P/C Insurance Industry Overview & Outlook for

2013 and BeyondCasualty Actuaries of New England

Sturbridge, MAApril 4, 2013

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

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

P/C Insurance Industry Financial Overview

Profit Recovery in 2012 After High CAT Losses; Ultimate

Impact of Sandy Still Unclear

2

P/C Net Income After Taxes1991–2012:Q3 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,1

50

$2

6,9

81

$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:Q3

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:Q3 ROAS1 = 6.3%

P-C Industry 2012:Q3 profits were up 222% from 2011:Q3, due primarily to lower catastrophe losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.6% ROAS through 2012:Q3, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

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

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q3 combined ratio including M&FG insurers is 100.9, 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

106.2106.5

95.7

3.6%4.7%

7.9%7.4%

4.3%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012E0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

A combined ratio of about 100 generates an ROE of ~6.6% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Catastrophes and lower investment

income pulled down ROE in 2012

-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

F

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

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:Q3 ROAS = 6.2% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2012E:3.6%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013F 5.8%

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

6

Growth Will Expand Insurer Exposure Base Across Most Lines

6

7

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 3/13; Insurance Information Institute.

2.7

%0

.5%

3.6

%3

.0%

1.7

%-1

.8%

1.3

%-3

.7%

-5.3

%-0

.3%

1.4

%5

.0%

2.3

%2

.2%

2.6

%2

.4%

0.1

%2

.5%

1.3

%4

.1%

2.0

%1

.3% 3

.1%

2.1

%2

.0%

2.5

%2

.7%

2.6

%2

.8%

2.9

%3

.0%

0.4

%

-8.9%

4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

14

:1Q

14

:2Q

14

:3Q

14

:4Q

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

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction

was severe

The Q4:2008 decline was the steepest since the Q1:1982

drop of 6.8%

2013 is expected to see initially slow

growth, then gradually accelerate throughout the year and into 2014

State-by-State Leading Indicatorsthrough 2013:Q2

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 10

The economic outlook for most of

New England is relatively strong, suggesting future

strength in the creation of insurable

exposures

74

.47

3.6

73

.67

2.2

73

.6 76

67

.86

8.9

68

.26

7.7 7

1.6 74

.57

4.2 77

.56

7.5 69

.8 74

.37

1.5

63

.75

5.7 5

9.5

60

.9 64

.16

9.9

75

.07

5.3

76

.27

6.4 79

.37

3.2

72

.3 74

.38

2.6

82

.77

4.5

73

.8 77

.67

8.6

40

45

50

55

60

65

70

75

80

85

90

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13

Fe

b-1

3

Ma

r-1

3

Consumer Sentiment Survey (1966 = 100)

January 2010 through March 2013

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

consumers, but improved substantially in late 2011 and in 2012

Source: University of Michigan; Insurance Information Institute

Optimism among consumers has

remained fairly strong despite tax hike, federal

budget concerns

11

12

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4 15

.3 15.8

16.0

16.2

16.2

16.2

16.216

.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F15F 16F17F18F 19F

(Millions of Units)

Auto/Light Truck Sales, 1999-2019F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (3/13); Insurance Information Institute.

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

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2013-14 is

still far below 1999-2007 average of 17 million units, but a robust

recovery is well underway.

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

2013 and beyond

13

16%

18%

20%

22%

24%

26%

28%

30%

01 02 03 04 05 06 07 08 09 10 11 12E 13F 14F$125

$135

$145

$155

$165

$175

$185

$195

% of registered cars under 3 years old Auto Ins Direct Pms$ Billions

Personal Auto Insurance Direct Written Premiums vs. Recently-Registered Cars

Sources: AIPSO Facts (various issues); SNL Financial; Conning Research & Consulting, Property-Casualty Forecast and Analysis, First Quarter 2012; Insurance Information Institute.

PP DWP, flat from 2004-2009, is rising again.Conning forecasts growth at 3.5% in 2013 and 4.0% in 2014.

Average age of registered cars rose as fewer new cars were bought (and

insured)

In 2004-07 no growth in

PP DWP despite

strong new car/truck

sales New car/truck sales grow to 14-15M/year

4%/yr growth forecast for PP

DWP from recovering

new car/truck sales

14

Monthly Change* in Auto Insurance Prices, 1991–2013*

*Percentage change from same month in prior year; through Feb. 2013; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-2%

0%

2%

4%

6%

8%

10%

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

Cyclical peaks in PP Auto tend to occur

approximately every 10 years (early 1990s, early

2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

Pricing peak occurred in late

2010 at 5.3%, falling to 2.8% by Mar. 2012

The Feb. 2013 reading of 5.2% is

up from 3.6% a year earlier; Highest since Dec. 2010

16

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.4

8

1.4

7 1.6

21

.64

1.5

71

.60 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

6

0.9

10

.55

0.5

9

0.6

1 0.7

81

.00

1.2

1 1.3

5

1.4

41

.50

1.5

11

.50

1.3

51.4

61

.29

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F14F15F16F17F18F19F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (3/13); Insurance Information Institute.

Homeowners Insurers Are Starting to See Meaningful Exposure Growth for the First Time Since 2005. Commercial Insurers with Construction Risk

Exposure, Surety, Workers Comp Also Benefit

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage

rates and demographics are stimulating new home construction

for the first time in years

17

Average Premium forHome Insurance Policies**

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates for 2011-2012 based on CPI data and other data.

$508$536

$593

$668

$822 $830

$880$909

$945$988

$804$764

$729

$400

$500

$600

$700

$800

$900

$1,000

$1,100

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

Countrywide Home Insurance Expenditures Increased by an Estimated 4.0%in 2011 and 4.5% in 2012

18

Construction Employment,Jan. 2010—February 2013*

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

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

5 5,47

85,

485

5,49

75,

524

5,53

05,

547

5,54

6 5,58

35,

576

5,57

7 5,61

25,

629

5,64

45,

640

5,63

65,

615

5,62

25,

627

5,63

05,

633

5,64

95,

673 5,

711

5,73

6 5,78

4

5,400

5,450

5,500

5,550

5,600

5,650

5,700

5,750

5,800

5,850

5,900

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-

132/

30/2

Construction employment growth accelerated in the second half of 2012. Stronger growth in this key

sector is possible in 2013.

(Thousands)

Construction for the new $4B

Tappan Zee Bridge will create

thousands of jobs

19

Construction Employment, Jan. 2003–Feb. 2013

Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

5,000

5,500

6,000

6,500

7,000

7,500

8,000

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

The “Great Recession” and housing bust destroyed 2.3 million constructions jobs

The Construction Sector Could Be a Growth Leader in 2013 and 2014 as the Housing Market and Private Investment Recover. Commercial Insurers Will Benefit.

