Homeowners Insurance:The National Market

and TrendsResidential Property Insurance Symposium

Charlotte, NC May 31, 2013

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

2

P/C Net Written Premiums,by Segment/Line, 2002 vs. 2012

Sources: A.M. Best; Insurance Information Institute research.

Commercial Lines$205.6B/46%

2012

Pvt. Pass Auto$171.8B/39%

Homeowners$66.6B/15%

2002

Commercial Lines$188.1B/50%

Homeowners$40.3B/11%

Pvt. Pass Auto$146.9B/39%

Homeowners insurance NWP grew from 11% to 15% of total P/C premiums, growing faster than commercial insurance NWP

(which shrank, as a percent of total P/C NWP, from 50% to 46%).

3

Homeowners InsuranceNet Written Premium, 2000–2012

$32.54$35.40

$40.30

$45.94

$49.98$53.01

$55.78 $57.05 $57.38 $58.48$62.03

$64.14$66.63

8.8%

13.8% 14.0%

8.8%

6.1%5.2%

2.3%

0.6%

1.9%

6.1%

3.4%3.9%

$25

$50

$75

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120%

2%

4%

6%

8%

10%

12%

14%

16%

HO NWP Pct Change

Sources: SNL Financial; Insurance Information Institute.

$ Billions

Homeowners insurance NWP resumed rising in 2010 after very low growth in 2007-09. Continued growth depends on exposure growth, the

composition of the market (renters vs. owners), and other factors.

Pct. Change

5

Homeowners Insurance Profit, 2011, by State

42.9

24.9

22.8

20.0

19.0

18.8

17.9

14.8

14.6

14.5

13.0

12.9

12.9

8.0

7.1

6.3

5.4

4.4

2.9

2.7

1.7

1.6

-0.4

-1.0

-1.4

-5

0

5

10

15

20

25

30

35

40

45

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

Ret

urn

on N

et W

orth

(%)

Sources: NAIC 2012 Profitability Report; Insurance Information Institute.

Highest 25 States

In 2011, Homeowners insurance produced double-digit percentage

profits in just 13 states

US average:-3.8%

6

Homeowners Insurance Profit, 2011, by State

-2.3

-4.5

-6.1

-7.2

-7.9

-8.1

-9.6

-9.8

-10

.3

-11

.0

-11

.7

-11

.8

-12

.2

-16

.7

-20

.7

-24

.1

-29

.3

-32

.2

-32

.7

-35

.2

-35

.5

-39

.1

-50

.1

-81

.2

-10

1.3

-120-110-100-90-80-70-60-50-40-30-20-10

0

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

Re

turn

on

Ne

t W

ort

h (

%)

Sources: NAIC 2012 Profitability Report; Insurance Information Institute.

Lowest 25 States

US average:-3.8%

7

45

.7

20

.3

19

.7

19

.6

19

.2

17

.9

17

.8

16

.4

15

.8

15

.7

15

.7

14

.9

14

.8

12

.7

12

.3

11

.7

11

.2

10

.7

10

.1

10

.1

10

.0

9.2

19

.0

18

.0

14

.00

5

10

15

20

25

30

35

40

45

50

HI AK RI SC NV DE OR NY CA UT MA CT WA ME VT ID ND NM VA NH PA MI NC NJ AZ

RN

W H

O

*Latest available.Source: NAIC.

Return on Net Worth: Homeowners Insurance, 10-Year Average (2002-2011*)

Hawaii was the most profitable state for home insurers from

2002-2011 due to the absence of hurricanes during this period

(Percent) Top 25 States

8

8.6

7.8

7.2

6.1

5.8

5.7

5.5

5.4

4.8

8.0

1.0

-4.5

-5.0

-5.6

-6.0

-7.4

-7.9 -8.3

-15

.1

-16

.1

-24

.0

-26

.3

-1.5

-0.1

0.1

4.5

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

1015

MT MD CO WY WV SD WI NE U.S. IA IL TX KS FL IN OH MN MO AR KY OK GA AL TN LA MS

RN

W H

O

*Latest available.Sources: NAIC

Hurricanes Katrina and Rita made Louisiana and Mississippi the least profitable states for home insurers

from 2002-2011

Bottom 25 States(Percent)

Return on Net Worth: Homeowners Insurance, 10-Year Average (2002-2011*)

15

Return on Net Worth: All P-C Linesvs. Homeowners, 1990-2011*

*Latest available.**Excluding Hurricane Andrew (1992); Including 1992 produces an average homeowners RNW of 0.5%.Sources: NAIC; Insurance Information Institute.

