Overview & Outlook for the Surety and P/C Insurance Industries for

2014 and BeyondTrends, Challenges & Opportunities

Association of General ContractorsSurety Bond & Construction Risk Management Conference

Naples, FLFebruary 3, 2014

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 bobh@iii.org www.iii.org

2

Presentation Outline

Surety Market Overview and Outlook Growth

– Public Sector Construction Issues

Underwriting Performance

Economic Drivers

P/C Insurance Industry Overview & Outlook

Profitability

Underwriting

Catastrophe Loss Trends

Growth

Investment Market Impacts

4

Surety, Net Premiums Written, 1990-2013E, ($ millions)

$2

,61

0

$2

,74

9

$2

,88

1

$3

,25

2

$3

,33

2

$3

,06

0

$3

,28

8

$3

,39

4

$3

,83

6

$3

,84

0

$4

,41

7

$4

,80

7

$4

,92

2

$4

,81

3

$4

,82

3

$4

,85

4

$4

,69

4

$4

,69

0

$2

,45

8

$2

,64

4

$2

,96

2

$2

,15

8

$2

,35

6

$2

,52

8

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

E

Note: 1990-1992 includes Financial Guaranty.

Source: A.M. Best; Insurance Information Institute estimate for 2013 based on 9-month data from SNL Financial.

Surety premium growth has been negative/flat ever since the “Great

Recession” began

5

Surety, Direct Premiums Written, Percent Change, 1990-2013E

8.1

%

7.5

% 12

.0%

9.2

%

7.3

%

3.2

%

5.4

%

4.8

%

12

.9%

2.5

%

-8.2

%

7.5

%

3.2

%

13

.0%

0.1

%

15

.0%

8.8

%

2.4

%

-2.2

%

0.2

%

0.6

%

-3.3

% 0.0

%

-27

.1%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

E

Surety premiums volume has historically been quite volatile,

reacting to due to influences from construction sector exposures as well as the P/C insurance industry

underwriting and pricing cycle

Source: A.M. Best; Insurance Information Institute estimate for 2013 based on 9-month data from SNL Financial.

6

Annual Change in Surety DWP vs. Nominal GDP, 1994-2013E

9.2%

7.3%

12.9

%

2.5%

7.5%

13.0

% 15.0

%

5.7% 5.6% 6.2%7.0% 7.7%

4.5% 3.9%5.1%

6.4% 6.4% 5.8%4.8%

3.6%5.0%

4.1%3.1%

0.0%

8.8%

2.4%

0.1%

3.2%

4.8%

-8.2

%

3.2%

-2.2

%

-3.3

%

0.6%

0.2%

5.4%

6.0%5.1%

2.7%-1.6%

-10%

-5%

0%

5%

10%

15%

20%

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

E

Surety: Change in Direct Premiums Written Nominal GDP: Annual Change

Annual changes in Surety premiums written are far more volatile than for GDP growth

Note: 1990-1992 includes Financial Guaranty.

Source: U.S. Department of Commerce; A.M. Best; Insurance Information Institute estimate for 2013 based on 9-month data from SNL Finl.

7

$314.9$304.0

$286.4 $279.0 $275.0

$216.1 $220.2$234.2

$255.4

$289.1$308.7

$0

$50

$100

$150

$200

$250

$300

$350

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

($ Billions)

Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Continues to Contract As State/Local Governments

Grapple with Deficits and Federal Sequestration Takes Hold

Value of New Federal, State and Local Government Construction: 2003-2013*

*2013 figure is a seasonally adjusted annual rate as of November.Sources: US Department of Commerce; Insurance Information Institute.

Construction across all levels of government

peaked at $314.9B in 2009

Austerity Reigns

Govt. construction is still shrinking, down $39.9B or

12.7% since 2009 peak

8

Public Sector Construction Activity, Dollar Value & Annual Change,1993-2013*

$127

.4

$130

.4

$140

.0

$146

.7

$153

.4

$154

.8 $169

.1

$181

.3 $201

.9

$213

.4

$216

.1

$220

.2 $234

.2 $255

.4

$289

.1 $308

.7

$314

.9

$304

.0

$286

.4

$279

.0

$275

.0

2.4%

7.4%

0.9%

9.2%

7.2%

11.4%

5.7%

-1.4%1.

