overview & outlook for the p/c i i d tp/c insurance industry · 2014-06-13 · presentation...

Overview & Outlook for the P/C I I d tP/C Insurance Industry

Drivers of Revenue, Cost and Competition in the Aftermath of the “Great Recession”the Aftermath of the Great Recession”

Casualty Actuaries of Greater New EnglandSouthbridge, MAMarch 31, 2011

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

Presentation Outline

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry P/C Profitability Overview & OutlookThe Elusive Market Turn: When, Why, How and IFThe Elusive Market Turn: When, Why, How and IF

Pricing: Up, Down or Sideways?Underwriting Trends: Drivers of Future Market Firming?Investments: New Investment Reality Not Reflected in PricingExpenses: Cyclical IncreaseLeverage/Capital Management: Excess Capacity and Squeezing it Out

M&A Activity in the P/C Insurance IndustryExternal Factors Influencing Profitability

T t S t R i O i d C f CTort System Review: Overview and Causes for ConcernInflation

Growth in the Aftermath of the Great RecessionCrisis-Driven Exposure Issues: Commercial Linesp

Global Issues Impacting P/C InsuranceCatastrophe Loss ReviewSocial Media Strategy

2

gyQ&A

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

Insurance IndustryInsurance Industry

The Outlook for the EconomyThe Outlook for the Economy Has Brightened, But the Outlook

for P/C Insurance Is Mixed3

for P/C Insurance Is Mixed

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

Economic Recovery in US is Self-Sustaining and StrengtheningNo Double Dip or Second RecessionEconomy is more resilient than most pundits presume

Consumer Confidence is Gradually ImprovingConsumer Spending is Recovering GraduallyConsumer and Business Lending Are Expanding

S 2011Housing Market Remains Weak, but Some Improvement Expected in 2011Inflation Remains Tame

Runaway inflation is highly unlikely; Fed has things under controlDeflation threat has disappearedDeflation—threat has disappeared

Private Sector Hiring is Consistently Positive for 14 MonthsAcceleration in hiring later in 2011 compared to 2010No significant secondary spike in unemploymentg y p p y

Japan Threat to Global Economy OverstatedSovereign Debt, Muni Bond “Crises” OverblownCurrent Middle East Turmoil Poses Only Moderate Risk to US Economy

4

Interest Rates Are Rising but Remain Low by Historical StandardsStock and Bond Markets More Stable, Less VolatilePolitical Environment Is More Hospitable to Business Interests


Era of Mass P/C Insurance Exposure Destruction Has EndedPersonal and commercial exposure growth is virtually certain in 2011But restoration of destroyed exposure will take 3-5 years in USy p y

Exposure Growth Returned in in 2nd Half 2010, Will Accelerate in 2011P/C Industry Saw Growth in 2010 (+0.8%) for the First Time Since 2006Increasing Private Sector Hiring Will Drive Payrolls/WC ExposuresIncreasing Private Sector Hiring Will Drive Payrolls/WC Exposures

Wage growth is also positive and could modestly accelerate

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

Investment Environment Is/Remains Much More FavorableReturn of realized capital gains as a profit driverInterest rates are low but are rising Boost to investment income

5

Agent Commissions Should Begin to Rise in 2011

Demand, Capital Management Strategies Will Temper Overcapitalization


Economic Recovery Is Not as Broad Based as Past RecoveriesHousing, Construction remain weak

Recovery Is UnevenyCertain states remain in recession and recoveries will lag: CA, FL, MI, NV

Credit Markets Are Not Completely Yet HealedWhile the financial sector has strengthened, hundreds more banks failures are possible

Consumers/Businesses Will Remain Cautious in their Borrowing/SpendingEnergy and Commodity Price Volatility Are Serious Economic Risks

Effects can be disruptive to a fragile recovery even without igniting overall inflationConcern over serial bubbles in various economic sectors on a global scale

Financial Markets, While Calm Now, Remain JitteryMarkets buy into “crisis du jour” mindset quickly; Another “Flash Crash” possibilityC rrenc risk is ele atedCurrency risk is elevated

Minor Muni Bond Default(s) Could Result in Irrational Market ResponsePotential for Botched Implementation of Dodd-Frank

Systemic risk definition may be too broad

6

Systemic risk definition may be too broadBanks will eventually find a way to screw up the economy—again

Strength of Admin/Congress Commitment to Pro-Business Policies Unclear


Exposure Loss Was Extraordinary, Concentrated in Commercial LinesWill take years to restore lost capacityCapacity will not be restored in the same industrial or geographic sectorsPublic sector pain has a long way to go

Consumers Emerged from the Crisis Much More Cost ConsciousQuicker to shop/switch; Price elasticity of demand is higherHeightens retention challenge

Commercial Customers Remain Comfortable/Able Retaining More Risk“Leakage” remains a problem (ART, captives, self insurance, large ded. progs.)g p ( p g p g )

Strength of Recovery Insufficient to Absorb Excess Capital or Firm PricingP/C Insurance Industry Capacity as of 12/31/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis

The industry is overcapitalized by approximately $100 billionRecord capacity, depressed exposures (S>D) mean that generally soft market conditions will persist through 2011

There is No Catalyst for a Robust Hard Market at the Current Time

7

There is No Catalyst for a Robust Hard Market at the Current TimePricing Today Does Not Reflect New Investment Realties or Underlying Deterioration in Underwriting Performance Masked by Release of Prior-Year Reserves Source: Insurance Information Institute.

Summary of Japan Earthquake

The March 11 Quake is Just theThe March 11 Quake is Just the Most Recent of Several Large

Catastrophe Losses8

Catastrophe Losses

Location of March 11, 2011 Earthquake Near Sendai, Honshu, Japan

M it d 9 0 th k t k

March 11 Earthquake Factsas of 3/24/2011

Magnitude 9.0 earthquake struck Japan at 2:46PM local time (2:46AM Eastern) off the northeast cost of Honshu, 80 miles east of the city of Sendaithe city of Sendai

Quake is among the 5 strongest in recorded history and the strongest in the 140 years for which records t e 0 yea s o c eco dshave been kept in Japan

11,000+ fatalities

Economic loss: $100 $300 bnEconomic loss: $100 - $300 bn

Insured losses up to $35 bn

Significant tsunami damage was

LOCATION130 km (80 miles) E of Sendai, Honshu, Japan178 km (110 miles) E of Yamagata, Honshu, Japan

9Source: US Geological Service; Insurance Information Institute.

g grecorded in Japan; relatively minor damage on the U.S. West Coast

178 km (110 miles) ENE of Fukushima, Honshu, Japan373 km (231 miles) NE of TOKYO, Japan

Insured Japan Earthquake Loss Estimates*

(Insured Losses, $ Billions)

Eqecat $12 ‐ $25 bn

AIR Worldwide $25 - $35 bn

S

Economic losses are likely to total in the $200 billion range,

i l f ti f th

$ $5 $10 $15 $20 $25 $30 $35 $40

RMS meaning only a fraction of the loss is insured

$‐ $5 $10 $15 $20 $25 $30 $35 $40

10

*As of March 29, 2011. Figures do not include insured tsunami losses.Sources: AIR Worldwide, Eqecat; Insurance Information Institute.

Top 20 Nonlife Insurance Companies in Japan by DPW, 2008

Direct premiums written, 2008

Rank Companies JPY (millions)

U.S. ($ millions)

Marketshare

Cumulative Market Share

1 T ki & M i Ni hid $2 032 131 2 $19 660 9 24 0% 24 0%1 Tokio & Marine Nichido $2,032,131.2 $19,660.9 24.0% 24.0%

2 Sompo Japan 1,504,262.7 14,553.8 17.8 41.8%

3 Mitsui Sumitomo 1,455,161.8 14,078.7 17.2 59.0%

4 Aioi 897,182.6 8,680.3 10.6 69.6%

5 Nipponkoa 728 262 9 7 046 0 8 6 78 2%5 Nipponkoa 728,262.9 7,046.0 8.6 78.2%

6 Nisay Dowa 361,530.7 3,497.8 4.3 82.5%

7 Fuji 329,345.7 3,186.4 3.9 86.4%

8 AIU 253,522.8 2,452.8 3.0 89.4%

9 Kyoei 199,393.1 1,929.1 2.4 91.8%y , , %

10 Nisshin 149,735.8 1,448.7 1.8 93.6%

11 American Home 82,889.8 802.0 1.0 94.6%

12 Asahi 73,600.1 712.1 0.9 95.5%

13 Sony 60,868.3 588.9 0.7 96.2%

14 ACE 54,876.2 530.9 0.7 96.9%

15 Zurich 45,471.3 439.9 0.5 97.4%

16 SECOM 44,245.0 428.1 0.5 97.9%

17 Sumi Sei 33,594.0 325.0 0.4 98.3%

11

18 AXA 30,418.9 294.3 0.4 98.7%

19 Mitsui Direct 29,471.9 285.1 0.4 99.1%

20 Daido 15,690.4 151.8 0.2 99.3%

Source: © AXCO 2011.