Construction employment

troughed at 5.435 million in Jan.

2011, after a loss of 2.291 million jobs, a 29.7%

plunge from the April 2006 peak

19

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of Feb. 2013 totaled 5.784 million, an

increase of 349,000 jobs or 6.4% from the

Jan. 2011 trough

20

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2012:Q4

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,25005

:Q1

05:Q

2

05:Q

305

:Q4

06:Q

106

:Q2

06:Q

3

06:Q

407

:Q1

07:Q

2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

3

08:Q

409

:Q1

09:Q

2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

3

10:Q

411

:Q1

11:Q

2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

3

12:Q

4

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2012:Q4) was $6.96 trillion, a new peak--$708B

above 2009 trough

Recent trough (2009:Q3) was $6.25 trillion, down

5.3% from prior peak

Growth rates in 2012Q1:12 over Q4:11: 1.8%Q2 over Q1: 1.4% Q3 over Q2: 0.3%

Q4 over Q3: 1.0%

Pace of payroll growth

accelerated in late 2012

20

21

Commercial & Industrial Loans Outstandingat FDIC-Insured Banks, Quarterly, 2006-2012:Q4*

$1.1

6

$1.1

8

$1.2

2

$1.4

4

$1.4

8

$1.4

9

$1.5

0

$1.4

9

$1.4

3

$1.3

7

$1.2

7

$1.2

1

$1.1

8

$1.1

7

$1.1

7

$1.1

8

$1.2

0

$1.2

4 $1.2

8 $1.3

5

$1.3

7 $1.4

2

$1.4

6

$1.4

6 $1.5

1

$1.1

3

$1.2

5 $1.3

0

$1.3

9

$1.0

$1.1

$1.2

$1.3

$1.4

$1.5

$1.6

06:Q

1

06:Q

3

07:Q

1

07:Q

3

08:Q

1

08:Q

3

09:Q

1

09:Q

3

10:Q

1

10:Q

3

11:Q

1

11:Q

3

12:Q

1

12:Q

3

12:Q

4

Outstanding Commercial Loan Volume Has Been Growing for Over Two Years and Is Now Nearly Back to Early Recession Levels. Bodes Very Well for the Creation of Current and Future Commercial Insurance Exposures

*Latest data as of 3/18/2013.Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.

$Trillions

Commercial lending plunged by 21.2% ($330B) during the financial crisis and ensuing

period of tight credit

Commercial lending activity is exceeds pre-crisis levels

(+29.1% or $340B above mid-2010 trough)

22

Percent of Non-current Commercial & Industrial Loans Outstanding at FDIC-Insured Banks,Quarterly, 2006-2012:Q4*

0.70

%

0.74

%

0.64

%

0.67

%

0.81

%

1.07

%

1.18

% 1.69

% 2.25

% 2.80

%

3.57

%

3.43

%

3.05

%

2.83

%

2.73

%

2.44

%

1.89

%

1.65

%

1.49

%

1.29

%

1.17

%

1.09

%

0.97

%

0.87

%

0.71

%

0.63

%

0.62

%

0.63

%

0%

1%

2%

3%

4%

06:Q

1

06:Q

2

06:Q

3

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

Non-current loans (those past due 90 days or more or in nonaccrual status) are back to early-recession levels, fueling bank willingness to lend.

*Latest data as of 3/18/2013.Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.

Almost back to “normal” levels of noncurrent

industrial & commercial loans

Recession

23

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

-1.5%

-11.7%

-1.2%

7.9%

12.6%

20.1%

6.1%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

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

Growth (%)

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

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

Private: +12.6% Public: -1.5%

Public sector construction activity remains depressed

24

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

4.3%0.1%

4.6%

-9.9%

17.2%

-7.1%

4.0%

9.9%

-11.9%

12.6%

20.1%

6.1%

19.8%24.6%

-15%-10%

-5%0%5%

10%15%20%25%30%

To

tal

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Private Construction Activity is Up in Most Segments, Including the Key Residential Construction Sector

Growth (%) Led by the Residential Construction, Lodging, Office, and Manufacturing industries, Private sector

construction activity is up across many segments after plunging during the “Great Recession”

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

25

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

-1.8%

-8.4%-13.6%

-8.8%

18.6%

5.1%

-13.7%

0.3%2.7%

23.8%

-1.5%

-11.7%

-1.2%

-19.4%

-7.5%

-25%-20%-15%-10%

-5%0%5%

10%15%20%25%30%

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Co

nserv

ati

on

&D

evelo

p.

Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2013.

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 many

segments, but is actually now up in some key segments

Transportation and Power projects lead

public sector construction

58

.35

7.1

60

.45

9.6

57

.85

5.3

55

.15

5.2

55

.3 56

.9 58

.25

8.5 6

0.8

61

.45

9.7

59

.75

4.2 55

.85

1.4 52

.55

2.5

51

.85

2.2 53

.1 54

.15

1.9 53

.35

4.1

52

.55

0.2

50

.55

0.7

51

.65

1.7

49

.95

0.2

53

.1 54

.25

1.3

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0A

pr-

10

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1A

pr-

11

Ma

y-1

1Ju

n-1

1

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1

De

c-1

1Ja

n-1

2

Fe

b-1

2M

ar-

12

Ap

r-1

2

Ma

y-1

2Ju

n-1

2

Jul-

12

Au

g-1

2

Se

p-1

2O

ct-1

2

No

v-1

2

De

c-1

2Ja

n-1

3

Fe

b-1

3M

ar-

13

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through March 2013

The manufacturing sector expanded for 33 of the 39 months from Jan. 2010 through Mar. 2013. The expectation is that this will continue.

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

Manufacturing activity continues to expand, albeit modestly

26

27

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Jan. 2013

*seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to Jan. 2013 was 35%. Manufacturing is an

energy intensive activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages

ENERGY INTENSIVE

The value of Manufacturing Shipments in Jan. 2013 were up 35% to $481.8B from its May 2009 trough.

June figure is only 0.7% below its previous record high in July 2008.

$ Millions

27

30

Manufacturing Employment,Jan. 2010—February 2013*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

4111

,870

11,9

1011

,920

11,9

2611

,935

11,9

5711

,943

11,9

2511

,931

11,9

3811

,951

11,9

6311

,977

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

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

3

Manufacturing employment is up by more than 500,000 or 4.5% since Jan. 2010—a surprising source of strength

in the economy. Employment in the sector is close to a multi-year high.

