Dollars)

105

$500

$530

$830

$975

$980

$1,000

$1,200

$1,400

$1,510

$2,000

$5,000

$6,900

$7,300

$840

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000

Flooding, April*

Wildfire, Sep. 4-19

Thunderstorms, Apr. 19-20

Thunderstorms, Aug. 18-19

Winter Storm, Jan. 31-Feb. 3

Thunderstorms, Jul. 10-14

Texas Drought, 2011*

Thunderstorms, Jun. 16-22




Hurricane Irene, Aug. 26-28**

Thunderstorms, May 20-27


**Includes $700 million in flood losses insured through the National Flood Insurance Program.Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute.

2011’s Most Expensive Catastrophes, Insured Losses

The Midwest was hard hit by catastrophes in 2011, especially thunderstorms,

including tornadoes, hail and high winds

U.S. Thunderstorm Loss Trends, 1980 – 2012:H1

107Source: Property Claims Service, MR NatCatSERVICE

Average thunderstorm

losses are up more than 5 fold since the early 1980s.

2012 will likely be among the top 5 years on record.

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss. 2008-2012 are the most expensive

years on record.

Thunderstorm losses in 2012:H1 totaled $8.8 billion, the 3rd highest

first half on record

109

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011*

*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

4.4

8.0

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.20*

Combined Ratio Points

113

Federal Disaster Declarations Patterns:

1953-2012

113

Records Were Set for Federal Disaster Declarations in 2010 and

2011—Most Declarations Were Unrelated to Tropical Activity

Number of Federal Disaster Declarations, 1953-2012*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

92

3

43

0

20

40

60

80

100

120

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

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

04

05

06

07

08

09

10

11

12

*Through July 31, 2012.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011

The number of federal disaster declarations set a

new record in 2011, with 99, shattering 2010’s record 81

declarations.

There have been 2,068 federal disaster

declarations since 1953. The average

number of declarations per year is 34 from

1953-2010, though that few haven’t been

recorded since 1995.

23 federal disasters were declared

through July 31, 2012

114

115

Federal Disasters Declarations by State, 1953 – 2012: Highest 25 States*

86

78

71

65

64

58

56

56

53

53

51

51

50

49

48

48

48

47

47

46

45

45

42

40

39

0

10

20

30

40

50

60

70

80

90

100

TX CA OK NY FL LA AL KY AR MO IL TN MS WV IA MN KS NE PA VA OH WA ND NC IN

Dis

as

ter

De

cla

rati

on

s

Over the past nearly 60 years,

Texas has had the highest number of Federal Disaster

Declarations

*Through July 27, 2012. Includes Puerto Rico and the District of Columbia.

Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

116

Federal Disasters Declarations by State, 1953 – 2012: Lowest 25 States*

39

39

37

36

35

34

34

29

28

27

26

26

25

24

24

23

22

21

17

17

17

15

14

12

10

9 9

0

10

20

30

40

50

ME SD AK GA WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC UT RI WY

Dis

as

ter

De

cla

rati

on

s

*Through July 27, 2012. Includes Puerto Rico and the District of Columbia.

Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

Over the past nearly 60 years, Utah and Rhode Island had the fewest

number of Federal Disaster Declarations

117

SPRING 2012 TORNADO & SEVERE STORM OUTBREAK

2012 Got Off to a Worrisome Start, But Is No Repeat of 2011

117

118

1,1

33

1,1

32 1

,29

7

1,1

73

1,0

82 1,2

34

1,1

73

1,1

48

1,4

24

1,3

45

1,0

71 1,2

16

94

1

1,3

76

1,2

64

1,1

03

1,0

98

1,6

92

1,1

46 1,2

82

89

7

1,819

1,6

91

553

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*

Nu

mb

er

of

To

rna

do

es

0

100

200

300

400

500

600

Nu

mb

er o

f De

ath

s

Number of Tornadoes

Number of Deaths

*Through August 1, 2012.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.html

Number of Tornadoes and Related Deaths, 1990 – 2012*

Tornadoes claimed 553 lives in 2011, the most since 1925

897 tornadoes have been recorded so far

this year*

2012 Tornado Losses Got Off to an Ominous Beginning, but Slowed. First Half 2011 Insured Losses from Tornadoes and Thunderstorms Topped $21B.