Recent Major Catastrophe Losses

(Insured Losses, $US Billions)

$30 The March 2011 earthquake in Japan will $25.0

$20

$25

$30 q pbecome among the most expensive in world history in terms of insured losses (current

leader is the 1994 Northridge earthquake with $22.5B in insured losses in 2010 dollars)

$10.0$8.0

$5.0$2 0$5

$10

$15)

$2.0$0.5$0

$5

Cyclone Yasi(Australia) Feb

2011

Australia Floods(Dec - Feb 2011)

New ZealandQuake (Sep 2010)

Chile Earthquake(Feb 2010)

New ZealandQuake (Feb 2011)

Japan Earthquake(Mar 2011)*

2011

Insured Losses from Recent Major Catastrophe Events Exceed $50 Billion, an Estimated $48 Billion of that from Earthquakes

12

*Midpoint of AIR Worldwide estimated insured loss range of $15 billion to $35 billion as of March 13, 2011. Does not include tsunami losses.Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.

Nonlife Insurance Market Impacts of Japan Earthquake

Primary Insurance: Downgrades of Some Domestic Japanese InsurersSignificant Absorption of Loss by Japanese Government

Residential earthquake damageq gNuclear-related property and liability damage

Market Share of Foreign Primary Insurers in Japan is SmallNot a capital event for any non-Japanese primary insurer

Significant Impacts for Global ReinsurersProperty-Catastrophe covers on Commercial LinesBusiness InterruptionContingent Business Interruption

Currently an Earnings Event for Global ReinsurersNot a capital event: Global reinsurance markets entered 2011 with record capital

Cost of Property/Catastrophe Reinsurance Rising in Japan, New Zealand, AustraliaAustralia

Up for all; Magnitude of increase is sensitive to size of lossReinsurance Coverage Remains Available in Affected RegionsLittle (If Any) Impact of Cost of US Property-Cat Reinsurance

13

Little (If Any) Impact of Cost of US Property Cat ReinsuranceMarket remains well capitalized and competitiveElevated global cat activity could halt price declines for property/cat reinsurance

P/C Insurance Industry Financial Overview

Profit Recovery ContinuesyEarly Stage Growth Begins

14

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

,496

65,7

77

$70 000

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

P-C Industry 2010:Q3 profits were$26.7B vs.$16.4B in 2009:Q3,

due mainly to $4.4B in realized capital gains vs $9 6B in previous

9

$62,

3

$6

44,1

55

501

$50 000

$60,000

$70,000 2007 ROE = 10.9%2008 ROE = 0.3%2009 ROAS1 = 5.8%2010:Q3 ROAS = 6.7%

capital gains vs. -$9.6B in previous realized capital losses

8 316

,598

24,4

04 $36,

81

$30,

773

1,86

5

$30,

029

$34,

893

$28,

311

$ 4

,559

$38,

5

$30,000

$40,000

$50,000

$14,

178

$5,8

40

$19,

3

$10,

870 $20 $2 $21

3,04

6

3,04

3

$20

$10,000

$20,000

,

$

$3 $3

-$6,970-$10,000

$0

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

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS for 2010:Q3 and 4.6% for 2009. 2009:Q3 net income was $29.8 billion excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

ROE: Property/Casualty Insurance,1987–2010E*

20%P/C Profitability Is Both by

Cyclicality and Ordinary Volatile K t i

(Percent)

15%

y y y Katrina, Rita, Wilma

%

10%

HugoSept. 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 10E

Northridge Financial Crisis*

16

* Excludes Mortgage & Financial Guarantee in 2008 - 2010.Sources: ISO, Fortune; Insurance Information Institute figure for 2010 is actual through 2010:Q3.

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

18%The P/C Insurance Industry Fell 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

-2.7

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

17

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

ROE Cost of Capital

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE

15.9%110 18%

A combined ratio of about 100 generated ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

97.5100.6 100.1 100.7 99.5 99.7101.0

9 6%

5 9%14.3%

12.7%

100

105

12%

15%

92.6 7.7%7.3%

9.6%

8.9%90

95

6%

9%

4.4%

80

85

1978 1979 2003 2005 2006 2008* 2009* 2010 Q3*0%

3%

1978 1979 2003 2005 2006 2008* 2009* 2010:Q3*

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s Depressed

* 2009 and 2010:Q3 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

RNW for Major P/C Lines,2000-2009 Averageg

19.1%19.8%20%10-year returns for some lines are

excellent, though homeowners is a major laggard largely due to major

12 2%15%

0% laggard, largely due to major catastrophes. WC returns are slipping.

8.5% 8.0% 7.4% 7.0% 6.4%

12.2%

7.2%10%

6.4%4.7% 4.7%5%

3 9%-5%

0%

-3.9%-5%Fire Inland

MarineAll

OtherCommAuto

CMP MedMal

PPAuto

AllLines

WC OtherLiab

HO Allied

Source: NAIC; Insurance Information Institute

The Elusive Market TurnThe Elusive Market Turn

When, Why, How and, y,IF

20

PRICING TRENDSPRICING TRENDS

Winds of Change or gMoving Sideways?

21

Soft Market Persisted in 2010 but May Be Easing: Relief in 2011?

25%

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

20%

25%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%

10%

-5%

0%NWP was up 0.5% in 2010 (est.) with

forecast growth of 1.4% in 2011

22

5%

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 0910

E11

F

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

Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2010E

Private Passenger Auto

While homeowners insurance has grown faster than auto over the past decade, auto is

generally more profitable

14.5%

9 2%

15.3%

11%

13%

15% HomeownersAll Lines

Average 2000-2009A t 2 9

3 0%

9.2%

6.0%

2 2%

5.7%

5 0%5%

7%

9%Auto = 2.9

Home = 6.5%All Lines = 3.4%

3.0%

-0.9%0.9%

2.2%

0.5%

5.0%

-1%

1%

3%

-4.9%

-5%

-3%

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

23Sources: A.M. Best; Insurance Information Institute.

P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter

5.1% 16

.8%

16.7

%% %

20%

The long-awaited uptick:

mainly personal lines

10.2

%1 5

12.5

%10

.1%

9.7%

7.8%

7.2%

6% 5%

10.3

%10

.2% 13

.4.6

%10%

15%

75.

62.

9%5.

5 6

2.1%

0.0% 0.5% 1.

3% 2.3% 3.0%

0%

5%

-4.6

%-4

.1%

-5.8

%-1

.6%

-1.6

%

-1.9

%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

-10%

-5%

Finally! Back to back quarters of net written premium growth

--10%

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

24Sources: ISO, Insurance Information Institute.

Finally! Back-to-back quarters of net written premium growth(vs. the same quarter, prior year)

Net Written Premium Growth by Segment: 2008-2011F

Personal lines growth resumed in 2010 and will continue in 2011, while commercial lines contracted

again in 2010 and but will stabilize in 20112.8% 2.5%

0.3%0%2%4%

g

-0.1%-2.0%

-3.1%

-0.1%

-6%-4%-2%

-9.4%-12%-10%

-8%

Personal Lines Commercial Lines

2008 2009E 2010P 2011F

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

25

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

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

Monthly Change* in Auto Insurance Prices, 1991–2011*,

10%Cyclical peaks in PP Auto tend to occur

approximately every 10

8%

pp y yyears (early 1990s, early

2000s and likely the early 2010s)

4%

6% A pricing peak may be occurring

2% “Hard” markets tend to occur

during

Feb. 2011 change

was 4.2%, down from

5.4% in

-2%

0%g

recessionary periods

Nov. 2010

26

*Percentage change from same month in prior year; through February 2011; 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 '11

Average Premium forHome Insurance Policies**

$950

Consumer efforts to economize (increased deductibles, more shopping, etc.) and

adverse exposure trends are depressing the average homeowners insurance premium

$822$791 $799 $807$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*

27

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.

Average Commercial Rate Change,All Lines, (1Q:2004–3Q: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

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 3Q

Magnitude of Price Declines Shrank

During Crisis,

-3.2

%% -4

.6%

-2.7

%-3

.0%

3% .1%

4.9% % 6% 3% .2%-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

% -5.

-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

28

-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 Account Size: 1999:Q4 to 2010:Q3Percentage Change (%)

Peak = 2001:Q4 +28.5%

Market has Been Soft for 6+ years and Remains Soft as Capital is Restored and

Pricing Turned

as Capital is Restored and Underwriting Losses

Remain Modest

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since KRW Effect

Trough = 2007:Q3 -13.6%

29Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q3

1999:Q4 = 100

Pricing today is where is was in

Q3:2000 (pre-9/11)

Downward pricing pressure is most pronounced for

larger riskslarger risks


Change in Commercial Rate Renewals, by Line: 2010:Q3Percentage Change (%)

n

All Com

mercial

GL Comml P

ropCom

ml Auto

Umbrella

Constr

uctio

nD&O

Bus. In

terrup

tion

EPL

Surety

0.3%

-1.0%

0.0%

1.0%

-3.7%-2.8% -2.7%

4 4% 4 2%-4.0%

-3.0%

-2.0%

Most Major Commercial Lines Renewed Down in Q3:2010 at a Pace

-5.2% -5.6% -5.3%-4.7% -4.4% -4.2%

-6.0%

-5.0%


jSimilar to that of a Year Earlier

UNDERWRITINGUNDERWRITING

Cyclicality is Driven Primarily y y yby the Industry’s Underwriting

Cycle, Not the Economy32

Cycle, Not the Economy

P/C Insurance Industry Combined Ratio, 2001–2010:Q3*

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 99.7101.0100.8100.1

107.5110 1949 (87.6) Releases

95.7

99.3 99.7

92.6

98.4

90

100

33

* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q3=101.2 Sources: A.M. Best, ISO.

