personal lines p-c insurance markets: challenges & opportunities for 2011 & beyond aaa/caa...

Personal Lines P-C Insurance Markets:

Challenges & Opportunities for 2011 & Beyond

AAA/CAA Insurance ConferenceSan Francisco, CA

March 8, 2011Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

2

Presentation Outline

Personal Lines Growth Overview Auto, Home: US and by State Average Premium/Expenditures

Personal Lines Growth Drivers Exposure, Pricing Factors

Personal Lines Profitability Analysis Cyclical Drivers in Personal Lines Growth Private Passenger Auto Performance Distribution Trends P/C Financial Overview & Outlook: The Role of Cyclicality

Profitability Premium Growth Capital, Capacity and Financial Strength Underwriting Performance Investment Performance

Financial Crisis, Recession & Recovery: P/C Insurer Impacts Catastrophe Losses Q&A

3

Personal Lines Growth Analysis

Growth Trajectories Differ Substantially by Line, by

State and Over Time

4

Distribution of Direct Premiums Written by Segment/Line, 2009

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

Personal/Commercial lines split has been about 50/50 for many years; Personal Lines likely overtook Commercial Lines in 2010

Pvt. Passenger Auto is by far the largest line of insurance and is currently the most important source of industry profits

Billions of additional dollars in homeowners insurance premiums are written by state-run residual market plans

Distribution Facts

Commercial Lines$232.4B/51%

2009

Pvt. Pass Auto$163.2B/35%

Homeowners$65.4B/14%

5

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

14.5%

3.0%

-0.9%0.9%

9.2%

6.0%

2.2%

5.7%

0.5%

-4.9%

15.3%

5.0%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

13%

15%

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

Private Passenger AutoHomeownersAll Lines

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

Average 2000-2009Auto = 2.9

Home = 6.5%All Lines = 3.4%

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

generally more profitable

6

Private Passenger Auto InsuranceNet Written Premium, 2000–2010E

$151.2

$157.3$159.6 $160.2 $159.1 $159.8

$156.6$158.0

$119.7

$139.7

$128.0

$110

$120

$130

$140

$150

$160

$170

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E


$ Billion

PP Auto premiums written rose by an estimated 3% in 2010 on stronger new

car sales after declining in recent years due to the weak economy impacting new vehicle sales, car choice, and increased price sensitivity among consumers. 2011

should provide further gains.

7

Auto Insurance Net Premiums Written, Canada, 2002-09

$16.82

$18.67

$22.90 $23.09$24.28

$25.34

$27.77

$29.06

$15

$20

$25

$30

2002 2003 2004 2005 2006 2007 2008 2009

Auto insurance premiums are a significantly larger part of total premium revenue in Canada compared to the U.S. Moreover, Auto NPW continued to

grow in Canada during the economic downturn but were flat/negative in the US

Sources: Best’s Aggregates & Averages, various years; Insurance Information Institute

$Canadian Growth Rate 2003: 11.0%2004: 22.7%2005: 0.8%2006: 5.2%2007: 4.4%2008: 9.6%2009: 4.6%

8

Commercial Auto InsuranceNet Written Premium, 2000–2010E

$25.4

$20.6

$23.7

$21.8

$26.7

$21.8

$25.5

$26.7$26.6

$24.6

$19.5

$18

$20

$22

$24

$26

$28

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E


$ Billion

In contrast to flat PP Auto NPW, Commercial auto premiums are down 22.8% since 2006 due to

soft market conditions in commercial lines and negative

exposure trends

9

Percent Change in NPW: Pvt. Pass. Auto by State, 2004-2009

16.6

16.0

13.8

12.6

12.4

12.3

9.0

8.7

8.6

8.5

7.1

7.0

6.3

6.2

6.1

5.8

5.6

5.6

4.9

4.4

4.1

3.4

2.3

1.9

1.8

0

2

4

6

8

10

12

14

16

18

20

UT

NC TX NM NV

WY

WA ID LA SC

MT

OK HI

AZ

GA

OR AK

DE

MS

MD AL

TN VA

KS

DC

Pec

ent c

hang

e (%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Utah was the fastest growing state between 2004 and 2009,

largely due to favorable demographics and a less

severe economic downturn

10

1.7

0.9

0.7

0.5

0.5

0.5

0.1

-1.4

-1.4

-1.6

-1.8

-2.5

-2.7

-3.3

-3.8

-5.2

-6.1

-6.3

-7.0

-7.2

-7.4

-8.3

-8.3

-9.6

-10.

9

-22.

0

-25

-20

-15

-10

-5

0

5

AR

ND IL

MO CA FL SD IA KY PA

CO W

I

WV

CT IN NE RI

NJ

VT

NY

OH

ME

NH

MN MI

MA

Pec

ent c

hang

e (%

)


Massachusetts saw the biggest drop in premiums written, due in large part to recent reforms that

increased competition and lowered overall rate levels

Percent Change in NPW: Pvt. Pass. Auto by State, 2004-2009

Bottom 25 States

11

6.468

10.110

14.575

0

2

4

6

8

10

12

14

16

Under 18 18-64 65+

Increase in Population by Age Category, 2010 to 2020

(Millions)