U.S. Tornado Count, 2005-2012*

119

*Through August 21, 2012.Source: http://www.spc.noaa.gov/wcm/

2012 count is running well behind 2011

There were 1,897 tornadoes in the US in 2011 far above

average, but well below 2008’s record

June 29, 2012 Derecho: Traveled 600 Miles from Midwest to Mid-Atlantic

120Source: National Weather Service: http://www.spc.noaa.gov/wcm/2012/20120629-derecho.png

The June 29 derecho traveled

600 miles in just 10 hours—an average speed of 60 MPH! Peak wind gusts

80-100 MPH.

Millions of people were without power

in sweltering heat for days, particularly in Mid-Atlantic states

10-HOUR RADAR COMPOSITE (2PM – MIDNIGHT)

Location of Tornadoes in the US, 2012*

*Through Aug. 1, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html# 121

898 tornadoes killed 68 people through

August 1

Location of Large Hail Reports in the US, 2012*

124*Through Aug. 1, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html#

There were 6,149 “Large Hail”

reports through Aug. 1, 2012,

causing extensive damage to homes,

businesses and vehicles

Location of Wind Damage Reports in the US, 2012*


Extreme density due to late June derecho

There were 10,542 “Wind Damage” reports through Aug. 1, causing

extensive damage to homes and,

businesses

Severe Weather Reports, 2012*


There were already 17,591 severe weather reports through

Aug. 1; including 8984

tornadoes; 6,149 “Large Hail” reports

and 10,542 high wind events

Extreme density due to late June derecho

Severe Weather Reports, 2011

129Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

There were 29,996 severe

weather reports in 2011;

including 1,894 tornadoes;

9,417 “Large Hail” reports

and 18,685 high wind events

The BIG Question:When Will the Market Turn?

131

Catastrophes and Other Factors Are Pressuring Insurance Markets

131

New Factor: Record Low Interest Rates Are Contributing to

Underwriting and Pricing Pressures

132

Historical Criteria for a “Market Turn”:Historically All Four Criteria Had to Be Met

Criteria Status Comments

Sustained Period of

Large Underwriting

LossesEarly Stage,

Inevitable

•Apart from 2011 CAT losses, overall p/c underwriting losses remain modest•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at onset of last hard market); CR= 97.6 in Q1:2012 (ex-M&FG)•Prior-year reserve releases continue to reduce u/w losses, boost ROEs, though more modestly

Material Decline in Surplus/ Capacity

Entered 2011 At Record High; Only

Small Decline

•Surplus hit a record $570.7B as of 3/31/12•Fell just 1.6% in 2011 due to CATs•Will likely see new records later in 2012•Little excess capacity remains in reinsurance markets•Modest growth in demand for insurance is insufficient to absorb much excess capacity

Tight Reinsurance

MarketSomewhat in

Place

•Much of the global “excess capacity” was eroded by cats•Higher prices in Asia/Pacific•Modestly higher pricing for US risks

Renewed Underwriting

& Pricing Discipline

Some Firming esp. in

Property, WC

•Commercial lines pricing trends have turned from negative to flat and now positive, esp. Property & WC; •Competition remains intense as many seek to maintain market share

Sources: Barclays Capital; Insurance Information Institute.

INVESTMENTS: THE NEW REALITY

133

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence

Underwriting & Pricing 133

134

Insurers Have Not Yet Fully Adapted to a Persistently Low Interest Rate Environment

No Expectation that Rates Would Be:Pushed to Such Low Levels

Pushed Down so Rapidly

Held to Such Low Levels for So Long

Suppressed via Unprecedented Aggressiveness of the Federal Reserve– Use of traditional and unconventional tools (QE)– Unconventional ’s policies couldn’t be anticipated, esp. QE1, 2 (3?)

Competitive PressureProtracted Soft MarketAbility to Release Prior Reserves Eases UrgencyRealization of Capital Gains

OFFSETTING FACTORSCapitalization Still SolidEmergence of Sophisticated Price Monitoring and Underwriting Tools

Property/Casualty Insurance Industry Investment Income: 2000–2012F1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.0

$46.6

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12F

Investment Income in 2011 Was Surprisingly Strong, Though Investment Income Is Likely to Weaken in 2012 Due to Persistently Low Interest Rates

1 Investment gains consist primarily of interest and stock dividends.*2012F is based on annualized Q1:2012 actual figure of $11.656B.Sources: ISO; Conning Research & Consulting; Insurance Information Institute.