902001 2002 2003 2004 2005 2006 2007 2008 2009 2010:Q3

Calendar Year Combined Ratios by Segment: 2008-2011F

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

102.4

106108

103.8104.5104106108110

98.9100 99.5

949698

100102

909294


2008 2009 2010P 2011F

Overall deterioration in 2011 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting

34Sources: A.M. Best . Insurance Information Institute.

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

Underwriting Gain (Loss)1975–2010:Q3*

$35 Cumulative underwriting deficit f 1975 th h

($ Billions)

$5

$15

$25 from 1975 through 2009 is $445B

$25

-$15

-$5

-$45

-$35

-$25 The industry recorded a $6.2B underwriting

loss in 2010:Q3 compared to $3.2B in

2009:Q3

Large Underwriting Losses Are NOT Sustainable

-$5575 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

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

in Current Investment Environment

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

36

* 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

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 Remained Strong in 2010 But Should Begin to Taper Off in 2011

37

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

38

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.

Inflation-Adjusted Dollar Value of Claims Paid by P/C Insurers, 1925–2010E*

$400Since 1925, P/C insurers

have paid more than $12.6 trillion in claims to

$ Billions

$300

$350trillion in claims to

policyholders on an inflation-adjusted basis

$150

$200

$250

Claim payouts increased

$50

$100

$150 exponentially for decades, but

more erratically in the post-1980 era

On an inflation-adjusted basis, claims paid have fallen to 1990s

levels, reflecting improved underwriting results, exposure

loss during the “Great Recession”

$0

$50

925

930

935

940

945

950

955

960

965

970

975

980

985

990

995

000

005

10E

loss during the Great Recession and leakage to alternative markets

39

*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.Sources: Insurance Information Institute research and calculations from A.M. Best data.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2

201

Cumulative Value of Inflation-Adjusted Claims Paid by P/C Insurers, 1925–2010E*

$13 000$14,000

Adjusted for inflation, it took 36 years for the

industry to pay its first

$ Billions

3 years (2008)

$9 000$10,000$11,000$12,000$13,000 $1 trillion in claims in

the years since 1925. Today, the industry

pays $1 trillion in claims 4 years (2000)2 years (2002)

3 years (2005)3 years (2008)

$6,000$7,000$8,000$9,000 every 2 to 3 years after

adjusting for inflation.

4 years (1986)4 years (1990)

3 years (1993)3 years (1996)

$2 000$3,000$4,000$5,000

9 years (1970)

7 years (1977)5 years (1982)

4 years (1986)

$0$1,000$2,000

925

930

935

940

945

950

955

960

965

970

975

980

985

990

995

000

005

10E

36 years (1925 – 1961)

40

*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.Sources: Insurance Information Institute research and calculations from A.M. Best data.

19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 *20

*20

201

$12.5 Trillion of Paid Claims and Someone Still Writes a Book With This Title?

This book by a Rutgers University law professor asserts

that insurers do everythingthat insurers do everything possible to avoid paying

legitimate claims.I will be debating the thesis of

Prof Feinman’s book andProf. Feinman s book and refuting his allegations in New

Orleans on March 24.

41

INVESTMENTS:INVESTMENTS: THE NEW REALITY

Investment Performance is a Key Driver of ProfitabilityKey Driver of Profitability

Does It Influence U d iti C li lit ?

42

Underwriting or Cyclicality?

Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q31

$64.0$70

($ Billions) 2009:Q3 gain was $29.3B

$42.8$47.2

$52.3

$44.4 $45.3$48.9

$59.4$55.7

$39 0 $39 5

$58.0$51.9

$56.9

$50

$60

$35.4 $36.0$31.7

$39.0 $39.5

$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:Q3In 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 Recovered Significantly 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:Q3

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

$4.4

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:Q3

Realized Capital Losses Were the Primary Cause

44Sources: A.M. Best, ISO, Insurance Information Institute.

of 2008/2009’s Large Drop in Profits and ROE and Were a Major Driver of Its Recovery in 2010

Treasury Yield Curves: Pre-Crisis (July 2007) vs. February 2011

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

3.58%

4.82% 4.96% 4.96% 4.82% 4.82% 4.88% 4.93%4.65%

4.42%

4%

5%

Treasury yield curve is near its most depressed level in at least

2.96%

2.26%

2%

3%45 years, though longer yields rose in late 2010/early 2011 as

economy improved. Investment income is falling as a result. QE2 Target

0.11% 0.13% 0.17% 0.29%0.77%

1.28%

1%

2%

February 2011 Yield Curve*0.11% 0.13%0%

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

Pre-Crisis (July 2007)

The Fed’s Announced Intention to Pursue Additional Quantitative Easing

45

The Fed s Announced Intention to Pursue Additional Quantitative Easing Could Depress Rates in the 7 to 10-Year Maturity Range through June

Sources: Board of Governors of the United States Federal Reserve Bank; 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

46

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 Factsas of 12/31/2009

As of December 31, 2009

Invested assets totaled $1.26 trillion

Generally, insurers

68.8%

Bondsy,

invest conservatively, with over 2/3 of invested assets in bondsbonds

Only 18% of invested assets were in common or preferred 7 0%

Common & PreferredOtherp

stock 6.2% 18.0%

7.0% Preferred StockCash &

Short-term Investments

47*Net admitted assets. Sources: NAIC; Insurance Information Institute research.

2011 Financial Overview About Half of the P/C Insurance Industry’s Bond Investments Are in Municipal Bondsest e ts e u c pa o ds

Investments in “Political

Bond Investment Factsas of 12/31/09 As of December 31, 2009

Investments in Political Subdivision [of states]” bonds were $102.5 billion

Investments in “States 31 0%Investments in States, Territories, & Possessions” bonds were $58.9 billion

Investments in “Special

31.0%33.3%Special

Revenue Industrial

Investments in Special Revenue” bonds were $288.2 billion

All state, local, and special 0 9%U.S. G t

Political Subdivisions, , p

revenue bonds totaled 48.2% of bonds, about 35.7% of total invested assets

0.9%

2.0%15.5%

6.3%

11.0% Government

States Terr F i G t

48Sources: NAIC, via SNL Financial; Insurance Information Institute research.

States, Terr., etc. Foreign Govt

Municipal Bonds: Recent Issues

Most Government Entities Are Under Financial DistressPlunging tax receipts, higher outlays, pension obligations

Analyst Meredith Whitney in Dec. 2010 Said (on 60 Minutes) that a “Spate” of 50-100 Sizeable Defaults Totaling “Hundreds of Billions of Dollars

Few other analysts believe such and outcome is likely, though most acknowledge that some are likely

The 3 Major Ratings Agencies Report Cumulative Muni BondThe 3 Major Ratings Agencies Report Cumulative Muni Bond Default Rates Ranging from 0.04% to 0.29% from 2000-2009

These figures indicate that muni defaults are very rareLonger term review corroborates rarity of such defaultsLonger-term review corroborates rarity of such defaultsEven in the event of default municipalities often (eventually) make good on the debt

49

Municipalities Have Many Tools to Meet Obligations

Revenues to State and Local Governments Are Starting to Recover

2011 Financial Overview When P/C Insurers Invest in Higher Risk Bonds,It’s Corporates, Not Munisp ,

97 4% 2 5%

0.1%SubdiviSt a

97.4% 2.5%

0.1%

sions of ates

92.5% 7.4%

0.1%

States

Class 1Class 2Classes 3-6

72.8% 20.4% 6.8%

Industri

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

ial

Th NAIC’ S iti V l ti Offi t b d i t f 6 l

Data are as of year-end 2009. Sources: SNL Financial; Insurance Information Institute.

The NAIC’s Securities Valuation Office puts bonds into one of 6 classes: class 1 has the lowest expected impairments; successively higher

numbered classes imply increasing impairment likelihood.

MUNICIPAL BOND CONCERNSMUNICIPAL BOND CONCERNS

Collapse of Muni Bond Market is Hi hl U lik lHighly Unlikely

51

Chapter 9 Bankruptcy Filings:1980-2010:Q3

18

6

18

20 There was a notable spike in municipal bankruptcy filings in 2009, the highest

level since 1994 (year of Orange County

13

1412

16

11 11

1212

14

16bankruptcy), but activity appears to

have tapered off in 2010.8

7

10 108

10

18

76

71

66

8

10

12

34 4

3

5

35 5

4

5

0

2

4

6

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 09 10*

Chapter 9 bankruptcy allows for the reorganization of “municipalities,” which include cities, towns, villages, counties, taxing districts, municipal

utilities and school districts.*Through Q3 2010.Note: Chapter 9 bankruptcy allows for the reorganization of Source: American Bankruptcy Institute; Insurance Information Institute.

Muni Bond Issuance: 2000 – 2011*

Muni issuance is was down in early 2011 after the end of a

special federal program in 2010special federal program in 2010 and amid the fiscal problems of many states and municipalities

53

*Through March 4, 2011Source: Thompson Reuters; Wall Street Journal; Insurance Information Institute.

