Reasons for Optimism in the P-C Insurance Industry

Challenges & Opportunities: 2011 & BeyondProfessional Insurance Association of Ohio

Agency Management & Profitability ConferenceColumbus, OH

September 23, 2010Download 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

Presentation Outline

Reasons for Optimism, Causes for Concern

Insurance Industry Financial Overview & Outlook Profitability Premium Growth Capital & Capacity Underwriting Performance: Commercial & Personal Lines Financial/Investment Review & Outlook

Financial Strength Overview

Financial Services Reform: Impacts on the Insurance Industry

Tort System Review: Overview and Causes for Concern

Performance by Segment/Line Personal & Commercial Lines

The Global Economic Storm: Financial Crisis & Recession Crisis-Driven Exposure Issues: Personal & Commercial Lines Exposure, Growth & Profitability

Catastrophe Losses

Q&A

3

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry Economic Recovery in US is Self-Sustaining: No Double Dip Recession

Pessimism “Bubble” Persists; Negative Economic News Amplified; Positive News is Discounted Financial market volatility will remain a reality

Era of Mass P/C Insurance Exposure Destruction Has Ended But restoration of destroyed exposure will take 3+ years in US

No Secondary Spike in Unemployment or Swoon in Payrolls/WC Exposure But job and wage growth remains sluggish

Exposure Growth Will Begin in 2nd Half 2010, Accelerate in 2011

Increase in Demand for Commercial Insurance is in its Earliest Stages and Will Accelerate in 2011 Includes workers comp, commercial auto, marine, many liability coverages, D&O

Laggards: Property, inland marine, aviation

Personal Lines: Auto leads, homeowners lags

P/C Insurance Industry Will See Growth in 2011 for the First Time Since 2006

Investment Environment Is/Remains Much More Favorable Volatility, however, will persist and yields remain low

Both are critical issues in long-tailed commercial lines like WC, Med Mal, D&O

Source: Insurance Information Institute.

4

P/C Insurance Industry Capacity as of 6/30/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis As of 12/31/09 capacity was within 2% of pre-crisis high

Record Capacity, Depressed Exposures Mean that Generally Soft Market Conditions Will Persist through 2010 and Potentially into 2011

There is No Catalyst for a Robust Hard Market at the Current Time High Global First Half 2010 CAT Losses Insufficient to Trigger Hard Market

Localized insurance and reinsurance impacts are occurring, especially earthquake coverage in Latin/South America, Offshore Energy Markets, European Wind Cover

Inflation Outlook for US and Major European Economies and Japan is Tame Will temper claims inflation Deflation is highly unlikely

Financial Strength & Ratings of Global (Re)Insurance Industries Remained Strong Throughout the Financial Crisis in Sharp Contrast With Banks

Insurers Avoided the Most Draconian Outcomes in Financial Services Reform Legislation

Tort Environment in US is Beginning to Deteriorate; No Tort Reform in US Major Transformation of US Economy Underway with Major Opportunities for Insurers

through 2020 in Health, Tech, Natural Resources, Energy

Source: Insurance Information Institute.

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

5

Profitability

Historically Volatile

P/C Net Income After Taxes1991–2010:H1 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$1

6,5

31$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:H1

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:H1 ROAS = 6.3%

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010:H1 and 4.6% for 2009. 2009:H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

P-C Industry 2010:H1 profits rose $10.6B from $6.0B in 2009:H1, due mainly to $2.2B in realized

capital gains vs. -$11.1B in previous realized capital losses

7

ROE: P/C vs. All Industries1987–2009*

* Excludes Mortgage & Financial Guarantee in 2008 and 2009.Sources: ISO, Fortune; Insurance Information Institute.

-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

US P/C Insurers All US Industries

P/C Profitability IsCyclical and Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 Is Where It’s At Now

Combined Ratio / ROE

* 2009 and 2010:Q1 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.5 100.1101.0

7.5%7.3%

9.6%

15.9%

14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009* 2010:H1*0%

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 generated a 7% ROE in 2009,10% in 2005 and 16% in 1979

11

Profitability in Ohio P/C Insurance Markets

Analysis by Line and Nearby State Comparisons

12

RNW All Lines: OH vs. U.S., 1999-2008

Sources: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

99 00 01 02 03 04 05 06 07 08

US All Lines OH All Lines

(Percent)

P/C profitability was higher on average in OH vs. the US overall between 1999-2008

OH: 8.5%

US: 7.0%

13

RNW PP Auto: OH vs. U.S., 1999-2008

Sources: NAIC.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

99 00 01 02 03 04 05 06 07 08

US PP Auto OH PP Auto

(Percent)

Pvt. Pass. Auto profitability was higher on average in

OH vs. the US overall between 1999-2008

OH: 11.2%

US: 7.5%

14

RNW Comm. Auto: OH vs. U.S.,1999-2008

Sources: NAIC.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

99 00 01 02 03 04 05 06 07 08

US Comm Auto OH Comm Auto

(Percent)

Commercial Auto profitability was higher on average in OH vs. the US

overall between 1999-2008

OH: 9.7%

US: 7.9%

15

RNW Commercial Multi-Peril:OH vs. US: 1999-2008

Sources: NAIC.