($ Billions)

Investment earnings in 2011 were 10.3% below

their 2007 pre-crisis peak

Property/Casualty Insurance Industry Investment Gain: 1994–2012F1

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$53.4$56.2

$49.4

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12F

Investment Gains in 2011 Were Surprisingly Robust. Investment Gains Recovered Significantly in 2011 Due to Realized Investment Gains; The

Financial Crisis Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2012F figure is III estimate based on annualized actual Q1:2012 result of

$12.341B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2011 were $2.8B above 2010 levels—a surprise given falling rates

and flat stock markets

137

P/C Insurer Net Realized Capital Gains/Losses, 1990-2012:Q1

Sources: A.M. Best, ISO, Insurance Information Institute.

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

90

$5.8

5

$7.1

9

$0.6

9

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112:Q1

Insurers Posted Net Realized Capital Gains in 2010 and 2011 After Following Two Years of Realized Losses During the Financial Crisis. Realized Capital

Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE

($ Billions) $27.0B positive swing from 2008-2011

138

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2012*

*Monthly, through Aug. 2012 (Aug. figure is for week ending 8/17). Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

Yields on 10-Year U.S. Treasury Notes recently

plunged to all time record lows

138

139

Treasury Yield Curves: Pre-Crisis (July 2007) vs. July 2012*

0.08% 0.10% 0.15% 0.17% 0.23%

0.95%

1.47%

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%

0.59%0.30%

2.51%2.15%

0%

1%

2%

3%

4%

5%

6%

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

July 2012 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve remains near its most depressed level

in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2014

at the earliest.

The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through Late 2014; This Adds to Pricing Pressure for Insurers.

*Week ending July 27.Source: Federal Reserve Board of Governors; Insurance Information Institute.

140

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

-8%-7%-6%-5%-4%-3%-2%-1%0%

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

Warra

nty

Surplu

s Line

s

Med

Mal

WC

Reinsu

rance

**

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

140

1. UNDERWRITING

141

Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?

141

142

P/C Insurance Industry Combined Ratio, 2001–2012:Q1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:Q1=99.0. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.4

97.6

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012:Q1

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Lower CAT

Losses

Underwriting Gain (Loss)1975–2012:Q1*

* Includes mortgage and financial guaranty insurers in all years.Sources: A.M. Best, ISO; Insurance Information Institute.

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

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 04 05 06 07 08 09 10 11 11

Cumulative underwriting deficit from 1975 through

2011 is $479B

($ Billions) Underwriting losses in

2011 totaled $36.5B, the

largest since 2001

145

2

(2)

(8)

(3)

(7)(10) (10)

(4)

(0)

11

24

15

119

(5)

(9)

(14)

(10) (11)(7)

(5)(2)

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

E

12

F

13

F

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2013F

Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to

Further Diminish in 2012 and 2103Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclays Capital; A.M. Best.

Prior year reserve releases totaled $8.8

billion in the first half of 2010, up from

$7.1 billion in the first half of 2009

Financial Strength & Underwriting

148

Cyclical Pattern is P-C Impairment History is Directly Tied to

Underwriting, Reserving & Pricing

148

P/C Insurer Impairments, 1969–20118

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15 16 1

9 21

34

5

0

10

20

30

40

50

60

70

69

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

04

05

06

07

08

09

10

11

Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

3 small insurers in Missouri did encounter

problems in 2011 following the May

tornado in Joplin. They were absorbed by a

larger insurer and all claims were paid.

149

150

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2011

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

1

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2011 impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated

Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

151

Reasons for US P/C Insurer Impairments, 1969–2010

3.6%4.0%

8.6%

7.3%

7.8%

7.1%

7.8%13.6%

40.3%

Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.

Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.

Investment and Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems (Overstatement of Assets)

Misc.

Sig. Change in Business

153

Number of Recessions Endured by P/C Insurers, by Number of Years in Operation

32

27

20

13

8

0

5

10

15

20

25

30

35

1-50 51-75 76-100 101-125 126-150

Sources: Insurance Information Institute research from National Bureau of Economic Research data.