Financial Strength & gUnderwriting

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

Underwriting, Reserving & Pricing

54

g, g g

P/C Insurer Impairments, 1969–2010E*

60 5860

70 8 of the 18 in 2009 were small Florida carriers. Total also

includes a few title insurers.

49 50 4855

541

49 504750

6034

9

36

3134

29 318 9

358 8

30

40

815

127

11 9 913 12

199

16 14 13

1612

18 19 1814 15 16 18

9

5

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 10

Th N b f I i t V i Si ifi tl O th P/C I

*2010 estimate.Source: A.M. Best Special Report “1969-2009 Impairment Review,” June 21, 2010; Insurance Information Institute.

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

56Source: A.M. Best; Insurance Information Institute

p g y gand Reached Record Lows in 2007/08

Reasons for US P/C Insurer Impairments, 1969–2009

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

Investment and Catastrophe Losses Play a Much Smaller Role

3.6%4 0%

Investment and Catastrophe Losses Play a Much Smaller Role

Reinsurance Failure

Mi

Sig. Change in Business

4.0%8.8%

7.1%40 1%

Deficient Loss Reserves/Inadequate Pricing

Investment Problems

Misc.

7.8%

40.1% Inadequate Pricing

Affiliate Impairment

7.2%

7.8% 13.6%Catastrophe Losses

57Source: A.M. Best: 1969-2009 Impairment Review, Special Report, June 21, 2010

Rapid GrowthAlleged Fraud

Summary of A.M. Best’s P/C InsurerRatings Actions in 2010

P/C insurance is by design a resilient in business. The dual threat of financial disasters and

catastrophic losses are

Oth 311 18 5%Upgraded, 112 ,

Initial, 33 , 2.0%catastrophic losses are

anticipated in the industry’s risk management strategy.

Other, 311 , 18.5%pg , ,6.7%

Downgraded, 114 , 6.8%

Despite a continued difficult operating environment, 66% of

ratings actions in 2010 were affirmations; 6 7% were

Affirm, 1,108 , 66.0%

Source: A.M. Best. 58

affirmations; 6.7% were upgrades and 6.8% downgrades.

Performance by Segment:Commercial/Personal Lines &Commercial/Personal Lines &

Reinsurance

59

Homeowners Insurance Combined Ratio: 1990–2011P

8.4170

158

77

140

150

160

113.

0

117.

7

113.

6

01.0 10

9.4

108.

2

111.

4 121.

7

109.

3

.3 00.1

7

117.

0

105.

6

103.

5

9.0

118.

4

112.

7 121.

7

110

120

130

10 98

94.2 10

89.4 95

.7 1

99

80

90

100

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E11P

Homeowners Line Is Expected to Improve in 2011. Extreme Regional Variation Can Be Expected Due to Local Catastrophe

Loss ActivityLoss Activity


Private Passenger Auto Combined Ratio: 1993–2011P

9.5

9

115

101.

7

101.

3

101.

3

101.

0

109

107.

9

104.

2

.4 .3 100.

3

101.

3

9.0 .59.5 101.

1

103.

5

105

110

98.

94.3

95.1

95.5 98

. 1 99 98.99

90

95

100

80

85

90

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

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


Commercial Multi-Peril Combined Ratio: 1995–2011P

0 8 5.0

2.4 .0130

119.

0

119.

8

08.5

125

116.

2

116.

1

.9 5.4

116.

8

113.

6

115.

3 122

115.

0

117.

0

08.0

0

113.

1

115.

0 121

110115120

1251

104

101.

9

105

95.1 97

.6

94.2

100.

7

97.3

0

97.7

93.8

.8

10

98.6 10

1.0

103.

0

95100105

110

89.0

83.8

89.

8085

9095

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E* 11P*

Commercial Multi-Peril Underwriting Performance is Expected to Deteriorate Modestlyis Expected to Deteriorate Modestly

*2010Eand 2011P figures are for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.

Commercial Auto Combined Ratio: 1993–2011P

9 8.1

7 2125

112.

1

112.

0

113.

0

115.

9

2.7 .0 4.0

118

115.

7

116.

2

110

115

120

102

95.2

92.9

92.1

92.4 94

.2 96.8 99

.5 102. 10

95

100

105

9

80

85

90

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

Commercial Auto Underwriting Performance is Expected to Deteriorate Modestly


Expected to Deteriorate Modestly

Inland Marine Combined Ratio: 1999–2011P

101.9105 0 9

92.8

100.2

93.2

89 3

94.5 94.5

89 995

100

83.8

79.5

89.3

80.882.5

89.9

80

85

90

77.3

70

75

80

99 00 01 02 03 04 05 06 07 08 09 10E 11P

Inland Marine is Expected to Remain Among the Most Profitable of All LinesProfitable of All Lines


Workers Compensation Combined Ratio: 1994–2011P

.5.7130

110.

9

110.

0

07.0

7 5 .4 110.

5 117.

5 121

121

07.0

115.

3

118.

2

110115120

125

102.

0

97.0 10

0.0

101.

0 1 0

102.

7

98.4 10

3.5

104.10

95100105

110

8085

9095

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

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst TheyDeteriorating Markedly and the Worst They

Have Been in a DecadeSources: A.M. Best; Insurance Information Institute.

EXPENSESEXPENSES

Expense Ratios Are Highly Cyclical d C t ib t D t i tiand Contribute Deteriorating

Underwriting Performance

66

Underwriting Expense Ratio*All P/C Lines, 1994-2010E**

28.1%28.6%29%

26.3% 26.5% 26.3%

27.0%27.4%

27.6%

28.0%27.4%

27%

28%

25.9%26.1%6 3% 6 3%

25 5%

27.0%

25.3%

25%

26%

Underwriting expense ratios are up25.5%

25.0%24.5%24%

25% ratios are up significantly as

premiums fall faster than expenses during generally soft market

22%

23%

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

g yconditions

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E*Ratio of expenses incurred to net premiums written.**2010 figure based on data through 2010:Q3.Source: A.M. Best; Insurance Information Institute.

Underwriting Expense Ratio*:Personal vs. Commercial Lines, 1990-2010E**

32%Commercial lines expense ratios are

highly cyclical

28 2%

29.9%

30.5%30.6%

28.5% 29.1%

30.0%30.5%28.3%

27.4%29.3%

29.9%30%

highly cyclical

24 3%24.7%24 4% 24 3%

26.4%26.6%

27.7%28.2%

26.4%

26.4%26.2%25.0%25 6%

25.6% 25.6%26.4%

26.6%

25 0%

28.4%27.4%

27.8%

28.7%

26%

28%

24.3% 24.4% 24.3%

24.5%24.7%24.7%

24.6%24.4%23.4%23.7%

23.5%23.9%

25.6%24.8%

25.0%

22%

24%

20%

22%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 0E


10

*Ratio of expenses incurred to net premiums written.**2010 figures are estimates.Source: A.M. Best; Insurance Information Institute.

Underwriting Expense Ratio*Personal Lines (Auto & Home), 1994-2010E**

31.1%30 8% 30 6%

32%

29.8%

28.5%29.3%

30.5%

29.6%

30.0%30.5%

28 4%

28.5%

30.8%30.8%

30.6% 30.3%

30.6%

29.4%

30%

24 5%24.7%25.0%25.2%25.1%

28.5%

24 3%

28.4%

27.7%

26%

28%

21.8%22.0%21.8%

23.5%

24.5%24.3%24.4%

23.6%

23.4%

23.2% 23.6%23.5%22%

24%Expenses ratios for both auto and home

22.7%

20%

22%

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

Auto Homeare up from their lows in 2003/04

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E*Ratio of expenses incurred to net premiums written.**2010 figures are estimates.Source: A.M. Best; Insurance Information Institute.

CAPITAL MANAGEMENT & LEVERAGE

Excess Capital is a Major Obstacle t M k t Tto a Market Turn;

Capital Management Decisions Will

70

Impact Market Direction

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:Q3

($ Billions)

$544 8$560

2007:Q3Previous Surplus Peak Surplus set a new

record in 2010:Q3*

$496 6

$512.8$521.8

$511.5

$540.7$530.5

$544.8

$505.0$515.6$517.9

$500

$520

$540

$487.1$496.6

$478.5

$455.6$463.0

$490.8

$460

$480

$500

The Industry now has $1 of surplus for every $0.77 of

NPW—the strongest claims-$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 10:Q3

NPW the strongest claimspaying status in its history.

Quarterly Surplus Changes Since 2007:Q3 Peak

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

10:Q1: +$18.9B (+3.6%)10:Q2: +$8.7B (+1.7%)

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

’

72Sources: ISO, A.M .Best.

09:Q2: $58.8B ( 11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q2: $8.7B ( 1.7%)10:Q3: +$23.0B (+4.4%)

insurer’s investment in a non-insurance business in early 2010.

Paid-in Capital, 2005–2010:Q3($ 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:Q3

I 2010 Q3 O I ’ P id i C it l R b $22 5B

73Source: ISO.