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

(Thousands)

50

.7 52

.7 54

.15

4.6

54

.85

3.5

53

.75

2.8 53

.95

4.6 56 5

7.1 5

9.4

59

.75

6.3

54

.45

3.3

53

.45

3.8

52

.65

2.6

52

.65

2.6

53

.05

6.8

56

.15

5.0

53

.75

4.1

52

.75

2.9 54

.3 55

.25

4.8

54

.85

5.7

55

.25

6.0

54

.4

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0A

pr-

10

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1A

pr-

11

Ma

y-1

1Ju

n-1

1

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1

De

c-1

1Ja

n-1

2

Fe

b-1

2M

ar-

12

Ap

r-1

2

Ma

y-1

2Ju

n-1

2

Jul-

12

Au

g-1

2

Se

p-1

2O

ct-1

2

No

v-1

2

De

c-1

2Ja

n-1

3

Fe

b-1

3M

ar-

13

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

January 2010 through March 2013

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

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

Optimism among non-manufacturers is stable

and remains expansionary in 2013

31

32

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

5371

,549

70,6

4362

,304

52,3

7451

,959

53,5

4954

,027

44,3

6737

,884

35,4

7240

,099

38,5

4035

,037

34,3

1739

,201

19,6

95 28,3

2243

,546

60,8

3756

,282

47,8

0630

,620

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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

:Q3

Business Bankruptcy Filings,1980-2012:Q3

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

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

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

than tripled during the financial crisis. Through Q3:2012, filings were down 15.8% vs. Q3:2011

% Change Surrounding Recessions

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

32

33

Private Sector Business Starts, 1993:Q2 – 2012:Q2*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

207

199

191 19

317

2 176

169

184

175 17

918

820

018

3 187 19

119

719

319

1

203

150

160

170

180

190

200

210

220

230

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

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

Are Recovering Slowly* Data through Jun. 30, 2012 are the latest available as of Apr. 3, 2013; Seasonally adjusted. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up 2.2% to 748,000 in 2011 vs. 2010. In 2012, starts are likely to be up by about

2.7% over 2011 levels.

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 742,000 2011: 748,000*

33

NFIB Small Business Optimism Index

January 1985 through February 2013

Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 34

Small business optimism is returning after taking a big hit

over “Fiscal Cliff” fears

35

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking, Pipelines)

Hurricane Sandy Summary

36

Sandy Will Become One of the Most Expensive Events in

Insurance History

36

38

Top 12 Most Costly Hurricanesin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

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

$9.2 $11.1$13.4

$22.0$25.6

$48.7

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

$0

$10

$20

$30

$40

$50

$60

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Andrew(1992)

Katrina(2005)

Hurricane Sandy could become the 3rd costliest

hurricane in US insurance history

Hurricane Irene became the 12th most expensive hurricane in US history in 2011

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

Hurricane Sandy: Claim Payments to Policyholders, by State

$9,600

$6,300

$700 $500 $410 $295 $292 $210 $103 $84 $57 $55 $37 $36 $13$58$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

NY NJ PA CT MD VA OH MA RI DE WV NC NH DC ME VT

Insurers Will Pay at Least $18.75 Billion to 1.52 Million Policyholders Across 15 States and DC in the Wake of Hurricane Sandy

39

At $9.6B and $6.6B, respectively, NY and NJ suffered, by far, the largest losses

from Hurricane Sandy

TOTAL = $18.75 BILLION($ Thousands)

Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of Jan. 18, 2013; Insurance Information Institute .

Auto, 250,500 ,

16%

Commercial, 202,500 ,

13%

Homeowner, 1,067,000 ,

71%

Hurricane Sandy resulted in an

estimated 1.52 million privately insured

claims resulting in an estimated $18.75 to

$25 billion in insured losses. Hurricane

Katrina produced 1.74 million claims and

$48.7B in losses (in 2012 $)

Hurricane Sandy: Number of Claims by Type*

*PCS claim count estimate s as of 1/18/13. Loss estimate represents PCS total ($18.75B) and upper end of range estimates by risk modelers RMS, Eqecat and AIR. All figures exclude losses paid by the NFIP.Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute. 40

Sandy is a high HO frequency, (relatively

low) severity event (avg. severity <50% Katrina)

Total Claims = 1.52 Million*

Auto, $2,729 , 15%

Commercial, $9,024 ,

48%

Homeowner, $6,997 ,

37%

Although Commercial Lines accounted for

only 13% of total claims, they account for 48% of all claim

dollars paid. In most hurricanes,

Commercial Lines accounts for about

1/3 of insured losses.

Hurricane Sandy: Insured Loss byClaim Type* ($ Millions)

*PCS insured loss estimates as of 1/18/13. Catastrophe modeler estimates range up to $25 billion. All figures exclude losses paid by the NFIP.Source: PCS; Insurance Information Institute. 41

Total Claim Value = $18.75 Billion*

New Jersey, $2,500 , 36% New York,

$2,700 , 38%

All Other, $1,797 , 26%

Hurricane Sandy: Value of Homeowners Claims Paid, by State* ($ Millions)

*Preliminary as of 1/18/13.Source: PCS. 42

Hurricane Sandy• Estimated

1,067,000 homeowners

claims**• $7.0 billion in insured losses.

• Average loss per claim is $6,558

• Claims in NJ estimated at $2.5 billion (36%) and $2.7 billion in NY

(38%)

New Jersey, 60,000 , 24%

All Other, 40,500 , 16%

New York, 150,000 ,

60%

Hurricane Sandy• Estimated 250,500

vehicle claims• $2.729 billion in

insured losses.• Average loss per

claim is $10,894• 60% of the claims

occurred in NY state.

Hurricane Sandy: Number of Auto Claims by State*

*Preliminary as of 1/18/13.Source: PCS. 43

New Jersey, $700 , 26%

All Other, $129 , 5%

New York, $1,900 , 69%

Hurricane Sandy• Estimated 250,500

vehicle claims• $2.729 billion in

insured losses.• Average loss per

claim is $10,894• About 69% of the

claim dollars will be paid in NY, 26%

in NJ.