-10%

-5%

0%

5%

10%

15%

20%

99 00 01 02 03 04 05 06 07 08

US Comm M-P OH Comm M-P

(Percent)

Commercial MP profitability was higher on average in

OH vs. the US overall between 1999-2008

OH: 9.2%

US: 7.4%

16

RNW Homeowners: OH vs. U.S.,1999-2008

Sources: NAIC.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

99 00 01 02 03 04 05 06 07 08

US HO OH HO

(Percent)

Homeowners profitability was lower on average in

OH vs. the US overall between 1999-2008

OH: 2.6%

US: 4.6%

All Lines: 10-Year Average RNW OH & Nearby States

6.3%

6.7%

7.0%

7.9%

8.5%

6.2%

6.4%

0% 2% 4% 6% 8% 10%

Ohio

Indiana

U.S.

Illinois

Michigan

Pennsylvania

Kentucky

Source: NAIC, Insurance Information Institute

1999-2008

PP Auto: 10-Year Average RNW OH & Nearby States

6.5%

7.9%

7.5%

8.8%

11.1%

6.3%

1.1%

0% 2% 4% 6% 8% 10% 12%

Ohio

Indiana

U.S.

Illinois

Michigan

Pennsylvania

Kentucky

Source: NAIC, Insurance Information Institute

1999-2008

Comm. Auto: 10-Year Average RNW OH & Nearby States

7.0%

8.3%

7.9%

9.3%

9.7%

5.2%

9.5%

0% 2% 4% 6% 8% 10% 12%

Ohio

Indiana

U.S.

Illinois

Michigan

Pennsylvania

Kentucky

Source: NAIC, Insurance Information Institute

1999-2008

Comm. M-P: 10-Year Average RNW OH & Nearby States

10.1%

9.3%

7.4%

4.6%

9.2%

8.1%

11.1%

0% 2% 4% 6% 8% 10% 12%

Ohio

Indiana

U.S.

Illinois

Michigan

Pennsylvania

Kentucky

Source: NAIC, Insurance Information Institute

1999-2008

HO: 10-Year Average RNW OH & Nearby States

14.0%

2.1%

4.6%

-6.6%

-2.6%

-3.1%

3.6%

-10% -5% 0% 5% 10% 15% 20%

Ohio

Indiana

U.S.

Illinois

Michigan

Pennsylvania

Kentucky

Source: NAIC, Insurance Information Institute

1999-2008

Avg. Expenditure on Private Passenger Auto Insurance, OH and Surrounding States, 2007*

$928

$820$795

$723 $720

$628 $618

$500

$550

$600

$650

$700

$750

$800

$850

$900

$950

MI PA US IL KY OH IN

*Latest available.Source: NAIC; Insurance Information Institute.

Average auto insurance expenditures in OH ranked

41st in the U.S.

Avg. Expenditure on Homeowners Insurance, OH and Surrounding States, 2007*

$822

$721$700

$689

$647

$578

$540

$500

$550

$600

$650

$700

$750

$800

$850

US MI IL PA IN KY OH

*Latest available.Source: NAIC; Insurance Information Institute.

Average homeowners insurance expenditures in OH ranked 45th in the U.S.

Financial Services Reform

24

Insurers Are Impacted, But Not Significantly

25

Financial Services Reform:What does it mean for insurers?

Systemic Risk and Resolution Authority

Creates the Financial Stability Oversight Council and the Office of Financial Research

Imposes heightened federal regulation on large bank holding companies and “systemically risky” nonbank financial companies, including insurers

Federal Insurance Office (FIO)

Establishes the FIO (while maintaining state regulation of insurance) within the Department of Treasury, headed by a Director appointed by the Secretary of Treasury

FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis

CONCERN: FIO morphs into quasi/shadow or actual regulator

Surplus Lines/Reinsurance

Title V of the Dodd-Frank bill includes, as a separate subtitle, the Nonadmitted and Reinsurance Reform Act (NRRA), which eliminates regulatory inefficiencies associated with surplus lines insurance and reinsurance

The Dodd Frank Wall Street Reform and Consumer Protection Act

Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WV

VA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI C

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

= A= B= C= D= F= NG

Source: Heartland Institute, May 2010

A- A-

A-

B-

B-

B-

B-

B-

B-B-

B-B-

B-

B-

B-

B-

B- C-

C-

C-

C -

C-

D-D-

A

A

A

A

B+

B+

B+

B

B

B

B

B

B

C+

C+

C

D+

D+D+

D

NG

NG

D F

F

2010 Property and Casualty InsuranceReport Card

Not Graded: District of ColumbiaMississippiLouisiana

Critical Differences Between P/C Insurers and Banks

36

Superior Risk Management Model and Low Leverage Make a Big Difference

37

How P/C Insurance Industry Stability Has Benefitted Consumers

Bottom Line:

Insurance markets – unlike banking – are operating normally

The basic function of insurance – the orderly transfer of risk from client to insurer – continues uninterrupted

This means that insurers continue to: Pay claims (whereas 287 banks have gone under as of 9/10/10)

– The promise is being fulfilled

Renew existing policies (banks are reducing and eliminating lines of credit)

Write new policies (banks are turning away people and businesses who want or need to borrow)

Develop new products (banks are scaling back the products they offer) Compete intensively (banks are consolidating, reducing consumer choice)

Source: Insurance Information Institute

Shifting Legal Liability & Tort Environment

41

Is the Tort PendulumSwinging Against Insurers?