In 2010:Q3 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

74Source: 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**

75

* 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

76

* 2010 NWP and Surplus figures are % changes as of Q3:10 vs Q3:09. Sources: A.M. Best, ISO, Insurance Information Institute

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

Ratio of Net Premiums Writtento Policyholder Surplus, 1970-2010*

2.7

2.52.52.5

3.0 The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.79:1 in 2010. It has decreased as PHS grows

Record High P-S Ratio was 2.7:1

in 1974

2.1

1.9

22.

3

1.8

1.7

1.7

1.9

1.9

1.9

1.9

1.7

6 6

2.0 2.1

2.0

2.5 more quickly than NPW, with the effect of holding down profitability.

1 1 11.

61.

61.

41.

41.

31.

31.

11.

10.

9

1.13

0.94

0.86.84

1.29

1.17

1.07

0.99

.84

0.91

790.95

.82

1.6 1.

8

1 0

1.5

0 00 0 0.70.

0.5

1.0

Record Low P-S Ratio was 2.7:1

in 2010*0.0

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 0 02 04 06 08 10*

The Premium-to-Surplus Ratio in 2010 Implies that P/C Insurers Held $1 in Surplus Against Each $0 79 Written in Premiums In 1974 Each $1 of

77

in Surplus Against Each $0.79 Written in Premiums. In 1974, Each $1 of Surplus Backed $2.70 in Premium.

*2010 data are is estimated using annualized NWP data through 2010:Q3.Sources: Insurance Information Institute calculations from A.M. Best data.

Merger & AcquisitionMerger & Acquisition

Capital Cycles Can Drive Consolidation

78

2010: U.S. Insurance M&A Bounces Back (All Segments)

500

600

160

180 436 transactions, up 36%

400

100

120

140

nsa

ctio

ns

n V

olu

me

200

300

60

80

No.

of

Tran

Tran

sact

ion

$46.5B in volume, up 224%

0

100

-

20

40

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Transaction Volume (left scale) No. of Transactions (right scale)

U.S. activity rebounded from lows recorded in 2009. M&A also made aU.S. activity rebounded from lows recorded in 2009. M&A also made a comeback worldwide, with global activity rising 20%.

Sources: Conning Research Consulting; Insurance Information Institute.

U.S. P/C Insurance-RelatedM&A Activity, 1988–2010E*

$60 140Transaction Value Number of Transactions

($ Billions)

$40

$50

alue

100

120

Num

be

$20

$30

rans

actio

n Va

60

80

er of Transact

$10

$20Tr

20

40

tions

$088 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910E

0

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

80

Note: U.S. Company was the acquirer and/or target.Source: Conning Research & Consulting. *2010E is derived from A.M. Best data for p/c insurers only (excludes brokers/agencies)

$in 2009, Volume Up 7% Capital, Slow Growth and Improved

Financial Market Conditions

U.S. P/C M&A Activity Rising, Volume Bouncing Back

120

140

50

60

edns)

63 deals in

80

100

30

40

Dea

ls A

nn

ou

nc

olu

me

($ b

illio

n 63 deals in 2009, vs. 59

in 20082010

volume to $6.5B (est),

40

60

10

20

Nu

mb

er o

f D

Tota

l Dea

l Vo from $3.5B

0

20

0

10

After a severe drop due to the capital crunch, M&A volume began to rebound i 2010 L l i b l 1998 2000 d 2006 k

Transaction Values (left scale) No. of Transactions (right scale)

81

Sources: Conning Research & Consulting through 2009; 2010 vol. est. from A.M. Best (2010 deal count N/A); Insurance Information Institute.

in 2010. Levels remain below 1998-2000 and 2006 peaks.

2009: More M&A activity outside U.S.

16.3 9516.0

18.0

U.S. P/C

95 9516.0

18.0

Non-U.S. P/C

75

85

10 0

12.0

14.0

eals

illio

ns)

14.0

11.5 80

75

85

10 0

12.0

14.0

eals

illio

ns)

5963

45

55

65

6.0

8.0

10.0

No.

of

De

Vol

um

e ($

b

45

55

65

6.0

8.0

10.0

No.

of

De

Vol

um

e ($

b

3.5

25

35

45

-

2.0

4.0

V

25

35

45

-

2.0

4.0

V2008 2009 2008 2009

Non-U.S. activity exceeded U.S. activity in number and volume. Non-U.S. l f ll b h l i U Svolume fell, but not as sharply as in U.S.


2009: Five Largest U.S. Deals

Buyer Target Value (millions)

Motivation

Zurich Financial Services AG

21st Century Insurance Group

$1.900 AIG asset sale

Fairfax Financial Holdings Odyssey Re Holding Corp. 960 Topping off ownership

Medical Professional Fincor Holdings, Inc. 237 ConsolidationMedical Professional Mutual Insurance Co.

Fincor Holdings, Inc. 237 Consolidation

Tower Group, Inc. Specialty Underwriters Alliance, Inc.

107 Geographic expansion/Diversification of operations

Emerging Capital Partners

Nouvelle SocieteInterafricaine d’AssuranceParticipatiion S.A. (Cote d’Ivoire)

48 Investment in Africa’s financial sector

Only one deal exceeded $1 Billion in 2009, vs. two in 2008 that exceeded $4 billion apiece (Liberty buying Safeco and Tokio’s acquisition of Philadelphiabillion apiece (Liberty buying Safeco and Tokio s acquisition of Philadelphia

Insurance Cos.)


2009: Five Largest Non-U.S. Deals

Buyer Target Value (millions)

Motivation

Banque Nationale de Paris Paribas Assurance (France)

Fortis Insurance Belgium (Belgium)

1,861 Fortis Bank forced to sell insurance assets

Partner Re Ltd. (Bermuda)

Paris Re Holdings Ltd (Switzerland)

1,716 Consolidation( uda) ( a d)

Validus Holdings, Ltd. (Bermuda)

IPC Holdings Ltd. (Bermuda)

1,650 Consolidation

Polish State (Poland) PZU S.A. (Poland) 1,200 Privatization of state assets

Porto Seguro S.A. (Brazil)

Seguros de Automovel eResidencia S.A (Brazil)

855 Consolidation and access to bank clients

One significant deal had no announced value – combination of Mitsui Sumitomo, Aioi Insurance and Nissay Dowa General in Japan. They merged

f i f l i h i ki J kfor economies of scale in shrinking Japanese market.


Major U.S. P/C Deals in 2010To

2010: Ten Largest U.S. DealsMerger & Acquisition Approximate Value ($

millions)Max Capital/Harbor Point 3,500Max Capital/Harbor Point 3,500

Fairfax Financial/Zenith National 1,300

Ace Ltd./Rain and Hail Insurance Services 1,100

QBE/NAU 565QBE/NAU 565

Doctors Co./American Physicians Capital 386

Fairfax Financial/General Fidelity Insurance 328

Fairfax Financial/First Mercury Financial 294

QBE/RenaissanceRe U.S. operations 275

Southwest Insurance Partners/Lightyear Capital 250

ProSight Specialty Insurance/NYMAGIC 230

Mergers were a way to expand in preferred markets amid the slow growth post-recession Acquirers generally had abundant capital Terms and


post-recession. Acquirers generally had abundant capital. Terms and conditions for financing were advantageous.

Valuations may have bottomed out

2.43 2.50

3.00

2010 –lowest since

1.79 1.74 1.58 1.59

2.03

1.77

1.51 1 31 1.50

2.00

Boo

k V

alu

e 2002

1.10

0.82

1.23

1.01

1.31

0.99 1.06

0 50

1.00

1.50

Pri

ce t

o B

-

0.50

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

So far this year, 10 deals have been announced, worth nearly $2 billion.

Sources: SNL Financial; Insurance Information Institute.

Buyers are consistently more profitable than targets, rest of industry

10.0%

15.0%

20.0%

ear)

-5.0%

0.0%

5.0%

10.0%

Equ

ity

(pri

or

y

-20.0%

-15.0%

-10.0%

Ret

urn

on

E

2005 2006 2007 2008 2009 2010 2011 to dateBuyers 14.7% 11.0% 16.2% 12.0% 8.0% 8.2% 10.5%Targets 2.6% -20.7% 11.6% 12.1% 6.0% 1.7% 2.8%US P/C Industry 9.4% 9.6% 12.2% 12.3% 4.4% 7.3% 7.7%

-25.0%

The year before merger, eventual targets have earnings that lag industry average. Buyers’ earnings are higher than the industry.

/ y 9.4% 9.6% 12.2% 12.3% 4.4% 7.3% 7.7%


Firms on both sides of merger have higher expense ratios than industry

33.2% 33.8%

30 0%

35.0%

40.0%

20

10

26.6%

20.0%

25.0%

30.0%

atio

20

05

-

10.0%

15.0%

xpen

se R

a

0.0%

5.0%

Buyers Targets All US P/C

Ex

M&A targets have slightly higher expense ratios than buyers. Both run higher expense ratios than the industry overall.


Type of acquisition is shifting

Mutual8% Other

2005 to 2007Mutual12%

2008 to 2010

8% Other3% Other

5%

Stock

Stock89%

Stock83%

Th 16 t l t t i 2008 2010 f 10 i th th iThere were 16 mutual targets in 2008-2010, up from 10 in the three prior years.


