after the crisis: overview & outlook for theoverview

After the Crisis:Overview & Outlook for theOverview & Outlook for the

P-C Insurance IndustryInternational Association of Claims Professionals

Amelia Island FLAmelia Island, FLSeptember 26, 2010

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

Presentation OutlineReasons for Optimism, Causes for ConcernInsurance Industry Financial Overview & Outlook

ProfitabilityPremium GrowthCapital & CapacityUnderwriting Performance: Commercial & Personal LinesFinancial/Investment Review & Outlook

Financial Strength OverviewFinancial Services Reform: Impacts on the Insurance IndustryTort System Review: Overview and Causes for ConcernTort System Review: Overview and Causes for ConcernPerformance by Segment/Line

Personal & Commercial Lines

The Global Economic Storm: Financial Crisis & RecessionThe Global Economic Storm: Financial Crisis & RecessionCrisis-Driven Exposure Issues: Personal & Commercial LinesExposure, Growth & Profitability

Catastrophe Losses

2

pQ&A

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

Economic Recovery in US is Self-Sustaining: No Double Dip RecessionPessimism “Bubble” Persists; Negative Economic News Amplified; Positive News is Discounted

Financial market volatility will remain a realityEra of Mass P/C Insurance Exposure Destruction Has Ended

But restoration of destroyed exposure will take 3+ years in USNo Secondary Spike in Unemployment or Swoon in Payrolls/WC Exposure

But job and wage growth remains sluggishExposure Growth Will Begin in 2nd Half 2010, Accelerate in 2011p g ,Increase in Demand for Commercial Insurance is in its Earliest Stages and Will Accelerate in 2011

Includes workers comp, commercial auto, marine, many liability coverages, D&OLaggards: Property, inland marine, aviationPersonal Lines: Auto leads, homeowners lags

P/C Insurance Industry Will See Growth in 2011 for the First Time Since 2006I t t E i t I /R i M h M F bl

3

Investment Environment Is/Remains Much More FavorableVolatility, however, will persist and yields remain lowBoth are critical issues in long-tailed commercial lines like WC, Med Mal, D&O

Source: Insurance Information Institute.

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

P/C Insurance Industry Capacity as of 6/30/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis

As of 12/31/09 capacity was within 2% of pre-crisis highRecord Capacity, Depressed Exposures Mean that Generally Soft Market Conditions Will Persist through 2010 and Potentially into 2011There is No Catalyst for a Robust Hard Market at the Current TimeHigh Global First Half 2010 CAT Losses Insufficient to Trigger Hard MarketHigh Global First Half 2010 CAT Losses Insufficient to Trigger Hard Market

Localized insurance and reinsurance impacts are occurring, especially earthquake coverage in Latin/South America, Offshore Energy Markets, European Wind Cover

Inflation Outlook for US and Major European Economies and Japan is TameWill temper claims inflationDeflation is highly unlikely

Financial Strength & Ratings of Global (Re)Insurance Industries Remained St Th h t th Fi i l C i i i Sh C t t With B kStrong Throughout the Financial Crisis in Sharp Contrast With BanksInsurers Avoided the Most Draconian Outcomes in Financial Services Reform LegislationTort Environment in US is Beginning to Deteriorate; No Tort Reform in US

4

Tort Environment in US is Beginning to Deteriorate; No Tort Reform in USMajor Transformation of US Economy Underway with Major Opportunities for Insurers through 2020 in Health, Tech, Natural Resources, Energy

Source: Insurance Information Institute.

ProfitabilityProfitability

Historically Volatiley

5

P/C Net Income After Taxes1991–2010:H1 ($ Millions)

,496

65,7

77

$70 000

$80,000 2005 ROE*= 9.6%2006 ROE = 12.7%

P-C Industry 2010:H1 profits rose $10.6B from $6.0B in 2009:H1, due mainly to $2.2B in realized

capital gains vs $11 1B in

19

$62$6

44,1

55

501

$50,000

$60,000

$70,000 2007 ROE = 10.9%2008 ROE = 0.3%2009 ROAS1 = 5.8%2010:H1 ROAS = 6.3%

capital gains vs. -$11.1B in previous realized capital losses

8 ,316

0,59

8

$24,

404 $3

6,81

$30,

773

1,86

5

$30,

029

531$2

8,31

1$ 4

0,55

9

$38,

5

$30,000

$40,000

$50,000

$14,

17

$5,8

40

$19,

$10,

870 $20 $ $2

3,04

6

3,04

3

$16,

5

$20

$10,000

$20,000

$ $

-$6,970-$10,000

$0

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10:H1* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010:H1 and 4.6% for 2009. 2009:H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

ROE: P/C vs. All Industries1987–2009*

20%P/C Profitability Is

Cyclical and Volatile Katrina,

(Percent)

15%

y at a,Rita, Wilma

%

10%

Hugo

Sept. 11

0%

5%g

Andrew

Northridge

Lowest CAT Losses in 15 Years

4 Hurricanes

Fi i l

-5%87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

US P/C Ins rers All US Ind stries

Northridge Financial Crisis*

7

* Excludes Mortgage & Financial Guarantee in 2008 and 2009.Sources: ISO, Fortune; Insurance Information Institute.

US P/C Insurers All US Industries

ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2010:H1*

18%The P/C Insurance Industry Well

Short of Its Cost of Capital in 2008 but Narrowed the Gap in 2009 and 2010

(Percent)

12%

14%

16%

2.3

pts

Narrowed the Gap in 2009 and 2010

6%

8%

10%

pts +1

.7 p

ts

+2

.0 p

ts

-6.4

pts

-3.2

pts

-2.9

pts

2%

4%

6%

-13.

2 p

-9

-

US P/C Insurers Missed Their Cost of Capital by an Average 6 7 Points from 1991

The Cost of Capital is the Rate of Return Insurers Need to

-2%

0%

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

Capital by an Average 6.7 Points from 1991 to 2002, but on Target or Better 2003-07,

Fell Short in 2008-2010

Insurers Need to Attract and Retain

Capital to the Business

8

* Return on average surplus in 2008-2010 excluding mortgage and financial guaranty insurers.Source: The Geneva Association, Insurance Information Institute

ROE Cost of Capital

Median ROE for Insurers vs. Financial Firms & Other Key Industries 2009(Profits as a % of Stockholders’ Equity)

21%Food Consumer Products

14%14%

19%21%21%Food Consumer Products

PharmaceuticalsComputers, Office Equip.

Health Insurance & Mgd. CareSpecialty Retailers

9%9%

10.5%12%

14%Specialty RetailersEnergy

All IndustriesDiversified FinancialsT l i ti

Stock P/C insurers earned a 7% ROE in 2009, below the

10 5% d b th9%9%

7%7%

TelecommunicationsUtilities

P/C Insurance (Stock)L/H Insurance (Stock)

10.5% earned by the Fortune 500 as a whole and well below health insurers’ 14%. P/C Mutuals’ average

ROE was 3 5%5%4%

0%3.5%

EntertainmentCommercial Banks

P/C Insurance (Mutual)*L/H Insurance (Mutual)

ROE was 3.5%.

Commercial bank ROE was 4% in 2009

9Source: Fortune, May 3, 2010; Insurance Information Institute.

$0 $0 $0 $0 $0 $0

A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 Is Where It’s At NowCombined Ratio / ROE

15.9%110 18%

A combined ratio of about 100 generated a 7% ROE in 2009,10% in 2005 and 16% in 1979

97.5100.6 100.1 100.7 99.5 100.1101.0

9 6%

5 9%14.3%

12.7%

100

105

12%

15%

92.6 7.5%7.3%

9.6%

8.9%90

95

6%

9%

4.4%

80

85

1978 1979 2003 2005 2006 2008* 2009* 2010 H1*0%

3%

1978 1979 2003 2005 2006 2008* 2009* 2010:H1*

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s Depressed

* 2009 and 2010:Q1 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial guaranty insurers

Source: Insurance Information Institute from A.M. Best and ISO data.

Investment Environment to Generate Risk Appropriate ROEs

Financial Services ReformFinancial Services Reform

Insurers Are Impacted, But Not Significantly

11

Financial Services Reform:What does it mean for insurers?

Systemic Risk and Resolution Authority

The Dodd Frank Wall Street Reform and Consumer Protection Act

Creates the Financial Stability Oversight Council and the Office of Financial Research

Imposes heightened federal regulation on large bank holding companies and “systemically risky” nonbank financial companies, including insurersy y y p g

Federal Insurance Office (FIO)Establishes the FIO (while maintaining state regulation of insurance) within the Department of Treasury headed by a Director appointed by the Secretary of TreasuryDepartment of Treasury, headed by a Director appointed by the Secretary of Treasury

FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis

CONCERN: FIO morphs into quasi/shadow or actual regulatorCONCERN: FIO morphs into quasi/shadow or actual regulator

Surplus Lines/ReinsuranceTitle V of the Dodd-Frank bill includes, as a separate subtitle, the Nonadmitted and

12

Reinsurance Reform Act (NRRA), which eliminates regulatory inefficiencies associated with surplus lines insurance and reinsurance

Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

Systemic Risk: Oversight & Resolution Authority

Financial Stability Oversight Council created to oversee systemic risk

Issues Related to Systemic Risk & Resolution Authority

Financial Stability Oversight Council created to oversee systemic risk of large financial holding companies) [a.k.a. TOO BIG TOO FAIL]

P/C insurers potentially could be determined to present systemic risk to the ffinancial system and thus be supervised by the Federal Reserve.

Such supervision would subject such insurers to prudential standards, if the Council determines that financial distress at the company would pose a threat to h U S fi i lthe U.S. financial system.

Orderly Liquidation

The legislation provides an “Orderly Liquidation Authority” mechanism whereby g p y q y ythe FDIC would have enhance powers to resolve distress at financial institutions.

Insurance holding companies and any non-insurance subsidiaries of insurers may be subject to this authority.

13

y j y

Source: Insurance Information Institute (I.I.I.) updates/research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

Systemic Risk: Oversight & Resolution Authority

Orderly Liquidation (cont )

Issues Related to Systemic Risk & Resolution Authority

Orderly Liquidation (cont.)

Insurers are generally exempt from the liquidation authority, but the FDIC would have “backup authority” to place an insurer into orderly liquidation under state l if th t t l t h t d ithi 60 d f t i i klaw if the state regulator has not done so within 60 days of a systemic risk determination.

Liquidation Fund Assessments

The liquidation fund would be funded by assessments on large financial companies, potentially including insurers.

But the insurance industry already has a funding system (state guaranty funds) y y g y ( g y )to pay for the unwinding of failed companies. Therefore, contributions to these state guaranty funds must be considered.

14Source: Insurance Information Institute (I.I.I.) updates/research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

Federal Insurance Office (FIO):What Would it Do?

Establishes office within US Treasury headed by a Director appointed

Duties of the Federal Insurance Office

Establishes office within US Treasury headed by a Director appointed by Treasury Secretary, and charged with:

Monitor the insurance industry to gain expertise (oversight extends to all lines of finsurance except health insurance, long-term care insurance and federal crop

insurance).

Identify regulatory gaps that could contribute to a systemic crisis in the insurance i d h U S fi i lindustry or the U.S. financial system.

Gather information from the insurance industry in order to analyze such data and issue reports. May require insurers, with exception of small insurers which are

t t b it d t d FIO di t i b t i h i fexempt, to submit data and FIO director can issue subpoenas to gain such info.

Deal with international insurance matters.

Monitor the extent to which underserved communities have access to affordable

15

insurance products.


Federal Insurance Office (FIO):What Would It Do? (Cont.)

Establishes office within US Treasury headed by a Director appointed by

Duties of the Federal Insurance Office

Establishes office within US Treasury headed by a Director appointed by Treasury Secretary, and charged with:

Make recommendations to the FSOC on whether an insurer (incl. reinsurers) poses fa systemic risk and should be placed under supervision of the Federal Reserve.

Annual reports to Congress and the President on the insurance industry are required.

A study on the modernization of insurance regulation in the U.S. is required within 18 months, as is a report on the U.S. and global reinsurance market

Oversee the federal Terrorism Risk Insurance Program.

Insurance will continue to be regulated by the states, but the FIO has limited preemption authority over state law in cases where it determines that state law is inconsistent with a negotiated international agreement and treats a non-U.S.

16

insurer less favorably than a U.S. insurer.


Surplus Lines/Reinsurance Regulation:What Is Included?

Title V of the Dodd Frank bill includes the Nonadmitted and

Surplus Lines and Reinsurance Regulation

Title V of the Dodd-Frank bill includes the Nonadmitted and Reinsurance Reform Act (NRRA), comprising two parts:

Surplus Lines:

Provides that the home state of the insured will have exclusive authority to regulate the placement of nonadmitted insurance.

Only the insured’s home state will be permitted to collect premium taxes on nonadmitted insurance.

The legislation also establishes a uniform system for allocation of premium tax obligations through an interstate compact or other procedures established by the states.

The NRRA would also establish uniform standards for surplus lines eligibility criteria by requiring capital and surplus requirements for U.S.-domiciled insurers

17

conform to those in the NAIC’s Nonadmitted Insurance Model Act.


Surplus Lines/Reinsurance Regulation:What Is Included? (Cont.)

Title V of the Dodd Frank bill includes the Nonadmitted and

Surplus Lines and Reinsurance Regulation

Title V of the Dodd-Frank bill includes the Nonadmitted and Reinsurance Reform Act (NRRA), comprising two parts:

Reinsurance:

NRRA’s reinsurance part provides that a ceding insurer’s state of domicile will be the single point of regulation with respect to credit for reinsurance, provided it is an NAIC-accredited state.

It also provides that a ceding insurer’s state of domicile will be the single point of regulation for purposes of:

The rights of the parties to provide for dispute resolution through arbitration agreements

Choice of law

Imposition of standard terms different than those in the reinsurance contract

The reinsurance part also provides that a reinsurer’s state of domicile will be

18

p psolely responsible for regulating the reinsurer’s solvency, providing it is an NAIC-accredited state.


Other Matters Impacting Insurance

Derivatives:

Derivatives and Bureau of Consumer Financial Protection

Derivatives:

The bill would require most standardized derivatives to be routed through clearinghouses and traded on exchanges.

Two new classes of regulated entities would be created: swap dealers and major swap participants.

Both would be required to register with the SEC and/or the CFTC and would be subject to margin, capital, record-keeping and business conduct requirements.