42

Important Issues & Threats Facing Insurers: 2010–2015

Source: Insurance Information Institute

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

No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration

Erosion of recent reforms is a certainty (already happening)

Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability

Torts twice the overall rate of inflation

Influence personal and commercial lines, esp. auto liability

Historically extremely costly to p/c insurance industry

Leads to reserve deficiency, rate pressure

Emerging Tort Threat

46

Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical

$0

$50

$100

$150

$200

$250

$300

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

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)

* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010

2009–2010 Growth in Tort Costs as % of GDP is Due in

Part to Shrinking GDP

Business Leaders Ranking of Liability Systems in 2009*

Best States

1. Delaware

2. North Dakota

3. Nebraska

4. Indiana

5. Iowa

6. Virginia

7. Utah

8. Colorado

9. Massachusetts

10. South Dakota

Worst States

41. New Mexico

42. Florida

43. Montana

44. Arkansas

45. Illinois

46. California

47. Alabama

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2009 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2009

North Dakota Massachusetts South Dakota

Drop-offs

Maine Vermont Kansas

Newly Notorious

New Mexico Montana Arkansas

Rising Above

Texas South Carolina Hawaii

Midwest/West has mix of good and bad states.

48

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

New MexicoAppellate

Courts

Watch List

California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley,

TX

Dishonorable Mention

AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme

Judicial Court Sacramento County

New JerseyAtlantic County (Atlantic City)

New York City

Financial Strength & Ratings

62

Industry Has Weathered the Storms Well

P/C Insurer Impairments, 1969–20098

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 65

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

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

5 of the 11 are Florida companies (1 of these

5 is a title insurer)

66

Reasons for US P/C Insurer Impairments, 1969–2008

38.1%

14.3%8.1%

7.6%

7.9%

7.0%

9.1%

4.2%

3.7%

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.

Investment Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/In-adequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems

Misc.

Sig. Change in Business

P/C Premium Growth Primarily Driven by the

Industry’s Underwriting Cycle, Not the Economy

67

68

-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

10F

Soft Market Appears to Persist 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 flat with 0.0% growth in 10:H1 vs. -4.4% in 09:H1

69

Average Expenditures on Auto Insurance

$651$668

$691$705

$726

$786

$830$842

$831$816

$795$816

$844

$878

$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 Increased2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)

* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

71

Average Premium forHome Insurance Policies**

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

$508$536

$593

$668

$822 $835$854

$879

$804

$764

$729

$500

$550

$600

$650

$700

$750

$800

$850

$900

$950

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

72

Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2010)

-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% -1

1.0

%

-6.4

% -5.1

%

-4.9

%

-5.8

%

-5.6

%

-5.3

%

-6.4

%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

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

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

KRW Effect

Magnitude of Price Declines Shrank

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

Performance, Higher Cat Losses and

Costlier Reinsurance

(Percent)

Market Remains Soft as Capital Restored and

Underwriting Losses Remain Modest

74

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q2

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

Percentage Change (%)

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

Underwriting Losses Remain Modest

Trough = 2007:Q3 -13.6%

KRW Effect

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since

Peak = 2001:Q4 +28.5%

Capital/PolicyholderSurplus (US)

76

Shrinkage, but Not Enoughto Trigger Hard Market

78

Policyholder Surplus, 2006:Q4–2010:Q2

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

$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

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2009:Q1 Trough

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%)10:Q2: -$10.2B (-1.9%)

Surplus set a new record in 2010:Q1*

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

81

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute

3.3%

9.6%

6.9%

10.9%

6.2%

13.8%

16.2%

0%

3%

6%

9%

12%

15%

18%

6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Overthe Past 20+ Years

(Percent)

Merger & Acquisition

83

Barriers to Consolidation Will Diminish in 2010

84

U.S. P/C Insurance-RelatedM&A Activity, 1988–2009

$2$5

$19

$1 $0

$20

$0

$9

$35

$14$16

$4

$56

$31

$8$12

$2$3 $3 $5$6

$40

$0

$10

$20

$30

$40

$50

$60

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

Tra

ns

ac

tio

n V

alu

e (

$ B

illio

n)

0

20

40

60

80

100

120

140

Nu

mb

er o

f Tra

ns

ac

tion

s

Transaction Values

Number of Transactions

Note: U.S. Company was the acquirer and/or target.

Source: Conning Research & Consulting.