Hurricane Sandy: Value of Auto Claims Paid, by State* ($ Millions)

*Preliminary as of 1/18/13.Source: PCS. 44

Hurricane Sandy: Loss Distribution by Commercial/Personal Lines and Reinsurance vs. Primary Insurer

*Fitch Ratings assigns a range of 60-65% commercial and 35-40% personal lines., Hurricane Sandy Update, January 8, 2013.**Source: Insurance Information Institute rough estimate based on company reports as of January 13, 2013. Actual number will vary. 45

Personal Lines45%

Commercial Lines55%

Primary70%

Reinsurance30%

Personal vs. Commercial Lines* Primary vs. Reinsurer Share**

~55% of Sandy losses appear to be commercial lines, and ~45% personal, the opposite of the

norm for hurricane losses

Reinsurers’ share of Sandy losses appears to be in the 30% range, though this is highly preliminary

Hurricane Sandy: Average Claim Payment by Type of Claim

$6,558$10,894

$43,056 $44,563

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

Home* Vehicle NFIP Flood** Commercial

Commercial (Business) Claims Were Nearly Seven Times More Expensive than Homeowners Claims; Vehicle Claims Were Unusually Expensive

Due to Extensive Flooding

46

Commercial (i.e., business claims) are more expensive

because the value of property is often higher as well as the impact of insured business

interruption losses

*Includes rental and condo policies (excludes NFIP flood). **As of Feb. 20, 2013.Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of Jan. 18, 2013; Insurance Information Institute .

The average insured flood loss was 6.5 times larger than the average non-flood insured loss

(mostly wind)

Hurricane Sandy: Flood Issues

47

Most of the Uninsured Direct Losses Are Due to Flooding

47

Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.

Residential NFIP Flood Take-Up Rates in NJ (2010) & Sandy Storm Surge

48

Flood coverage penetration rates were extremely low in

many very vulnerable areas in NJ, with take-up rates far below

50% in many areas

Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.

Residential NFIP Flood Take-Up Rates in NY, CT (2010) & Sandy Storm Surge

49

Flood coverage

penetration rates were

extremely low in many very

vulnerable areas of NY and CT, with take-up rates far below 50% in many areas

Hurricane Sandy: National Flood Insurance Program Payment, by State*

$2,437

$2,152

$149$19 $12 $11 $8 $7 $0 $0

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

NY NJ CT RI MD DE VA NC ME DC

The NFIP Will Ultimately Likely Pay Close to $7 Billion to 100,000 Policyholders Across 9 States and DC in the Wake of Hurricane Sandy

50

At $2.437B and $2.152B, respectively, NY and NJ sustained,

by far, the largest NFIP flood losses from Hurricane Sandy

TOTAL = $4.797 BILLION($ Millions)

*As of February 20, 2013.Sources: NFIP; Insurance Information Institute .

51

Flood Loss Paid by the National Flood Insurance Program, 1980-2012E

*Estimate as of 11/25/12.Sources: Department of Homeland Security, Federal Emergency Management Agency, NFIP; Insurance Information Institute.

Billions (Original Values)

$0.23 $0.37 $0.17$1.30

$0.25

$17.74

$0.64 $0.61

$3.47

$0.78 $0.77$1.85

$7.50

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012*

Hurricanes Katrina and Rita accounted for the majority of

2005’s record $17.4B payout

Hurricane Ike

51

Hurricane Sandy and other events could result in $7.5

billion in payouts from the NFIP in 2012, second only to 2005

and potentially exhausting the NFIP’s borrowing authority

53

Federal Disaster Declarations Patterns:

1953-2012

53

Despite 11 Sandy Declarations, Fewer Disasters Were Declared in 2012 than the Record Number of

Declarations in 2010 and 2011

Number of Federal Disaster Declarations, 1953-2013*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

94

79

43

0

20

40

60

80

100

120

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

*Through Apr. 3, 2013.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011. Hurricane Sandy Produced 13 Declarations in 2012/13.

The number of federal disaster declarations set a

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

declarations.

There have been 2,103 federal disaster

declarations since 1953. The average

number of declarations per year is 35 from 1953-2012, though

there few haven’t been recorded since 1995.

47 federal disasters were declared in 2012

54

55

Federal Disasters Declarations by State, 1953 – 2013: Highest 25 States*

86

78

72

66

65

60

57

56

54

53

52

51

51

50

48

48

48

48

47

47

47

46

42

40

39

0

10

20

30

40

50

60

70

80

90

100

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

Dis

as

ter

De

cla

rati

on

s

Over the past 60 years, Texas has had the highest

number of Federal Disaster

Declarations

*Through Apr. 3, 2013. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

56

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

40

39

38

36

36

35

34

32

28

28

26

26

25

24

24

24

23

22

19

17

17

15

15

13

11

11

9

0

10

20

30

40

50

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

Dis

as

ter

De

cla

rati

on

s

Over the past 60 years, Wyoming and Rhode Island had the fewest

number of Federal Disaster Declarations

*Through Apr, 3, 2013. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

57

U.S. Insured Catastrophe Loss Update

2012 Catastrophe Losses Were Close to “Average” Until Sandy Hit

2011 Was the 5th Most Expensive Year on Record

57

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

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

Source: MR NatCatSERVICE 60

41

19

121

3

50

100

150

200

250

300

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

There were 184 natural disaster events in the

US in 2012

U.S. Thunderstorm Loss Trends, 1980 – 2012

62Source: Property Claims Service, MR NatCatSERVICE

Average thunderstorm

losses are up 7 fold since the early

1980s. The 5- year running average

loss is up sharply.

Hurricanes get all the headlines, but thunderstorms are consistent

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

years on record.

Thunderstorm losses in 2012 totaled $14.9 billion, the 2nd

highest on record

63

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

$7.8 $8.7 $9.2 $11.1$13.4

$22.0$23.9 $24.6$25.6

$48.7

$7.5$7.1$6.7$5.6$5.6$4.4

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Hurricane Sandy could become the 4th or 5th costliest event in US

insurance history

Hurricane Irene became the 12th most expense hurricane

in US history in 2011

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have

Occurred Over the Past Decade

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

64

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.1

$3

9.0

$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

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

US Insured Catastrophe Losses

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

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

Basis (Pvt Insured). 2011 Losses Were the 5th Highest

2012 was likely the second most expensive

year ever for insured CAT losses

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2012 Dollars)

64

65

Top 16 Most Costly World Insurance Losses, 1970-2012*

(Insured Losses, 2012 Dollars, $ Billions)

*Figures do not include federally insured flood losses.**Estimate based on PCS value of $18.75B as of 1/18/13 and assumption of upward development based on catastrophe modeler estimates ranging as high as $25B.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.