Bureau of Consumer Financial Protection:

The Bill creates a new federal level entity within the Federal Reserve with theThe Bill creates a new federal level entity within the Federal Reserve with the authority to regulate financial products offered to consumers.

Insurance products are specifically exempted from this bureau’s authority.

19Source: Insurance Information Institute (I.I.I.) updates/research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

New Rulemakings Under The Dodd Frank Wall Street Reform and Consumer Protection Act

95100

A total of at least 243 new rulemakings are expected under the Dodd-Frank financial reform by Federal Agency*

61

95

708090

100

24

6156

31

54

30405060

24

2

17

49

0102030

Bureau ofConsumerFinancialProtection

CFTC FinancialStability

OversightCouncil

FDIC FederalReserve

FTC OCC Office ofFinancialResearch

SEC Treasury

* Total eliminates double counting for joint rule-makings and this estimate only includes explicit rule-makings in the bill, and thus likely represents a significant underestimate.

Source: Wall Street Journal, July 14, 2010; Davis Polk & Wardwell. 20

Financial Services Reform: Impact on Insurers

Resolution Authority/Systemic Risk: Regulators may seize and break-up troubled financial firms whose collapse might cause widespread damage (i.e., systemically important companies)

R l ld f i h h $ 0B iRegulator would recoup fees with more than $50B in assetsSets up liquidation procedure run by FDICEstablishes 10-member oversight council to monitor and address risks to financial stabilityEliminates Office of Thrift Supervision (regulator of AIG’s holding company, not its insurance units which were (are) state regulated)

Volcker Rule: Largely bars largest firms largest investment firms from trading with their own fundsg

Exempts insurers, asset managers and trust/custody banks, though Fed could impose Volcker Rule and capital standards on individual firms if warranted

Derivatives: Requires routine derivatives to be traded on exchanges and routed through clearinghousesg g

Imposes capital, margin, reporting and record keeping and business conduct rules on firms that deal in derivatives

Consumer Financial Protection Bureau: To housed within FedWill it be limited to banks/creditors

21

Will it be limited to banks/creditorsOffice of National Insurance: To be established within Treasury to monitor and gather information in the insurance industry

Source: Wall Street Journal, June 26, 2010; Insurance Information Institute.

2010 Property and Casualty InsuranceReport Card

ME

NH

ND

MN

WA

AL

VTMT

AK

B-B-

B

C -

AB

F NH

MA

CT

PA

NE

MN

MI

IL

IA

IDOR

NJRI C

DE

NY

MD

SD WI

INOH

NV

WY

= A= B= C= D

A-

B-

B

B-B-

B-

B- C-A

B+B+

BB

C+

C+

C

D+F

WVVA

NC

OK

IL

AZSC

TN

ARNM

KYMOKS

IN

CA

NV

UTCO

D= F= NG

A- A-

B-B-

B

B-

B-

B-C-

C-

D-D-

AB

B

C+

D+D+D

Source: James Madison Institute, February 2008.

LATX

HI GAAL

FL

MS

NM

B- B-B-C-

C-A B+ BNG

NGN t G d d Di t i t f C l bi

Source: Heartland Institute, May 2010

D FNot Graded: District of ColumbiaMississippiLouisiana

Critical Differences Between P/C Insurers and Banks

Superior Risk Management Model and L L M k Bi DiffLow Leverage Make a Big Difference

23

How P/C Insurance Industry Stability Has Benefitted Consumers

Bottom Line:

Insurance markets – unlike banking – are operating normally

The basic function of insurance – the orderly transfer of risk from li t t i ti i t t dclient to insurer – continues uninterrupted

This means that insurers continue to:Pay claims (whereas 287 banks have gone under as of 9/10/10)y ( g )

– The promise is being fulfilledRenew existing policies (banks are reducing and eliminating lines of credit)W it li i (b k t i l d b i hWrite new policies (banks are turning away people and businesses who want or need to borrow)Develop new products (banks are scaling back the products they offer)Compete intensively (banks are consolidating reducing consumer choice)

24

Compete intensively (banks are consolidating, reducing consumer choice)

Source: Insurance Information Institute

Reasons Why P/C Insurers Have Fewer Problems Than Banks

Emphasis on Underwritingf ( )

A Superior Risk Management Model

Matching of risk to price (via experience and modeling)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk

Strong Relationship Between Underwriting and Risk BearingI l i i k i h b i h d i k i “ ki i hInsurers always maintain a stake in the business they underwrite, keeping “skin in the game” at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences – straightforward moral hazard problem from Econ 101

Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry

Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid

Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds private equity complex securitized instruments credit derivatives – CDS’s)

25

funds, private equity, complex securitized instruments, credit derivatives – CDS s)

Greater TransparencyInsurance companies are an open book to regulators and the public

Source: Insurance Information Institute

Obama Administration Proposal to Scale Back Terrorism Risk Insurance Program

Administration’s Budget Proposal for FY 2011:

I l d l t l b k f d l t f t i i k

5Includes proposal to scale back federal support for terrorism risk insurance program

Proposal projects savings of $249 million from 2011-2020j g

Administration’s justification is that this would “encourage the private sector to better mitigate terrorism risk through other means, such as developing alternative reinsurance options and building saferdeveloping alternative reinsurance options and building safer buildings.”

Key Concerns Among Industry Observers Over Proposed Reduction in Federal Support

S ti f h t l ld h d t i t l ff tSuggestion of changes to law would have detrimental effect on availability and affordability of terrorism insurance

A 2009 Aon study estimated some 70-80 percent of the commercial

26Source: Budget of the U.S. Government Fiscal Year 2011

property insurance market would revert to absolute exclusions for terrorism, if TRIA is changed.

Terrorism: Insurance Concerns Resurface

Reasons Why Concerns Are Mounting in 2010

Perception (Reality) that U.S. vulnerability is risingThwarted Christmas Day attack by “underwear bomber”

And new bin Laden tape claiming al Qaeda is responsibleAnd new bin Laden tape claiming al Qaeda is responsibleFoiled NYC Subway Bomber Plot (Zazi case)Failed Times Square Car Bombing on May 1Trials of Guantanamo 9/11 suspects in Manhattan Court (?)U.K. in January Raised Terror Alert Status to 2nd Highest LevelIncreased anti-terror efforts, including full-body scans, g yEffort by government to appear more vigilant, preparedRise of groups such al Qaeda in the Arabian PeninsulaU S military surge in Afghanistan operations

27

U.S. military surge in Afghanistan operationsMost buyers/producers haven’t thought about coverage recentlyObama Administration’s Intent to Reduce Support for TRIA

Shifting Legal Liability & g g yTort Environment

Is the Tort PendulumSSwinging Against Insurers?

28

Important Issues & Threats Facing Insurers: 2010–2015

Emerging Tort Threat

No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration

Erosion of recent reforms is a certaint (alread happening)Erosion of recent reforms is a certainty (already happening)

Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability

T t t i th ll t f i fl tiTorts twice the overall rate of inflation

Influence personal and commercial lines, esp. auto liability

Historically extremely costly to p/c insurance industry

Bottom Line: Tort “crisis” is on the horizon and will be

Leads to reserve deficiency, rate pressure

29Source: Insurance Information Institute

Bottom Line: Tort crisis is on the horizon and will be recognized as such by 2012–2014

Trial Bar Priorities

Reverse U.S. S p eme Supreme Court decisions on pleadingspleadings

Eliminate pre-dispute

Pass Foreign Manufactures L l

Confirm pro-trial lawyer j d pre dispute

arbitration

Erode federal

Legal Accountability Act

judges –“Federalize Madison County”preemption

Expand iti

Grant enforcement authorities to

County

Roll back existing securities

litigationauthorities to state AGs

existing legal reforms

Source: Institute for Legal Reform.

Trial Lawyer Poll: Which Areas Offer the Greatest Potential Benefit?

Top Categories Percentage

Environmental 14%

Insurance coverage 13%Insurance coverage 13%

Mortgage fraud 12%

Nursing home/seniors issues 11%

Bad-faith against insurance companies 10%Bad-faith against insurance companies 10%

41 different practice areas were included as categories41 different practice areas were included as categories

Source: Institute for Legal Reform poll, December 2009.

Cost of US Tort System ($ Billions)

Tort costs consumed 1.79% of GDP in 2008, down from 2.24% in 2003

3 46 $260

$261

247

252

255

$263 $273 $2

89.5

$300

$3501 44 48 15

956 56 $1

67$1

69 $180 $2

05 $23 $2 $ $ $2 $2 $2 $

$200

$250

$129

$130 $1

4$1

4$1

4 $1 $1 $1 $ $

$100

$150

Per capita “tort tax” was $? in

$0

$50

Per capita tort tax was $? in 2009, up from $838 in 2008

and $636 in 2000

$0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809

E10

E11

E

Source: Tillinghast-Towers Perrin, 2009 Update on US Tort Cost Trends.

Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical

$300 2.50%Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

$250

2.25%

To

y

$150

$200

stem

Cos

ts

2.00%

ort Costs as

$100Tort

Sys

1.75%

% of G

DP

2009–2010 Growth in Tort

$0

$50

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08E 10E1.50%

2009 2010 Growth in Tort Costs as % of GDP is Due in

Part to Shrinking GDP

33

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

* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010

Business Leaders Ranking of Liability Systems in 2009*

Best States1 Delaware

Worst States41 New Mexico

New in 2009N l N t i1. Delaware

2. North Dakota

3 Nebraska

41. New Mexico

42. Florida

43. Montana

North DakotaMassachusettsSouth Dakota

Newly Notorious

New MexicoMontana3. Nebraska

4. Indiana

5. Iowa

43. Montana

44. Arkansas

45. IllinoisDrop-offs

Arkansas

Rising Above

6. Virginia

7. Utah

46. California

47. Alabama

MaineVermontKansas

TexasSouth CarolinaHawaii

8. Colorado

9. Massachusetts

48. Mississippi

49. LouisianaMidwest/West has mix of

10. South Dakota 50. West Virginia

Source: US Chamber of Commerce 2009 State Liability Systems Ranking Study; Insurance Info. Institute.

good and bad states.

The Nation’s Judicial Hellholes: 2010

West VirginiaIllinoisCook County

Watch List

California

New York City

AlabamaMadison County, ILJefferson County, MSTexas Gulf CoastTexas Gulf CoastRio Grande Valley, TX

Dishonorable Mention

AR Supreme CourtMN Supreme Court

S C

New JerseyAtlantic County (Atlantic City)

New MexicoAppellate

ND Supreme CourtPA GovernorMA Supreme Judicial Court

35Source: American Tort Reform Association; Insurance Information Institute

South Florida

Appellate CourtsSacramento County

Average Jury Awards 1999 - 2008

$1,200

$1,018 $1,022$1,077

$1,046

$1 000

$1,100

$800 $799

$950

$900

$1,000

$725 $747 $756$800 $799

$700

$800

$500

$600

$5001999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Jury Verdict Research; Insurance Information Institute.

Avg. Jury Awards 1999 vs. 2003 and 2008

$7,000

$4,8

38

64 $4,8

85$5,4

46

$5 000

$6,000

38 $2,8

87

$

$4,1

$3,4

99

$3,7

17

$3,7

22

$

$

$4,000

$5,0001999 2003 2008

44 9

$2,3 $

99 901

1,04

6

49$2,000

$3,000

$64

$201 $5

89$79

$208

$9$

$327 $8

$0

$1,000

Overall Vehicular Premises Wrongful Medical ProductsOverall Vehicularliability

Premisesliability

Wrongfuldeath*

Medicalmalpractice

Productsliability

*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.

Sum of Top 10 Jury Awards 2004-2009

$6,000

$5,159$5,000

$2,954$3,000

$4,000

$1,344 $1,511$2,000

$3,000

$815$616

$0

$1,000

$02004 2005 2006 2007 2008 2009

Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009 and 2010.

2009 Top Ten Jury Verdicts

Value Issue State

$370 Million Defamation California

$330 Million Personal Injury (Drunk driving case) Florida

$300 Million Personal Injury (Tobacco verdict) Florida$300 Million Personal Injury (Tobacco verdict) Florida

$89 Million Personal Injury (Drunk driving case) Missouri

$78.75 Million Personal Injury (Prempro) New Jersey$ j y ( p ) y

$77.4 Million Medical Malpractice New York

$71 Million Conversion and Breach of Fiduciary Duty Texas

$70 Million Workers Comp Case Texas

$65 Million Personal Injury Florida

Source: Lawyers USA, January 15, 2010.

$60 Million Medical Malpractice New York

2008 Top Ten Jury Verdicts

Value Issue State

$388 Million Fraud Intentional Infliction of Emotional Nevada$388 Million Fraud, Intentional Infliction of Emotional Distress

Nevada

$316 Million Breach of Contract Georgia

$188 Million Defamation New York$188 Million Defamation New York

$85 Million Premises Liability Pennsylvania

$84 Million Negligence, Personal Injury Texasg g j y

$66 Million Breach of Fiduciary Duty Oklahoma

$60 Million Insurance Bad Faith Nevada

$55 Million Negligence California

$54 Million Wrongful Death Georgia

$

Source: Lawyers USA, January 13, 2009.

$48 Million Negligence Indiana

Medical Malpractice Tort Cost: Growth Continues, Though Modestly

($ Billions)

2 26.5 $28.

2$2

9.4

$30.

1$3

0.4

$29.

8

$28$30$32 Over the period from 1990

through 2008, medical malpractice tort costs rose 224%

5 6.4

$17.

9$1

9.6 $21.

7 $24.

2 $2

$20$22$24$26$28 malpractice tort costs rose 224%,

more than double the 101% increase in tort costs generally

8 9 3 6 8.5

$9.2 $10.

1$1

0.6

$11.

5$1

2.5

$13.

3$1

4.1

$15. $16 $

$10$12$14$16$18

Med mal tort costs

$1.2

$1.4

$1.8

$2.2 $4

.8 $5.8 $6

.8$6

.7$6

.9$7

.3$7

. $8 $

$2.7

$3.4

$4.1

$2$4$6$8

$10 actually declined in 2008 for the first time

since 1985

$0$2

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

Sources: Towers Perrin; Insurance Information Institute

Average Medical Malpractice Jury Award: 2002 - 2008

$4,600 The average Med Mal jury award has been relatively

$4,379

$4,200

$4,400

award has been relatively flat in recent years

$3 697

$3,951

$3 700 $3,722$3,800

$4,000

$3,499

$3,697

$3,340

$3,700 $ ,

$3,400

$3,600

$3,800

$3 000

$3,200

$3,400

$3,0002002 2003 2004 2005 2006 2007 2008

Source: Jury Verdict Research; Insurance Information Institute.