Source: US Census Bureau

Over the next decade, the demand for personal lines

insurance will be driven by an increasingly older population

Claim Trends in Personal Lines Will Shift With Demographics; Insurers Must Adapt

12

Homeowners InsuranceNet Written Premium, 2000–2010E

$45.8

$49.5

$52.2$54.6 $54.9

$60.3

$56.9$55.7

$32.4

$40.0

$35.2

$30

$35

$40

$45

$50

$55

$60

$65

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E


$ Billions

Homeowners insurance NWP continues to rise (up 86.1% 2000-2010E) despite very

little unit growth in recent years. Reasons include rate increases, especially in coastal

zones, ITV endorsements (e.g., “inflation guards”), and inelastic demand

13

Average Premiums For Home InsuranceBy State, 2008 (1)

$1

,46

0

$1

,39

0

$1

,15

5

$1

,04

8

$1

,02

6

$9

83

$9

80

$9

80

$9

26

$9

16

$9

11

$8

97

$8

62

$8

56

$8

45

$8

45

$8

42

$8

14

$8

08

$7

91

$7

89

$7

88

$7

88

$7

49

$7

21

$7

15

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600T

X (

2)

FL

(3) LA

OK

MA

NY

CT

MS

DC

KS

CA

(4) RI

HI

AK

AL

MN

CO

NE

ND

US

SC

AR

MO

GA

MT MI

(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written. (2) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms. (3) Florida data exclude policies written by Citizens Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly of incomparable with other states. (4) California data were provided by the California Department of Insurance.

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.

Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.

14

Average Premiums For Home InsuranceBy State, 2008 (1) (con’t)

$7

03

$6

92

$6

92

$6

91

$6

83

$6

76

$6

58

$6

50

$6

47

$6

38

$6

37

$6

28

$6

28

$6

12

$6

09

$6

04

$6

01

$5

86

$5

72

$5

65

$5

35

$5

03

$4

71

$4

39

$4

32

$3

87

$0

$200

$400

$600

$800

NM NV

TN NJ

NC

WY IN VT

NH

WV

MD AZ IL IA S

D VA

KY

PA

ME

OH

DE WI

WA

OR

UT ID

(1) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days insured coverage for a single dwelling.

Source: © 2010 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.

15

Personal Lines Growth Drivers

Rate is Presently a Bigger Driver than Exposure

16

Private Passenger Auto

Economy, Employment Are Main Drivers

Gas Prices: Big Wild Card

17

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

*Percentage change from same month in prior year; through January 2011; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-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

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

A pricing peak may be occurring

Jan. 2011 change fell

to 4.2% from 4.4%

in Dec.

19

Average Expenditures on Auto Insurance

$651$668

$691$705

$726

$786

$830$842

$831$816

$795 $789$806

$824

$690$685$703

$600

$650

$700

$750

$800

$850

$900

$950

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

Countrywide Auto Insurance Expenditures Decreased0.8% in 2008 and Increased 2.2% in 2009 (est.) and 2010 (est.)

* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2009-2010 based on CPI and other data.

The average expenditure on auto insurance is lower today than it was in 2004

20

Average Expenditures For Auto InsuranceBy State, 2008

$1

,12

6

$1

,10

5

$1

,08

1

$1

,05

5

$1

,04

4

$1

,00

7

$9

86

$9

70

$9

50

$9

22

$9

07

$9

04

$9

03

$8

58

$8

54

$8

40

$8

17

$8

16

$8

08

$7

89

$7

76

$7

65

$7

51

$7

29

$7

28

$7

27

$0

$200

$400

$600

$800

$1,000

$1,200

DC LA

NJ

FL

NY

DE RI

NV

CT

MD MI

AK

MA AZ

TX

WA

PA HI

WV

US

CA

GA

SC

CO

NM

NH

Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.

Source: © 2010 National Association of Insurance Commissioners.

21

Average Expenditures For Auto InsuranceBy State, 2008 (con’t)

$7

27

$7

20

$7

09

$6

99

$6

98

$6

67

$6

67

$6

63

$6

63

$6

57

$6

54

$6

53

$6

53

$6

41

$6

32

$6

17

$6

12

$6

00

$5

95

$5

81

$5

76

$5

62

$5

47

$5

20

$5

19

$5

03

$0

$200

$400

$600

$800

OR IL UT

KY

MN

MT AL

OK VA

MO

MS

VT

AR

TN

WY

OH IN ME

NC WI

KS ID NE

SD IA

ND

Note: Average expenditure=Total written premium/liability car years. A car year is equal to 365 days of insured coverage for a single vehicle.

Source: © 2010 National Association of Insurance Commissioners.

22

16.9

16.5

16.1

13.2

10.4

11.6

13.1 13

.9 14.7 15

.1

15.0 15

.5

16.9

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 11F 12F 13F 14F 15F 16F

(Millions of Units)

Auto/Light Truck Sales, 1999-2016F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 2/11); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales in 2011

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

still far below 1999-2007 average of 17 million units, but a recovery is underway.

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

2011 and beyond

24

Number of Registered Passenger Vehicles in the US, 2000-2008

Sources: US Federal Highway Administration, Bureau of Transportation Statistics; Barclays Capital; Insurance Information Institute.