2010: Affiliations continue

NLC Insurance Cos./Hingham Mutual Fireg

Danbury Insurance/Casco Indemnity

Texas Farm Bureau/Farm Bureau County Mutual (Texas)

Cooperative Mutual (NE)/Austin MutualCooperative Mutual (NE)/Austin Mutual

Wisconsin America Mutual/Western National

Smaller (sometimes distressed) carriers affiliate with regionals or super-Smaller (sometimes distressed) carriers affiliate with regionals or superregionals.


2011 Forecast (A.M. Best)

Activity to increase, especially among commercial linesy , p y gSlow economic growth, limited opportunities

Advantageous financingg g

Need to use capital more efficiently

Possible obstaclesPossible obstaclesLow valuations deter sellers

Companies might prefer to wait out soft marketCompanies might prefer to wait out soft market

Looking Ahead

Smaller scale M&A is more likely than “mega deals”St k l ti i lStock valuations remain low

Number of actual acquirers and targets is limited

Biggest gro th opport nities are abroad/life sectorBiggest growth opportunities are abroad/life sector

Incentives for Smaller Size Firms to MergeEconomies of scale

Inability to make necessary investments in technology

Key markets hit hard by economic downturn (e.g., small commercial, contractors, construction, etc.)

Poor financialsPoor financials

Capital issues

Secondary ConsiderationsOPERATING ENVIRONMENTOPERATING ENVIRONMENT

REGULATORY ENVIRONMENT

Many Other Factors Influence P/C Insurer Profitability

93

Shifting Legal Liability & g g yTort Environment

Is the Tort PendulumSSwinging Against Insurers?

94

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

95Source: Insurance Information Institute

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

Cost of US Tort System ($ Billions)

0 0

Tort costs consumed 1.74% of GDP in 2009, down from 2.21% in 2003

05 $233 $2

46 $260

$261

$247

$252

$255

$248 $2

70$2

59 $270

$250

$300

29 30 141

$144

$148 $1

59$1

56$1

56 $167

$169 $1

80 $20

$150

$200

$12

$13 $ $ $

$100

$150

P it “t t t ” $808

$0

$50Per capita “tort tax” was $808 in 2009, up from $793 in 2000*

$0

90 92 94 96 98 00 02 04 06 08

10E

12E

* Restated in 2009 dollars, based on CPI.Source: Towers Watson, 2010 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

Tort Costs Have Remained High but

$0

$50

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10E 12E1.50%

gRelatively Stable Since the mid-2000s. As a Share of GDP they Should Fall as

the Economy Expands

97

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

Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A

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.

Business Leaders Ranking of Liability Systems in 2010

Best States1 Delaware

Worst States41 New Mexico

New in 2010N 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 2010 State Liability Systems Ranking Study; Insurance Info. Institute.

good and bad states.

The Nation’s Judicial Hellholes: 2010

West VirginiaIllinoisCook County

Watch ListMadison County, IL

Philadelphia

Atlantic County, NJSt. Landry Parish, LADistrict of Columbia

CaliforniaLos Angeles

NYC and Albany, NYSt. Clair County, ILDishonorable

Mention

Los Angeles and Humboldt

Counties

MentionMI Supreme CourtCity of St. LouisCO Supreme Court

NevadaClark County

CO S p C

101Source: American Tort Reform Association; Insurance Information Institute

South Florida

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 2004-2010

$6,000

$5,159$5,000

$2,954$3,000

$4,000

$1,344 $1,511 $1,568$2,000

$3,000

$815$616

$0

$1,000

$02004 2005 2006 2007 2008 2009 2010

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

2010 Top Ten Jury Verdicts

Value Issue State

$505.1 Million Products Liability Nevada

$208.8 Million Personal Injury (Asbestos/Mesothelioma case) California

$152 Million Wrongful Death (Tobacco verdict) Massachusetts$152 Million Wrongful Death (Tobacco verdict) Massachusetts

$132.5 Million Personal Injury (Ford rollover retrial) Mississippi

$124.5 Million Personal Injury (Passenger van rollover case) Texas$ j y ( g )

$103 Million Legal Malpractice/Breach of Fiduciary Duty Mississippi

$90.8 Million Products Liability, Wrongful Death (Tobacco verdict) Florida

$89 Million Personal Injury, Products Liability Pennsylvania

$82.5 Million Wrongful Death Texas

Source: Lawyers USA, January 18, 2011.

$80 Million Wrongful Death (Tobacco verdict) Florida


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


$60 Million Medical Malpractice New York


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

$


$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

115Source: Equal Opportunity Employment Commission; Insurance Information Institute.

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

InflationInflation

Is it a Threat to Claim Cost SSeverities

116

Annual Inflation Rates, (CPI-U, %),1990–2014FAnnual 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 near-

3.8 3.8

5.14.9

4 0

5.0

6.0 commodity bubble have reduced near-term inflationary pressures

2.8 2.6

1 51.9

3.3 3.4

2.5 2.3

3.0

3.8

2.8

3.8

1.62.2 2.1 2.2 2.2

2.92.4

3.23.0

2.0

3.0

4.0

1.5 1.31.6

0.0

1.0

2.0

-0.4-1.090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F

The slack in the U.S. economy suggests that inflation should not heat up

117Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 3/11 (forecasts).

before 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns

P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests

8.8%9%

Price Changes in 2010

6 1%6% Excludes F d d

3 4%

6.1%

4.3%

3%

Food and Energy

1.6%1 0%

3.4% 3.3% 3.1%3%

1.0%0%

Overall CPI "Core" CPI Medical CPI InpatientHospitalServices

OutpatientHospitalServices

Physicians'Services

PrescriptionDrugs

Medical CareCommodities

Source: Bureau of Labor Statistics; Insurance Information Institute.

Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least

118

Economic Issues for the Next 3-5 Years

Growth in the Wakeof the “Great Recession”of the Great Recession

119

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.

7% 2.6% 2.8% 3.

4%3.

4%3.

4%3.

4%3.

1%3.

2%3.

2%3.

3%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 projections

for 2011 have been revised

-4.0

%-6

.8% -4

.9%

-8%

-6%

0 2

3

4

5

6 Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

upward. This is a major positive for insurance demand

and exposure growth.

20

00

20

01

20

0 2

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

12:1

12: 2

12:3

12:4

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

120

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 3/11; Insurance Information Institute.

Conditions, but the Benefits of Even Slow Growth Will Compound and Gradually Benefit the Economy Broadly

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% -0.8

%-0

.8%

-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

E11

F

P/C I I d t ’ G th i I fl d M d tl

121Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 3/11; Insurance Information Institute

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

2011 Financial Overview State Economic Growth Varied in 2009

Mountain, Plains states still growing the fastest

122

Some Southeast states growing well, but others

among the weakest

Direct Premiums Written: All Lines Percent Change by State, 2004-2009

Top 25 StatesNorth Dakota is the growth

42.9

354045

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

23.8

22.0

8

253035

hang

e (%

)

2

18.8

17.2

15.4

14.8

14.2

14.1

14.0

13.5

13.0

13.0

12.9

12.8

12.3

12.2

11.5

10.7

.9101520

Pece

nt c

h

7.

5.8

5.5

5.1

5.0

4.6

05

10

ND LA SD WY

MT

UT

OK DE IA M MS

WV

SC DC TX NE

KS

NC ID AL

FL WA

GA

AR HI

123

N L S W M U O D N M W S D T N K N I A F W G A H

Sources: SNL Financial LC.; Insurance Information Institute.

Direct Premiums Written: All Lines Percent Change by State, 2004-2009

4.5

4.2

2.6

2.5

2.4

2.0

0.9

0.7

0.6 .5 0 .1

5Bottom 25 States

0 0 0 0 0.0

-0.

-2.8

-3.1

-3.5

-3.7

2

-0.5

-1.2

-1.6

-1.8

-2.4

-5

0

nge

(%)

-

-5.2

-8.2

-9.2-10

Pece

nt c

han

States with the poorest performing economies also produced the most negative

t h i i f

-14.

8

-15.

2

-20

-15

P net change in premiums of the past 5 years

20

AK VA TN KY

MD

MO AZ

OR WI

NV NY IN PA MN VT CO CT RI

NJ IL ME

OH

NH

MA MI

CA

Over the 5 years from 2004 2009 15 states saw premiums shrink

124Sources: SNL Financial LC; Insurance Information Institute.

Over the 5 years from 2004-2009, 15 states saw premiums shrink,one had no growth, and 4 others grew premiums by less than 1%

11 Industries for the Next 10 Years: Insurance Solutions Needed

Health Sciences

Health Care

Health Sciences

Energy (Traditional)

Alternative EnergyAlternative Energy

Agriculture

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

125

Shipping (Rail, Marine)

Auto/Light Truck Sales, 1999-2016F

.57.8419

(Millions of Units) New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2011-12 is

still far below 1999-2007 average f 17 illi it b t

16.9

16.5

16.1

4.7 5.

1

5.0 15

.5

16.9

16.617

.117.

1717.

161718 of 17 million units, but a

recovery is underway.

13.2

.6

13.2 14

.0 14 1 1

131415

10.4

11

101112 Job growth and improved

credit market conditions will boost auto sales in

2011 and beyond

999 00 01 02 03 04 05 06 07 08 09 10 11F 12F 13F 14F 15F 16F

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

126Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 3/11); Insurance Information Institute.

g ,but High Unemployment, Tight Credit Are Still Restraining Sales in 2011

New Private Housing Starts, 1990-2016F

(Millions of Units)

1 1.85 1.