$11.1$13.4 $13.4$13.4

$22.0$23.9 $24.6$25.6

$38.6

$48.7

$7.8 $8.1 $8.5 $8.7 $9.2 $9.6

$0

$10

$20

$30

$40

$50

$60

Hugo (1989)

WinterStormDaria(1991)

ChileQuake(2010)

Ivan (2004)

Charley(2004)

TyphoonMirielle(1991)

Wilma(2005)

ThailandFloods(2011)

NewZealandQuake(2011)

Ike (2008)

Sandy(2012)**

Northridge(1994)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)**

Katrina(2005)

5 of the top 14 most expensive

catastrophes in world history have occurred within the past 3 years

Hurricane Sandy could become the 6th costliest event

in global insurance history

2012 insured CAT Losses totaled $60B; Economic losses totaled $140B, according to Swiss Re

67

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1992–20111

0.4%

1.6%

3.8%4.7%

6.3%

7.3%

33.9%

42.0%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $161.3

Fires (4), $6.0

Tornadoes (2), $130.2

Winter Storms, $28.2

Terrorism, $24.4

Geological Events, $18.2

Wind/Hail/Flood (3), $14.8

Other (5), $1.4

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1992-2011

totaled $384.3B, an average of $19.2B per year or $1.6B

per month

Homeowners Insurance Catastrophe-Related Claim Frequency and Severity, 1997—2012*

*All policy forms combined, countrywide.Source: Insurance Research Council, Trends in Homeowners Insurance Claims, Sept. 2012 from ISO Fast Track data. 68

Avg. catastrophe claim cost rose

approximately 200% from 1997-2011

Cat claim frequency in 2011 was at historic highs and more than

double the rate in 1997

69

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*

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 (1960-2011); A.M. Best (2012E) Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

3.4

8.7 9.

4

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

E

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

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 7.20*

Combined Ratio Points Catastrophe losses as a share of all losses reached

a record high in 2012

Homeowners Insurance Combined Ratio: 1990–2014F

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.2

94

.4 10

0.3

89

.0 95

.7

11

6.9

10

5.8

10

6.7

12

2.2

11

8.0

10

5.5

10

6.81

18

.4

11

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F

1

Homeowners Performance Deteriorated in 2011/12 Due to Large Cat Losses. Extreme Regional Variation Can Be

Expected Due to Local Catastrophe Loss Activity

Sources: A.M. Best (1990-2013F);Conning (2014F); Insurance Information Institute. 70

Hurricane Ike

Hurricane Sandy

Record tornado activity

71

Growth Analysis by State and Business Segment

Premium Growth Rates Vary Tremendously by State

71

72

Direct Premiums Written: Total P/CPercent Change by State, 2006-2011*

71

.5

41

.8

26

.4

22

.8

22

.6

20

.8

18

.2

11

.8

10

.5

6.6

6.3

6.1

5.8

4.9

4.7

4.2

3.9

2.4

2.2

2.1

2.1

2.1

0.9

0.9

0.7

0.4

0

10

20

30

40

50

60

70

80

ND

SD

MT IA NE

KS

OK

WY

TX

MN LA

AR WI

TN IN AK

DE

NM

NC

KY

SC

WA

DC

MO VT

MS

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

A limited number of states showed strong growth over

the past 5 years

73

Direct Premiums Written: Total P/CPercent Change by State, 2006-2011*

0.4

-0.6

-0.8

-0.8

-1.1

-1.3

-1.4

-1.6

-1.9

-2.0

-2.5

-3.1

-3.2

-3.5

-4.1

-4.4

-5.2

-5.8

-6.0

-10

.3

-10

.5

-10

.8

-11

.7

-12

.0

-13

.5

-19

.2

-25

-20

-15

-10

-5

0

5

AL

OH IL VA

NY

UT

US

GA

CT

PA

NJ

CO

MD

MA ID OR RI

ME MI

HI

NH

WV

FL

CA AZ

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

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

the past 5 years

Sources: SNL Financial LC.; Insurance Information Institute.

NY’s change in premium growth

was similar to the US average

82

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

82

83

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

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 7.7% in

Feb. 2013—lowest in 4 years.

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

Peak rate in the last 30 years:

10.8% in November -

December 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 14.3%

in Feb. 2013

January 2000 through Feb. 2013, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

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

83

22

75

41

68

50

12

36

61

-79

24 6

8 74

51

2-1

14

-10

5-2

22

-21

9-2

03

-26

7-2

69

-42

9-4

84

-78

6 -70

1-8

21

-69

2-8

12

-82

1-2

88

-44

2-2

82 -2

22 -1

62

-23

3-3

4-1

67

-17

-26

17

01

02

94 10

31

29

11

3 18

81

54

11

48

02

43

22

3 30

31

83

17

72

06

12

92

56

17

41

97 24

9 32

32

65

20

81

20 15

27

81

77

13

11

18

21

7 25

62

24

14

02

46

11

1(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Fe

b-0

7M

ar-

07

Ap

r-0

7M

ay-

07

Jun

-07

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Fe

b-1

2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2S

ep

-12

Oct

-12

No

v-1

2D

ec-

12

Jan

-13

Fe

b-1

3

Monthly Change in Private Employment

January 2007 through Feb. 2013 (Thousands)

Private Employers Added 6.31million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

246,000 private sector jobs were

created in February

84

Jobs Created2012: 2.247 Mill2011: 2.420 Mill2010: 1.235 Mill

-0.0

17

-0.0

43

0.06

8

0.23

8

0.34

0

0.43

4

0.53

7

0.66

6

0.77

9

0.96

7

1.12

1

1.23

5

1.31

5

1.55

8

1.78

1

2.08

4

2.26

7

2.44

4

2.65

0

2.77

9

3.03

5

3.20

9

3.40

6

3.65

5

3.97

8

4.24

3

4.45

1

4.57

1

4.72

3

4.80

1

4.97

8

5.10

9

5.22

7

5.44

4

5.70

0

5.92

4

6.06

4

6.31

0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mill

ion

sCumulative Change in Private Sector Employment: Jan. 2010—Feb. 2013

January 2010 through February 2013* (Millions)

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

Cumulative job gains through Feb. 2013 totaled 6.31 million

86

Job gains and pay increases have added more than $600 billion to payrolls

since Jan. 2010

Private Employers Added 6.31million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

4

-10

33

92

511

287

98

-68

-224 -1

84

-194

-213

-224

-271

-289

-288

-356 -324

-452

-449

-480

-488

-511

-530

-542

-536

-539

-547

-574

-565

-589 -555

-535

-592

-601

-606

-627

-637

-800

-600

-400

-200

0

200

400

600

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Cumulative Change in Government Employment: Jan. 2010—Feb. 2013

January 2010 through Feb. 2013* (Millions)

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

Cumulative job losses through Feb. 2013 totaled 637,000

87

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

Financial Crisis: Sequestration Will Add to this Toll

Government at all levels has shed more than half a million jobs since Jan. 2010 even as

private employers created 6.31 million jobs, though

losses may now be ending.