How the Risk Dollar is Spent (2008)

Total liability costs account for about 30% of the risk dollar

Firms w/Revenues < $1 Billion

Other Costs,

Property Premiums,

15%

Firms w/Revenues > $1 Billion

Property Premiums, Other Costs,

21%Retained Property

Losses, 1%

15%

Admin Costs

Other Costs, 15%

e u s,12%

Retained Property

Losses, 5%Admin Costs, 7%Admin Costs,

9% Liability Premiums,

13%

Liability Premiums,

11%

7%

Prof. Liability Costs, 4%

Prof. Liability Costs, 9%

WC Premiums,

7%

Liability Retained

Losses, 9%Total Mgmt.

Liab., 5%Retained WC Losses, 10% Retained WC

Losses, 22%

Retained Liability

Losses, 12%

Source: 2009 RIMS Benchmark Survey; Insurance Information Institute

7%Total Mgmt.

Liab., 6%WC

Premiums, 6%

,

Average Total Limits Purchasedby All U.S. Firms* ($ Millions)

$105.0$110Limits fell by 45%

$85 8 $85 9$88.7

$99.1$101.8

$95.7

$87$90

$100

ybetween 2000 and 2008.

Price/capacity are issues.

$77.9

$85.8$83.2

$85.9 $87

$77 $75$80

$90

$66 $66

$58$60

$70

$50

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

*Includes underlying primary limitsSource: Limits of Liability 2008, Marsh, Inc.

Excess Liability Market CapacityNorth America ($ Billions)( )

$3 0

In 2008, capacity is back to 2000 levels.

$2.0

15

$1.6

60

$1.6

45

1.57

0

.535

425

1.57

5

$1.7

10$2.0

45

$1.9

41

$2.0

11

$1.7

21

405

34432

$2.5

$3.0

$$$1$1$1.4$1$

$1.4

$1.3

3

$1.4

3

$1.5

$2.0

$0 5

$1.0

$0.0

$0.5

994

995

996

997

998

999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Source: Marsh, 2008 Limits of Liability Report

19 19 19 19 19 19 20 20 20 20 20 20 20 20 20

Insurer Defense & Cost Containment Expenses as a % of Incurred Losses, 2005-2008*

%

150%2005 2006 2007 2008

% .6%

%

134.

5%100%

ed L

osse

s

70.0

%

48.0

%

42.2

%

%

56.6

%

6.7% %

78

55.1

%

41.2

%

%

65.4

%

58.1

%

3% %50%nt o

f Inc

urre

15.9

%

4

28.3

%

11.1

%

10.0

%

6.6%15

.2%

3 6

27.1

%

9.9%

6.6%14

.5%

4

24.5

%

12.0

%

11.6

%

6.1%13

.6% 34

.

24.4

%

11.6

%

10.7

%

5.9%11

.0%

Perc

e n

0%

Liabilit

y Lines

ducts

Liab

ility

al Malp

racti

ce

Comm. M

-P**

ral Liab

ility*

**Worke

rs Comp

Auto Liab

ility

PPA Liabilit

y

All L

Produ

Medica

l C

Genera Wo

Comm. A P

*Net of reinsurance, excl. state funds. **Liability portion only. ***Excludes products liability.Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC; Insurance Information Institute.

Shareholder Class Action Lawsuits*

600After surging in 2007 and

2008, litigation activity related t th fi i l i i b t

498500

to the financial crisis began to ebb after financial markets began to recover in the 2nd

quarter of 2009

231 241266

22 238300

400

164202

163

231188

111

173

241209216 227238

182

119176

222168200

65

0

100

*Securities fraud suits filed in U.S. federal courts as of June 25, 2010.Source: Stanford University School of Law (securities.stanford.edu); Insurance Information Institute

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

Discrimination Charges Filed with EEOC by Type: Percent Change FY06-FY09

60%

Change in Charges Filed (%) Retaliation and age discrimination suits are up

substantially

37.6% 37.7%33.7% 33.3%

49.0%

40%

50%

60%

9.4%

23.1% 23.3% 20.6%

10%

20%

30%

0%

10%

All

Race

Sex

alOrig

in

Religio

n

taliat

ion Age

isabil

ity

ual P

ay

Nation

al Re

Reta Dis

Equa

The Financial Crisis and Poor Labor Market Conditions Have Contributed

48Source: Equal Opportunity Employment Commission; Insurance Information Institute.

The Financial Crisis and Poor Labor Market Conditions Have Contributed to a Surge Employment Discrimination Charges

Financial Strength & RatingsFinancial Strength & Ratings

Industry Has Weathered the Storms Well

49

P/C Insurer Impairments, 1969–2009

60 5860

70 5 of the 11 are Florida companies (1 of these

5 is a title insurer)

49 50 4855

541

49 5047

40

50

6034

9

36

3134

29 318 9

358

30

40

815

127

11 9 913 12

19

16 14 13

1612

1 8 1 1814 15

7 65

10

20

0

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

The Number of Impairments Varies Significantly Over the P/C Insurance

Source: A.M. Best; Insurance Information Institute.

p g yCycle, With Peaks Occurring Well into Hard Markets

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009

115

120

1.8

2.0Combined Ratio after Div P/C Impairment Frequency

110

115

Rat

io

1.2

1.4

1.6

Impair

100

105

Com

bine

d

0.6

0.8

1.0

rment R

ate

90

95

0 0

0.2

0.4

0.6

2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969

90

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* 0.0

g

Impairment Rates Are Highly Correlated With Underwriting Performance

51Source: A.M. Best; Insurance Information Institute

p g y gand Reached Record Lows in 2007/08

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009

Despite financial market turmoil and a soft market

in 2009, 76% of ratings actions by A.M. Best

11 9%

actions by A.M. Best were affirmations;

just 2.9% were downgrades and 3.2%

were upgradesOther – 216

3.8%2.4%

11.9%75.7%

pg

Affirm – 1,375

Initial 44Under Review – 69

2.9%3.2%

Downgraded –53

Upgraded – 59Initial – 44

P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses

52

.Source: A.M. Best.

pAre Anticipated in the Industry’s Risk Management Strategy

Reasons for US P/C Insurer Impairments, 1969–2008

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.

Investment Catastrophe Losses Play a Much Smaller Role

4 2%3.7%

Investment Catastrophe Losses Play a Much Smaller Role

Reinsurance Failure

Mi

Sig. Change in Business

38.1%7.0%

9.1%4.2%

Deficient Loss Reserves/In adequate Pricing

Investment Problems

Misc.

38.1%

7.9%

In-adequate Pricing

Affiliate Impairment

14.3%8.1%

7.6%Catastrophe Losses

53Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009

Rapid GrowthAlleged Fraud

P/C Premium GrowthP/C Premium GrowthPrimarily Driven by the

I d t ’ U d iti C lIndustry’s Underwriting Cycle, Not the Economy

54

Soft Market Appears to Persist in 2010 but May Be Easing: Relief in 2011?

25%

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

20%

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.

10%

15%

5%

-5%

0%

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 F

NWP was flat with 0.0% growth in 10:H1 vs. -4.4% in 09:H1

55

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 10F

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

Average Expenditures on Auto Insurance

$950

$830 $842 $831$816 $816

$844

$878

$850

$900

$705$726

$786$816

$795$816

$703$750

$800

$651$668

$691$705

$690$685$703

$650

$700

$60094 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10*

Countrywide Auto Insurance Expenditures Increased

56

Countrywide Auto Insurance Expenditures Increased2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)

* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

Monthly Change in Auto Insurance Prices*

(Percent)

6%

Auto Insurance Price Increases Seem to Have Leveled Off in Recent Months,

Averaging 4.5% for All of 2009

% .7% 4.0%

4.0% 4.

3% 4.4% 4.

7%4.

4% 4.7%

4.6% 4.7%

4.5% 4.6%

4.5% 4.

7%

4%

5%

%2.

6%2.

6% 2.7% 3.

0% 3.1% 3.

4 % 3.

3%

4%

0.8%

0.8%

0.5%

0.4%

0.3%

0.3% 0.

5% 0.6%

0.5%

1% 0.5% 0.

9% 1.1% 1.

3% 1.7%

2%

1%

2%

0 0 0 0.1 0.

0%

Jan

07eb

07

Mar

07

Apr

07

May

07

Jun

07Ju

l 07

Aug

07

ep 0

7O

ct 0

7N

ov 0

7D

ec 0

7Ja

n 08

eb 0

8M

ar 0

8A

pr 0

8M

ay 0

8un

08

Jul 0

8A

ug 0

8ep

08

Oct

08

Nov

08

Dec

08

Jan

09eb

09

Mar

09

Apr

09

May

09

Jun

09Ju

l 09

Aug

09

ep 0

9O

ct 0

9N

ov 0

9D

ec 0

9

57

* Percentage change from same month in prior year.Source: US Bureau of Labor Statistics

J F M A M J J A S O N D J F M A M Ju J A S O N D J F M A M J J A S O N D

Average Premium forHome Insurance Policies**

$950

$822 $835$854

$879

$804$764$800

$850

$900

$668

$764$729

$6 0

$700

$750

$

$508$536

$593

$550

$600

$650

$508$500

00 01 02 03 04 05 06 07 08* 09* 10*

58

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2010)

Q04

Q04

Q04

Q04

Q05

Q05

Q05

Q05

Q06

Q06

Q06

Q06

Q07

Q07

Q07

Q07

Q08

Q08

Q08

Q08

Q09

Q09

Q09

Q09

Q10

Q10

(Percent)-0

.1%

-2%

0%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

Magnitude of Price Declines Shrank

During Crisis,

-3.2

%% -4

.6%

-2.7

%-3

.0%

3% .1%

4.9% % 6% 3%-6%

-4%

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

-5.9

%-7

.0%

4% 7%-8

.2%

-

-5.

6%

-6.4

% -5 -4-5

.8%

-5.6 -5.

-6.4

%

-10%

-8%

gPerformance, Higher

Cat Losses and Costlier Reinsurance

-9.

-9.7

-9.6

-11.

3%-1

1.8%

.3% -12.

0%5% 2.

9% -11.

0%

-14%

-12%

KRW Eff t

Market Remains Soft as Capital

59

-13

-13. -1

2-16%

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

KRW Effectp

Restored and Underwriting Losses

Remain Modest

Change in Commercial Rate Renewals, by Line: 2010:Q2Percentage Change (%)

n

All Com

mercial

Comml P

ropGL Umbre

llaCom

ml Auto

WV

Constr

uctio

nD&O

Bus. In

terrup

tion

EPL

Surety

-0.1%

-3 0%-2.0%-1.0%0.0%

-4.6%

-3.4% -3.3% -3.0%

6 0%-5.5% -5.4%-6.0%

-5.0%-4.0%3.0%

Most Major Commercial Lines Renewed Down in Q2:2010 at a

-6.4%-7.0%

-6.3% -6.0%

-8.0%-7.0%

60Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

jFaster Pace than a year Earlier

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q2Percentage Change (%)

Market has Been Soft for 6 years and Remains Soft

Peak = 2001:Q4 +28.5%

as Capital is Restored and Underwriting Losses

Remain Modest

Pricing Turned Negati e in Earl

28.5%

KRW

Negative in Early 2004 and Has Been Negative

Ever Since

KRW Effect

Trough = 2007:Q3 -13.6%


Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q2

1999:Q4 = 100

Pricing today is where is was in

Q4:2000 (pre-9/11)


Capital/Policyholderp ySurplus (US)

Shrinkage, but Not Enoughto Trigger Hard Market

63

US Policyholder Surplus:1975–2010*

$600

($ Billions)

Surplus as of 6/30/10 was a near-record $530.5B, up from $437 1B at the crisis trough at 3/31/09

$400$450$500$550 up from $437.1B at the crisis trough at 3/31/09.

Prior peak was $521.8 as of 9/30/07. Surplus as of 6/30/10 is now 1.7% above 2007 peak; Crisis trough

was as of 3/31/09 16.2% below 2007 peak.

$250$300$350$400

“Surplus” is a measure of

$50$100$150$200 underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in

non-insurance organizations

$0$50

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

organizations

The Premium-to-Surplus Ratio Stood at $0.80:$1 as of

* As of 6/30/10; **Calculated using annualized net premiums written based on H1 2010 data.Source: A.M. Best, ISO, Insurance Information Institute.

The Premium to Surplus Ratio Stood at $0.80:$1 as of6/30/10, A Record Low (at Least in Recent History)**

Policyholder Surplus, 2006:Q4–2010:Q2

($ Billions)

$560

2007:Q3Previous Surplus Peak Surplus set a new

record in 2010:Q1*

$496.6

$512.8$521.8

$490 8

$511.5

$540.7$530.5

$505.0$515.6$517.9

$500

$520

$540

$487.1$

$478.5

$455.6$463.0

$490.8

$460

$480

$500

$437.1

$420

$440

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

Quarterly Surplus Changes Since 2009:Q1 Trough

09:Q1: -$84.7B (-16.2%)09:Q2: -$58.8B (-11.2%)

10:Q1: +$18.9B (+3.6%)10:Q2: -$10.2B (-1.9%)

*Includes $22.5B of paid-in capital from a holding company parent for one

’

65Sources: ISO, A.M .Best.

09:Q2: $58.8B ( 11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q2: $10.2B ( 1.9%)insurer’s investment in a non-insurance business

Paid-in Capital, 2005–2010:H1($ Billions)

$22 5$25

Paid-in capital for insurance ti i 2009 H1

$23.8

$22.5

$15

$20operations in 2009:H1 was $2.3B. In 2010:H1 it was a

record $23.8B

$14 4$10

$15

$14.4

$3.8 $3.2

$12.3

$1.3$6.5$0

$5

$02005 2006 2007 2008 2009 2010:Q1

I 2010 H1 O I ’ P id i C it l R b $22 5B

66Source: ISO.

In 2010:H1 One Insurer’s Paid-in Capital Rose by $22.5Bas Part of an Investment in a Non-insurance Business

Global Reinsurance Capacity Shrankin 2008, Mostly Due to Investments

Global Reinsurance Capacity Source of Decline in 2008

$360$350

$350

$370 RealizedCapitalLosses

$310

$33031%

$300

$290

$310 55% 14%

Change inUnrealizedCapital Losses

Hurricanes

$2702007 2008 2009E

Global Reinsurance Capacity

Capital Losses

67Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute estimate for 2009.