96 2.07

801 9

2.1

New home starts plunged

72% from 2005-2009; A

t l

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1 1.1.

36

0 1.33 1.

43 1.50

1.351.

46.2

909

1.5

1.7

1.9 net annual decline of 1.49 million units, lowest since

records began in 1959

0.91

6 0.86

1.20 11

1.2

1.01

1.1

0.9

1.1

1.3in 1959

I I I estimates that each incremental 100 000

0.55 0.59 0.

66

0 3

0.5

0.7I.I.I. estimates that each incremental 100,000

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 billion

Job growth, improved credit

market conditions and demographics

will eventually boost home construction0.3

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F

Little Exposure Growth Likely for Homeowners Insurers Until 2013.

home construction

127Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 3/11); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until 2013. Also Affects Commercial Insurers with Construction Risk Exposure, Surety

2011 Financial Overview Average Square Footage of Completed New Homes in U.S., 1973-2010*,

4 69 2,52

12,

519

8

2,700Square Ft The average size of completed new

homes often falls in recessions (yellow bars), but historically bounces back in expansions

5 5 0 5 0 50 ,190

2,22

32,

266

2,32

42,

320

2,33

02,

349 2,43

42,

4 2 22,

432,

374

2,300

2,500p

0 5 25 1,90

5 1,99

52,

035

2,08

02,

075

2,09

52,

095

2,10

02,

095

2,12 2,

1 2, 2

1 900

2,100

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,

82

1,700

1,900

The trend toward building larger homes reversed in 2009 and 2010 affecting exposure growth

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 09 10

in 2009 and 2010, affecting exposure growth beyond the decline in number of units built

The average size of completed new homes fell by 145 square feet (5 75%) from

*2010 figure is weighted average square feet of completed homes in first three quarters of 2010Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.

128

The average size of completed new homes fell by 145 square feet (5.75%) from 2008-2010, the largest recession-based drop in nearly four decades

2011 Financial Overview Value* of Construction Put In Place

$1,200

Nonresidential Public Residential Nonresidential PrivateBillionsTotal Construction Spending (Annual Rate)D b 2007 $1 109 0B

$402

.0

413.

907

.089

.392

.0 2.6

1.5

8.4

2.6

2.8

2.6

7.2 4.8

5.6

3.2

6.4 1 1 6 3 3 3 4 1

$900

$ ,December 2007: $1,109.0BNovember 2010: $ 810.2 B

$410

.3

$321

.830

5.5

293.

727

7.3

265.

926

0.3

249.

124

5.3

247.

025

7.4

251.

628

0.1

273.

226

6.2

269.

238

.925

8.3

273.

726

9.6

268.

524

7.7

233.

223

6.2

245.

024

6.8

$ 4 $4 $38

$39

$40

$40

$39

$38 2

$372

$372

$347

$33

$32 5

$323

$316

$275

.9$2

75.1

$274

.$2

70.

$269

.$2

52. 3

$253

.3$2

58. 3

$256

.4$2

56.1

$600

$289

.5

$308

.9$2

99.6

$294

.2$2

97.8

$301

.3$3

09.6

$310

.8$3

17.3

$314

.8$3

11.9

$311

.7$3

09.0

$301

.9$3

00.3

$298

.6$2

82.4

$290

.7$2

95.3

$294

.6$2

98.2

$298

.7$3

04.9

$306

.6$3

05.4

$307

.4

$ $ $ 2 $2 $2 $2 $2 $2 $2 $2 $2 $ $ 2 $2 $2 $23

$2 $2 $2 $2 $2 $2 $2 $2 $2

$0

$300

Since the recession started, private residential and nonresidential

$0

Dec '07

Nov '08

Dec '08

Jan '09

Feb '09Mar '0

9Apr '0

9May '0

9Ju

n '09Ju

l '09

Aug '09

Sep '09

Oct '09

Nov '09

Dec '09

Jan '10

Feb '10Mar '1

0Apr '1

0May '1

0Ju

n '10Ju

l '10

Aug '10

Sep '10

Oct '10

Nov '10

129*Seasonally adjusted annual rate Source: http://www.census.gov/const/C30/release.pdf

Since the recession started, private residential and nonresidential construction together are down $300 billion (annual rate), a drop of 38%. This affects property, surety, and other construction-related exposures

2011 Financial Overview Wage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums

Wage and Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)

Workers Comp Net Written Premiums

7/90-3/91 3/01-11/01

$6,000

$7,000

$50

$6012/07-6/09

$3,000

$4,000

$5,000

$30

$40

$1,000

$2,000

,

$10

$20Wage & SalaryDisbursements

WC NPW

WC net premiums written were down $13.7B or 28.7%

to $34.1B in 2009 after peaking at $47.8B in 2005

Weakening payrolls have eroded $2B+ in workers comp premiums; nearly 29% of NPW has been eroded away by the soft market and weak economy

$0

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

$0

130

* Average Wage and Salary data as of 7/1/2010. Shaded areas indicate recessions. **Estimated “official” end of recession June 2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books

29% of NPW has been eroded away by the soft market and weak economy

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

82%

Percent of Industrial Capacity

H i

“Full Capacity” The US operated at 75.2% of industrial

capacity in November 2010, above the June

2009 low of 68.3%

78%

80%Hurricane

Katrina

74%

76%

The closer the economy is

70%

72%

M h 2001

yto operating at “full

capacity,” the greater the inflationary pressure

66%

68%

70% March 2001-November 2001

recession December 2007-

June 2009 Recession66%

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

Sep

10

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 131

Business Bankruptcy Filings,1980-2010:Q3

00 4 277

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

,00 4

71,2

63,8

5363

,235

64,8

5 371

,570

,662

,304

52,3

7451

,959

53,5

4954

,027

367

4 99 0 1 546 60

,837

1660,000

70,000

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

43,6 48

5 5

44,3

37,8

8435

,472

40,0

938

,540

35,0

3734

,317

39,2

0,6

95 28,3

22 43,5

43,0

30,000

40,000

50,000

19

0

10,000

20,000 There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:Q3

bankruptcies totaled 29,059, down 5.5% from 2009:Q3

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

:3Q

Significant Exposure Implications for All Commercial Lines

132

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

g p p

Private Sector Business Starts,1993:Q2 – 2010:Q2*

6 220 22

322

022

022

1

18220

230

(Thousands) Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697 000

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

2120

920

720

719

93

203

200

210

220 2009: 697,000 2010:H1: 344,000

175

186

7418

018

6 192

188

187 18

918

6 190 19

419

1 19 19 19

192 1

192

192

193

191 19

32 17

618

42 2180

190

200

344 000 new business starts were1 17 172

169 17

217

2

160

170

344,000 new business starts were recorded through the first half of 2010, which was likely 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 10

Business Starts Were Down Nearly 20% in the Recession,

133

y ,Holding Back Most Types of Commercial Insurance Exposure

* Data through June 30, 2010 are the latest available as of March 10, 2011; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

2011 Financial Overview Weekly Percentage Change in Commercial and Industrial Loans by Large U.S. Banks, 2004-2010 y g ,

2.5%3.0%3.5%

Increasing lendingIncreasing

lending again?

1.0%1.5%2.0%

-0.5%0.0%0.5%

-2.0%-1.5%-1.0%

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

Decreasing lending

2004

-01-

120

04-0

4-1

2004

-07-

120

04-1

0-1

2005

-01-

120

05-0

4-1

2005

-07-

120

05-1

0-1

2006

-01-

120

06-0

4-1

2006

-07-

120

06-1

0-1

2007

-01-

120

07-0

4-1

2007

-07-

120

07-1

0-1

2008

-01-

020

08-0

4-0

2008

-07-

020

08-1

0-0

2009

-01-

020

09-0

4-0

2009

-07-

020

09-1

0-0

2010

-01-

020

10-0

4-0

2010

-07-

020

10-1

0-0

Lending peak: $827.3 billion at mid-October 2008;

134

Note: Recession indicated by gray shaded column.Sources http://research.stlouisfed.org/fred2/series/CIBOARD/downloaddata?cid=100 ; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Lending peak: $827.3 billion at mid October 2008;Trough $600.5 billion at mid-October 2010; Latest (12/20/2010) $619.9 billion

Labor Market TrendsLabor Market Trends

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

Lines Exposure, But Trend is Improving

135

Improving

Unemployment and Underemployment Rates: Falling Faster in 2011?