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

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

US All Lines US HomeAverage RNW: 1990-2011*

All P-C Lines: 7.8% Homeowners: 3.2%**

Homeowners Insurance Is Considerably More Volatile than the Market Overall Due to Coastal Exposure and Interior Wind/Hail Events

Hurricane Irene

Katrina, Rita, Wilma

Texas “Mold” Crisis

Number of Insurers Competing

Total Market Share of

Top 5 Insurers

HHI

US 400 46.7% 668.9

North Carolina

63 58.8% 896.1

South Carolina

68 55.2% 943.6

Sources: SNL Financial; Insurance Information Institute

The Marketplace for HO Premiumsis Quite Competitive, 2012

Note: An HHI score under 1,000 is considered a competitive marketplace.

Example: In a market, the top 5 insurers’ market share is 16%, 14%, 12%, 10%, and 8%. Total market share of these insurers is 60%. The HHI score for the state is likely to be 900-1000.

17

Demographic and Macroeconomic Forces Affecting Homeowners

InsuranceBrighter Days Ahead,

but Not Without Challenges

18

Projected Population Growth Rates (2010-2020) Vary Widely by State and Region*

21.6

%14

.6%

13.1

%11

.3%

9.3%

8.8%

8.5%

6.4%

3.7%

2.9%

2.3%

-1.5

%

10.0

%8.

9%4.

9%1.

6%0.

7%

10.0

%5.

9%3.

8%3.

4%3.

1%2.

7%

11.6

%

5.3%

-4%

0%

4%

8%

12%

16%

20%

24%

FL NC

GA

VA

MS TN SC

AR KY

AL

LA WV

MD DE NJ

PA NY

NH VT

ME RI

MA CT

AK HI

Une

mpl

oym

ent R

ate

(%)

*based on 2000 census.Source: http://www.census.gov/population/projections/data/state/projectionsagesex.html (Table 7)

Southeast Mid-Atlantic New England

U.S. population growth overall, 2010-2020, is projected to be 8.7%

19

Projected Population Growth Rates (2010-2020) Vary Widely by State and Region* (cont’d)

28

.3%

4.8

%

2.0

%

0.4

%-1

.0%

-1.9

%

27

.4%

4.0

%5.3

%

16

.2%

15

.2%

9.3

%

5.6

%2

.1%

14

.8%

3.7

%

8.9

%

4.7

%

2.6

%

3.0

%

0.6

%2.5

%

13

.6%

12

.4%

10

.9%

-4%

0%

4%

8%

12%

16%

20%

24%

28%

32%

AZ

TX

NM

OK

UT ID CO

MT

WY

NV

WA

OR

CA

WI

IN MI

IL OH

MN

MO

KS

SD IA ND

NE

*based on 2000 census.Source: http://www.census.gov/population/projections/data/state/projectionsagesex.html (Table 7)

Southwest Mountain Far West Great PlainsGreat Lakes

U.S. population growth overall, 2010-2020, is projected to be 8.7%

20

As the Population Ages, the Numberof People per Household Shrinks (2012)

2.292.07

1.911.60

2.642.98

3.343.353.06

2.65

0.0

1.0

2.0

3.0

4.0

25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-74 75 andover

Source: US Census Bureau at http://www.census.gov/hhes/families/data/cps2012.html Table AVG1.

As the “baby boom” ages and households get smaller, this will spur growth of smaller homes that are more suited to their requirements.

Average Household Size

Age of Householder

The number of households in these

age brackets will soar in the next 20 years

21

24.8

29.7

9.8

27.2

3.9

23.6

32.9

11.2

31.2

5.1

0

5

10

15

20

25

30

35

Husband/wifew/own children

Husband/wifew/no children

Single parents Individualsliving alone

Multi-generationhouseholds

2000

2010

Millions

Changes in Household Composition, 2000-2010

Sources: U.S. Census Bureau, “Households and Families: 2010,” issued April 2012.; Insurance Information Institute.