Global Reinsurance CapacityFell by an Estimated 17% in 2008

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

18%

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Over

(Percent)

13.8%

16.2%

15%

18% pthe Past 20+ Years

9.6%

6.9%

10.9%

6 2%

9%

12%

3.3%

6.2%

3%

6%

0%6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

68

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute

Hugo Andrew Earthquake Hurricanes Katrina 3/31/09**

Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*

30%

(Percent)Surplus growth is now positive but premiums

continue to fall, a departure from the historical pattern

15%

20%

25%p

0%

5%

10%

15%

-10%

-5%

0%

-15%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*

NWP % change Surplus % change

Sharp Decline in Capacity is a Necessary but

69

* 2010 NWP and Surplus figures are % changes as of H1:10 vs H1:09. Sources: A.M. Best, ISO, Insurance Information Institute

Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market

Merger & AcquisitionMerger & Acquisition

Barriers to Consolidation Will Diminish in 2010

70

U.S. P/C Insurance-RelatedM&A Activity, 1988–2009

$56$60 140Transaction Values

$35$40

$40

$50

($ B

illio

n)

100

120

Num

be

Number of Transactions

$19 $20

$35

$16

$31

$20

$30

ctio

n Va

lue

60

80

er of Transa

$2$5

$1 $0 $0

$9$14

$16

$4$8

$12

$2$3 $3 $5$6

$10

$20

Tran

sac

20

40

ctions

$$0

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090

2010: No Mega Deals So Far, Despite Record Capital Slo Gro th and Impro ed$ Value of Deals Down 78%

71

Note: U.S. Company was the acquirer and/or target.Source: Conning Research & Consulting.

Record Capital, Slow Growth and Improved Financial Market Conditions

$in 2009, Volume Up 7%

Investment PerformanceInvestment Performance

Investments Are a PrincipleS f D li i P fi biliSource of Declining Profitability

72

Property/Casualty Insurance Industry Investment Gain: 1994–2010:H11

$64.0$70

($ Billions) 2009:H1 gain was $12.5B

$42.8$47.2

$52.3

$44.4 $45.3$48.9

$59.4$55.7

$39 0

$58.0$51.9

$56.9

$50

$60

$35.4 $36.0$31.7

$39.0

$25.8

$20

$30

$40

Investment gains in

$0

$10

$20 Investment gains in 2010 are on track to be their best since 2007

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10:H1In 2008, Investment Gains Fell by 50% Due to Lower Yields and

Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income p g

Investment Gains Are Recovering So Far in 20101 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

P/C Insurer Net Realized Capital Gains, 1990-2010:H1

9 2 81 $18.

023.

02 16.2

1

3 04$20

($ Billions) Capital losses have turned to capital gains,

aiding earnings

$2.8

8$4

.81 $9

.89

$9.8

2

$10. $

$13 $

$6.6

3

$6.6

1$9

.13

$9.7

0$3

.52 $8

.92

$2.2

3$9.2

4$6

.00

$1.6

6$5

$10$15$20

-$1.

21

7.98

-$15-$10

-$5$0

-$7

$19.

81-$25-$20-$15

-$

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910:Q1

Realized Capital Losses Were the Primary Cause

74Sources: A.M. Best, ISO, Insurance Information Institute.

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

Treasury Yield Curves: Pre-Crisis (July 2007) vs. August 2010

4 82% 4.96% 5.04% 4.96% 4 82% 4 82% 4 88% 5.00% 4 93% 5.00% 5.19%6%

4.82% 4.96% 4.96% 4.82% 4.82% 4.88% 4.93%

3.80%3.52%4%

5%

Treasury yield curve is near its most depressed level in at

2.10%

2.70%

%2%

3%

most depressed level in at least 45 years. Investment

income is falling as a result

0.15% 0.16% 0.19% 0.26%0.52%

1.47%

0.78%1%

2%

August 2010 Yield Curve*Pre-Crisis (July 2007)

0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Pre Crisis (July 2007)

Stock Dividend Cuts Have Further Pressured Investment Income

75

Stock Dividend Cuts Have Further Pressured Investment Income

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

Treasury Yields Are Low and Expected to Remain Low Through 2011

6

Short-term yields remain very depressed, impacting insurers ability

to generate investment earnings4.85 4.804.48 4.63

3.663.26 3.2 3.4

4.29

3.224

5

6 g g

1.40

0 2 0.51

2

3

0.15 0.2 0 5

03-Month T-Bill Yield 10-Year T-Note Yield

2005 2006 2007 2008 2009 2010F 2011F

The ability of reserves releases to favorably impact calendar year results will diminish over time reserved redundancies fall

76

Sources: Board of Governors of the United States Federal Reserve Bank; Blue Chip Economic Indicators, 9/10; Insurance Information Institute.

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

l Lines

s Autop cia

lAuto

PropCas Suret

yy Lin

esl ance

**

y

Persona

l L

Pvt Pas

s A

Pers Prop

Commerc

i

Comml A

u

Credit

Comm Pro

Comm C

a

Fidelity

/Su

Warranty

Surplus L

i

Med M

al

WC Reinsu

ran

.8%

.8%

.0% .9%

.1%

%

-3%-2%-1%0%

-1 -1 -2.

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

5.7%

-1 -2.

-3.1

%

-7%-6%-5%-4%

-5 -7.3%-8%

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

77

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

Distribution of P/C Insurance Industry’s Investment Portfolio

Portfolio Facts As of December 31, 2008

Invested assets totaled $1.214 trillion as of 12/31/08

68.4%

Bonds

Insurers are generally conservatively invested, with more than 2/3 of assets invested in bonds as of

68.4%

12/31/08

Only about 15% of assets were invested in common stock

f 12/31/08 8 0%14.8%6.1%

P f d St k

Other

as of 12/31/08

Even the most conservative of portfolios was hit hard in 2008

8.0%

0.9%1.8% Common

StockReal Estate

Cash and Short-term

Investments

Preferred Stock

78Sources: NAIC; Insurance Information Institute research.

Underwriting Trends –Underwriting Trends Financial Crisis Does Not

Directly Impact UnderwritingDirectly Impact Underwriting Performance: Cycle, Catastrophes

Were 2008’s DriversWere 2008’s Drivers

79

P/C Insurance Industry Combined Ratio, 2001–2010:H1*

As Recently as 2001, Insurers Paid Out

Nearly $1 16 for Every

Relatively Low CAT L

Heavy Use of Reinsurance Lowered Net

Relatively Low CAT LNearly $1.16 for Every

$1 in Earned Premiums

Losses, Reserve Releases

Cyclical

Lowered Net Losses Losses,

Reserve Releases

115.8120

Best Combined

Ratio Since 1949 (87 6)

Cyc caDeterioration

Lower CAT Losses,

More Reserve R l

99 3 100.1101.0100.8100.1

107.5110 1949 (87.6) Releases

95.7

99.3

92.6

98.4

90

100

80

* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:H1=101.7 Sources: A.M. Best, ISO.

902001 2002 2003 2004 2005 2006 2007 2008 2009* 2010:H1

Underwriting Gain (Loss)1975–2010:H1*

$

$35 Cumulative underwriting deficit f 1975 th h

($ Billions)

$5

$15

$25 from 1975 through 2009 is $445B

-$25

-$15

-$5

$55

-$45

-$35

$ 5The industry recorded a $5.1B underwriting

loss in 2010:H1 compared to $2.1B in

2009:H1

Large Underwriting Losses Are NOT Sustainable

-$55

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

* Includes mortgage and financial guarantee insurers.Sources: A.M. Best, ISO; Insurance Information Institute.

in Current Investment Environment

P/C Reserve Development, 1992–2011E

23.2$25

$30

$B)

6

8 Impac

Prior Yr. ReserveDevelopment ($B)

Prior year reserve releases totaled

$8.8 billion in the first half of 2010 up

11.7 13.79.9

7.3$

$10

$15

$20

e R

elea

se ($

2

4

6 ct on Com

b

Impact onCombined Ratio

first half of 2010, up from $7.1 billion in

the first half of 2009

2.3

-2.1 -2.6-6 6

-4.1

1

6 7 -5$10

-$5

$0

$5

rYr.

Res

erve

-2

0

ined Ratio (

-8.3 -6.6-9.9 -9.8

-6.7-9.5

-14.6-16 -15-$20

-$15

-$10

2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 E E

Prio

r

-6

-4

(Points)

92 9 94 9 9 9 9 9 0 0 02 0 0 4 0 0 0 0 0

10E

11E

Reserve Releases Are Continuing Strong in 2010 But Should Begin to Taper Off in 2011

82

Note: 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: Barclay’s Capital; A.M. Best.

Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1

.1 115.

9

114.

7

1.8

2 2 .0 2.3

4115.

7

4115

120

105.

6

107.

8

110.

107.

3

100.

1

8.3 10

0.9 10

5.1

101.

9 105.

9

1

107.

8 11

107.

4

108.

3

105.

3 109.

2

109.

2

110. 11

100.

8

6 0 100.

6

.4

105.

5

105.

7 109.

4

106.

9

108.

4

106.

4

105.

8

101.

6

105

110

115

1 98

92.4 95

.5

96. 6

96.0 1

93.9 97

.

90

95

100

80

85

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

Calendar Year Accident Year

Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases

83

Note: 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: Barclay’s Capital; A.M. Best.

Number of Years with Underwriting Profits by Decade, 1920s–2000s

10

12Number of Years with Underwriting Profits

8

10

76

8

10

3

54

6

4

6

0 00

2

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*

Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –

But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

84

* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Recorded in the 25 Years from 1979 Through 2003

Performance by Segment:y gCommercial/Personal Lines

85

Calendar Year Combined Ratios by Segment: 2008-2012F

Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate

101.7 101.9103.7

100 9103.5 102.5

107.2

103.6104106108110

101.799.9100.9 100.2

949698

100102

909294

Personal Lines Commercial Lines

2008 2009E 2010P 2010F 2010F

Overall deterioration in 2010 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting

86Sources: A.M. Best (historical) Conning forecasts for 2010 - 2012); Insurance Information Institute.

return to normal catastrophe activity along with deteriorating underwriting performance related to the prolonged commercial soft market

Net Written Premium Growth by Segment: 2008-2012F

Personal lines will show growth in 2010 while commercial lines is expected to continue to shrink

3.6%5.2% 4.8%5.1% 5.8%

4%6%8%

0.6%

-0.7%

4 0%

-0.7%-4%-2%0%2%

-7.9%

-4.0%

-10%-8%-6%

Personal Lines Commercial Lines

2008 2009E 2010P 2011F 2011F

Rate and exposure are more favorable in personal lines, whereas a l d ft k t d l i h f th i

87

prolonged soft market and sluggish recovery from the recession weigh on commercial lines.

Sources: A.M. Best (historical) Conning forecasts for 2010 - 2012); Insurance Information Institute.

Claim Trends in A t IAuto Insurance

Ri i C t H ld i Ch k bRising Costs Held in Check by Falling Frequency:

Can That Pattern Be Sustained?

88

Bodily Injury: Severity Trends Generally Above Decline in Frequency

Annual Change, 2005 through 2010*

4.7%5.9% 6.1%

6%

8%

Severity Frequency

2.9%2.1% 2.3%

0%

2%

4%

-3.8%-3.1% -3.2%

-2.2%-4%

-2%

0%

-5.4%3.8%

-5.0%-6%2005 2006 2007 2008 2009 2010*

Cost Pressures Will Increase if BI Severity Increases

89

*For 2010, data are for the 4 quarters ending with 2010:Q1.Source: ISO/PCI Fast Track data; Insurance Information Institute

Cost Pressures Will Increase if BI Severity Increases Outpace Declines in Frequency

Property Damage Liability: Frequency and Severity Trends Nearly Offset in 2009/10


2.9%3.6%

2.1%3%

4%

Severity Frequency

0.8%0.3% 0.6%

1.4%

0%

1%

2%

-1.6%

-0.3% -0.4%

-3%

-2%

-1%

-3.5% -3.4%-4%2005 2006 2007 2008 2009 2010*

Stable Severity/Frequency Trends Keeping PD Costs in

90

Stable Severity/Frequency Trends Keeping PD Costs in Check, But Are These Trends Sustainable?


No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse*


5.9%7.4%

4 7%6.3% 6.4% 6.5%

5 0%6%

8%

10%

Severity Frequency

4.7%

2.4%

5.0%

0%2%

4%

6%

-4.8%5 7%

-2.7%

-6%

-4%

-2%

0%

-5.7%-6.9%-8%

2005 2006 2007 2008 2009 2010*

Multiple States Are Experiencing Severe Fraud and Abuse

91

*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT; 2010 data are for the 4 quarters ending 2010:Q1.Source: ISO/PCI Fast Track data; Insurance Information Institute

Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ

Collision Coverage: Frequency and Severity Trends Have Been Favorable

Severity Frequency


2.3%

3.9%3.1%

3%

4%

5%

y q y

0.7% 0.4%0%1%

2%

-1.8%

3 %

-2.4%-1.6% -1.8%

-2.3% -2.3%

4%

-3%

-2%

-1%

-3.5%-4%2005 2006 2007 2008 2009 2010*

The Recession, High Fuel Prices Have Helped Push Down Frequency and Temper Severity But this Trend Will Likely Be

92

Frequency and Temper Severity, But this Trend Will Likely Be Reversed Based on Evidence from Past Recoveries


Comprehensive Coverage: Severity Trends Very Favorable in 2009/2010

Severity Frequency


15.5%13.0%

10%

15%

20%

y q y

1.6% 1.5% 2.6%

0%

5%

10%

-3.1%

-9.8%-6.6%

-1.4% -1.4%

-8.3% -9.8%15%

-10%

-5%

-15%2005 2006 2007 2008 2009 2010*

Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper

93

Recession Has Helped Push Down Frequency and Temper Severity, But This Factors Will Weaken as Economy Recovers


The Economic StormThe Economic Storm

Wh t th Fi i l C i i dWhat the Financial Crisis and Recession Mean for the Industry’s

E B G th dExposure Base, Growth and Profitability

94

US Real GDP Growth*

0% %% %6%

Real GDP Growth (%) The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

2.7%

0.9%

3.2%

2.3% 2.