16

18 Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6U-6 went from 8.0% in March

2007 to 17.5% in O 2009

January 2000 through February 2011, Seasonally Adjusted (%)

12

14

Unemployment

October 2009; Stood at 15.9%

in February 2011Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

8

10

Unemployment rate fell to 8.9%

in FebruaryUnemployment peaked at 10.1% i O t b 2009

4

6

in October 2009, highest monthly rate since 1983.Peak rate in the last 30 years:F b

2

4

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

last 30 years: 10.8% in

November -December 1982

Feb 11

136

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

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

Stubbornly high unemployment and underemploymentwill constrain payroll growth, which directly affects WC exposure

Monthly Change in Private Employment86 21

3

7 241

7 3 93 8 67 222

58

400January 2008 through February 2011* (Thousands)

Private employers added jobs in every month in 2010 for a total of

179

265

127

42 1509

-14

65 9723

-12

85 -58

75-8

316 62 51 61

117

143

112 1

128 16

682

15

(200)

0

200y1.449 million for the year

-10 -

-161

-253 -230

-257

-347

-456

7

-334

-452

-297 -2

15 -186

-262

-

(600)

(400)

(200)

Monthly Losses in 222,000 private sector jobs --5

47-7

34 -667

-806 -7

07-7

44 -649

-

(1,000)

(800)

(600) Dec. 08–Mar. 09 Were the Largest in the Post-WW II Period

jwere created in February

(1,000)

Jan-

07Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

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

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Private Employers Added 1 739 million Jobs Since Jan 2010 AfterPrivate Employers Added 1.739 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008

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

Monthly Change Employment*

3 432600

January 2008 through February 2011* (Thousands)

The job gain and loss figures in 2010 were l di t t d b th hi i d t i ti f

64 14 3920

8 313 4

-1

210

93 152

6319

2

0

200

400 severely distorted by the hiring and termination of temporary Census workers. In 2010, 1.178 million

nonfarm jobs were created.

-72

-144 -122

-160 -137

-161 -128

-175

-321

-380

7 28 -387

15-3

46 -212

-225

-224 -1

09

-175

-66 -41

-600

-400

-200

192,000 f j b

-597

-681

-779 -726

-753

-52

-51

-1,000

-800

600

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 0 0 0 0

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

nonfarm jobs were created in February

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

Sep

10

Oct

10

Nov

10

Dec

10

Jan

11Fe

b 11

Job Losses Since the Recession Began in Dec. 2007 Peaked at 8 4 Mill i D 09 St d t 6 4 Milli Th h F b 2011

138

*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 6.4 Million Through February 2011; 13.7 Million People are Now Defined as Unemployed

US Unemployment Rate

0%11.0%Rising

unemployment

2007:Q1 to 2012:Q4F*

%9.

3% 9.6% 10

.09.

7%9.

6%9.

6%

9.2%

9.1%

8.9%

8.8%

8.6% .5%

3% %

9.6%

9.0%

10.0%

p yeroded payrolls

and workers comp’s exposure base.Unemployment

% 6.9%

8.1% 8 8 8.3

8.1%

7.0%

8.0%

p ypeaked at 10% in

late 2009.

Unemployment

5% 5% .6%

4.8% 4.9% 5.

4%6.

1%

5.0%

6.0%

forecasts remain stubbornly high

through 2011, but still imply millions of new

jobs will created.

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

2:Q

1

2:Q

2

2:Q

3

2:Q

4

139

07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (3/11); Insurance Information Institute

US Unemployment Rate Forecasts

11.0% 10 Most PessimisticC /Mid i t

Quarterly, 2011:Q1 to 2012:Q4

9 3%9.5% 9.4%

9.6%10.0%

10.5%Consensus/Midpoint10 Most Optimistic

9.2% 9.1%8.9% 8.8%

8.80%8 60%

9.3%9.4%

9.00%

9.50%9.40%

9.20%

8 6%8.9%

9.1%9.3%

8.5%

9.0%

9.5%

8.60% 8.50%8.30%

8.5%8.2%

8.0%7.7%

8.6%

7.5%

8.0%Unemployment will remain high even under

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

7.0%11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4

Stubbornly High Unemployment Will Slow the Recovery of the

140Sources: Blue Chip Economic Indicators (2/11); Insurance Information Institute

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

Unemployment Rates by State, December 2010:Highest 25 States*

516In December, 31 states and DC reported

unemployment rate decreases from a year earlier 16 states had increases and

61.5

7

12.5

12.0

1.7

14. 5

12

14

16

%)

year earlier, 16 states had increases and 3 had no change.

8.89.

59.

59.7

9.5

9.6

9.6

9.3

9.1

9.3

8.89.

4

9.0

9.19.410

. 61

9.810

.110

.210

.3

10. 71

8

10

12

ent R

ate

(%

6

8

empl

oym

e

16 states + DC had

2

4Une 16 states + DC had

unemployment rates above the US average in Dec. 2010,

34 states were below.

141

0NV CA FL MI RI SC OR KY GA MS NC DC WV OH MO IN ID US TN AZ WA IL NJ AL CT CO

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

Unemployment Rates By State, December 2010: Lowest 25 States*

10

In December, state and regional unemployment rates were little changed.

Some 31 states and DC reported unemployment rate decreases from a

887.37.4

0.2

8.18.2

7.5

7.57.

98.08.28.

58.

58.

38.5

8

10

%)

unemployment rate decreases from a year earlier, 16 states had increases and

3 had no change.

6.7

6.4

6.3

5.8

6.8

6.877

4.65.

5

7.7

6.4

6

ent R

ate

(%

4.44.

3.8

4

empl

oym

e

0

2Une

142

0PA NM DE TX NY MA AK LA AR WI UT MD ME MT MN OK KS VA WY HI IA VT NH SD NE ND

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

Labor Underutilization: Broader than Just Unemployment

17 0%17.5%17.2%17.3% 17 1% 17 1%17 0%17 0%

18%

% of Labor Force

16.4%16.5%16.3%16.8%17.0% 17.2%

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

17.1%17.0%17.0%16.7%16.1%

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

Sep10

Oct10

Nov10

Dec10

Jan11

M i ll Att h d d U l d P A t f 16 1% f thMarginally Attached and Unemployed Persons Account for 16.1% of the Labor Force in January 2011 (1 Out 6 People). Unemployment Rate

Alone was 9.0%. Underutilization Shows a Broader Impact on WC and Other Commercial Exposures

143

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 – January 2011 (Millions)

The US Economy Lost About Employment Peak;

38.0

38.1

38.0

37.9

37.8

37.8

37.7

37.6

37.6

7.4

.0 7139

y8.4 Million Jobs in the Two

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.

13.

58135

136137138

first lines to see exposure gains

1313

2.8

132.

113

1.5

131.

213

0.6

130.

330

.129

.929

.629

.79.

69.

39.

2 9.4

29.7

130.

230

.029

.929

.929

.830

.013

0.1

130.

213

0.3

131132133134

1 1 12 12 12 12 129

129

129

12 1 1 12 12 12 1 1 1 1

129130

ov 0

7ec

07

an 0

8eb

08

Mar

08

Apr

08

ay 0

8Ju

neJu

l 08

ug 0

8ep

08

Oct

08

ov 0

8ec

08

an 0

9eb

09

Mar

09

Apr

09

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

0ay

10

un 1

0Ju

l 10

ug 1

0ep

10

Oct

10

ov 1

0ec

10

an 1

1

144

N De Ja Fe M A M J Au

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

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

Se O N De Ja

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

146

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

Catastrophic Loss –Catastrophe Losses Trends Are p

Trending Adversely

147

US Insured Catastrophe Losses

$100

.0$120$100 Billion CAT Year is

Coming Eventually($ Billions)

$61.

9

$

$60

$80

$1002010 CAT

Losses Were About

Average

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

13.6

5 $22.

9

5 $16.

9

$20

$40

$60 Average$8

.3

$7.4

$2.6 $1

0

$8.3

$4.6

$5.9 $1 $9.

$6.7 $10

$1

$1.1$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 11*20??

2010 CAT Losses Were Close to “Average” Figures Do Not Include an Estimate of Deepwater Horizon Loss

148

*First quarter 2011.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 – 2010E

810

Avg. CAT Loss Component of theCombined Ratio

Combined Ratio Points

8.8

5.9

4

8.1

6789

Combined Ratio by Decade

1960s: 1.04 1970s: 0.85

0 0

3.0

1 .35

3.3

2.8 3.

62.

9

5.4

3.3

3.3

2.7

5.0

2.6 3.

33.6

3456 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.

2 2.1 2.

1.0 1.

6

1.6

21.

6

2

0.9

0.1

1.1

1.1

0.8

0123

0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 E

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

E

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

149

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 estimate for 2010.

Increased Sharply in Recent Decades

U.S. Tornado Count, 2010

There were 1483 tornadoesThere were 1483 tornadoes in the US in 2010, slightly

above average

Source: NOAA 150

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 151© 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 152© 2010 Munich Re

Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2010*($ Billions) Texas

$42.30 , 11% $36.68 ,

10%

Louisiana

$237.52 , $62.62 ,

17%Rest of US

62%Florida

Louisiana Accounted for 10% of All US Insured CAT Losses

153

* Adjusted to 2010 dollars.Source: PCS division of ISO; Insurance Information Institute.

from 1980-2010: $36.7B out of $237.5B

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

$45 1$50 Hurricane Katrina Remains By Far the $45.1

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

Most Expensive Insurance Event in US and World History

$11.3 $12.6$17.2

$22.2 $22.7

$8.5$8.1$6.6$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)

Andrew(1992)

9/11Attacks(2001)

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

154Sources: 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 JerseyMore than $1.4

Trillion in i d t l

$224.4$191.9

$158.8$146 9

$479.9ConnecticutLouisiana

S. CarolinaVirginia

Maine

insured coastal exposure in

New England

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

156Source: 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

157Source: 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_ g

overview & outlook for the p/c i i d tp/c insurance industry · 2014-06-13 · presentation...

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