Number of Recessions Since 1860

Many US Insurers Are Close to a Century Old or Older

Number of Years in Operation

Insurers are true survivors—not just of natural catastrophes but also economic ones

153

154

Performance by Segment

154

Private Passenger Auto Combined Ratio: 1993–2012P

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.2

10

1.3

10

1.0

10

0.8

10

0.3

99

.5 10

1.1

10

3.5

80

85

90

95

100

105

110

115

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E 12F

Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry

Sources: A.M. Best (1990-2012F); Insurance Information Institute. 156

Homeowners Insurance Combined Ratio: 1990–2012F

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.2

94

.4 10

0.3

88

.9 95

.6

11

6.8

10

5.7

10

6.7

12

3.7

10

5.0

11

8.4

11

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E12F

Homeowners Performance Deteriorated in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected

Due to Local Catastrophe Loss Activity

Sources: A.M. Best (1990-2012E); Insurance Information Institute. 157

158

Homeowners Multi-Peril Loss & LAE Ratio, 2011:Highest 25 States

214.

8

182.

6

138.

8

126.

5

121.

1

118.

4

118.

4

113.

7

109.

6

106.

4

99.8

99.0

93.5

89.3

88.2

86.7

86.1

84.9

82.5

82.4

82.1

80.5

80.0

78.2

75.0

020

4060

80100

120140

160180

200220

TN AL KS MO IA CT NC AR SD WY OH AZ NJ MD PA IL WI GA NE MA IN UT SC OK MN

Loss

& L

AE

Rat

io (

%)

Sources: SNL Financial; Insurance Information Institute.

TN and AL had the worst underwriting performance of all states in 2011 due to high

tornado and storm losses

159

Homeowners Multi-Peril Loss & LAE Ratio, 2011:Lowest 25 States

73.7

73.2

72.3

69.0

68.6

67.3

67.1

64.4

64.1

61.7

61.4

59.3

54.8

53.4

52.9

51.7

51.0

48.0

47.9

46.9

45.2

44.2

43.6

42.2

38.9

16.5

0

10

20

30

40

50

60

70

80

CO TX VA NM MS KY MT RI MI VT WV NY AK ND NH DE NV ID ME WA CA DC LA OR FL HI

Loss

& L

AE

Rat

io (%

)

Sources: SNL Financial; Insurance Information Institute.

HI and FL had the best performance in 2011 due to the absence of

hurricanes/tropical storms impacts in either state last year

109.4110.2

118.8

109.5

112.5

110.2

107.6

104.1

109.7 110.2

102.5

105.4

91.2

94.8

101.299.5

101.0

107.5

102.0102.0

111.1112.3

122.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

P

12

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute

Commercial Lines Combined Ratio, 1990-2012F*

Commercial lines underwriting

performance in 2011 was the worst since 2002

160

Workers Compensation Combined Ratio: 1994–2012F

10

2.0

97

.0 10

0.0

10

1.0

11

0.9

11

0.0

10

7.0

10

2.7

98

.4 10

3.6

10

4.4 1

10

.6 11

6.8

11

5.0

11

6.01

21

.7

10

7.0

11

5.3

11

8.2

80

85

90

95

100

105

110

115

120

125

130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11P 12F

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They

Have Been in a DecadeSources: A.M. Best (1994-2010 all carriers); NCCI for 2011 (Private carriers only); 2012 (All Carriers) Insurance Information Institute. 167

2. SURPLUS/CAPITAL/CAPACITY

178

Have Large Global Losses Reduced Capacity in the Industry, Setting

the Stage for a Market Turn?

178

180

Policyholder Surplus, 2006:Q4–2012:Q1

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$559.2 $559.1

$538.6

$550.3

$570.7$566.5

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1

2011:Q1Previous Surplus Peak

Quarterly Surplus Changes Since 2011:Q1 Peak

11:Q2: -$7.4B (-1.0%)11:Q3: -$27.9B (-4.6%)11:Q4: -$16.2B (-2.5%)12:Q1: +$3.2B (+0.7%)

Surplus as of 3/31/12 hit an all time record high of $570.7B, 0.7% or $3.2B

above the previous record set as of 3/31/11.

*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.

The Industry now has $1 of surplus for every $0.80 of NPW, close to the strongest claims-

paying status in its history.