9%

0.6% 1.

6%5.

03.

7%1.

6% 1.8% 2.3% 2.5% 2.8% 3.0% 3.2%4.

1 %1.

1% 1.8% 2.

5% 3.6 %

3.1%

2%

4%

6%

-0.7

%

%

-0.7

%

-4%

-2%

0%

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump,

Economic growth up sharply in late 2009 with rebuilding of

inventories and stimulus. M d t th

-4.0

%-6

.8% -4

.9%

-8%

-6%

0

1

2

3

4

5

6

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

More moderate growth expected in 2010/11 but no

“double dip”

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

07:2

07:3

07:4

08:1

08:2

08:3

08:4

09:1

09:2

09:3

09:4

10:1

10:2

10:3

10:4

11:1

11:2

11:3

11:4

Demand Commercial Insurance Continues To Be Impacted by Sluggish Economic Conditions

95

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 7/10; Insurance Information Institute.

Economic Conditions

Length of US Business Cycles,1929–Present*

120120

Length of Expansions Greatly Exceeds

Contractions

Duration (Months) The “Great Recession”

lasted 18

80

106

9290

100110120 Contraction Expansion Following

Average Duration**Recession = 10.4 Mos

months, longest since Great Depression

50

3745

39

58

73

4350607080 Expansion = 60.5 Mos

10 1116

616

8 818

37 39

2436

12 14138 11 10 810

203040

010

Aug1929

May1937

Feb1945

Nov1948

Jul1953

Aug1957

Apr1960

Dec1969

Nov1973

Jan1980

Jul1981

Jul1990

Mar2001

Dec2007

Month Recession Started

96

Month Recession Started

*Through Sept. 2010. Most recent recession began Dec. 2007 and ended June 2009. ** Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.

Real GDP Growth vs. Real P/CPremium Growth: Modest Association

% 3%25% 8%R l NWP G th R l GDP

Real GDP Growth vs. Real P/C (%)

18.6

%20

.3

13.7

%%

15%

20%

25%

owth

4%

6%

8%

Real

Real NWP Growth Real GDP

4.3% 5.

8%0.

3% 3.1%

1.1%

0.8%

0.4%

0.6% 1.6%

5.6% 7.

7%1.

2%

5.2%

1.8%

0%

5%

10%

eal N

WP

Gro

0%

2%

l GD

P Grow

-1.6

%-1

.0%

-1.8

%-1

.0%

-0.4

%-0

.3%

-2.9

% -0.5

%-3

.8%

-4.4

%-3

.3%

-1.6

%

-0.9

%.4

%6.

5%-1

.5%

-10%

-5%

0%Re

-4%

-2%

wth

-7 -6

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 0910

E

P/C I I d t ’ G th i I fl d M d tl

97Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 9/10; Insurance Information Institute

P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy

Will Future Tax Policy Impact P/C Insurance Industry ExposureInsurance Industry Exposure

and Growth?

Various Tax Proposals for 2011 Could Have Significant Impacts g pon the P/C Insurance Industry

for Years to Come

98

Potential Impacts of Current Federal Tax Proposals on P/C Insurance Industry

Proposal Potential P/C Insurance Industry Impact P/C Lines that Benefit

100% Expensing of N I t t i

Could produce a 5-10% surge in i t t i h i l l t d

•Commercial PropertyNew Investment in Plant & Equipment in 2011 and Continuation of Bonus Depreciation

investment in physical plant and equipment in 2011 which will need to be insured immediately. Although the proposal only “steals” investment from the future this provides a permanent

•Construction•Commercial Liability•Commercial AutoSpecialty LinesBonus Depreciation the future, this provides a permanent

benefit to commercial insurers since insurance coverage must be purchased sooner and be maintained. New construction activity boosts WC and

•Specialty Lines•Excess & Surplus•Workers Comp•Suretyconstruction activity boosts WC and

surety.Surety

•ReinsuranceReinstate 36% and 39.6% Rates for High Income Taxpayers

Potential damage to new/small business formation and growth. Weakness in these areas has hurt p/c insurance

•None

Income Taxpayers >$250K

these areas has hurt p/c insurance exposure and tax hikes could depress insurance exposure in this segment

Continue 2001 and 2003 T C t f All

Should produce an environment that b fi i l t i ll

•Small Business

Sources: Proposals from Tax Policy Center; P/C discussion is Insurance Information Institute research.

2003 Tax Cuts for All Taxpayers

more beneficial to recovery in small business segment & associate insurance exposures

Commercial Lines•Personal Lines

Potential Impacts of Current Federal Tax Proposals on P/C Insurance Industry (cont’d)

Proposal Potential P/C Insurance Industry Impact P/C Lines that Benefit

Impose 20% Tax The increase in dividends and capital gains •NoneRate for Capital Gains and Dividends for High Income

taxes makes private investment less attractive. Under current law the rate is 15%. Additional taxes on investment would presumably result in a marginal but

Taxpayers negative impact on p/c insurance exposure.Payroll Tax Holiday

Reducing the cost of hiring workers would theoretically reduce the cost of employment and should spark hiring,

•Workers comp

e p oy e t a d s ou d spa g,increasing overall employment and payrolls

Limit Value of Itemized Deductions to

Will have an unambiguously negative impact on charitable giving. Nonprofit sector will be negatively impacted

•None (Commercial lines products Designed for NPOsDeductions to

28% for High Income Taxpayers

sector will be negatively impacted. Designed for NPOs would be negatively impacted; This is a large p/c market.)

Sources: Proposals (except Payroll Tax Holiday) from Tax Policy Center; P/C discussion is Insurance Information Institute research.

Regional Differences Will Significantly Impact P/C Markets

Recovery in Some Areas Will Begin Years Ahead of OthersBegin Years Ahead of Others

and Speed of Recovery Will Differ by Orders of Magnitude

101

y g

State Economic Growth Varied Tremendously in 2008

Mountain, Plains States Growing the Fastest

Percent Change in Real GDP by State, 2007–2008

Rocky Mountain2.2

Plains2.0 Great Lakes

-0.4

New England1.0

WA2.0

OR

MT1.8

ND7.3 MN

2 0 WI

ME1.4

NH1 8

VT1.7 MA

Mideast1.3

1.6

CA

NV-0.6

ID0.0

WY4.4

UT1.4 CO

NE1.3

SD3.5

2.0

IA2.1

WI0.7

IL0.3

MI-1.5

IN-0.6

OH-0.7

NY1.6

PA1.1

NJ0.6

MDDE

1.8 MA1.9

RI-0.9CT

-0.4

Highest Quintile

Far West0.6 US = 0.7

CA0.4

CO2.9

AZ-0.6 NM

2.0

OK2.7

KS2.2

MO1.3

MD1.3

-1.6DC3.0VA

1.3

WV2.5KY

-0.1NC0.1

SC

TN0.5AR

0 7 Highest Quintile

Fourth Quintile

Third Quintile

Second Quintile

L t Q i til

TX2.0

0.60.7

LA0.3

MS1.7

AL0.7

GA-0.6

FL-1.6

AK-2.0

HI

102US Bureau of Economic Analysis

Lowest Quintile

Southwest1.7

Southeast0.0

HI0.7

Fastest Growing States in 2008:Plains, Mountain States Lead

8%

Real State GDP Growth (%)

7.3%

6%

7%

8%

2 1% 2 0%

4.4%

3.5%2.9% 2.7% 2.5%3%

4%

5%

2.1% 2.0%

0%

1%

2%

0%ND WY SD CO OK WV IA TX, MN,

NM, WA

Natural Resource and Agricultural States Have Done Better Than Most

103Source: US Bureau of Economic Analysis; Insurance Information Institute.

Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas

Slowest Growing States in 2008: Diversity of States SufferingReal State GDP Growth (%)

KY CT AZ GA IN NV RI MI DE FL OH AK

-0.1%

-0.4%-0.5%

0.0%KY CT AZ GA IN NV RI MI DE FL OH AK

-0.9%

-0.6% -0.6% -0.6% -0.6%

-1.0%

-1.5% -1.6% -1.6% -1.7%

-2.0%-2.0%

-1.5%

Ohio has been among the states hardest hit

States in the North South East Midwest and West All Represented

2.0%

-2.5%

the states hardest hit by the recession

104Source: US Bureau of Economic Analysis; Insurance Information Institute.

States in the North, South, East, Midwest and West All Represented Among Hardest Hit, But for Differing Reasons

Labor Market TrendsLabor Market Trends

Massive Job Losses Sapped the Economy and Commercial/PersonalEconomy and Commercial/Personal

Lines Exposure, But Trend is Improving

105

Improving

Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilizing in 2010?

18 Traditional Unemployment Rate U 3 U 6 went from

January 2000 through August 2010, Seasonally Adjusted (%)

14

16

18 Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

U-6 went from 8.0% in March

2007 to 17.5% in Oct 2009; Stood at 16.7% in July

2010Recession U l t R i

12

14

Unemployment rate was 9.6% in

A t

2010Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

8

10 AugustUnemployment peaked at 10.1%

in Oct. 2009, highest monthly

4

6

Aug10

g est o t yrate since 1983.Peak rate in the last 30 years: 10.8% in Nov -

Dec 1982

106

2Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10

10 Dec 1982

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

US Unemployment Rate

0%11.0% Rising unemployment

2007:Q1 to 2011:Q4F*

%

9.3% 9.

6% 10. 0

9.7%

9.7%

9.6%

9.5%

9.4%

9.2%

9.0%

9.6%

9.0%

10.0%eroded payrolls

and workers comp’s exposure base.

Unemployment likely

% 6.9%

8.1 %

7.0%

8.0%

p y ypeaked at 10% in late 2009.

Unemployment

5% 5% .6%

4.8% 4.9% 5.

4%

6.1 %

5.0%

6.0%

p yforecasts remain stubbornly high

through 2011

4. 4. 4

4.0%

5.0%

7:Q

1

7:Q

2

7:Q

3

7:Q

4

8:Q

1

8:Q

2

8:Q

3

8:Q

4

9:Q

1

9:Q

2

9:Q

3

9:Q

4

0:Q

1

0:Q

2

0:Q

3

0:Q

4

1:Q

1

1:Q

2

1:Q

3

1:Q

4

107

07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/10); Insurance Information Institute

US Unemployment Rate Forecasts

11.0% 10 Most PessimisticC /Mid i t

Quarterly, 2010:Q1 to 2011:Q4

9.8%9.6%

9.9%9.9% 9.9%9.7%

9 6%

10.0%

10.5%Consensus/Midpoint10 Most Optimistic

9.2%9.0%

8 6%

9.4%

9.6% 9.6% 9.5%

8.9%9.1%

9.4%9.5%

8.5%

9.0%

9.5%

8.6%8.4%

7.5%

8.0%Unemployment will remain high even under

the most optimistic of scenarios, but forecasts are being revised downwards

7.0%10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4

Stubbornly High Unemployment Will Slow the Recovery of the

108Sources: Blue Chip Economic Indicators (9/10); Insurance Information Institute

Stubbornly High Unemployment Will Slow the Recovery of theWorkers Comp Exposure Base

Unemployment Rates Vary Widelyby State and Region: July 2010*

14.3

%

3.1%

3%

15%Southwest Mountain

Far West

Great Plains

Great Lakes

13

%10.6

%12.3

10.2

%10

.3%

2%10.3

%

%%.6%

12%

te (%

)

6.5%

%

8.9

7.8%

6.8%

6.8%

9.2

8.0%

6.7%7.

3%7.

2%

8.8 %

8.2%

8.2%

6.9%

9.

9%

ymen

t Rat

4.7%

4.4%

3.6%

3%

6%

Une

mpl

oy

Unemployment in July was far

above average in OH 10 3% vs

0%

3%

AZ M TX K D O UT MT

WY V A R A MI IL H N WI O N A KS NE D D

OH, 10.3% vs. 9.5% nationally

109

A N T O I C U M W N C O W M I O I W M M I K N S N

*Provisional figures for July 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Unemployment Rates Vary Widelyby State and Region: July 2010* (cont’d)

%

15% Southeast Mid-Atlantic New England11

.5%

10.8

%10

.8%

9.9%

9.9%

9.8%

9.8%

9.7%

% 9.7% 3% %

11.9

%% %

12%

e (%

)

9 9 9 9 98.

6%7.

4%7.

2%7.

0%

9 9.3

8.4%

8.2%

7.1%

9.0

8.9

8.1%

6.0% .8%

7.7%

6.3%

9%

ymen

t Rat

6 5. 6

3%

6%

Une

mpl

oy

0%

3%

L S C A KY N C AL V R A A NJ A E Y D RI A T E T H K HI

U

110

F M S G K T N A WV A L V N P D N M R M C M V N A H

*Provisional figures for July 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Monthly Change Employment*

3 432600

January 2008 through August 2010* (Thousands)

The job gain and loss figures in 2010 are severely distorted by the hiring and

64 14 3920

8 313 4

4 4

0

200

400 severely distorted by the hiring and termination of temporary Census workers. So far in 2010, 763,000 private sector jobs

have been created.

-72

-144 -122

-160 -137

-161 -128

-175

-321

-380

7 28 -387

15-3

46 -212

-225

-224 -1

09

-175

-54

-54

-600

-400

-200

Monthly Losses in

-597

-681

-779 -726

-753

-52

-51

-1,000

-800

8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

Jan

08Fe

b 08

Mar

08

Apr

08

May

08

Jun

08Ju

l 08

Aug

08

Sep

08

Oct

08

Nov

08

Dec

08

Jan

09Fe

b 09

Mar

09

Apr

09

May

09

Jun

09Ju

l 09

Aug

09

Sep

09

Oct

09

Nov

09

Dec

09

Jan

10Fe

b 10

Mar

10

Apr

10

May

10

Jun

10Ju

l 10

Aug

10

Job Losses Since the Recession Began in Dec. 2007 Peaked at 8 4 Mill i D 09 St d t 7 7 Milli Th h A t 2010

111

*Estimate based on Reuters poll of economists.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

8.4 Mill in Dec. 09; Stands at 7.7 Million Through August 2010; 14.9 Million People are Now Defined as Unemployed

Labor Underutilization: Broader than Just Unemployment

16 8% 17 0%17.5% 17.2% 17.3%

16 8% 16 9% 17.1%18%

% of Labor Force

16.4% 16.5% 16.3%16.8% 17.0%

16.5% 16.8% 16.9% 17.1%16.6% 16.5% 16.5%16.7%

14%15%16%17%

11.2%11%12%13%14%

10%Sep08

May09

Jun09

Jul09

Aug09

Sep09

Oct09

Nov09

Dec09

Jan10

Feb10

Mar10

Apr10

May10

Jun10

Jul10

Aug10

M i ll Att h d d U l d P A t f 16 7% f thMarginally Attached and Unemployed Persons Account for 16.7% of the Labor Force in August 2010 (1 Out 6 People). Unemployment Rate

Alone was 9.6%. Underutilization Shows a Broader Impact on WC and Other Commercial Exposures

112

NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Source: US Bureau of Labor Statistics; Insurance Information Institute.