3%

-5.8

%

13.2%

$100

$150

$200

$250

$300

$350

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

Va

lue

of

Pu

blic

Co

ns

tru

cti

on

Pu

t in

Pla

ce

-10%

-5%

0%

5%

10%

15%

An

nu

al C

ha

ng

e (%

)

Value of Public Construction

Annual Change

($ Billions)

Public construction could turn positive in 2014 for the first

time since 2009

2001 recession

*November 2013 figure, seasonally adjusted annual rate.Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

“Great” Recession impact intensified after

stimulus dollars dried up

Public sector construction activity declined for the 4th consecutive year in 2013,

down 12.7% or $39.9B since its 2009 peak

9

Public Sector Construction Spending vs. Surety Premium Growth, 1993-2013*

$127

.4

$130

.4

$140

.0

$146

.7

$153

.4

$154

.8 $169

.1

$181

.3 $201

.9

$213

.4

$216

.1

$220

.2 $234

.2 $255

.4

$289

.1 $308

.7

$314

.9

$304

.0

$286

.4

$279

.0

$275

.0

9.2%

7.3%

3.2%

4.8%

12.9%

-8.2%

3.2%

13.0%

0.1%

8.8%

2.4%

-2.2%

0.6%

-3.3%

0.2%

15.0%

7.5%

2.5%

5.4%

$100

$150

$200

$250

$300

$350

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

Va

lue

of

Pu

blic

Co

ns

tru

cti

on

Pu

t in

Pla

ce

-10%

-5%

0%

5%

10%

15%

20%

An

nu

al C

ha

ng

e in

Su

rety

DW

P (%

)

Value of Public Construction

Annual Change in Surety DWP

($ Billions)

Surety DWP has been falling along with

public construction spending

2001 recession

*November 2013 figure, seasonally adjusted annual rate.Source: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

“Great Recession”

11

Surety Combined Ratio, 1990-2012*

84

.1

82

.7

84

.2

83

.8

86

.7

12

2.7

11

7.0

12

2.0

11

9.5

10

1.8

81

.6

70

.4

66

.6 79

.5

70

.5

72

.7

76

.887

.0

75

.9 83

.8

84

.7 91

.5

88

.2

0

20

40

60

80

100

120

140

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

*Net basis.Note: 1990-1992 includes Financial Guaranty.

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

Underwriting performance in the surety line has been

strong since 2006

CONSTRUCTION INDUSTRY: MAJOR DRIVER OF SURETY

EXPOSURE

12

The Construction Sector Is Critical to the Economy, the P/C Insurance Industry & the

Surety Exposures12

13

Value of New Private Construction: Residential & Nonresidential, 2003-2013*

Billions of Dollars

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

03 04 05 06 07 08 09 10 11 12 13*

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2013: Value of new pvt. construction hits $659.4B, up

32% from the 2010 trough but still

28% below 2006 peak

13

$261.8

$238.8

$332.1

$290.8

*2013 figure is a seasonally adjusted annual rate as of November.Sources: US Department of Commerce; Insurance Information Institute.

14

Value of Construction Put in Place, November 2013 vs. November 2012*

-0.2%

-13.4%

0.1%

5.9%8.6%

16.6%

1.0%

-15%

-10%

-5%

0%

5%

10%

15%

20%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

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

Growth (%)

Private sector construction activity is now up in the

residential and nonresidential segments

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

Private: +8.6% Public: -0.2%

Public sector construction activity remains depressed

15

Value of Private Construction Put in Place, by Segment, Nov. 2013 vs. Nov. 2012*

20.7%

3.0%6.7%

-5.8%

18.3%

-10.5%

-24.2%

15.6%12.1%

8.6%

16.6%

1.0%

32.7%

11.5%

-30%

-20%

-10%

0%

10%

20%

30%

40%

To

tal

Pri

vate

Co

nst

ruct

ion

Res

iden

tial

To

tal

No

nre

sid

enti

al

Lo

dg

ing

Off

ice

Co

mm

erci

al

Hea

lth

Car

e

Ed

uca

tio

nal

Rel

igio

us

Am

use

men

t &

Rec

.

Tra

nsp

ort

atio

n

Co

mm

un

icat

ion

Po

wer

Man

ufa

ctu

rin

g

Private Construction Activity is Up in Most Segments, Including the Key Residential Construction Sector; Bodes Well for Early 2014

Growth (%) Led by the Residential Construction, Lodging, Power and Transportation segments, Private

sector construction activity is rising after plunging during the “Great Recession.”