The Number of Registered Passenger Vehicles Declined in 2009 for the First Time in Many Years Could Rise in 2011/2012

Growth in vehicle registrations could reach 1% in 2011

and 2012

25

“Light-Duty” Vehicle Registrations in Canada*, 1999-2008

16.5416.83

17.06

17.5417.76

17.9218.12

18.74

19.20

19.61

15

16

17

18

19

20

99 00 01 02 03 04 05 06 07 08

The number of light-duty vehicles grew every year during the past decade, including recession years. In the US, where registration were flat or fell.

*Includes passenger autos, passenger vans, and light trucks and vans (less than 4,500 kg)Sources: http://www.tc.gc.ca/eng/roadsafety/tp-tp3322-2008-1144.htm Insurance Information Institute

MillionsExposure Growth Rate

2000: 1.8%2001: 1.4%2002: 2.8%2003: 1.3%2004: 0.9%2005: 1.1%2006: 3.4%2007: 2.5%2008: 2.1%

http://www.tc.gc.ca/eng/roadsafety/tp-tp3322-2008-1144.htm

Do Changes in Miles Driven AffectAuto Collision Claim Frequency?

7.00

6.81

6.59

6.80 6.78

6.91

6.65

6.32

6.025.94

5.71

5.85

5.705.62

5.58

5.5

6.0

6.5

7.0

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

Pa

id C

laim

Fre

q

2400

2500

2600

2700

2800

2900

3000

3100

Bil

lio

ns

of

Mil

es D

rive

n

Collision Claim FrequencyBillions of Vehicle Miles

Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm; ISO Fast Track Monitoring System, Private Passenger Automobile Fast Track Data: 3rd Qtr. 2010, published Jan. 7, 2011 and earlier reports. *2010 ISO figure is for 12 months ending 9/30/2010; FHA data is for 12 months ending Oct. 2010.

Paid Claim Frequency = (No. of paid claims)/(Earned Car Years) x 100

People are beginning to drive more (+0.6% YTD),

and frequency drop is flattening

http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm

27

Will Skyrocketing Gas Prices Hurt Auto Insurers?

Here We Go Again!

28

Monthly Retail Price of Gasoline, January 1990–February 2011*

*Week ending Feb. 28.Note: Recessions indicated by gray shaded columns.Sources: Energy Information Administration; Insurance Information Institute.

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

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

Current Middle East tensions, strengthening

demand threaten to push gas beyond the $4 per

gallon level by late Spring

Gas prices tend to eventually fall

during recessions

Record retail price: $4.14/gal in

July 2008

Gas prices hit .

$3.44/gal in the last week of

February

U.S. City Average

Miles Driven and Annual Percent Change: 1986-2010

1,83

8.2

1,92

4.3

2,02

5.6

2,10

7.0

2,14

7.5

2,17

2.2

2,24

7.2

2,29

6.7

2,35

7.6

2,42

2.8

2,48

2.2

2,56

0.4

2,62

5.4

2,67

9.5

2,74

6.9

2,79

5.5

2,85

5.3

2,88

9.7

2,96

4.2

2,98

9.4

3,01

4.3

3,02

9.8

2,97

3.5

2,97

9.2

2,99

9.6

1,000

1,500

2,000

2,500

3,000

3,500

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

Bil

lio

ns

of

Mil

es

Dri

ve

n

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

% C

ha

ng

e i

n M

ile

s D

riv

en

Billions of Vehicle MilesPercent Change

Sources: Federal Highway Administration; Insurance Information Institute.

In 2008, miles driven dropped for the first time in decades (-1.9%), but were up 0.7% to almost 3 trillion miles in 2010

Higher gas prices will slow the increase in miles driven, with

mixed impacts on private passenger auto (less exposure

attributable to mileage, but perhaps tempering claim frequency)

Source: ISO, US DOT.

Oct. 17, 1973: Arab

oil embargo begins

Frequency Impacts

Collision: -7.7%PD: -9.5%BI: -13.3%

March 17, 1974: Arab oil states announce

end to embargo

Driving StatsGas prices rose 35-40%Miles driven fell 6.7% in

1974

Frequency began to rebound almost

immediately after the embargo

ended

Auto Insurance: Claim Frequency Impacts of Energy Crisis/Recession of 1973/74

32

Homeowners

Glut of Existing Homes, Foreclosures, Weak

Demographics Mean Unit Growth Will Remain Slow

33

(Millions of Units)

New Private Housing Starts, 1990-2016F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

7

0.8

9

1.2

0 1.3

3 1.4

3

1.5

0

1.3

51.4

6

1.2

9

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 11F12F13F14F15F16F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 2/11); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until 2012. Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers

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

estimated at about $1.3 billion

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

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

1,66

01,

695

1,64

51,

700

1,72

01,

755

1,76

01,

740

1,72

01,

710

1,72

51,

780

1,78

51,

825 1,90

5 1,99

52,

035

2,08

02,

075

2,09

52,

095

2,10

02,

095

2,12

02,

150

2,19

02,

223

2,26

62,

324

2,32

02,

330

2,34

9 2,43

42,

469

2,52

12,

519

2,43

82,

374

1,500

1,700

1,900

2,100

2,300

2,500

2,700

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

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

Square Ft

The trend toward building larger homes reversed in 2009 and 2010, affecting exposure growth beyond the decline in number of units built

The average size of completed new homes often falls in recessions (yellow bars), but historically bounces back in expansions

34

The average size of completed new homes fell by 147 square feet (5.75%) from 2008-2010. This is the largest recession-based drop in nearly four decades.

http://www.census.gov/const/www/quarterly_starts_completions.pdf

36

State Population Growth Rate Projections, 2010-2020*

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

The Mountain West region is projected to grow the most from now to 2020 (up 17.6%), followed by the South Atlantic (up 14.5%) and Pacific (up 11.2%).The Mid-Atlantic is projected to be the slowest-growing region (up 1.9%).