Temporary Census hiring distorted 2010

figures

89

Unemployment Rates by State, February 2013:Highest 25 States*

9.6

9.6

9.6

9.5

9.4

9.4

9.3

8.8

8.7

8.6

8.6

8.6

8.4

8.4

8.1

8.0

7.9

7.9

7.8

7.7

7.5

7.3

7.3

7.2

7.2

0

2

4

6

8

10

12

CA MS NV IL NC RI NJ MI IN DC GA SC NY OR PA CT AZ KY TN FL WA ME WV AL AR

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for February 2013, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In February, 22 states had over-the-month unemployment rate decreases, 12 states had increases, and 16 states

and the District of Columbia had no change.

90

7.2

7.2

7.2

7.0

6.8

6.7

6.6

6.5

6.5

6.4

6.2

6.0

5.8

5.6

5.6

5.5

5.5

5.2

5.2

5.0

5.0

4.9

4.4

4.4

3.8

3.3

0

2

4

6

8

CO DE WI OH NM MO MD AK MA TX ID LA NH MT VA KS MN HI UT IA OK WY SD VT NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, February 2013: Lowest 25 States*

*Provisional figures for February 2013, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In February, 22 states had over-the-month unemployment rate decreases, 12 states had increases, and 16 states

and the District of Columbia had no change.

91

Oil & Gas Extraction Employment,Jan. 2010—February 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.

6 169.

317

0.1

171.

017

2.5

173.

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

192.

219

3.3

150

155

160

165

170

175

180

185

190

195

200

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

0

Oil and gas extraction employment is up 24.4%

since Jan. 2010 as the energy sector booms.

Domestic energy production is essential to

any robust economic recovery in the US.

(Thousands)

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

95

Payroll Base* WC NWP

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

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

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

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

$Billions $Billions

WC premium volume dropped two years before

the recession began

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

$33.8B in 2010 after peaking at $47.8B

in 2005

+9% in 2012E

The BIG Question:Where Is the Market Heading?

96

Catastrophes and Other Factors Are Pressuring Insurance Markets

96

New Factor: Record Low Interest Rates Are Contributing to

Underwriting and Pricing Pressures

INVESTMENTS: THE NEW REALITY

97

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

97

Property/Casualty Insurance Industry Investment Income: 2000–2012E1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.0

$46.8

$39.6

$49.5

$52.3

$30

$40

$50

$60

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

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

1 Investment gains consist primarily of interest and stock dividends.*2012F is based on annualized 9M:2012 actual figure of $35.131B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings in 2012 were running 14% below their 2007 pre-crisis peak

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

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$53.4$56.2

$50.8

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

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

Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce Investment Income and Lower Realized Investment Gains; The Financial

Crisis Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2012F figure is III estimate based on annualized actual 9M:2012 result of

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

($ Billions)

Investment gains in 2012 are running approximately 20% below their pre-crisis peak

100

P/C Insurer Net Realized Capital Gains/Losses, 1990-2012:Q3

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

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

90

$5.8

5

$7.1

9

$2.9

6

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 1112:9M

Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital

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

($ Billions)Realized capital gains

through 2012:9M are down 46% from $5.53B in 2011:9M

101

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2013*

*Monthly, through Feb. 2013. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

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

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

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

rose 55bp from its all time record lows to 1.98% in Feb. 2013

101

104

Average Maturity of Bonds Held by US P/C Insurers, 2006—2011*

6.456.53

6.89

7.307.46

7.32

5.0

5.5

6.0

6.5

7.0

7.5

8.0

2006 2007 2008 2009 2010 2011

*Year-end figures. Latest available.Sources: Insurance Information Institute calculations based on A.M. Best data.

Average Maturity (Years)

Falling Average Maturity (and Duration) of the P/C Industry’s Bond Portfolio is Contributing to the Drop in Investment

Income Along With Lower Yields

The average bond maturity is down by a full year between

2007 and 2011

104

105

Distribution of Bond Maturities,P/C Insurance Industry, 2006-2011

16.2%

16.3%

15.2%

29.5%

30.0%

32.4%

36.2%

39.5%

41.4%

34.1%

33.8%

31.2%

28.7%

26.7%

26.8%

13.1%

12.9%

12.7%

11.7%

11.1%

10.3%

7.4%

8.1%

8.1%

7.3%

6.4%

6.3%

16.0%

15.7%

15.2%

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

2006

2007

2008

2009

2010

2011

Under 1 year

1-5 years

5-10 years

10-20 years

over 20 years

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

The main shift over these 6 years has been from bonds with 5-10 years of maturity to bonds with 1-5 years of maturity. The industry also slightly

trimmed it holdings of bonds in the 10-20-year maturity categoryand bonds in the longest-maturity category.

107

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

Warra

nty

Surplu

s Line

s

Med

Mal

WC

Reinsu

rance

**

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

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

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

107

1. UNDERWRITING

108

Underwriting Losses in 2011 and 2012 Are Elevated by High

Catastrophe Losses

108

109

P/C Insurance Industry Combined Ratio, 2001–2012:Q3*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:Q3=100.0. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.4

100.0101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012:Q3

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Lower CAT

Losses Before Sandy

Underwriting Gain (Loss)1975–2012:Q3*

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

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Cumulative underwriting deficit from 1975 through

2011 is $479B

($ Billions) Underwriting losses

through 2012:Q3

totaled $6.7B

High cat losses in 2011 led to the highest

underwriting loss since 2002

111

Combined Ratios by Predominant Business Segment, 2012:9 Mos. vs. 2011:9 Mos.*

*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute

109.4108.0

105.4

112.0

100.0 99.498.6

102.7

96

98

100

102

104

106

108

110

112

114

All Lines Personal LinesPredominating

Commercial LinesPredominating

Diversified Insurers

2011:9M 2012:9M

(Percent)

The combined ratios for both personal and commercial lines

improved substantially through 2012:Q3, prior

to Hurricane Sandy

112

2

(2)

(8)

(3)

(7)(10) (10)

(4)

(0)

11

24

15

119

(5)

(9)

(14)

(10) (11)(7)

(5)(2)

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

E

12

F

13

F

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2013F

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

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

Prior year reserve releases totaled $8.8

billion in the first half of 2010, up from

$7.1 billion in the first half of 2009

113

Number of Years with Underwriting Profits by Decade, 1920s–2010s

0 0

3

0

54

8

10

76

0

2

4

6

8

10

12

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**

* 2009 combined ratio excl. mort. and finl. guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit.**Data for the 2010s includes 2010 and 2011.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Number of Years with Underwriting Profits

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

113

Financial Strength & Underwriting

114

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

Underwriting, Reserving & Pricing

114

P/C Insurer Impairments, 1969–20128

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15 16 1

9 21

34

18

5

0

10

20

30

40

50

60

70

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012 and March 6, 2013 update; Insurance Info. Institute.