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

16

Value of Public Construction Put in Place, by Segment, Nov. 2013 vs. Nov. 2012*

-9.1%

0.0% 1.0% 1.0%5.2% 4.6%

-4.6%

0.1%

-0.1%-2.2%-0.2%

-13.4%

0.1%

-12.9%

-27.7%-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

To

tal

Pu

bli

cC

on

stru

ctio

n

Res

iden

tial

To

tal

No

nre

sid

enti

al

Off

ice

Co

mm

erci

al

Hea

lth

Car

e

Ed

uca

tio

nal

Pu

bli

c S

afet

y

Am

use

men

t &

Rec

.

Tra

nsp

ort

atio

n

Po

wer

Hig

hw

ay &

Str

eet

Sew

age

&W

aste

Dis

po

sal

Wat

er S

up

ply

Co

nse

rvat

ion

&D

evel

op

.

Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2014.

Growth (%)

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

Public sector construction activity is down substantially in most segments, a situation that will likely persist, dragging

on public entity risk exposures

Transportation and Power projects lead

public sector construction

17

5.2%

5.5%

3.1% 3.6%

2.6% 5.

4%2.

8%-4

.0%

-12.

2%-1

6.3%

-11.

0%-3

.1%

3.3%

1.9%

5.3% 8.

1% 10.2

%11

.3%

5.0%

3.0% 4.0%

4.1%

2.9% 5.

3%8.

6% 9.0%

6.1%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%20

07:Q

1

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

2011

:Q1

2011

:Q2

2011

:Q3

2011

:Q4

2012

:Q1

2012

:Q2

2012

:Q3

2012

:Q4

2013

:Q1

2013

:Q2

2013

:Q3

*versus same quarter in prior yearSources:  The Nelson A. Rockefeller Institute of Government, Special State Revenue Report, No. 94, published December 19, 2013, Table 1 (citing data from the U.S. Census Bureau); I.I.I.

Quarterly Change* in State Income and Sales Tax Revenues, 2007:Q1 – 2013:Q3

Recession

Consistently-growing tax revenues mean public-sector finances are likely to improve.

Public entity exposures including surety are likely to grow as a result after many

years of decline.

18

Net Change in Government Employment: Jan. 2010—Dec. 2013*

-631

-424

-100 -107

-700

-600

-500

-400

-300

-200

-100

0

Total Local State Federal

(Thousands)

Local government employment shrank by 424,000 from Jan.

2010 through Dec. 2013, accounting for 67% of all government job losses,

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

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

State government employment fell by 1.9% since the end of 2009 but is

recovering while Federal employment is down by 3.8% and deteriorating

21

12 Industries for the Next 10 Years: Some Exposure Growth Leaders

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light & Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking, Pipelines)

22

P/C Insurance Industry Financial Overview

2013: Best Year in the Post-Crisis Era

Performance Improved with Lower CATs, Strong Markets

22

P/C Net Income After Taxes1991–2013:Q3 ($ Millions)

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013:9M ROAS1 = 9.5%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.9% ROAS through 2013:Q3, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

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

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$4

3,0

29

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13:9M

2013:9M ROAS

was 9.5%

Net income is up substantially

(+54.7%) from 2012:Q3 $27.8B

24

P/C Insurance Industry Combined Ratio, 2001–2013:Q3*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013:Q3 = 95.8. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

96.6

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120Best

Combined Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

25

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.6

$3

5.0

$1

2.8

$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*

U.S. Insured Catastrophe Losses

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

2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Well

Below 2011 and 2012 YTD Totals.