28.3

%

27.4

%

21.6

%

16.2

%

15.2

%

14.8

%

14.6

%

14.5

%

13.6

%

13.1

%

12.4

%

11.3

%

8.7%

2.5%

2.5%

2.3%

2.1%

2.0%

1.9%

1.6%

0.7%

0.6%

0.4%

-1.0

%

-1.5

%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

NV AZ FL

TX

UT ID NC

DE

WA

GA

OR

VA

US IL

MS LA WY

SD NE

PA NY

OH IA

ND

WV

Projected Population Growth

Highest Growth Rate States

Lowest Growth Rate States

U.S. overall: +8.7%

http://www.census.gov/population/www/projections/projectionsagesex.html

37

Average Premium forHome Insurance Policies**

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

$508$536

$593

$668

$822$791 $799 $807$804

$764

$729

$500

$550

$600

$650

$700

$750

$800

$850

$900

$950

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

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

adverse exposure trends are depressing the average homeowners insurance premium

38

70.6

52.7

42.7

41.9

41.1

41.0

38.9

37.8

37.6

36.9

36.7

35.0

35.0

34.5

33.8

32.8

32.6

31.6

31.1

30.0

29.7

29.5

28.0

27.8

27.7

05

1015202530354045505560657075

HI

LA SC RI

NM ID DE

MS FL AL

GA

CT

NC

MA

UT

NY NJ

AR

WY

MT

MO

NH

ME VA

ND

Pec

ent c

hang

e (%

)


Hawaii was the fastest growing state between

2004 and 2009

Percent Change in NPW: Homeowners, by State, 2004-2009

Top 25 States

39

26.7

26.6

24.9

24.7

24.5

24.2

23.7

23.2

23.1

22.6

22.2

22.1

22.0

20.6

19.8

19.7

19.6

19.5

19.2

19.2

18.4

16.8

16.5

12.4

11.2

0.2

0

5

10

15

20

25

30

KY

TN WA

DC VT

TX KS

NV

MN AK

MD

OK

OR

SD IA NE

CO

OH IL W

I

PA IN AZ

WV

CA MI

Pec

ent c

hang

e (%

)


Michigan was the slowest growing state

between 2004 and 2009

Percent Change in NPW: Homeowners, by State, 2004-2009

Bottom 25 States

40

US Residual Market Exposure to Loss: Can Drain Private Insurer Premium

$372.3$430.5 $419.5

$656.7

$771.9

$696.4$703.0

$292.0$244.2$221.3

$281.8

$150.0

$54.7

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: PIPSO; Insurance Information Institute

Hurricane Andrew

4 Florida Hurricanes

Katrina, Rita, and Wilma

In the 20-year Period From 1990 and 2009, Total Exposure to Loss in the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B

in 1990 to $703.0B in 2008

($ Billions)

41

Advertising Spending Trends

After and Unprecedented and Rapid Increase, Ad

Expenditures are Flattening Out

42

Advertising Expenditures by P/C Insurance Industry, 1999-2009

$2.97

$3.44

$4.12$4.35

$4.15

$2.34

$1.88$1.69$1.64$1.71$1.69

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

99 00 01 02 03 04 05 06 07 08 09

Source: SNL Financial LC.

($ Billions)

Ad spending by p/c insurers increased by 170% ($2.74 bill) from 2001 to 2008 before

easing slightly in 2009. The upward trend could

well resume as the economy improves and

direct writers seek growth and big insurers seek to maintain share.

Private Passenger Auto Accounts for the Largest Share of Advertising Expenditures. One Company Accounts for 1/6 of Total P/C Ad Spending.

43

Advertising Expenditures as a Percent of P/C Insurance Industry NPW, 1999-2009

0.70%0.77%

0.92%0.99% 0.98%

0.59% 0.58%0.51%

0.46% 0.46%0.55%

0.00%

0.25%

0.50%

0.75%

1.00%

99 00 01 02 03 04 05 06 07 08 09

Source: SNL Financial LC.

From 2003-2008 advertising as a percent

of NPW more than doubled (up 115.2%)

In dollar terms, ad spending increased in every year from 2002 to 2008.The percentage drops in 2002-03 (vs. 2001) are explained by the rapid growth in premiums in the 2002-03 “hard market” that outpaced dollar

growth in ad spending.

44

Personal Lines Profitability Analysis

Significant Variability Over Time and Across States

45

Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2009*

*Latest available.**Excluding 1992, the Hurricane Andrew, produces a homeowners RNW of 3.3%.Sources: NAIC.