2010: No Mega Deals So Far, Despite Record Capital, Slow Growth and Improved

Financial Market Conditions

$ Value of Deals Down 78% in 2009, Volume Up 7%

Investment Performance

85

Investments Are a PrincipleSource of Declining Profitability

Property/Casualty Insurance Industry Investment Gain: 1994–2010:H11

$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

$25.8

$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:H1In 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 Are Recovering So Far 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:H1 gain was $12.5B

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

88

Treasury Yield Curves: Pre-Crisis (July 2007) vs. August 2010

0.15% 0.16% 0.19% 0.26%0.52%

2.10%

2.70%

4.82% 4.96% 5.04% 4.96% 4.82% 4.82% 4.88% 5.00% 4.93% 5.00%5.19%

1.47%

0.78%

3.80%3.52%

0%

1%

2%

3%

4%

5%

6%

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

August 2010 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve is near its most depressed level in at least 45 years. Investment

income is falling as a result

Stock Dividend Cuts Have Further Pressured Investment Income

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

90

-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*

92

Underwriting Trends – Financial Crisis Does Not

Directly Impact Underwriting Performance: Cycle, Catastrophes

Were 2008’s Drivers

93

P/C Insurance Industry Combined Ratio, 2001–2010:H1*

* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:H1=101.7 Sources: A.M. Best, ISO.

95.7

99.3 100.1101.0

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:H1

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

Underwriting Gain (Loss)1975–2010:H1*

* Includes mortgage and financial guarantee insurers.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 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

The industry recorded a $5.1B underwriting

loss in 2010:H1 compared to $2.1B in

2009:H1

Cumulative underwriting deficit from 1975 through

2009 is $445B

($ Billions)

95

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$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

E

11

E

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, 1992–2011E

Reserve Releases Are Continuing Strong in 2010 But Should Begin to Taper Off in 2011

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

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

96

Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1

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

10

5.6

10

7.8

11

0.1 1

15

.9

10

7.3

10

0.1

98

.3 10

0.9

92

.4 95

.5

10

5.1

10

1.9 10

5.9

11

4.7

10

7.8 11

1.8

10

7.4

10

8.3

10

5.3 10

9.2

10

9.2

11

0.0

11

2.3

10

0.8

96

.6

96

.0

10

0.6

93

.9 97

.4

10

5.5

10

5.7 10

9.4

11

5.7

10

6.9

10

8.4

10

6.4

10

5.8

10

1.6

80

85

90

95

100

105

110

115

120

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

Calendar Year Accident Year

Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases

98

Performance by Segment:Commercial/Personal Lines

99

Calendar Year Combined Ratios by Segment: 2008-2012F

Sources: A.M. Best (historical) Conning forecasts for 2010 - 2012); Insurance Information Institute.

101.799.9

101.9103.7

100.9

103.5

100.2

102.5

107.2

103.6

9092949698

100102104106108110

Personal Lines Commercial Lines

2008 2009E 2010P 2010F 2010F

Overall deterioration in 2010 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

100

Net Written Premium Growth by Segment: 2008-2012F

0.6%

-7.9%

3.6%

-0.7%

5.2% 4.8%5.1% 5.8%

-4.0%

-0.7%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Personal Lines Commercial Lines

2008 2009E 2010P 2011F 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 will show growth in 2010 while commercial lines is expected to continue to shrink

Sources: A.M. Best (historical) Conning forecasts for 2010 - 2012); Insurance Information Institute.

Insurance, Monopoly and Workers Compensation: in Ohio

101

What Does Economics Have to Say About Monopoly in Workers Compensation

Insurance Markets ?The Debate Over WC in Ohio

103

Rationale for Government Monopoly & The Standard Monopoly Critique Governments Do Not Create or Sanction Monopolies for the Purpose of Wealth Creation

Governments Create Monopolies When They Believe the Public Interest Is Being Served To provide a necessary service that otherwise would be unavailable

To provide a service that otherwise would be unaffordable to most

To create an unavoidable service (e.g., toll road)

Any Level of Government Can Create a Monopoly: Federal, State, Local

Standard Critique of Monopoly Monopolies (Including Government Monopolies) Produce Products and Services that

Are of Inferior Quality Due to the fact that the monopolist has no market-based incentive to provide high-quality service or to

improve

Market share and finances are guaranteed by the government

No external benchmark for performance

In contrast, competition drives sellers to improve/innovate or lose market share

The Quality-of-Product Issue is One of the Most Frequently Leveled Criticisms Against Government Monopolies Examples: DMVs, highway maintenance, education, sanitation, public safety

104

Competition and Workers Compensation in the 21st Century: Market Observations

46 or the 50 State Allow Competition in their Worker Comp Markets Means most states believe competition in WC markets is feasible and desirable Also implies that insurance departments can adequately regulate WC market

764 Insurers (Comprised of 314 Insurance Groups) Wrote Workers Coverage in 2009 By U.S. Dept. of Justice standards, the WC market in every non-monopolistic fund state fits the

definition of “competitive” (no antitrust concerns) Even the largest WC carrier had only an 11% market share nationally in 2009

Barriers to Entry in Workers Compensation Are Low New insurers can enter WC markets with relative ease

Many Insurers Compete in States Near/Like Ohio IN: 88; PA: 85; IL: 95, MI: 62; WI: 82 If OH were competitive today, 65-85 private insurers would likely be writing coverage

No Traditional Economic Criteria that Would Justify the Existence of Monopoly Exist in 2010 In 1910, the situation was different

Residual Market Shares Are Very Small and Are Shrinking Nationally, WC residual market share was just 5% of DPW in 2009 (NCCI states) Combined underwriting loss of these states was just $75 million in 2009

Where Will the Growth in WC Exposure Come From?