2012 was the third most expensive year ever for insured CAT

losses

Record tornado losses caused

2011 CAT losses to surge

($ Billions, $ 2012)

25

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

:Q3

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:Q3*

*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2012: 5.9%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013:Q3 8.9%

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

Combined Ratio / ROE

* 2008 -2013 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2013:9M combined ratio including M&FG insurers is 95.8; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

96.6

102.4

106.5

95.7

14.3%

15.9%

12.7%

10.9%

7.4% 7.9%

4.7%6.2%9.6%

8.8%

4.3%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013:9M0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Lower CATs are improved ROEs

in 2013

28

-5%

0%

5%

10%

15%

20%

25%

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213

:9M

Net Premium Growth: Annual Change, 1971—2013:Q3

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

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

Net Written Premiums Fell 0.7% in 2007 (First Decline

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

2013:9M = 4.2%

2012 growth was +4.3%

29

Direct Premiums Written: Total P/CPercent Change by State, 2007-2012*

58

.4

25

.4

24

.5

21

.0

19

.2

17

.6

16

.3

13

.2

13

.2

12

.4

9.9

9.2

9.2

8.5

8.0

6.2

5.8

5.2

4.5

4.4

4.3

4.3

4.2

4.0

3.8

3.6

0

10

20

30

40

50

60

70

ND

SD

OK

NE IA KS

VT

AK

TX

WY

MN

AR

TN IN W

I

KY

MT

OH LA

VA

NJ

MI

SC

CO

MO

NM

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota was the country’s growth leader over the past 5 years with premiums written

expanding by 58.4%

30

Oil & Gas Extraction Employment,Jan. 2010—Dec. 2013*

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

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

616

9.3

170.

117

1.0

172.

517

3.6

176.

317

8.2

178.

518

0.9

181.

918

3.1

184.

818

5.2

185.

718

6.8

187.

618

8.0

188.

018

8.2

190.

019

1.7

191.

919

3.4

192.

419

2.6

193.

119

3.3

195.

019

6.5

197.

419

9.1

200.

120

1.9

150

160

170

180

190

200

210

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3

Oil and gas extraction employment is up 29.1% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in

the US.

(Thousands) Highest since Nov.

1986

31

Direct Premiums Written: Total P/CPercent Change by State, 2007-2012*

3.6

3.1

3.0

2.9

2.7

2.2

2.1

2.1

2.0

1.8

1.1

0.0

-0.1

-0.3

-0.7

-0.9

-2.8

-5.6

-6.0

-7.2

-7.2

-9.3

-10

.1

-11

.2

-12

.5

-17

.3

-20

-15

-10

-5

0

5

CT

MS

NC AL

MD PA

U.S

.

MA IL

WA

GA

UT

NH RI

ID ME

NY FL

CA

DC

WV HI

AZ

OR

DE

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Growth was negative in 13 states and DC between

2007 and 2012

32

Change in Commercial Rate Renewals, by Line: 2013:Q3

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

Major Commercial Lines Renewed Uniformly Upward in Q3:2013 for the 9th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat

Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

3.5%

4.7%5.4%

5.8%

1.0%

2.9% 2.7% 2.9% 2.9%3.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Su

rety

Co

nst

ruct

ion

Bu

sin

ess

Inte

rru

ptio

n

Um

bre

lla

Ge

ne

ral

Lia

bili

ty

Co

mm

erc

ial

Au

to

Co

mm

erc

ial

Pro

pe

rty

D&

O

EP

L

Wo

rke

rsC

om

p

Survey: Surety rate gains are slower than

in other major commercial lines

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

33

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2013:Q2

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

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Percentage Change (%)

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

nearly 8 years; Q2:2013 renewals were up 4.3%. Some insurers posted

stronger numbers.

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

KRW : No Lasting Impact

34

Policyholder Surplus, 2006:Q4–2013:Q3

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$559.2 $559.1

$538.6$550.3

$567.8

$583.5$586.9

$607.7$614.0

$624.4

$570.7$566.5

$505.0$515.6$517.9

$400

$450

$500

$550

$600

$650

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

2007:Q3Pre-Crisis Peak

Surplus as of 9/30/13 stood at a record high $624.4B

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .

The industry now has $1 of surplus for every $0.78 of NPW,close to the strongest claims-paying status in its history.

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2014in very strong financial condition.

INVESTMENTS: THE NEW REALITY

35

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

35

36

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

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

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

Recession2-Yr Yield10-Yr Yield

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

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

U.S. Treasury security yields

recently plunged to record lows

36

Property/Casualty Insurance Industry Investment Income: 2000–2013*1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$47.7$45.8

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13*

Investment Income Fell in 2012 and is Falling in 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing

1 Investment gains consist primarily of interest and stock dividends..*Estimate based on annualized actual 9M:2013 investment income of $34.338B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings are running below their 2007

pre-crisis peak

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38