Drop due to near-record 2011 CAT losses

187

3. REINSURANCE MARKET CONDITIONS

Record Global Catastrophes Activity is

Pressuring Pricing

187

189

Global Property Catastrophe Rate on Line Index, 1990—2012 (as of July 1)

15%

-3%

-13%

-8%

-20% -18% -1

1%

3%

14%

-11%

-6%

-9%

-16%

10%

-12%

-3%

7%

14%

76%

68%

25%

20%

0%

115

141

230

200184

147

121

152

255

233

195

215

184

196

133111

108

237

100

154

173

145

190

-40%

-20%

0%

20%

40%

60%

80%

100%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Ye

ar

Ov

er

Ye

ar

% C

ha

ng

e in

RO

L

0

50

100

150

200

250

300

Cu

mu

lativ

e R

ate

on

Lin

e (1

99

0=

10

0)

Year Over Year % Change

Cumulative Rate on Line Index

Sources: Guy Carpenter; Insurance Information Institute.

Property-Cat reinsurance pricing is up about 7% as of

7/1/12 but much more over the past 7-12 years—a cost that

must be reflected in LPI rates

4. RENEWED PRICING DISCIPLINE

191

Is There Evidence of a Broad and Sustained Shift in Pricing?

191

193

-5%

0%

5%

10%

15%

20%

25%

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 04 05 06 07 08 09 10 11 12

Premium Growth Is Up Modestly: More in 2012?

(Percent)1975-78 1984-87 2000-03

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

2012:Q1 growth

was +3.1%

194

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

44

.8

25

.4

19

.8

17

.3

16

.6

14

.2

13

.9

12

.4

12

.3

11

.9

9.1

8.1

8.1

7.1

6.8

5.4

5.2

4.7

3.8

3.7

3.1

3.0

1.5

1.2

1.1

0

5

10

15

20

25

30

35

40

45

ND

SD LA

WY

OK

WV

KS IA TX

MT

NE

DE

MS

NM SC

DC

UT

AR

NC ID WA

AL

WI

AK

TN

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

195

0.7

0.6

0.1

-0.1

-0.3

-0.5

-0.8

-1.4

-1.6

-1.7

-2.5

-2.8

-2.9

-3.4

-3.6

-4.1

-4.5

-4.7

-4.8

-5.7

-5.8

-8

-8.2

-8.3

-13

.5

-14

.2

-15

.5

-20

-15

-10

-5

0

5M

D

MO

KY IN NY

GA

MN

VA

US

PA

OR FL IL CT

VT

OH RI

CO

NJ HI

ME

NH

MA

AZ

NV MI

CA

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC; Insurance Information Institute.

Bottom 25 States

States with the poorest performing economies also produced the most negative net change in premiums of

the past 5 years

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

US Direct Premiums Written declined by 1.6% between 2005

and 2010

199

Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2012)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9%

-11

.0%

-6.4

%-5

.1%

-4.9

%-5

.8%

-5.6

%-5

.3%

-6.4

%-5

.2%

-5.4

% -2.9

%

2.7

% 4.4

%4

.3%

-0.1

% 0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

KRW Effect

Pricing as of Q2:2012 was positive marking the first full

year of gains since 2003. Increases are holding steady in

2012.

(Percent)

Q2 2011 marked the 30th consecutive quarter of price

declines

200

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2012:Q2

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

Percentage Change (%)

Trough = 2007:Q3 -13.6%

Peak = 2001:Q4 +28.5%

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

KRW : No Lasting Impact

Pricing turned positive in Q3:2011, the first increase in

nearly 8 years; Q2:2012 renewals were up 4.3%

Trough = 2007:Q3 -13.6%

202

Change in Commercial Rate Renewals, by Line: 2012:Q2

Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Major Commercial Lines Renewed Uniformly Upward in Q2:2012 for Only the Fourth Time Since 2003; Property Lines & Workers

Comp Leading the Way; Cat Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

4.7%5.1%

7.2%

8.3%

0.6%

3.0%3.8% 3.9% 4.1% 4.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Su

rety

Co

mm

l Au

to

Um

bre

lla

Bu

sin

ess

Inte

rru

ptio

n

Ge

ne

ral

Lia

bili

ty

EP

L

D&

O

Co

nst

ruct

ion

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

Workers Comp rate increases are large than any other line, followed

by Property lines

Shifting Legal Liability & Tort Environment

219

Is the Tort PendulumSwinging Against Insurers?

219

220

Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E

$0

$50

$100

$150

$200

$250

$300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A

Tort costs in dollar terms have remained high but relatively stable

since the mid-2000s., but are down substantially as a share of GDP

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

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Overview & Outlook for the P/C Insurance Industry: 2012 and Beyond 2012 NAMIC Operations Seminar Charleston, SC August 22, 2012 Download at