105

Industry and Occupation Growth Analysis

106

Fastest Growing Occupations, 2008–2018:Health/Science/Tech Dominate

Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute

OccupationsPercent change

Number of

new jobs(in thousands)

Wages (May 2008 median) Education/training category

Biomedical engineers 72 11.6 $ 77,400 Bachelor's degree

Network systems and data communications analysts

53 155.8 71,100 Bachelor's degree

Home health aides 50 460.9 20,460 Short-term on-the-job training

Personal and home care aides 46 375.8 19,180 Short-term on-the-job training

Financial examiners 41 11.1 70,930 Bachelor's degree

Medical scientists, except epidemiologists

40 44.2 72,590 Doctoral degree

Physician assistants 39 29.2 81,230 Master's degree

Skin care specialists 38 14.7 28,730 Postsecondary vocational award

Biochemists and biophysicists 37 8.7 82,840 Doctoral degree

Athletic trainers 37 6.0 39,640 Bachelor's degree

Physical therapist aides 36 16.7 23,760 Short-term on-the-job training

Dental hygienists 36 62.9 66,570 Associate degree

Veterinary technologists and technicians

36 28.5 28,900 Associate degree

Dental assistants 36 105.6 32,380 Moderate-term on-the-job training

Computer software engineers, applications

34 175.1 85,430 Bachelor's degree

Medical assistants 34 163.9 28,300 Moderate-term on-the-job training

Physical therapist assistants 33 21.2 46,140 Associate degree

Veterinarians 33 19.7 79,050 First professional degree

Self-enrichment education teachers

32 81.3 35,720 Work experience in a related occupation

Compliance officers, except agriculture, construction, health and safety, and transportation

31 80.8 48,890 Long-term on-the-job training

SOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook

WC exposure growth the fastest in the health, science and tech areas

107

Occupations with Largest Numerical Growth, 2008–2018: Health, Services Dominate

Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute

Dollar growth in WC exposures should grow the most (at current rate levels) in the health and services industries

Occupations

Number of

new jobs(in thousands) Percent change

Wages (May 2008 median) Education/training category

Registered nurses 581.5 22 $ 62,450 Associate degree

Home health aides 460.9 50 20,460 Short-term on-the-job training

Customer service representatives 399.5 18 29,860 Moderate-term on-the-job training

Combined food preparation and serving workers, including fast food

394.3 15 16,430 Short-term on-the-job training

Personal and home care aides 375.8 46 19,180 Short-term on-the-job training

Retail salespersons 374.7 8 20,510 Short-term on-the-job training

Office clerks, general 358.7 12 25,320 Short-term on-the-job training

Accountants and auditors 279.4 22 59,430 Bachelor's degree

Nursing aides, orderlies, and attendants

276.0 19 23,850 Postsecondary vocational award

Postsecondary teachers 256.9 15 58,830 Doctoral degree

Construction laborers 255.9 20 28,520 Moderate-term on-the-job training

Elementary school teachers, except special education

244.2 16 49,330 Bachelor's degree

Truck drivers, heavy and tractor-trailer

232.9 13 37,270 Short-term on-the-job training

Landscaping and groundskeeping workers

217.1 18 23,150 Short-term on-the-job training

Bookkeeping, accounting, and auditing clerks

212.4 10 32,510 Moderate-term on-the-job training

Executive secretaries and administrative assistants

204.4 13 40,030 Work experience in a related occupation

Management analysts 178.3 24 73,570 Bachelor's or higher degree, plus work experience

Computer software engineers, applications

175.1 34 85,430 Bachelor's degree

Receptionists and information clerks

172.9 15 24,550 Short-term on-the-job training

Carpenters 165.4 13 38,940 Long-term on-the-job trainingSOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook

117

The Economic Storm

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

Exposure Base, Growth and Profitability

118

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 7/10; 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

%

1.6

%

1.8

%

2.3

%

2.5

%

2.8

%

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

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”

120

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

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 9/10; 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 (%)

121

Will Future Tax Policy Impact P/C Insurance Industry Exposure

and Growth?

Various Tax Proposals for 2011 Could Have Significant Impacts on the P/C Insurance Industry

for Years to Come

Potential Impacts of Current Federal Tax Proposals on P/C Insurance Industry

Sources: Proposals from Tax Policy Center; P/C discussion is Insurance Information Institute research.

Proposal Potential P/C Insurance Industry Impact P/C Lines that Benefit

100% Expensing of New Investment in Plant & Equipment in 2011 and Continuation of Bonus Depreciation

Could produce a 5-10% surge in investment in physical plant and equipment in 2011 which will need to be insured immediately. Although the proposal only “steals” investment from the future, this provides a permanent benefit to commercial insurers since insurance coverage must be purchased sooner and be maintained. New construction activity boosts WC and surety.