US Nonfarm Private Employment

Monthly, Nov 2007 – August 2010 (Millions)The US Economy Lost About

8.4 Million Jobs in the Two Employment Peak;

38.0

38.1

38.0

37.9

37.8

37.8

37.7

37.6

37.6

7.4

.0 7139

Years from Dec. 07 – Dec. 09.As employment expands,

workers comp will be among the first lines to see exposure

gains

Recession Starts

13 13 13 13 13 13 13 13 13 137

137

136.

713

6.2

135.

133

.58135

136137138 gains

1313

2.8

132.

113

1.5

131.

213

0.6

130.

330

.129

.929

.629

.79.

629

.629

.629

.813

0.2

130.

613

0.4

130.

413

0.3

131132133134

1 1 12 12 12 12 12 12 12 1 1

129130

ov 0

7ec

07

an 0

8eb

08

Mar

08

Apr

08

May

08

June

Jul 0

8ug

08

ep 0

8O

ct 0

8ov

08

ec 0

8an

09

eb 0

9M

ar 0

9A

pr 0

9M

ay 0

9un

09

Jul 0

9ug

09

ep 0

9O

ct 0

9ov

09

ec 0

9an

10

eb 1

0M

ar 1

0A

pr 1

0M

ay 1

0un

10

Jul 1

0ug

10

113

N De J Fe M A M J A Se O N De J Fe M A M J J A Se O N De J Fe M A M J J A

Seasonally adjusted. Source: US Bureau of Labor Statistics

Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)y ( p p )

8.5%10% Recessions in the 1970s and 1980s saw smaller exposure impacts

because of continued wage

The Dec. 2007 to mid-2009 recession

caused the largest

(Percent Change)

(All Post WWII Recessions)

3.7%4.6%

3.5%4%

6%

8% because of continued wage inflation, a factor not present

during the 2007-2009 recession

caused the largest impact on WC

exposure in 60 years

1 1%

1.1%2.1%

-0.5%2%

0%

2%

-4.4%

-2.0%-1.1%

-3.6%-6%

-4%

-2%

1948-1949

1953-1954

1957-1958

1960-1961

1969-1970

1973-1975

1980 1981-1982

1990-1991

2001 2007-2009

Recession Dates (Beginning/Ending Years)

*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).

Frequency: 1926–2008A Long-Term Drift DownwardManufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers

25

30

15

20

10

15

0

5

115

Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research

'26 '29 '32 '35 '39 '42 '45 '48 '52 '55 '58 '61 '65 '68 '71 '74 '78 '81 '84 '87 '91 '94 '97 '00 '04 '07

Insurance IndustryInsurance Industry Employment Trends: 1990-2010

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

September 2010 Report: Employment Highlights*

P-C InsurersEmployment down by 400 (-0.1%) vs. June 2010Employment down by 17,700 (-3.7%) vs. July 2009

ReinsurersEmployment up by 100 (+0.4%) vs. June 2010Employment down by 1,400 (-5.1%) vs. July 2009

Claims AdjustersClaims AdjustersEmployment up by 400 (+0.9%) vs. June 2010Employment down by 4,800 (-9.9%) vs. July 2009

Insurance Agents & BrokersInsurance Agents & BrokersEmployment up by 700 (+0.1%) vs. June 2010Employment down by 16,300 (-2.5%) vs. July 2009

Life InsurersEmployment down by 1,200 (-0.3%) vs. June 2010Employment down by 5,500 (-1.6%) vs. July 2009

Health/Medical InsurersEmployment down by 4 100 ( 0 9%) vs June 2010

117

Employment down by 4,100 (-0.9%) vs. June 2010Employment down by 7,200 (-1.6%) vs. July 2009

*data are through July 2010 and are preliminary (i.e., subject to later revision)

Baselines:U.S. Employment Trends

118

U.S. Nonfarm Employment,Monthly, 1990–2010*

Millions

140

130

135

120

125

115

120

105

110

119

*As of August 2010; Not seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

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

U.S. Employment in Service Industries,Monthly, 1990–2010*

Millions

120

110

115

100

105

90

95

80

85

120

*As of August 2010; Not seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

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

Insurance Industry Employment Trends

Soft Market, Difficult Economy, Outsourcing, Productivity g, y

Enhancements and Consolidation Have Contributed

121

to Industry’s Job Losses

U.S. Employment in the DirectP/C Insurance Industry: 1990–2010*

Thousands

520

500500

480As of July 2010, P/C insurance industry employment

was down by 26 900 or 5 5% to 464 200 since the

460

was down by 26,900 or 5.5% to 464,200 since the recession began in Dec. 2007 (compared to overall

US employment decline of 7.2%)

122

*As of July 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

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

U.S. Employment in the DirectLife Insurance Industry: 1990–2010*

Thousands575

As of July 2010, Life insurance industry employment was down by 10,400 or 2.9% to 343,900 since the recession began in

Dec. 2007 (compared to overall US

500

525

550Dec. 2007 (compared to overall US

employment decline of 7.2%)

425

450

475

500

375

400

425

300

325

350

123


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

U.S. Employment in the Direct Health-Medical Insurance Industry: 1990–2010*

Thousands450

375

400

425

300

325

350

375

250

275

300

As of July 2010, Health-Medical insurance industry employment was down by 11,300 or 2.6% to 430,600

i th i b i D

175

200

225 since the recession began in Dec. 2007 (compared to overall US employment decline of 7.2%)

124


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

U.S. Employment in the Reinsurance Industry: 1990–2010*

Thousands

48

40

44As of July 2010, US employment in the reinsurance industry was down by 1 000 or 3 7% to 25 900

36

40 down by 1,000 or 3.7% to 25,900 since the recession began in Dec.

2007 (compared to overall US employment decline of 7.2%)

32

24

28

125

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of July 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

U.S. Employment in Insurance Agencies & Brokerages: 1990–2010*

Thousands

700

650

600

550

As of July 2010, employment at insurance agencies and

brokerages was down by 47,900 or 7.0% to 631,700 since the

500

,recession began in Dec. 2007

(compared to overall US employment decline of 7.2%)

126

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of July 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

U.S. Employment in Insurance Claims Adjusting: 1990–2010*

Thousands

60

55 Katrina, Rita, Wilma

50

45 As of July 2010, claims adjusting employment was down by 8,100 or 15.6%

to 43 900 since the recession began in

40

n-90

p-90

y-91

n-92

p-92

y-93

n-94

p-94

y-95

n-96

p-96

y-97

n-98

p-98

y-99

n-00

p-00

y-01

n-02

p-02

y-03

n-04

p-04

y-05

n-06

p-06

y-07

n-08

p-08

y-09

n-10

to 43,900 since the recession began in Dec. 2007 (compared to overall US

employment decline of 7.2%)

127

Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

*As of July 2010; Not seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

U.S. Employment in Third-Party Administration of Insurance Funds: 1990–2010*

Thousands

135

125

115

95

105

85

95

128

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of July 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Crisis-Driven Exposure pDrivers

Economic Obstaclesto Growth in P/C Insurance

129

Auto/Light Truck Sales, 1999-2011F

9917.5

17.8

7.4

1819

(Millions of Units)New auto/light truck sales

fell to the lowest level since the late 1960s. Forecast for

2010-11 is still far below 1999-2007 average of 17

16.9

16.5

16.116

.9

16.617

.1 7117

15161718 1999-2007 average of 17

million units

13.1

1.5 12

.7

12131415

“Cash for Clunkers” generated about $300M in net new personal auto premiums

10.3

11

9101112

Sharply lower auto sales will have a smaller effect on auto insurance

exposure level than problems in the housing market will on home insurers

999 00 01 02 03 04 05 06 07 08 09 10F 11F

Car/Light Truck Sales Will Recover from the 2009 Low Point, but

130Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/10); Insurance Information Institute.

High Unemployment, Tight Credit Are Still Restraining Sales

New Private Housing Starts, 1990-2011F

(Millions of Units)

1 .85 1.96 2.

07

801 9

2.1

New home starts plunged 34% from 2005-2007; drop

through 2009 was

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1 1.8

1.36

1.351.

46

.29

09

1.5

1.7

1.9g

72% (est.); A net annual decline of 1.49 million units,

lowest since records began

0.90

.76

1

1.2

1.01

1.1

0.9

1.1

1.3 in 1959

I.I.I. estimates that each incremental 100,000

0.56 0.60 0

0 3

0.5

0.7

,decline in housing starts costs home insurers

$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is estimated

at about $1.3 billion0.3

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F

Little Exposure Growth Likely for Homeowners InsurersD t W k H C t ti F t f 2010 2011

131Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/10); Insurance Information Institute.

Due to Weak Home Construction Forecast for 2010-2011.Also Affects Commercial Insurers with Construction Risk Exposure, Surety

Percent Changes in Residential Fixed Investment, 2006:Q2-2010:Q1*

18.9

%

20%

30%

1

3.8%

0%

10%

20%

% 15.8

%

15.9

%

2% 3%

-10.

3%

4%-12.

9%

6.2%

.7%

2%6.9%

-30%

-20%

-10%

-29.

5%

-28.

2 %

-1 -1

-23.

2

-38.

2%

-23.

3

-22.

4--1-19

-21.-1

-50%

-40%

30%

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

06:Q

06:Q

06:Q

07:Q

07:Q

07:Q

07:Q

08:Q

08:Q

08:Q

08:Q

09:Q

09:Q

09:Q

09:Q

10:Q

The Drop in 2006 is in Relation to the Record 2.07 Million Units Started in 2005; 1 8 Million Units Were Started That Year The 2010:Q1 Drop Supports

132

*seasonally adjustedSource: U.S. Department of Commerce, Bureau of Economic Analysis

2005; 1.8 Million Units Were Started That Year. The 2010:Q1 Drop Supports the Weak Home Construction Forecast for 2010-2011.

Average Square Footage of Completed New Homes in U.S., 1973-2010:Q2

Square FtAverage size of completed new homes often falls in recessions

(yellow bars), but historically bo nces back in e pansions

66 324

320

,330

2,34

9 2,46

22,

492

2,50

92,

463

2,36

72,

362

2,39

8

2,500

2,700 bounces back in expansions

05 1,99

52,

035

2,08

02,

075

2,09

52,

095

2,10

02,

095

2,12

02,

150

2,19

02,

223

2,2 6 2, 2,

3 2, 2 2 2

2,100

2,300

1,66

01,

695

1,64

51,

700

1,72

01,

755

1,76

01,

740

1,72

01,

710

1,72

51,

780

1,78

51,

825 1,9 0 1

1,700

1,900The trend to building larger homes

reversed in 2008, affecting exposure growth beyond the decline in number of

1,500

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 08 090:

Q1

0:Q

2

g yunits built. Trend may now be reversing.

10 10

Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute. 133

Unemployment’s Effect on Percent of Uninsured Motorists, 1989-2014F

19% 12%

Uninsured Motorist Percentage National Unemployment PercentageUnemployment

% Uninsured

The unemployment rate appears to be closely

l t d ith th In 2010 roughly 18% of

17%

18%

9%

correlated with the uninsured motorist

percentage.

In 2010 roughly 18% of motorists are expected to be driving without

insurance as high unemployment

prompts some people

15%

16%

prompts some people to drop coverage

13%

14%6%

12%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

E

2010

F

2011

F

2012

F

2013

F

2014

F

3%

Source: Uninsured Motorists, 2008 Edition, Insurance Research Council; Blue Chip Economic Indicators (Unemployment data, including forecasts); Insurance Information Institute. 134

New Boat Sales Symptomatic of Decline in Insured Exposure Growth for Luxury/Discretionary Items

30$1,000,000 $12.5New Boats Sold Value of Boats Sold

880,

300

844,

100

837,

900

870,

650

864,

450

912,

1 3

841,

820

$850 000

$900,000

$950,000

$11.5

$12.0

Valu8 8 8

04,8

20

$750,000

$800,000

$850,000

Boa

t Sal

es

$10 0

$10.5

$11.0

ue of Boats

593,

000

71,4

00

82,5

00

76,8

00

7 0

$600 000

$650,000

$700,000

New

B

$9.0

$9.5

$10.0 Sold ($ Bill)Boat sales fell by 16% in

2008 d h l f h5

57 5 5 7

$500,000

$550,000

$600,000

97 98 99 00 01 02 03 04 05 06 07 08$8.0

$8.5

$ )

2008 and the value of those sales plunged by 21%

135

97 98 99 00 01 02 03 04 05 06 07 08

Sources: National Marine Manufacturers Association, 2008 Abstract (latest available as of Feb. 2010); Insurance Information Institute.

Business Bankruptcy Filings,1980-2010:H1

00 277

81,2

3582

,446

3 549

43

90,000

% Change Surrounding Recessions

1980-82 58.6%1980-87 88 7%

694

8,12

569

,30

62,4

3664

,004 71,2 8

63,8

5363

,235

64,8

5371

,570

,662

,304

52,3

7451

,959

53,5

4954

,027

367

4 99 0 1 546 60

,837

60,000

70,000

80,0001980 87 88.7%1990-91 10.3%2000-01 13.0%2006-09 208.9%*

43,6 48

5 5 5

44,3

37,8

8435

,472

40,0

938

,540

35,0

3734

,317

39,2

0,6

95 28,3

2243

,5

29,0

59

30,000

40,000

50,000

Th 60 837 b i b k t i i 2009 19

0

10,000

20,000

,There were 60,837 business bankruptcies in 2009, up

40% from 2008 and the most since 1993. 2010:H1 bankruptcies totaled 29,059, down 4% from H1:2009, but

still very high by historical standards.

0

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 0910

:H1

Significant Exposure Implications for All Commercial Lines. There Are Some Preliminary Indications that Business

136Source: American Bankruptcy Institute; Insurance Information Institute

There Are Some Preliminary Indications that Business Bankruptcies Are Beginning to Decline.