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

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

US All Lines US Home US PP Auto(Percent)

Average RNW: 1990-2009*

All P-C Lines: 8.0% PP Auto: 9.1% Homeowners: 0.4%**

Pvt.Pass. Auto Has Consistently Outperformed the P-C Industry as a Whole. Homeowners Volatility is Associated Primarily With Coastal Exposure Issues

Hurricane Andrew

46

Return on Net Worth: All P-C Lines vs. Pvt. Pass. Auto, 1990-2009*

*Latest available.Sources: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

US All Lines US PP Auto(Percent)


All P-C Lines: 8.0% PP Auto: 9.1

Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13 of the 20 Years from 1990-2009 (Inclusive)

47

Return on Net Worth: Pvt. Pass. Auto vs. Homeowners, 1990-2009* (excl. 1992)

-10%

-5%

0%

5%

10%

15%

20%

25%

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

US Home US PP Auto(Percent)


Homeowners: 3.3%** PP Auto: 9.1

Pvt.Pass. Auto Profitability Has Exceeded the P-C Industry as a Whole in 13 of the 20 Years from 1990-2009 (Inclusive)

*Latest available.**Excluding 1992, the year of Hurricane Andrew. Including 1992 produces a homeowners RNW of 0.4%.Sources: NAIC.

48

18.2

14.0

13.8

13.3

12.9

11.9

11.6

11.3

11.2

11.1

11.0

10.8

10.6

10.4

10.4

10.3

10.3

10.2

10.2

9.0

8.9

8.9

8.8

8.7

8.5

0

2

4

6

8

10

12

14

16

18

20

HI VT ME DC ID NH SD MN OH NM CT RI KS IA WY ND VA AZ OR AL CA WI UT IN CO

RN

W P

PA

Sources: NAIC * latest available

Hawaii was the most profitable state for auto insurers from 2000-2009

Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2000-2009*)

Top 25 States(Percent)

49

8.5

8.3

8.1

7.9

7.8

7.7

7.7

7.6

7.6

7.3

7.2

7.2

7.1

7.0

7.0

6.8

6.7

6.7

6.4

6.1

5.5

4.9

4.7

3.6

2.9

0.8

-0.6

-0.4

-10123456789

10

NY

NE

WA

SC

AK

MD

TN IL

OK

GA

US

NJ

MO

MA

MT

AR

NC PA

WV

TX

KY

DE

MS

NV

FL

LA MI

MI

RN

W A

uto

Return on Net Worth: Pvt. Passenger Auto, 10-Year Average (2000-2009*)

*Latest avaiiable.Sources: NAIC

Michigan was the least profitable state for auto insurers from 2000-2009 (-0.6%

RNW), dragged down by rampant no-fault fraud and abuse and the Michigan

Catastrophic Claims Association.

(Percent) Bottom 25 States

50

45.0

20.8

20.1

20.0

18.7

18.6

18.5

17.4

17.2

15.7

15.5

15.2

14.7

14.4

14.3

13.9

13.7

13.5

12.0

11.9

11.9

11.214

.018.019

.0

0

5

10

15

20

25

30

35

40

45

50

HI SC RI DC CT AK UT NY NV MA DE AZ OR NC CA MT WY PA WA NJ CO NM ME VT ID

RN

W H

O

Sources: NAIC

Return on Net Worth: Homeowners Insurance, 10-Year Average (2000-2009*)

Hawaii was the most profitable state for home insurers from 2000-2009 due to the absence

of hurricanes during this period

(Percent) Top 25 States

51

9.3

5.3

5.1

4.7

4.3

2.2

1.6

0.5

-32.4

0.4

-1.6

-2.3

-3.7

-29

.0

-14

.4

-11

.8

-10

.8-8.6

-7.9

-7.1-6.9

-6.7-5.5-4.9

1.0

8.0

-35

-30

-25

-20

-15

-10

-5

0

5

10

VA MD NH WV MI US KS SD IL IA FL WI OK TX OH TN IN NE AR GA AL KY ND MO MN MS LA

RN

W H

O

Sources: NAIC

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

from 2000-2009

Bottom 25 States(Percent)

Return on Net Worth: Homeowners Insurance, 10-Year Average (2000-2009*)

56

Claim Trends in Auto Insurance

Rising Costs Held in Check by Falling Frequency:

Can That Pattern Be Sustained?

57

Bodily Injury: Severity Trend Moderating, Frequency Decline Continues

-5.4%

-3.8%-5.0%

-3.1% -3.2%

-1.1%

2.9%

4.7%5.9% 6.1%

2.2% 1.7%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010*

Severity Frequency

*For 2010, data are for the 4 quarters ending with 2010:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

Annual Change, 2005 through 2010*

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

58

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

-1.6%

-3.5%

0.8%

-3.4%

0.6%0.3%

2.9%3.6%

2.1% 2.0%

-0.3%

0.4%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2005 2006 2007 2008 2009 2010*

Severity Frequency


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

*For 2010, data are for the 4 quarters ending with 2010:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

59

Collision Coverage: Frequency and Severity Trends Have Been Favorable

-1.8%

-3.6%

2.5%

-2.6%

-1.2%-0.7%

3.9%3.1%

0.0%0.5%

-2.3%

-0.7%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2005 2006 2007 2008 2009 2010*

Severity Frequency


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

Reversed Based on Evidence from Past Recoveries*For 2010, data are for the 4 quarters ending with 2010:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

60

Comprehensive Coverage: Recent Severity Trends Favorable, Frequency is Up in 2010

-3.1%

-9.8%-6.6%

1.7% 1.5%

7.8%

15.5%

-1.4% -1.4%

12.8%

-8.2%-10.7%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2005 2006 2007 2008 2009 2010*

Severity Frequency


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

Severity, But This Factors Will Weaken as Economy Recovers*For 2010, data are for the 4 quarters ending with 2010:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute

61

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

-4.8%-5.7%

-2.7%

-6.9%

5.9% 6.4%

4.7%

2.4%

6.3% 6.4% 6.4%5.7%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010*

Severity Frequency

*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT; 2010 data are for the 4 quarters ending 2010:Q3.Source: ISO/PCI Fast Track data; Insurance Information Institute


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

62

Increase in No-Fault Claim Severity: 2004-2010*

*2009 figure is for the 4 quarters ending 2010:Q3.**Since 2006 the increase in Florida was 23.7% (average severity that year was $6,344). Sources: Insurance Information Institute research from ISO/PCI Fast Track data.