The number of traditional households (husband, wife, children at home) fell by 1.25 million in the first decade of the 21st century. Multi-generation

households rose by roughly the same number in that decade.

Down 5%

Up 14.4%

Up 14.6%

Up 30.8%

Up 14.7%

22

Millions of Units

Private Housing Unit Starts, 1990-2014F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

1 0.7

8

1.0

2 1.2

31.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F

Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (5/13); Insurance Information Institute.

Homeowners insurers are starting to see meaningful exposure growth for the first time since 2005. Commercial insurers with construction risk

exposure, surety also benefit.

Starts plunged 72% from 2005-2009 to lowest level since

records began in 1959

Forecast range for 2013 is 0.90 to 1.35 million

unitsHousing“Bubble”

So Far, the Pickup Is Mostly in Multi-Family Housing Starts

100

150

200

250

300

350

400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

400

600

800

1000

1200

1400

1600

1800

units in multi-family buildings single family units

*average of annualized seasonally adjusted January-April 2013 data; April is preliminary.Source: US Census Bureau at www.census.gov/construction/nrc/pdf/newresconst.pdf.

Thousands of Units, Multi-Family

2013:Q1 multi-unit starts at a seasonally adjusted annual rate of 325,000,are nearly back to the average annual pre-recession rate of 339,000.

Multi-family-unit starts rose in 2011, more in 2012, still

more so far in 2013.

Thousands of Units, Single Family

Multi-family plunge did not begin until 2009

Single family plunge began

in 2006

24

Number of Rental-Occupied Housing Units, Quarterly, 1990-2013

32

34

36

38

40

42

90

:Q1

91

:Q1

92

:Q1

93

:Q1

94

:Q1

95

:Q1

96

:Q1

97

:Q1

98

:Q1

99

:Q1

00

:Q1

01

:Q1

02

:Q1

03

:Q1

04

:Q1

05

:Q1

06

:Q1

07

:Q1

08

:Q1

09

:Q1

10

:Q1

11

:Q1

12

:Q1

13

:Q1

Sources: US Census Bureau; Insurance Information Institute.

Trough in 2004:Q4 at 33.1

million units

Since the Great Recession ended, renters occupied 3.6 million more units (+9.9%)—outstripping population growth (+2.9%). When will this end?

24

MillionsLatest was 40.1 million units in

2013:Q1

25

Rental Vacancy Rates, Quarterly, 1990-2013

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.59

0:Q

1

91

:Q1

92

:Q1

93

:Q1

94

:Q1

95

:Q1

96

:Q1

97

:Q1

98

:Q1

99

:Q1

00

:Q1

01

:Q1

02

:Q1

03

:Q1

04

:Q1

05

:Q1

06

:Q1

07

:Q1

08

:Q1

09

:Q1

10

:Q1

11

:Q1

12

:Q1

13

:Q1

Sources: US Census Bureau; Insurance Information Institute.

Peak vacancy rate 11.1% in

2009:Q3

Before the 2001 recession rental vacancy rates were 8% or less.Can they get there again?

25

Percent vacant

Latest vacancy rate was 8.6%

in 2013:Q1

26

Rental-Occupied Housing Units as % of Total Occupied Units, Quarterly, 1990-2013

30%

31%

32%

33%

34%

35%

36%

37%9

0:Q

1

91

:Q1

92

:Q1

93

:Q1

94

:Q1

95

:Q1

96

:Q1

97

:Q1

98

:Q1

99

:Q1

00

:Q1

01

:Q1

02

:Q1

03

:Q1

04

:Q1

05

:Q1

06

:Q1

07

:Q1

08

:Q1

09

:Q1

10

:Q1

11

:Q1

12

:Q1

13

:Q1

Sources: US Census Bureau; Insurance Information Institute.

Trough in 2004:Q2 and Q4 at 30.8%

Since the Great Recession ended, renters occupied 3.6 million more units (+9.9%)—outstripping population growth (+2.9%). When will this end?