•Commercial Property•Construction•Commercial Liability•Commercial Auto•Specialty Lines•Excess & Surplus•Workers Comp•Surety•Reinsurance

Reinstate 36% and 39.6% Rates for High Income Taxpayers >$250K

Potential damage to new/small business formation and growth. Weakness in these areas has hurt p/c insurance exposure and tax hikes could depress insurance exposure in this segment

•None

Continue 2001 and 2003 Tax Cuts for All Taxpayers

Should produce an environment that more beneficial to recovery in small business segment & associate insurance exposures

•Small Business Commercial Lines•Personal Lines

Potential Impacts of Current Federal Tax Proposals on P/C Insurance Industry (cont’d)

Proposal Potential P/C Insurance Industry Impact P/C Lines that Benefit

Impose 20% Tax Rate for Capital Gains and Dividends for High Income Taxpayers

The increase in dividends and capital gains taxes makes private investment less attractive. Under current law the rate is 15%. Additional taxes on investment would presumably result in a marginal but negative impact on p/c insurance exposure.

•None

Payroll Tax Holiday

Reducing the cost of hiring workers would theoretically reduce the cost of employment and should spark hiring, increasing overall employment and payrolls

•Workers comp

Limit Value of Itemized Deductions to 28% for High Income Taxpayers

Will have an unambiguously negative impact on charitable giving. Nonprofit sector will be negatively impacted.

•None (Commercial lines products Designed for NPOs would be negatively impacted; This is a large p/c market.)

Sources: Proposals (except Payroll Tax Holiday) from Tax Policy Center; P/C discussion is Insurance Information Institute research.

124

Regional Differences Will Significantly Impact P/C Markets

Recovery in Some Areas Will Begin Years Ahead of Others

and Speed of Recovery Will Differ by Orders of Magnitude

125

State Economic Growth Varied Tremendously in 2008

US Bureau of Economic Analysis

Highest Quintile

Fourth Quintile

Third Quintile

Second Quintile

Lowest Quintile

Far West0.6

Rocky Mountain2.2

Southwest1.7

Plains2.0 Great Lakes

-0.4

New England1.0

Mideast1.3

Southeast0.0

US = 0.7

WA2.0

OR1.6

CA0.4

NV-0.6

ID0.0

MT1.8

WY4.4

UT1.4 CO

2.9

AZ-0.6 NM

2.0

TX2.0

OK2.7

KS2.2

NE1.3

SD3.5

ND7.3 MN

2.0

IA2.1

MO1.3

WI0.7

IL0.3

MI-1.5

IN-0.6

OH-0.7

NY1.6

PA1.1

NJ0.6

MD1.3

DE-1.6

DC3.0VA

1.3

WV2.5

KY-0.1

NC0.1

SC0.6

TN0.5

AR0.7

LA0.3

MS1.7

AL0.7

GA-0.6

FL-1.6

AK-2.0

HI0.7

ME1.4

NH1.8

VT1.7 MA

1.9

RI-0.9CT

-0.4

Mountain, Plains States Growing the Fastest

Percent Change in Real GDP by State, 2007–2008

128

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

129

Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilizing in 2010?

2

4

6

8

10

12

14

16

18

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

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Aug10

Unemployment rate was 9.6% in

August

Unemployment peaked at 10.1%

in Oct. 2009, highest monthly rate since 1983.

Peak rate in the last 30 years: 10.8% in Nov -

Dec 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in Oct 2009; Stood at 16.7% in July

2010

January 2000 through August 2010, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

130

US Unemployment Rate

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

% 6.1

%

6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

9.7

%

9.7

%

9.6

%

9.5

%

9.4

%

9.2

%

9.0

%9.6

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

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

Rising unemployment eroded payrolls

and workers comp’s exposure base.

Unemployment likely peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/10); Insurance Information Institute

2007:Q1 to 2011:Q4F*

Unemployment forecasts remain stubbornly high

through 2011

132

Unemployment Rates Vary Widelyby State and Region: July 2010*

14.3

%

13.1

%

6.5%

4.7%

4.4%

3.6%

8.9%

10.6

%12.3

%

10.2

%7.

8%

6.8%

10.3

%

6.8%

9.2%

10.3

%

8.0%

6.7%7.

3%7.

2%

8.8%

8.2%

8.2%

6.9%

9.6%

0%

3%

6%

9%

12%

15%

AZ

NM TX OK ID CO UT

MT

WY

NV

CA

OR

WA MI IL O

H IN WI

MO

MN IA KS NE

SD

ND

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for July 2010, seasonally adjusted.

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

Southwest Mountain

Far West

Great Plains

Great Lakes

Unemployment in July was far

above average in OH, 10.3% vs.

9.5% nationally

133

Unemployment Rates Vary Widelyby State and Region: July 2010* (cont’d)

11.5

%10

.8%

10.8

%9.

9%9.

9%9.

8%9.

8%9.

7%8.

6%7.

4%7.

2%7.

0%

9.7%

9.3%

8.4%

8.2%

7.1%

11.9

%9.

0%8.

9%8.

1%6.

0%5.