$35,865

$16,573

$8,776 $7,847$6,674$5,871

$12,136

$24,385

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Michigan New Jersey New York Florida

2004 2010*

The no-fault systems in MI, NJ, NY and FL are under stress due to rising fraud and abuse which will ultimately lead to higher premiums for drivers

+47.1%

+36.6%

+49.5% +17.6%**

63

Florida’s No-Fault Fraud Tax: Estimated Aggregate Annual Cost, 2009-2011F ($ Millions)

$945.8

$548.9

$303.8

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2009 2010E 2011F

Fra

ud

Ta

x (

$ M

illio

ns

)

*2010 estimate is based on data through Q3:2010. 2011 forecast is based on an assumed increase in pure premium of 25% (pure premium increased 27% in the 4 quarters ending with 2010:Q3). Estimates assume 11.288 million insured vehicles in FL in 2009-2011 (11.288 million is 2008 actual figure from AIPSO).Source: Insurance Information Institute calculations and research from ISO/PCI and AIPSO data.

The total fraud tax levied on Florida

vehicle owners was and estimated $549

million in 2010.

+80.7%

+72.3%

If nothing is done to address Florida’s runaway no-fault fraud problem, the

aggregate fraud tax on Florida vehicle owners

could rise to $946 in 2011

No-Fault Fraud is Costing Honest Florida Drivers Hundreds of Millions of Dollars

64

New York State No-Fault Claim Severity, 1997–2009:Q4

Sources: ISO/PCI Fast Track data; Insurance Information Institute.

$5,6

75 $6,0

63$6

,699

$8,3

47$8

,327

$7,8

88$7

,507

$8,2

34$9

,235

$8,7

27$8

,577

$7,7

73$7

,311

$6,9

58$6

,870

$6,1

56$6

,052

$5,8

20$5

,991

$5,6

15$6

,094

$5,9

14 $6,2

50$6

,269 $6

,530

$6,6

06$7

,063 $7

,323

$7,3

78$7

,297 $7

,670

$7,7

40$8

,443

$8,1

77 $8,5

07$8

,025

$8,5

62$8

,748

$8,6

90$8

,862

$5,000

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,500

$9,000

$9,500

1997

1999

1:01

1:03

2:01

2:03

3:01

3:03

4:01

4:03

5:01

5:03

6:01

6:03

7:01

7:03

8:01

8:03

9:01

9:03

No

-Fa

ult

Cla

im S

ev

eri

ty

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

No

-Fa

ult C

laim

Fre

qu

en

cy

Avg. Claim Severity

Frequency

About 20% of No-Fault Claim Costs Are Attributable to Fraud and Abuse

No-Fault Claim Severity

Avg. Claim Severity is at its 2nd Highest Level

in History = $8,862

Avg. Claim Severity Rose 63% in 5 years

after 1997 Presbyterian

Decision

Avg. Claim Severity is up 58% since 2004:Q4

65

Distribution Trends

Distribution by Channel Type Continues to Evolve

67

Personal Lines Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

80%

72 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

Direct Independent Agents

Independent agents have lost significant personal lines market share since the early 1970s. Although the trend has slowed, it may be

accelerating again.

69

P/C Insurance Industry Financial Overview

Profit Recovery ContinuesEarly Stage Growth Begins

P/C Net Income After Taxes1991–2010: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

$2

6,7

00

$2

8,3

11

-$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:Q3

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:Q3 ROAS = 6.7%

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

due mainly to $4.4B in realized capital gains vs. -$9.6B in previous

realized capital losses

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

71

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

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

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E

P/C Profitability Is Both by Cyclicality and Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

P/C Premium Growth Cycles

75

Cyclicality is Driven Primarily by the Industry’s Underwriting

Cycle, Not the Economy

76

-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 0910

E11

F

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

(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.

NWP was up 0.5% in 2010 (est.) with forecast growth of 1.4% in 2011

77

Premiums Written, Net vs. Direct, Canada, 2002-09

$29.08

$32.64

$34.40 $34.50

$37.23

$38.72$38.07

$40.33

$31.51

$35.71$36.34 $36.66

$39.49

$41.04$41.65

$42.81

$25

$30

$35

$40

$45

2002 2003 2004 2005 2006 2007 2008 2009

Net Premiums Direct Premiums

Unlike the situation in the U.S. (where premiums written dropped year-over-year for three straight years (2007-09), in Canada direct premiums written grew every year and net premiums written dropped only once (2008) in the current decade.