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

115

Impairments among P/C insurers remain infrequent

117

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

3.6%4.0%

8.6%

7.3%

7.8%

7.1%

7.8%13.6%

40.3%

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

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

Investment and Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems (Overstatement of Assets)

Misc.

Sig. Change in Business

118

Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010

2.0%4.4%

4.8%

6.5%

6.9%

7.7%

8.1%

10.9%

22.2%

26.6%

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

Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade

Workers Comp

Financial Guaranty

Pvt. Passenger Auto

Homeowners

Commercial Multiperil

Commercial Auto Liability

Other Liability

Med Mal

SuretyTitle

Private Passenger Auto Combined Ratio: 1993–2014F

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.3

10

1.3

10

1.0

10

1.9

99

.6

98

.5 10

0.2

99

.5 10

1.1

10

3.5

80

85

90

95

100

105

110

115

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

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

121Sources: A.M. Best (1990-2013F);Conning (2014F); Insurance Information Institute.

Homeowners Insurance Combined Ratio: 1990–2014F

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.2

94

.4 10

0.3

89

.0 95

.7

11

6.9

10

5.8

10

6.7

12

2.2

11

8.0

10

5.5

10

6.81

18

.4

11

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F

1

Homeowners Performance Deteriorated in 2011/12 Due to Large Cat Losses. Extreme Regional Variation Can Be

Expected Due to Local Catastrophe Loss Activity

Sources: A.M. Best (1990-2013F);Conning (2014F); Insurance Information Institute. 122

Hurricane Ike

Hurricane Sandy

Record tornado activity

109.4110.2

118.8

109.5

112.5

110.2

107.6

104.1

109.7 110.2

102.5

105.4

91.1

93.6

104.2

98.9

102.1

106.7

109.0

102.9102.0

111.1112.3

122.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

F

13

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2013F figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute

Commercial Lines Combined Ratio, 1990-2013F*

Commercial lines underwriting

performance in 2012 was the worst since 2002 due

to heavy impact from Sandy

125

Commercial Auto Combined Ratio: 1993–2014F

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4 94

.3 96

.8 99

.4

98

.0

10

4.6

10

7.1

10

3.6

10

1.2

11

8.1

11

5.7

11

6.2

80

85

90

95

100

105

110

115

120

125

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

Commercial Auto is Expected to Improve as Rate Gains Outpace Any Adverse Frequency and Severity Trends

126Sources: A.M. Best (1990-2013F);Conning (2014F); Insurance Information Institute.

Commercial Multi-Peril Combined Ratio: 1995–2013F

119.

0

119.

8

108.

5

125.

0

116.

2

116.

1

104.

9

101.

9

105.

5

95.4 97

.6

94.2 96

.1 102.

0

100.

7

116.

8

113.

6

115.

3 122.

4

115.

0

117.

0

97.3

89.0

97.7

93.8

83.8

89.8

108.

4

98.7 10

2.5

120.

5

116.

6

102.

6

113.

1

115.

0 121.

0

80

85

90

95

100105

110

115

120

125

130

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F

CMP-Liability CMP-Non-Liability

Commercial Multi-Peril Underwriting Performance is Expected to Improve in 2013 Assuming Normal

Catastrophe Loss Activity

*2012-2013 figures are A.M. Best estimate/forecast for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute. 127

General Liability Combined Ratio: 2005–2014F

112.

9

95.1 99

.0

94.2

100.

7

103.

3

103.

7107.

1 110.

8

99.6

80

85

90

95

100

105

110

115

05 06 07 08 09 10 11 12F 13F 14F

Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years

Source: Conning Research and Consulting. 128

Inland Marine Combined Ratio: 1999–2014F

101.9

92.8

100.2

83.8

77.379.5

93.3

89.3

86.2

97.7 97.7

89.7 89.7

80.882.5

89.9

70

75

80

85

90

95

100

105

99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F

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

Sources: A.M. Best (1999-2011); Insurance Information Institute (2012F); Conning (2013F-2014F) 129

Other & Products Liability Combined Ratio: 1991–2013F

11

0.3

10

9.1

11

2.0

12

2.6

12

4.4

11

1.8

11

4.4

11

2.1

96

.3 99

.0

95

.1

10

5.4

10

9.8

10

0.5

10

3.6

10

6.3

12

5.51

32

.8

13

3.2

11

4.5

143.6

12

3.5

11

0.6

80

90

100

110

120

130

140

150

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E13F

Liability Lines Have Performed Better in the Post-Tort Reform Era (~2005), but There Has

Been Some Deterioration in Recent YearsSources: A.M. Best ; Insurance Information Institute. 130

Workers Compensation Combined Ratio: 1994–2014F

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5

103.

5

104.

5 110.

6 116.

8

116.

9

117.

3

115.

0

111.

0

121.

7

107.

0

115.

3

118.

2

80

85

90

95

100

105

110

115

120

125

130

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

Workers Comp Results Should Begin to Improve in 2013. Underwriting Results Deteriorated Markedly from 2007-2012 and Were the Worst They Had Been in a Decade.

Sources: A.M. Best (1994-2013F); Insurance Information Institute (2014F). 133

Workers Compensation Medical SeverityModerate Increase in 2011

134

Accident Year

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2010: +6.0%

Average Medical Cost per Lost-Time ClaimMedicalClaim Cost ($000s)

2011p: Preliminary based on data valued as of 12/31/20111991-2010: Based on data through 12/31/2010, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes high deductible policies

Cumulative Change = 245%(1991-2011p)

$9

.8

$9

.5

$9

.2

$9

.7

$9

.8

$1

0.4

$1

1.2

$1

2.2

$1

3.5

$1

4.8

$1

6.2

$1

6.7

$1

7.5

$2

2.3

$2

2.5

$2

2.3$

18

.3

$1

7.6

$1

9.3

$2

0.8

$2

1.9

-2.8%+0.6%+8.8%

+2%

+5.5%

+3.6%+1.0%+4.6%

+3.1%+9.2%

+10.1%

+10.1%

+9.0%+7.7%

+5.9%+1.7%+4.9%-2.8%-3.1%+1.0%

+6.5%

5

7

9

11

13

15

17

19

21

23

25

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011p

IndemnityClaim Cost ($ 000s)