26

Millions

Latest was 35.0% in 2013:Q1

Trend down began in 1994:Q3 from

36.2% in Q2

Highly Variable P/C Claims Drivers

29

30

Change* in the Consumer Price Index, 2004–2013

*Monthly, year-over-year, through April 2013. Not seasonally adjusted.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13

RecessionCPICore CPI

Over the last decade, prices generally rose about 2% per year.

30

For two months in 2008, led by gasoline, the

general price level was rising at a 5.5% pace

But when gas prices dropped, the general price level was

briefly lower than a year prior

31

Pct Changes in Price* for Residential Construction, 1990–2013

*Monthly vs. same month, prior year. Note: Recessions indicated by gray shaded columns.Sources: BLS Producer Price index ; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Three times in the past decade the price of residential construction rose ata 7.5% annual rate, or more. Such spikes were probably not in the base rates.

31

32

Prices for Hospital Services:12-Month Change,* 1998–2013

*Percentage change from same month in prior year; through April 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

2%

4%

6%

8%

10%

12%

14%

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Recession Outpatient Services Inpatient Services

Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)

April 2013Inpatient services +4.0,

Outpatient services +4.5%

33

Change* in Price Index for Lumber:Sudden Spikes, 2008–2013

*Monthly, year-over-year, through April 2013. Softwood is seasonally adjusted; hardwood is not.January through April 2013 prices are preliminary.Sources: US Bureau of Labor Statistics, Producer Price Index series WPS0811 (softwood); WPU812 (hardwood).National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

'08 '09 '10 '11 '12 '13

Perc

ent C

hang

e

Recession

Hardwood

SoftwoodLumber

33

The price of lumber dropped

before and during the recession…

But 30% spikes can

happen suddenly

Jul 2012 to Apr 2013

Catastrophes

3737

40

The Dozen Most Costly Hurricanesin U.S. History

Insured Losses, 2012 Dollars, $ Billions

*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

$9.2 $11.1$13.4

$20.0

$25.6

$48.7

$8.7$7.8$6.7$5.6$5.6$4.4

$0

$10

$20

$30

$40

$50

$60

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Andrew(1992)

Katrina(2005)

Sandy will likely become the 3rd costliest hurricane in US insurance history

Irene became the 12th most expensive

hurricane in US history

10 of the 12 most costly hurricanes in insurance history occurred in the past 9 years (2004—2012)

41

If They Hit Today, the Dozen Costliest (to Insurers) Hurricanes in U.S. History

Insured Losses,2012 Dollars, $ Billions

*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: Karen Clark & Company, Historical Hurricanes that Would Cause $10 Billion or More of Insured LossesToday, August 2012; I.I.I.

$40$50 $50 $50

$65

$125

$40$35$25$20$20$20

$0

$20

$40

$60

$80

$100

$120

$140

Sandy*(2012)

Betsy(1965)

Hazel(1954)

Donna(1960)

NewEngland(1938)

Katrina(2005)

Galveston(1915)

Andrew(1992)

south-Florida(1947)

Galveston(1900)

mid-Florida(1928)

Miami(1926)

When you adjust for the damage prior storms could have done if they occurred today, Hurricane Katrina slips to a tie for 6th among the most

devastating storms.

Storms that hit long ago had less property and businesses to damage, so simply adjusting their actual claims for inflation doesn’t capture their

destructive power.Karen Clark’s analysis aims to overcome that.

43

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.1

$3

7.0

$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

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

US Insured Catastrophe Losses

*As of 1/2/13. Includes $20B gross loss estimate for Hurricane Sandy.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

US CAT Losses in 2012 Will Likely Become the 2nd or 3rd Highest in US History on An Inflation-Adjusted Basis (Pvt

Insured). 2011 Losses Were the 5th Highest

2012 CAT losses were down nearly 50% from 2011 until Sandy struck in late October

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2012 Dollars)

43

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2012Number of Events (Annual Totals 1980 – 2012)

Source: MR NatCatSERVICE 44

41

19

121

3

50

100

150

200

250

300

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

There were 184 natural disaster events in the

US in 2012

There were over 150 natural disaster events in the US every

year since 2006. That hadn’t happened in any year before.