8%

7.7%

6.3%

0%

3%

6%

9%

12%

15%

FL MS

SC

GA KY

TN NC AL

WV AR LA VA NJ

PA DE

NY

MD RI

MA CT

ME

VT

NH

AK HI

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for July 2010, seasonally adjusted.

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

Southeast Mid-Atlantic New England

134

Monthly Change Employment*-7

2-1

44

-12

2-1

60

-13

7-1

61

-12

8-1

75

-32

1-3

80

-59

7-6

81

-77

9-7

26

-75

3-5

28 -3

87

-51

5 -34

6 -21

2-2

25

-22

46

4-1

09

14 39

20

8 31

3 43

2-1

75 -5

4-5

4

-1,000

-800

-600

-400

-200

0

200

400

600

Jan

08

Fe

b 0

8M

ar

08

Ap

r 0

8M

ay

08

Jun

08

Jul 0

8A

ug

08

Se

p 0

8O

ct 0

8N

ov

08

De

c 0

8Ja

n 0

9F

eb

09

Ma

r 0

9A

pr

09

Ma

y 0

9Ju

n 0

9Ju

l 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 1

0A

ug

10

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

*Estimate based on Reuters poll of economists.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Job Losses Since the Recession Began in Dec. 2007 Peaked at 8.4 Mill in Dec. 09; Stands at 7.7 Million Through August 2010;

14.9 Million People are Now Defined as Unemployed

January 2008 through August 2010* (Thousands)

The job gain and loss figures in 2010 are severely distorted by the hiring and

termination of temporary Census workers. So far in 2010, 763,000 private sector jobs

have been created.

144

Insurance Industry Employment Trends

Soft Market, Difficult Economy, Outsourcing, Productivity

Enhancements and Consolidation Have Contributed

to Industry’s Job Losses

145

U.S. Employment in the DirectP/C Insurance Industry: 1990–2010*

*As of July 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Thousands

460

480

500

520

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

As of July 2010, P/C insurance industry employment was down by 26,900 or 5.5% to 464,200 since the

recession began in Dec. 2007 (compared to overall US employment decline of 7.2%)

149

U.S. Employment in Insurance Agencies & Brokerages: 1990–2010*

Thousands

500

550

600

650

700

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of July 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

As of July 2010, employment at insurance agencies and

brokerages was down by 47,900 or 7.0% to 631,700 since the

recession began in Dec. 2007 (compared to overall US

employment decline of 7.2%)

Crisis-Driven Exposure Drivers

152

Economic Obstaclesto Growth in P/C Insurance

153

16.9

16.5

16.1

13.1

10.3

11.5

12.7

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 10F 11F

(Millions of Units)

Auto/Light Truck Sales, 1999-2011F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/10); Insurance Information Institute.

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

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

2010-11 is still far below 1999-2007 average of 17

million units

Sharply lower auto sales will have a smaller effect on auto insurance

exposure level than problems in the housing market will on home insurers

“Cash for Clunkers” generated about $300M in net new personal auto premiums

154

(Millions of Units)

New Private Housing Starts, 1990-2011F

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

0

0.5

6

0.6

0 0.7

6

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 10F11F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (9/10); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners InsurersDue to Weak Home Construction Forecast for 2010-2011.

Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged 34% from 2005-2007; drop

through 2009 was 72% (est.); 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

159

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

3729

,059

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 0910

:H1

Business Bankruptcy Filings,1980-2010:H1

Source: American Bankruptcy Institute; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines. There Are Some Preliminary Indications that Business

Bankruptcies Are Beginning to Decline.

There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:H1

bankruptcies totaled 29,059, down 4% from H1:2009, but still very high by historical standards.

% Change Surrounding Recessions

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

160

Private Sector Business Starts,1993:Q2 – 2009:Q4*

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

199

191 19

317

117

716

918

0

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

Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure

*Latest available as of September 12, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

(Thousands)

180,000 businesses started in 2009:Q4, the best quarter in 2009. 2009 was the slowest year for new

business starts since 1993.

66%

68%

70%

72%

74%

76%

78%

80%

82%

Ma

r 0

1

Ju

n 0

1

Se

p 0

1

De

c 0

1

Ma

r 0

2

Ju

n 0

2

Se

p 0

2

De

c 0

2

Ma

r 0

3

Ju

n 0

3

Se

p 0

3

De

c 0

3

Ma

r 0

4

Ju

n 0

4

Se

p 0

4

De

c 0

4

Ma

r 0

5

Ju

n 0

5

Se

p 0

5

De

c 0

5

Ma

r 0

6

Ju

n 0

6

Se

p 0

6

De

c 0

6

Ma

r 0

7

Ju

n 0

7

Se

p 0

7

De

c 0

7

Ma

r 0

8

Ju

n 0

8

Se

p 0

8

De

c 0

8

Ma

r 0

9

Ju

n 0

9

Se

p 0

9

De

c 0

9

Ma

r 1

0

Ju

n 1

0

Recovery in Capacity Utilization is a Positive Sign for Insurance Exposure

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 165

Percent of Capacity Utilized (Manufacturing, Mining, Utilities)

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the demand for insurance

Manufacturing capacity stood at

74.8% in July 2010, above the June 2009 low of 68.2% but well below the pre-crisis

peak of 80%+

Recession began December 2007

167

Year-Over-Year Change in Quarterly USState Tax Revenues, Inflation Adjusted

Source: US Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/.