Sources: Best’s Aggregates & Averages, various years; Insurance Information Institute

$Canadian

Capital/PolicyholderSurplus (US)

78

Total Surplus Exhibits Little Cyclicality, While Surplus Leverage

Ratios Influence Cycle

80

Policyholder Surplus, 2006:Q4–2010: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

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

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

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2007:Q3 Peak

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%)10:Q2: +$8.7B (+1.7%)10:Q3: +$23.0B (+4.4%)

Surplus set a new record in 2010:Q3*

*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 $0.77 of

NPW—the strongest claims-paying status in its history.

Investment Performance

87

Investments Cycles Also Influence P/C Insurer Profitability

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

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.0 $39.5

$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:Q3In 2008, Investment Gains Fell by 50% Due to Lower Yields and

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

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

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

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

91

-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

War

rant

y

Surplu

s Line

s

Med

Mal

WC

Reinsu

ranc

e**

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*

EXPENSES

95

Expense Ratios Are Highly Cyclical and Contribute Deteriorating Underwriting Performance

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

21.8%22.0%21.8%

23.5%

24.5%24.7%25.0%25.2%25.1%

29.8%

28.5%

29.3%

30.5%

24.3%24.4%

23.6%

23.4%

22.7%

23.2%23.6%23.5%

29.6%

30.0%30.5%

28.4%

27.7%

28.5%

30.8%31.1%

30.8%

30.6% 30.3%

30.6%

29.4%

20%

22%

24%

26%

28%

30%

32%

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

Auto Home

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

Expenses ratios for both auto and home

are up from their lows in 2003/04

Financial Strength & Underwriting

99

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

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–2010E8

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

7 69

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

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

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

There have been very few p/c failures in recent years, mostly title insurers and small Florida

property insurers

102

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

3.6%4.0%

8.8%

7.1%

7.8%

7.2%

7.8% 13.6%

40.1%

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

Deficient loss reserves and inadequate pricing are the leading cause of insurer impairments, underscoring the effect of an inflation spurt.

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems

Misc.

Sig. Change in Business

103

Personal Lines Underwriting Trends:

Cycle, Catastrophes Are the Typical Drivers of Performance

104

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

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

95.7

99.3 99.7101.0

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: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

Cyclical Deterioration

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Lower CAT

Losses, More

Reserve Releases

105

Calendar Year Combined Ratios by Segment: 2008-2011F

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

102.4

98.9100

106

99.5

108

103.8104.5

9092949698

100102104106108110

Personal Lines Commercial Lines

2008 2009 2010P 2011F

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

performance related to the prolonged commercial soft market

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

106

Net Written Premium Growth by Segment: 2008-2011F

-0.1%

-9.4%

2.8%

-2.0%

2.5%

0.3%

-3.1%

-0.1%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Personal Lines Commercial Lines

2008 2009E 2010P 2011F

Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession

weigh on commercial lines.

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

again in 2010 and but will stabilize in 2011


Private Passenger Auto Combined Ratio: 1993–2011P

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

99

.0

98

.5

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 10E 11P

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


Homeowners Insurance Combined Ratio: 1990–2011P

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

.3

94

.2 10

0.1

89

.4 95

.7

11

7.0

10

5.6

10

3.5

99

.0

11

8.4

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 10E11P

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

Loss Activity


Economic Issues for the Next 3-5 Years

109

Growth in the Wakeof the “Great Recession”

110

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/11; Insurance Information Institute.

2.7

%

0.9

%

3.2

%

2.3

%

2.9

%

-0.7

%

0.6

%

-4.0

%

-6.8

% -4.9

%

-0.7

%

1.6

%

5.0

%

3.7

%

1.7

%

2.6

%

3.2

%

3.5

%

3.4

%

3.5

%

3.5

%

3.1

%

3.2

%

3.2

%3

.3%

4.1

%

1.1

%

1.8

%

2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

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

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 has

been severe but modest recovery is underway

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

Economic growth projections for 2011 have been revised

upward. This is a major positive for insurance demand

and exposure growth.

111

Canadian Real GDP Annual Change,2000-2010

Forecasts from Blue Chip Economic Indicators, 2/2011 issue.Sources: World Bank, World Development Indicators, I.I.I. calculations; Blue Chip

5.2%

1.8%

2.9%

1.9%

5.4%

3.0% 2.8%2.2%

0.5%

-2.5%

3.1%2.6% 2.9%

-3%

0%

3%

6%

Real GDP Growth Economic growth rates

in Canada are expected to be slightly below the

US in 2011-2012

2011 Financial Overview State Economic Growth Varied in 2009

113

Mountain, Plains states still growing the fastest

Some Southeast states growing well, but others

among the weakest

114

The Economic Storm

What the Financial Crisis and Recession Mean for the Industry’s

Exposure Base, Growth and Profitability

115

US Real GDP Growth*

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

2.7

%

0.9

%

3.2

%

2.3

%

2.9

%

-0.7

%

0.6

%

-4.0

%

-6.8

% -4.9

%

-0.7

%

1.6

%

5.0

%

3.7

%

1.7

%

2.0

%

2.3

%

2.5

%

2.7

%

3.0

%

3.2

%

4.1

%

1.1

%

1.8

%

2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

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

Demand Commercial 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 has

been severe but modest recovery is underway

The Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%

Economic growth up sharply in late 2009 with rebuilding

of inventories and stimulus. More moderate growth

expected in 2010/11 but no “double dip”