Private Sector Business Starts,1993:Q2 – 2009:Q4*

6 220 22

322

022

022

1

18220

230

(Thousands)

4 199 20

420

295 96 96

206

206

201

198

206

206

203

211

205

212

200 20

520

420

497

203 20

920

1

320

1 204

202

210 21

220

921

6 2 2 221

0 212

204

2 120

920

719

93

203

200

210

220

175

186

7418

018

6 192

188

187 18

918

6 190 19

419

1 1 9 19 19

192 1

192

192

193

191 19

317

7 180

180

190

200

180 000 businesses started in1 17

171

169

160

170180,000 businesses started in

2009:Q4, the best quarter in 2009. 2009 was the slowest year for new

business starts since 1993.

15093 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Business Starts Are Down Nearly 20% in the Current Downturn,

137

y ,Holding Back Most Types of Commercial Insurance Exposure

*Latest available as of September 12, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

Net New Business Formations*1999:Q1-2009:Q1*

313634 3639

284050

Thousands 2008-2009 recession

1422 2020

2524

136

2

13

2317

126 6

1422 25

1824 25 26

14

28

19

3

15

20

102030

-1-5 -3 -3

28-30-20-10

0

In 2008, over 110,000 more businesses

disappeared than started -28-32

-48-60-50-40 March-

November 2001

recession

pp

In 2009:Q1 69,000 more business disappeared than

were started

-69-70

99:Q

1

00:Q

1

01:Q

1

02:Q

1

03:Q

1

04:Q

1

05:Q

1

06:Q

1

07:Q

1

08:Q

1

09:Q

1

Net Business Formations Likely Were Positive Again

138

Net Business Formations Likely Were Positive Again,at Least in the Second Half of 2009 and into 2010.

*Business “births” minus business “deaths.” Latest data on business “deaths” is for 2009:Q1 as of Sept. 12, 2010.Sources: Bureau of Labor Statistics at http://www.bls.gov/news.release/cewbd.t07.htm ; Insurance Information Institute.

FDIC-Insured Banks AreReducing Credit: 2008, 2009, 2010:Q1

$Billions

$2 500

Down $128.5B (-6.3%)

April 2010: Many banks are maintaining tight loan standards; some are tightening further; virtually no one loosening; Hurts

business formation/expansion and commercial exposure

$1,916.7$1,887.37

$1 494 0

$2,045.2$2,000

$2,500 200820092010:Q1

Down $273.2B (-18.3%)

( 6.3%)

$1,220.8$1,187.61

$590 9

$1,494.0

$1,000

$1,500 Down $139.4B (-13.1%)

$451.5 $417.97$590.9

$0

$500

FDIC-Insured Institutions Had $541.1B (-13.1%) Less in Outstanding L i Th Th C t i t Y d 2009 2008

Construction andDevelopment Secured by

Real Estate

Commercial and Industrial 1-4 Family ResidentialMortgages

139Source: FDIC Quarterly Banking Profile, First Quarter 2010, Table II-A

Loans in These Three Categories at Year-end 2009 vs. 2008,and Even Less at End of 2010:Q1

Business Fixed Investment2008:Q1 to 2011:Q4F

19.0

%

% %5.6% % .5%

20%

Investment in Equipment & Software is forecast to be positive in both 2010 and 2011

-0.1

%

1.0% 3.

0% 4.5%

5.0%6.5%

2.2% 4.

5%

1.5%

1

11.4

%

6.5% 7.6% 9.2% 10

.3%

9.7%

9.6%

9.3%

1 5

11.2

6.8%

140%

10%

20%

-7.2

%

3% % % 5% 11.0

% -5.0

%

-3.5

%

-0.5

%

-0.5

%

-5.0

%

-9.4

% -4.9

%

-20%

-10%

0%

-17.

3

-18.

4%

-18.

0

-15. - 1

-25.

9%

.4%-40%

-30%StructuresEquipment & Software

Investment in Structures is forecast to be down in 2010

-43.

6% -36

-50%

7:Q

1

7:Q

2

7:Q

3

7:Q

4

8:Q

1

8:Q

2

8:Q

3

8:Q

4

9:Q

1

9:Q

2

9:Q

3

9:Q

4

0:Q

1

0:Q

2

0:Q

3

0:Q

4

:Q1

:Q2

:Q3

:Q4

and low in 2011. This will hold exposure in many commercial

lines down

140

Sources: Bureau of Economic Analysis, U.S. Department of Commerce (history); Wells Fargo Securities Economics Group, Monthly Outlook, April 7, 2010 (forecasts)

07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11

Total Industrial Production

8 3%10%

2007:Q1 to 2011:Q4F (%) Economic slowdown is reducing industrial

production8.3%

7.0% 7.1% 6.7%5.1%

3.7% 3.9% 4.1% 4.1% 4.2%1.5%

3.2% 3.6%

0.3% 0.2%0%

5%

10%

-9.0%10 3%

-4.6%

-10%

-5%Industrial Production is Aided

by a Rebuild of Inventories, Gradual Economic Recovery

-13.0%

-17.6%

-10.3%

-20%

-15%Gradual Economic Recovery

and Stimulus Program (Q2:09 through 2010)

Industrial Production Began to Contract Sharply in Late 2008 and Plunged

in 2009:Q1

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

End of Recession in mid-2009, Stimulus Program Benefited Industrial

141Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/10); Insurance Information Institute

Production and Insurance Exposure Both Directly and Indirectly, Albeit it Very Modestly; Stimulus Effect is Waning in 2010 and Will Be Gone in 2011.

Recovery in Capacity Utilization is a Positive Sign for Insurance Exposure

82%

Percent of Capacity Utilized (Manufacturing, Mining, Utilities)

H i

“Full Capacity”

78%

80%Hurricane

Katrina Recession began December 2007

74%

76%Manufacturing

capacity stood at 74.8% in July 2010,

above the June 2009 low of 68 2% but well

70%

72%

M h 2001The closer the economy is

low of 68.2% but well below the pre-crisis

peak of 80%+

66%

68%

70% March 2001-November 2001

recession

yto operating at “full

capacity,” the greater the demand for insurance

66%

Mar

01

Jun

01

Sep

01

Dec

01

Mar

02

Jun

02

Sep

02

Dec

02

Mar

03

Jun

03

Sep

03

Dec

03

Mar

04

Jun

04

Sep

04

Dec

04

Mar

05

Jun

05

Sep

05

Dec

05

Mar

06

Jun

06

Sep

06

Dec

06

Mar

07

Jun

07

Sep

07

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

Jun

10

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 142

State & Local Government Finances in Dire Straits

Large, Long-Term Cuts Necessary to Align Spending with Shrinking

Tax Revenues

143

Year-Over-Year Change in Quarterly USState Tax Revenues, Inflation Adjusted

% 9.9% .5%

% 2% % % 12.4

%% % % %

15%

20% State tax revenues are beginning a slow recovery in 2010

2.4% 4.

7% 5.6%

9 94.

4%1.

8%0.

4%%

0.0% 1.

6%%

0.1% 4.

0% 4.7% 5.7% 8.

23.

4% 6.0 % 7.0%

6.6%

4.2%

3.7% 6.

3%2.

6%1.

3% 3.2% 5.

5 %3.

1% 3.6%

2.6% 5.

4%2.

8%

2.5%

2.2%

2.4%

0%

5%

10%

-1.3

%-1

.7%

-3.0

%-7

.6%

0.7%

-0.6

%

-3.9

%

0.9%

-4.1

%

.6%-15%

-10%

-5% Nationwide, state-tax collections for fiscal year 2009 declined by a record $63 billion, or 8.2 percent from the

previous year. That loss is roughly twice th t t t i d i fi l li f

-10

-10

-16.

4%-11.

-25%

-20%

99 99 99 99 00 00 00 00 01 01 01 01 02 02 02 02 03 03 03 03 04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 0 0

the amount states gained in fiscal relief from the federal stimulus package. Receipts now beginning to recover.

1Q9

2Q9

3Q9

4Q9

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q1

2Q1

States Revenues Were Up 2.2% in Q2 2010, the 2nd Consecutive Quarter of Revenue Increase Public Infrastructure Spending is Still Likely to Remain

144Source: US Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/.

Revenue Increase. Public Infrastructure Spending is Still Likely to Remain Depressed, Dampening Related Insurance Exposures and Demand.

State and Local Debt Outstanding, 1975-2009

Debt issued by state and local governments has soared by 100%

between 1999 and 2009

Many States/Localities Are in Dire Fiscal Straights, but the Default Rate on Moody’s-Rated Muni Debt is Just 0.09% over the Past 10 Years. Just 1 State H D f lt d i th P t 100 Y (AR) D f lt R t M i D i th

145Source: Federal Reserve Board of Governors, Flow of Funds Accounts from Credit Suisse.

Has Defaulted in the Past 100 Years (AR). Default Rate on Munis During the Great Depression was 1.8%, 97% of Which Was Ultimately Recovered

State and Local Expenditures vs. Tax Receipts, 1960-2010:Q1

The gap between state and local governments revenues and

expenditures is at a 50-year high and is widening

Many States/Localities Are in Dire Fiscal Straights, but the Default Rate on Moody’s-Rated Muni Debt is Just 0.09% over the Past 10 Years. Just 1 State H D f lt d i th P t 100 Y (AR) D f lt R t M i D i th

146Source: Bureau of Economic Analysis and Credit Suisse estimates.

Has Defaulted in the Past 100 Years (AR). Default Rate on Munis During the Great Depression was 1.8%, 97% of Which Was Ultimately Recovered

Inflation Trends:Concerns Over Stimulus Spending

and Monetary Policy

M ti P Cl i

y y

Mounting Pressure on Claim Cost Severities?

147

Annual Inflation Rates(CPI-U, %), 1990–2011FAnnual Inflation Rates (%) Inflation peaked at 5.6% in August 2008

on high energy and commodity crisis. The recession and the collapse of the

commodity bubble have reduced

3 3 3 43.8 3.8

5.14.9

4.0

5.0

6.0 commodity bubble have reduced inflationary pressures

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.33.0 2.8

1.6 1.5

2.92.4

3.23.0

2.0

3.0

0 4

0.0

1.0

-0.4-1.090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F

There is So Much Slack in the US Economy Inflation Should Not Be a Concern Through 2010/11 but Deficits and Monetary Policy Remain Longer

148Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 9/10 (forecasts).

Concern Through 2010/11, but Deficits and Monetary Policy Remain Longer Run Concerns

P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests

5 5%6.2%

6%

8%(Percent)

2.7% 3.0% 3.1%3.8%

4.3%5.5%

4%

6%

0%

2%

-0.4%-2%

Overall Legal US Tort Medical Motor Bodily WC Med No-FaultCPI Services Costs Care Vehicle

BodyWork

InjurySeverity

Severity ClaimSeverity

Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are

Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.

Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely

149

WC Insurers Experience Inflation More Intensely than 2009 CPI Suggests

6.9%8%

(Percent increase Dec 08 to Dec 09)

Excludes

Inpatient Services Rose 6.7%;

O t ti t S i

6%

Excludes Food and Energy

Outpatient Services Rose 7.4%

2.7% 3.0% 3.0%3.4% 3.1% 3.4%4%

1.8%2%

0%Overall CPI "Core" CPI Hospital

ServicesPhysicians'

ServicesDental

ServicesPrescription

DrugsMedical CareCommodities

Medical CPI

H lth C t A M j WC I C t D i Th A

Source: Bureau of Labor Statistics; Insurance Information Institute.

Healthcare Costs Are a Major WC Insurance Cost Driver. They AreLikely to Increase Faster than the CPI for the Next Few Years, at Least

150

WC Medical Severity Risingat Twice the Medical CPI Rate

13.5%14%

16% Average annual increase in WC medical severity form 1995 through 2009 was nearly twice the medical CPI (7.6% vs.

10.1% 10.6%

13.5%

12%

14%y (

3.9%). New healthcare reform legislation is unlikely to have any

impact on the gap.

7.4%8.3%

7.3%

8.8%

7.3% 7.4%6.7%8%

10%

4.5% 4 1% 4.6% 4.7% 4 4% 4 2% 4 4%

5.1%5.6% 5.4% 5.4% 5.0%

4%

6%

4.5%3.5%

2.8% 3.2% 3.5%4.1% 4.0% 4.4% 4.2% 4.0% 4.4%

3.7% 3.4%

0%

2%Change in Medical CPIChange Med Cost per Lost Time Claim0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2009E*

14% Tort system is an inflation Tort costs move with inflation

but at twice the rate of inflation

10%

12%

%amplifier

Avg. Ann. Change: 1961-2009E*Tort costs: +8.4%Med costs: +5 9%

8%

10% Med costs: +5.9%Overall inflation: +4.2%

4%

6%

Are there healthcare reform spillover effects?

0%

2%Tort Costs Medical Costs CPI

reform spillover effects?

1961-70 1971-80 1981-90 1991-2000 2001-09E* CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast.Source: U.S. Bureau of Labor Statistics; Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; I.I.I.

Top Concerns/Risks for Insurersif Inflation Is Reignited

ConcernsThe Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Gov’t Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary.

What are the potential impacts for insurers?What can/should insurers do to protect themselves from the risks of inflation?

p y y

Rising Claim SeveritiesCost of claims settlement rises across the board (property and liability)

Key Risks From Sustained/Accelerating Inflation

(p p y y)Rate Inadequacy

Rates inadequate due to low trend assumptions arising from use of historical data Reserve Inadequacy

Reserves may develop adversely and become inadequate (deficient)Reserves may develop adversely and become inadequate (deficient)Burn Through on Retentions

Retentions, deductibles burned through more quicklyReinsurance Penetration/Exhaustion

153Source: Insurance Information Institute.

Higher costs risks burn through their retentions more quickly, tapping into reinsurance more quickly and potentially exhausting their reinsurance more quickly

Top Concerns/Risks for Insurersif Deflation Becomes a Reality

Concerns

Deflation is defined as a sustained decline in the general price level. It can result from the reduction in the supply of money or credit or reductions in government, personal or investment spending. When deflation takes hold, the incentive is to defer purchases until prices decline further. This depresses aggregate demand, i l t d t i i

What are the potential impacts for insurers?What can/should insurers do to protect themselves from the risks of deflation?

increases unemployment and triggers recessions.