2.4

%4

.7%

5.6

% 9.9

%9

.5%

4.4

%1

.8%

0.4

%-1

.3%

-1.7

%-3

.0%

-7.6

%-1

0.7

%0

.0%

1.6

%-0

.6%

0.1

% 4.0

%4

.7%

5.7

% 8.2

%3

.4% 6.0

%7

.0%

12

.4%

6.6

%4

.2%

3.7

% 6.3

%2

.6%

1.3

%3

.2% 5.5

%3

.1%

3.6

%2

.6% 5.4

%2

.8%

-3.9

%

-10

.9%

-4.1

%2

.5%

2.2

%

-16

.4%-11

.6%

2.4

%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1Q

99

2Q

99

3Q

99

4Q

99

1Q

00

2Q

00

3Q

00

4Q

00

1Q

01

2Q

01

3Q

01

4Q

01

1Q

02

2Q

02

3Q

02

4Q

02

1Q

03

2Q

03

3Q

03

4Q

03

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

States Revenues Were Up 2.2% in Q2 2010, the 2nd Consecutive Quarter of Revenue Increase. Public Infrastructure Spending is Still Likely to Remain

Depressed, Dampening Related Insurance Exposures and Demand.

Nationwide, state-tax collections for fiscal year 2009 declined by a record

$63 billion, or 8.2 percent from the previous year. That loss is roughly twice the amount states gained in fiscal relief

from the federal stimulus package. Receipts now beginning to recover.

State tax revenues are beginning a slow recovery in 2010

170

Mounting Pressure on Claim Cost Severities?

Inflation Trends:Concerns Over Stimulus Spending

and Monetary Policy

171

Annual Inflation Rates(CPI-U, %), 1990–2011F

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

1.6 1.5

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 10F11F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 9/10 (forecasts).

There is So Much Slack in the US Economy Inflation Should Not Be a Concern Through 2010/11, but Deficits and Monetary Policy 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 inflationary pressures

P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests

Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.

-0.4%

2.7% 3.0% 3.1%3.8%

4.3%

5.5%6.2%

-2%

0%

2%

4%

6%

8%

OverallCPI

LegalServices

US TortCosts

MedicalCare

MotorVehicleBodyWork

BodilyInjury

Severity

WC MedSeverity

No-FaultClaim

Severity

(Percent)

Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely

172

179

Primary Causesand Major Bouts of DeflationDeflation is:

A falling general price levelNote: this is different from

A fall in the rate of increase of the general price level; This is called disinflation

A fall in the prices of some items or category of itemsFor a prolonged period That is expected to continue indefinitely

Deflation results from some or all of:A surge in productivity, generally from technological innovationA steep and prolonged drop in the money supplyA steep and prolonged recession

Note: this is different from a fall in the rate of increase of the price level

Major US Bouts of Deflation1920-22 1930-33

Sources: http://www-personal.umich.edu/~alandear/glossary/d.html; http://en.wikipedia.org/wiki/Deflation; I.I.I.

181

What History Teaches UsAbout Deflation

and the P-C Industry

182

1920-1950: Inflation, Deflation andthe P-C Industry’s Combined Ratio*

85

90

95

100

105

110

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

12

14

16

18

20

22

24

26

Combined Ratio Price Index

*From 1920-1934, stock companies onlySources: Best’s Aggregates & Averages; http://www.rateinflation.com/consumer-price-index/usa-historical-cpi.php?form=usacpi

From 1930 to 1933 the Price Level Dropped 24%

Combined Ratio Price Index

(1982-84 = 100)

From Year-end 1929 Through 1932, the Industry’s Combined Ratio Rose from 96.3 to 104.9 as the CPI Dropped. But from 1933 into the 1950s, the Combined Ratio

Remained Below 100 Even as Prices Slowly Rose, Then Shot Up after WWII.

Declining CR Almost Completely a Result of Sharply

Lower Loss/LAE Ratio

183

1920-1950: Inflation, Deflation andP-C Industry Profitability*

-5%

0%

5%

10%

15%

1920

1921

1922

1923

1924

1925

1926

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

12

14

16

18

20

22

24

26

ROAS Price Index

*stock companies onlySources: Best’s Aggregates & Averages; I.I.I.; ; http://www.rateinflation.com/consumer-price-index/usa-historical-cpi.php?form=usacpi

From 1930 to 1933 the Price Level Dropped 24%

The Significant Deflation from 1930-32 Punished the Industry’s ROAS, But an Improving Economy (and Slight Inflation) Helped Achieve

ROAS in Double Digits in 1935-36.

From 1930-32 ROAS was below 1.2%, but was 5.1% in 1933 and

10% or higher in 1935-36

Combined Ratio Price Index

(1982-84 = 100)

185

Catastrophic Loss –Catastrophe Losses Trends Are

Trending Adversely

186

$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

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 192© 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 193© 2010 Munich Re

Source: Property Claims Service, MR NatCatSERVICE 194© 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

197

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

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