116

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

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

4.3

%1

8.6

%2

0.3

%5

.8%

0.3

%-1

.6%

-1.0

%-1

.8%

-1.0

%3

.1%

1.1

%0

.8%

0.4

%0

.6%

-0.4

%-0

.3%

1.6

% 5.6

%1

3.7

%7

.7%

1.2

%-2

.9%

-0.5

%-3

.8%

-4.4

%-3

.3%

-1.6

%

5.2

%-0

.9%

-7.4

%-6

.5% -1

.5%

1.8

%

-10%

-5%

0%

5%

10%

15%

20%

25%

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

E

Re

al N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Re

al G

DP

Gro

wth

Real NWP Growth Real GDP

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

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

117

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

118

Unemployment and Underemployment Rates: Falling Faster in 2011?

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment rate fell to 8.9%

in February

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 15.9%

in February 2011

January 2000 through February 2011, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

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

Feb 11

119

Unemployment Rate in Canada

7.6

5.9

7.8

8.7

5

6

7

8

9

Jan08

Apr08

Jul08

Oct08

Jan09

Apr09

Jul09

Oct09

Jan10

Apr10

Jul10

Oct10

Jan11

Source: www.tradingeconomics.com

January 2008 throughJanuary 2011 (%)

Unemployment peaked at 8.7% in Canada in Aug.

2009. US peak was 10.1% in Oct. 2009

Current unemployment rate in Canada is between 7.5%

and 8.0% compared to about 9% in the US

Canada’s unemployment

problem has been less severe

than the US

http://www.tradingeconomics.com/

18

67

92

13

65 1

27

42

15

-10

9-1

46

5 97

23

-12

-85 -58

-16

1-2

53

-23

0-2

57

-34

7-4

56

-54

7-7

34 -66

7-8

06 -7

07

-74

4 -64

9-3

34

-45

2-2

97 -2

15

-18

6-2

62

75

-83

16 6

2

24

15

1 61 1

17

14

31

12 1

93

12

8 16

76

82

22

15

8

(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

1

Monthly Change in Private Employment

January 2008 through February 2011* (Thousands)

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

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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

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

1.449 million for the year

222,000 private sector jobs were created in

February

http://www.bls.gov/ces/home.htm

Inflation

125

Is it a Threat to Claim Cost Severities

126

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

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.61.9 2.0 2.2 2.2

2.92.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 2/11 (forecasts).

The slack in the U.S. economy suggests that inflation should not heat upbefore 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns

Annual Inflation Rates (%)

Inflation peaked at 5.6% in August 2008 on high energy and commodity crisis. The recession and the collapse of the commodity bubble have reduced near-

term inflationary pressures

P/C Personal Insurance Claim Cost Drivers Grow Faster than the Overall CPI Suggests

Source: Bureau of Labor Statistics; Insurance Information Institute.

1.6%1.0%

8.8%

6.1%

3.3%

4.3%

3.1%3.6%

3.3%

4.3%

0%

3%

6%

9%

Overall CPI "Core" CPI InpatientHospitalServices

OutpatientHospitalServices

Physicians'Services

PrescriptionDrugs

Medical CareCommodities

LegalServices

Motor VehicleParts &

Equipment

ResidentialMaint. &Repair

Price Changes in 2010

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

127

Excludes Food and Energy

128

Catastrophic Loss –Catastrophe Losses Trends Are

Trending Adversely

129

$8

.3

$7

.4

$2

.6 $1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9 $

27

.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$7

.9

$1

00

.0

$7

.5

$2

.7

$4

.7

$2

2.9

$5

.5 $1

6.9

$0

$20

$40

$60

$80

$100

$120

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

US Insured Catastrophe Losses

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

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

$100 Billion CAT Year is Coming Eventually

First Half 2010 CAT

Losses Were Down 19% or $1.4B from

first half 2009

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

130

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2009

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.

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

3.6

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

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

Combined Ratio Points

50

100

150

200

250

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

First Half 201095 Events

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

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 – 2010Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)

Source: MR NatCatSERVICE 131© 2010 Munich Re

Thunderstorm losses have quadrupled since 1980.

First Half 2010 $3.0 Bn

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

Source: Property Claims Service, MR NatCatSERVICE 135© 2010 Munich Re

Source: Property Claims Service, MR NatCatSERVICE 136© 2010 Munich Re

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

First Half 2010 $2.4 Bn

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

Severe winter storms in early 2010 caused major

damage to energy infrastructure

138

Top 12 Most Costly Disastersin US History

(Insured Losses, 2009, $ Billions)

Sources: PCS; Insurance Information Institute inflation adjustments.

$11.3 $12.5

$18.2$22.8 $23.8

$45.3

$8.5$8.1$7.3$6.2$5.2$4.2

$0$5

$10$15$20$25$30$35$40$45$50

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

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

8 of the Top 12 Disasters Affected FL

Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US

and World History

www.iii.org

Thank you for your timeand your attention!

Download at www.iii.org/presentationsTwitter: twitter.com/bob_hartwig

Insurance Information Institute Online:

personal lines p-c insurance markets: challenges & opportunities for 2011 & beyond aaa/caa...

Documents

auto insurance premiums

auto insurance net premiums

auto home

years personal lines

homeowners insurance

auto npw

pp auto premiums

pmeslide p6466