Reduced ExposuresDeflation is likely accompanied (potentially severe) recession, depressing insurance demand

Key Risks From Sustained Deflation Inflation

y p (p y ) , p gReduced Investment Earnings

Deflationary periods that interest rates drop to very low levels. Stock markets may fall as the economy struggles with recessions and reduced corporate earnings.

Underwriting ProfitabilityUnderwriting ProfitabilityLack of investment earnings makes sustained underwriting profitability a necessity

RatesRegulatory, buyer and market pressure will be biased strongly toward rate reduction

154Source: Insurance Information Institute.

Lost CostsEven with a general decline in price levels insurers may experience rising costs in coverages vulnerable to medical claim costs, tort inflation and demand surge

Deflation BasicsDeflation Basics

155

Primary Causesand Major Bouts of Deflation

Deflation is:A falling general price level

Note: this is different fromNote: this is different from A fall in the rate of increase of the general price level;

This is called disinflationA fall in the prices of some items or category of items

F l d i dFor a prolonged period That is expected to continue indefinitely

Deflation results from some or all of:A surge in productivity, generally from technological innovationA steep and prolonged drop in the money supplyA steep and prolonged recession

Note: this is different from a fall in the rate of increase of the price levelNote: this is different from a fall in the rate of increase of the price level

Major US Bouts of Deflation1920 22

156

1920-22 1930-33

Sources: http://www-personal.umich.edu/~alandear/glossary/d.html; http://en.wikipedia.org/wiki/Deflation; I.I.I.

Broad Impact of Deflation

Deflation causes…Consumers to delay buying things

Th t t b th thi l t t l iThey expect to buy those things later at lower pricesA drop in the level of aggregate demand, from the delay in consumptionA transfer of wealth

From borrowers and holders of illiquid assetsTo savers/lenders and holders of liquid assets and currency

A drop in the level of business investmentFollowing the drop in aggregate demandSlack in capacity if the economy is in recessionIncreased likelihood of lower profits or losses as selling prices drop below costs

157Sources: http://en.wikipedia.org/wiki/Deflation; I.I.I.

What History Teaches UsfAbout Deflation

and the P-C Industryy

158

1920-1950: Inflation, Deflation andthe P-C Industry’s Combined Ratio*y

110 26

Combined Ratio Price IndexCombined Ratio Price Index (1982-84 = 100)

105

22

24Declining CR Almost Completely a Result of Sharply

Lower Loss/LAE Ratio

95

100

18

20

9014

16

From 1930 to 1933 the Price Level Dropped 24%

85

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

12

pp

From Year-end 1929 Through 1932, the Industry’s Combined Ratio Rose from 96.3 t 104 9 th CPI D d B t f 1933 i t th 1950 th C bi d R ti

159

*From 1920-1934, stock companies onlySources: Best’s Aggregates & Averages; http://www.rateinflation.com/consumer-price-index/usa-historical-cpi.php?form=usacpi

to 104.9 as the CPI Dropped. But from 1933 into the 1950s, the Combined Ratio Remained Below 100 Even as Prices Slowly Rose, Then Shot Up after WWII.

1920-1950: Inflation, Deflation andP-C Industry Profitability*y y

15% 26

ROAS Price Index

From 1930 to 1933 From 1930-32 ROAS was below 1 2% b 1% i 1933 d

Combined Ratio Price Index (1982-84 = 100)

10%22

24

From 1930 to 1933 the Price Level Dropped 24%

1.2%, but was 5.1% in 1933 and 10% or higher in 1935-36

5%

18

20

0%

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

14

16

‐5% 12

The Significant Deflation from 1930-32 Punished the Industry’s ROAS, But an Improving Economy (and Slight Inflation) Helped Achieve

160

*stock companies onlySources: Best’s Aggregates & Averages; I.I.I.; ; http://www.rateinflation.com/consumer-price-index/usa-historical-cpi.php?form=usacpi

Improving Economy (and Slight Inflation) Helped AchieveROAS in Double Digits in 1935-36.

Deflation’s Effectson the P-C Insurance Industry

Lower Claim SeveritiesParticularly for property claims, severity drops for many items that insurers pay forthat insurers pay for

Rate contingency margins increaseAt least until rate construction reflects persistently declining claims se erit margins ill be higher than other ise d e toclaims severity, margins will be higher than otherwise due to high trend assumptions arising from use of historical data

Reserve Releases?Reserves may develop beneficially to become “redundant”

Lower Claim Frequency as Fewer Claims Reach Deductible, Retention Levelsete t o e e sLess Use of Reinsurance

Lower costs risks burn through their retentions less quickly reaching policy limits less quickly

161

quickly, reaching policy limits less quickly

Catastrophic Loss –Catastrophe Losses Trends Are p

Trending Adversely

162

US Insured Catastrophe Losses

$100

.0$120$100 Billion CAT Year is

Coming Eventually

Fi t H lf

($ Billions)

$61.

9

$

$60

$80

$100 First Half 2010 CAT

Losses Were Down 19% or

$1.4B from first half 2009

2000s: A Decade of Disaster2000s: $193B (up 117%)

1990s: $89B

3 4 0.1

3

$26.

5

9 12.9 $2

7.5

2 7

$27.

1

0.6

95 $22.

9

5 $16.

9

$20

$40

$60 first half 2009$8

.3

$7.4

$2.6 $1

0

$8.3

$4.6

$5. 9 $1 $9.

$6.7 $10

$7.9

$7.5

$2.7

$4.7

$5.5 $

$0

$20

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*20??

2010 CAT Losses Are Running Below 2009, So FarFigures Do Not Include an Estimate of Deepwater Horizon Loss

163

*Through June 30, 2010.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2009

810 Avg. CAT Loss Component of the

Combined Ratio Points

8.8

.9

8.1

789

Component of theCombined Ratio

by Decade

1960s: 1.04

3.0

35

3.3

2.8 3.

62.

9

5.4

3.3

3.3

.7

5.0

.6

3.6

3456 1970s: 0.85

1980s: 1.31 1990s: 3.39 2000s: 3.52

0.4 1.

20.

4 0.8 1.

30.

3 0.4 0.

7 1.5

1.0

0.4

0.4 0.

71.

81.

10.

6 1.4 2.

01.

3 2.0

0.5

0.5 0.7 1.

22.

1 2.3 2

1.0

21.

6

1.6

21.

62 .

0.9

0.1

1.1

1.1

0.8

0123

0

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

The Catastrophe Loss Component of Private Insurer Losses Has I d Sh l i R t D d

164

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.

Increased Sharply in Recent Decades

Largest International Oil Well Blowouts by Volume, as of July 12, 2010*

Date Well Location Bbl Spilled

April 20 2010-July 12 2010

Deepwater Horizon Gulf of Mexico, USA est. 4,900,000July 12, 2010June 1979-April 1980

Ixtoc I Bahia del Campeche, Mexico 3,300,000

October 1986 Abkatun 91 Bahia del Campeche, Mexico 247,000

April 1977 Ekofisk Bravo North Sea, Norway 202,381

January 1980 Funiwa 5 Forcados, Nigeria 200,000

October 1980 Hasbah 6 Gulf Saudi Arabia 105 000October 1980 Hasbah 6 Gulf, Saudi Arabia 105,000

December 1971 Iran Marine International Gulf, Iran 100,000

January 1969 Alpha Well 21 Platform A Pacific, CA, USA 100,000

March 1970 Main Pass Block 41 Platform C

Gulf of Mexico 65,000

October 1987 Yum II/Zapoteca Bahia del Campeche, Mexico 58,643

December 1970 South Timbalier B-26 Gulf of Mexico USA 53 095December 1970 South Timbalier B 26 Gulf of Mexico, USA 53,095

*Date well was capped. Federal government estimate as of August 2, 2010. Does not include offset for any amounts recovered.Source: American Petroleum Institute (API), 09/18/2009; http://www.api.org/ehs/water/spills/upload/356-Final.pdf and updates from the Insurance Information Institute.

Global Natural Catastrophes: January – June 2010

6

2

3

6

8 911 10

12

1The 12 Jan. Haiti

quake killed 225,500 people, caused $8B+ in economic damage, but little in the way of

insured losses

4

5

7Severe winter weather in the

Eastern US produced insured l f d d t l t

insured losses

Chilean earthquake (mag. 8.8) on 27 Feb. produced at least $4 billion in insured losses, $20

Winter Storm Xynthia produced

at least $2B in insured losses

and $4B in

Geophysical events(earthquake, tsunami, volcanic activity)

Hydrological events(flood, mass movement)

Global natural catastrophes

losses of produced at least $1B in insured losses and $2B

in economic losses

,billion in economic losses. Most

costly insurance event in 2010economic losses

( q , , y)Meteorological events (storm)

( , )Climatological events(extreme temperature, drought, wildfire)

Selection of significant natural catastrophes (see table)

© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 16 June 2010

Probabilty of Landfall of at Least One Major Hurricane (CAT 3-4-5) in 2010*

Region Average Over Last Century

2010Forecast*

Entire U.S. Coastline 52% 76%U.S. East Coast Incl. FL Peninsula

31% 51%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 50%

Caribbean 42% 65%

The Probability of a Major Hurricane Making Landfall Somewhere Along the US Coast is Greatly Elevated in 2010, Including a 50% g y , g

Chance Along the Oil Spill-Impacted Gulf Coast

*Forecast as of June 2, 2010.Source: Colorado State University, Department of Atmospheric Sciences; Insurance Information Institute.

Outlook for 2010 North Atlantic Hurricane Season*

Forecast Parameter Average(1950-2000)

2010Forecast*

Named Storms 9.6 18Named Storm Days 49.1 90Hurricanes 5.9 10Hurricane Days 24.5 40Major Hurricanes 2.3 5Major Hurricane Days 5 0 13Major Hurricane Days 5.0 13Accumulated Cyclone Energy 96.1 185Net Tropical Cyclone Activity 100% 195%

The 2010 Hurricane Season is Expected to Be Nearly Twice as Active as the Long-Run Average (195% of Normal)g g ( )

*Forecast as of June 2, 2010.Source: Colorado State University, Department of Atmospheric Sciences; Insurance Information Institute.

Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)

250

Fi t H lf 2010

Number of events in first half of 2010 is close to the annual totals from five of past ten years.

u be o e ts ( ua ota s 980 009 s st a 0 0)

200

First Half 201095 Events

100

150

Num

ber

50

100

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

Geophysical ClimatologicalMeteorological (storm)Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Source: MR NatCatSERVICE 169© 2010 Munich Re

U.S. Thunderstorm Loss TrendsAnnual Totals 1980 – 2009 vs. First Half 2010

Thunderstorm losses have quadrupled since 1980.

First Half 2010 $3.0 Bn

Source: Property Claims Service, MR NatCatSERVICE 170© 2010 Munich Re

U.S. Winter Storm Loss TrendsAnnual totals 1980 – 2009 vs. First Half 2010

Average annual winter storm losses have increased over 50% since 1980.

Severe winter storms in

First Half 2010

early 2010 caused major damage to energy

infrastructure

$2.4 Bn

Source: Property Claims Service, MR NatCatSERVICE 171© 2010 Munich Re

U.S. Significant Natural Catastrophes, 1950 – 2009Number of Events ($1+ Bill economic loss and/or 50+ fatalities)

There were 7 Significant Natural Catastrophes in

Sthe United States in 2009

Sources: MR NatCatSERVICE

Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*($ Billions)

$

Texas

$31.20 , 10%

$33.60 , 11%

Louisiana

$176 , 60% $57 10

Rest of US60% $57.10 ,

19%Florida

Florida Accounted for 19% of All US Insured CAT Losses

173

* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

from 1980-2008: $57.1B out of $297.9B

Top 12 Most Costly Disastersin US History(Insured Losses, 2009, $ Billions)

$45 3$50 Hurricane Katrina Remains, By Far, the

$23 8

$45.3

$30$35$40$45$50 Hurricane Katrina Remains, By Far, the

Most Expensive Insurance Event in US and World History

$11.3 $12.5$18.2

$22.8 $23.8

$8.5$8.1$7.3$6.2$5.2$4 2$10$15$20$25$

$5.2$4.2

$0$5

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

(2001)

8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;

8 f th T 12 Di t Aff t d FL

174Sources: PCS; Insurance Information Institute inflation adjustments.

8 of the Top 12 Disasters Affected FL

Share of Losses Paid by Reinsurers for Major Catastrophic Events

70%

Reinsurance plays a very large role in claims payouts

associated with major60%

45%50%

60%

associated with major catastrophes

30%25%

45%

33%30%

40%

25%20%

10%

20%

30%

0%

10%

HurricaneHugo (1989)

HurricaneAndrew (1992)

Sept. 11Terrorist

2004Hurricane

2005Hurricane

2008 TexasHurricaneHugo (1989) Andrew (1992) Terrorist

Attack (2001)Hurricane

SeasonHurricane

SeasonHurricane

Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute.

Total Value of Insured Coastal Exposure

(2007, $ Billions)

$2,458.6Florida

$635.5$772.8

$895.1$2,378.9

$ ,New York

TexasMassachusetts

New Jersey $159B Insured C t l

$224.4$191.9

$158.8$146 9

$479.9ConnecticutLouisiana

S. CarolinaVirginia

Maine

Coastal Exposure in

Virginia in 2007

I 2007 Fl id Still R k d th #1 M t$146.9$132.8

$92.5$85.6$60.6

MaineNorth Carolina

AlabamaGeorgia

Delaware

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B

in insured coastal exposure$60.6$55.7$51.8$54.1

$14.9

DelawareNew Hampshire

MississippiRhode Island

Maryland

in insured coastal exposure

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

176Source: AIR Worldwide

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

US Residual Market Exposure to Loss

$900

Katrina, Rita, and Wilma

($ Billions)

$656.7

$771.9$696.4

$600

$700

$800

$900

4 Florida Hurricanes

$372.3$430.5 $419.5

$292.0$281 8$400

$500

$600Hurricane Andrew

$292.0$244.2$221.3

$281.8

$150.0

$54.7$100

$200

$300

$01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in the Resid al Market (FAIR & Beach/Windstorm) Plans Has S rged from

177Source: PIPSO; Insurance Information Institute

the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B in 1990 to $696.4B in 2008

Insurance Information Institute Online:

www iii orgwww.iii.org

Thank you for your timed tt ti !and your attention!

Twitter: twitter.com/bob_hartwig_ gDownload: www.iii.org/presentations

after the crisis: overview & outlook for theoverview

Documents