P/C Industry Homeowners Claim Frequency, US, 1997-2011

1.57

2.822.34

1.842.32

1.69

2.67 2.572.97

2.28

1.32

3.42

2.39 2.35

3.68

6.996.71 6.45 6.26 6.53

5.83

4.63

3.83 3.64 3.77 3.94 4.03 4.16 4.17 4.31

8.56

9.53

8.798.10

8.85

7.52 7.30

6.40 6.616.05

5.26

7.46

6.55 6.52

7.99

0

2

4

6

8

10

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2010 2011

CAT-related claims Non-CAT-related claims All Claims

Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.29; Insurance Information Institute

Claims Paid per 100 Exposures

P/C Industry Homeowners Average Claim Severity, 1997-2011

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

non-cat claims cat claims

Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p. 29, BLS inflation calculator,and Insurance Information Institute

HO average claim severity is now

three times what it was in 1997.

Investments: The Stark Reality

5050

51

U.S. Treasury Security Yields*:A Long Downward Trend, 1990–2013

*Monthly, constant maturity, nominal rates, through Mar 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Recession2-Yr Yield10-Yr Yield

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

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

U.S. Treasury security yields

recently plunged to record lows

51

53

Distribution of Bond Maturities,P/C Insurance Industry, 2003-2012

16.0%

15.2%

15.7%

16.2%

16.3%

29.8%

29.2%

28.8%

29.5%

30.0%

32.4%

36.2%

39.5%

41.4%

40.4%

31.3%

32.5%

34.1%

34.1%

33.8%

31.2%

28.7%

26.7%

26.8%

27.6%

15.4%

15.4%

13.6%

13.1%

12.9%

12.7%

11.7%

11.1%

10.3%

9.8%

9.2%

7.6%

7.6%

7.4%

8.1%

8.1%

7.3%

6.4%

6.3%

5.7%16.5%

15.2%

14.4%

16.0%

15.4%

0% 20% 40% 60% 80% 100%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Under 1 year

1-5 years

5-10 years

10-20 years

over 20 years

Sources: SNL Financial; Insurance Information Institute.

The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds

(from 24.6% in 2003 to 15.4% in 2012) and then trimmed bonds in the 5-10-year category. Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in

investment income along with lower yields.

Purchasing Power of P/C Industry Investment Gains: 1994–2012F1

$54.8

$64.5

$69.1

$74.8

$57.6

$45.9

$56.5$59.4

$69.8

$63.4

$70.9

$33.8

$42.0

$56.2 $57.4

$50.8

$81.7

$71.5$75.9

$30

$60

$90

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

In 2012 both investment income and realized capital gains were lower than in the comparable period in 2011. And because the Federal Reserve Board aims to keep

interest rates exceptionally low until the unemployment rate hits 6.5%—likely at least another year off—maturing bonds will be re-invested at even lower rates.

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.*2005 figure includes special one-time dividend of $3.2B; 2012F figure is I.I.I. estimate based on annualized actual 2012:Q3 result of

$38.089B. Sources: ISO; Insurance Information Institute.

($ Billions, 2012 dollars) Average yearly gain: $60.85B.

We haven’t hit that average in the last 5 years.

58

Policyholder Surplus, 2006:Q4–2012:Q3

Sources: ISO; A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$559.2 $559.1

$538.6$550.3

$583.5$570.7$566.5

$505.0$515.6$517.9

$425

$450

$475

$500

$525

$550

$575

$600

06:Q

4

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

12:Q

1

12:Q

3

Surplus as of 9/30/12 was a

new peak

The industry now has $1 of surplus for every $0.80 of NPW, the strongest claims-paying status in its history

Drop due to near-record 2011 CAT losses

59

Key Takaways

59

60

HO Insurance Exposures Will Grow With the U.S. Economy and Population In 2013-14, more growth in rental market than ownership market Longer term, demographics might continue to shift the

composition of the market toward smaller homes, more rentals HO Underwriting Profit is Highly Variable, Depends

on Frequency, Severity of CATs Frequency, Severity trends appear to be rising Inflation in some claims drivers has been/can be severe, even

when overall inflation is moderate Industry Capacity Hits a New Record by Year-End

2013 (Barring Meg-CAT) Pressure on Underwriting to Generate Profits as the

Investment Environment Is/Remains Challenging Most economists forecast interest rates to remain low for the next

few years

Takeaways

www.iii.org

Thank you for your timeand your attention!

Insurance Information Institute