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2010:+3.4%

2010p: Preliminary based on data valued as of 12/31/20111991–2010: Based on data through 12/31/2010, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes high deductible policies

Accident Year

Workers Comp Indemnity Claim Costs: Modest Increase in 2011

Average indemnity costs per claim resumed its upward climb in 2011

Average Indemnity Cost per Lost-Time Claim

Workers Compensation Premium: First Increase in YearsNet Written Premium

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011p

0

10

20

30

40

50

31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3

25.0 26.129.2 31.1

34.737.8 38.6 37.6

33.830.3 29.9

32.2

31.0 31.329.8 30.5

29.126.3

28.226.9 25.9 25.0

28.6

32.1

37.7

42.3

46.547.8

46.544.3

39.3

34.6 33.836.3

State Funds ($ B)

Private Carriers ($ B)

$ Billions

Calendar Yearp Preliminary

Source: 1990–2010 Private Carriers, Best's Aggregates & Averages; 2011p, NCCI1996–2011p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

Workers Comp Rate Changes,2008:Q4 – 2012:Q4

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

-5.5%-4.6%

-4.0%-4.6%

-3.7%-3.9%

-5.4%

-3.7%-3.4%

-1.6%

2.6%

4.1%

7.5% 7.4%8.3% 8.1%

9.0%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

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

WC rate changes have been positive for 7

consecutive quarters, longer than any other

commercial line

(Percent Change)

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

2. SURPLUS/CAPITAL/CAPACITY

143

How Will Large Catastrophe Losses Impact Capacity?

143

145

Policyholder Surplus, 2006:Q4–2012:Q3

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$559.2 $559.1

$538.6

$550.3

$567.8

$583.5

$570.7$566.5

$505.0

$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

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

2007:Q3Pre-Crisis Peak

Surplus as of 9/30/12 was up $12.8B or 2.2% from the

previous record high of $570.7B set as of 3/31/12.

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

The Industry now has $1 of surplus for every $0.80

of NPW, close to the strongest claims-paying

status in its history.

Drop due to near-record 2011 CAT losses

The P/C Insurance Industry Both Entered and Emerged from the 2012 Hurricane

Season Very Strong Financially. There is No Insurance Industry “Fiscal Cliff”

146

3. REINSURANCE MARKET CONDITIONS

Record Global Catastrophes Activity is

Pressuring Pricing

146

148

Regional Property Catastrophe Rate on Line Index, 1990—2013 (as of January 1)

Sources: Guy Carpenter; Insurance Information Institute.

Property-Cat reinsurance pricing was up in the US as

of 1/1/13 but was down in Europe/UK

4. RENEWED PRICING DISCIPLINE

149

Evidence of a Broad and Sustained Shift in Pricing

149

151

-5%

0%

5%

10%

15%

20%

25%

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Net Premium Growth: Annual Change, 1971—2012E

(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.

2012E growth

was +4.9%

152

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

Sources: ISO, Insurance Information Institute.

Sustained Growth in Written Premiums(vs. the same quarter, prior year) Will Continue into 2013

10.2

%15

.1%

16.8

%16

.7%

12.5

%10

.1%

9.7%

7.8%

7.2%

5.6%

2.9%

5.5%

-4.6

%-4

.1%

-5.8

%-1

.6%

10.3

%10

.2% 13

.4%

6.6%

-1.6

%2.

1%0.

0%-1

.9%

0.5%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

1.3% 2.

3%1.

7% 3.5%

1.6%

4.1%

3.8%

3.1% 4.

2% 5.1%

-10%

-5%

0%

5%

10%

15%

20%

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

2011

:Q1

2011

:Q2

2011

:Q3

2011

:Q4

2012

:Q1

2012

:Q2

2012

:Q3

Premium growth in Q3 2012 was up 5.1% over Q3 2011, the strongest growth since Q4 2006

153

Growth in Net Written Premium by Segment, 2012:9 Mos. vs. 2011:9 Mos.*

*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute

3.2% 3.2%

4.0%

2.4%

4.2%

3.3%

6.1%

3.8%

0%

1%

2%

3%

4%

5%

6%

7%

All Lines Personal LinesPredominating

Commercial LinesPredominating

Diversified Insurers

2011: 9 Mos. 2012: 9 Mos.

(Percent)

154

Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2012)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9%

-11

.0%

-6.4

%-5

.1%

-4.9

%-5

.8%

-5.6

%-5

.3%

-6.4

%-5

.2%

-5.4

% -2.9

%

2.7

% 4.4

%4

.3%

3.9

%5

.0%

-0.1

% 0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

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

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

KRW Effect

Pricing as of Q4:2012 was positive for the 6th consecutive

quarter. Gains are likely to continue through 2013.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

155

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

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 (%)

Trough = 2007:Q3 -13.6%

KRW : No Lasting Impact

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

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

nearly 8 years; Q4:2012 renewals were up 5.0%, the largest increase since late

2003; Some insurers posted stronger numbers.

159

Change in Commercial Rate Renewals, by Line: 2012:Q4

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

Major Commercial Lines Renewed Uniformly Upward in Q4:2012 for the Sixth Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat

Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

4.4% 4.4%4.9%

5.7%

9.0%

1.3%

3.2% 3.3% 3.4% 3.5% 3.4%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

Su

rety

Bu

sin

ess

Inte

rru

ptio

n

Ge

ne

ral

Lia

bili

ty

Co

mm

erc

ial

Au

to

Um

bre

lla

Co

mm

erc

ial

Au

to EP

L

Co

nst

ruct

ion

D&

O

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

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

by Property lines

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

CLIPS: Change in Written Price Level:All Lines, 2010:Q2 – 2012:Q4

Source: Towers Watson; Information Institute.

-1% -1%

0%

1%

2% 2%

3%

5%

6% 6%

7%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4

Rate changes have been positive for 8 consecutive quarters, longer than any

other commercial line

(Percent Change)

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

163

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

$0

$50

$100

$150

$200

$250

$300

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

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

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

Tort costs in dollar terms have remained high but relatively stable

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

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

Business Leaders Ranking of Liability Systems in 2012

Best States

1. Delaware

2. Nebraska

3. Wyoming

4. Minnesota

5. Kansas

6. Idaho

7. Virginia

8. North Dakota

9. Utah

10. Iowa

Worst States

41. Florida

42. Oklahoma

43. Alabama

44. New Mexico

45. Montana

46. Illinois

47. California

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2012 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2012

Wyoming Minnesota Kansas Idaho

Drop-offs

Indiana Colorado Massachusetts South Dakota

Newly Notorious

Oklahoma

Rising Above

Arkansas

166

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168