beyond the crisis: the p/c insurance in the aftermath of the … · 2014-06-13 · beyond the...

Beyond the Crisis: The P/C Insurance in the Aftermath of the

“Great Recession”Insurance Information Institute

June 10, 2010

Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

Tel: 212.346.5520 ♦ Cell: 917.453.1885 ♦ [email protected] ♦ www.iii.org

Presentation Outline

Reasons for Optimism, Causes for ConcernThe Economic Storm: Financial Crisis & Recession

Exposure, Growth & Profitability

Crisis-Driven Exposure Issues: Personal & Commercial LinesWhen and Where Will Growth Return?

Threats and Issues Facing P/C Insurers Through 2015Financial Strength & Ratings

Key Differences Between Insurer and Bank Performance During CrisisKey Differences Between Insurer and Bank Performance During Crisis

Insurance Industry Financial Overview & OutlookProfitabilityPremium GrowthUnderwriting Performance: Commercial & Personal LinesFinancial Market Impacts

Capital & Capacity

2

Catastrophe Loss TrendsQ&A

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

Economic Recovery in US is Self-Sustaining: No Double Dip RecessionEuropean Debt Crisis Will Pass; Concerns are Overblown

Volatility will remain a reality, howeverVolatility will remain a reality, howeverEra of Mass Commercial Insurance Exposure Destruction Has Ended

But restoration of destroyed exposure will take 3+ years in USNo Secondary Spike in Unemployment or Swoon in Payrolls/WC ExposureNo Secondary Spike in Unemployment or Swoon in Payrolls/WC Exposure

But wage growth remains sluggishExposure Growth Will Begin in Earnest in 2nd Half 2010, Accelerate in 2011Increase in Demand for Commercial Insurance is in its Earliest Stages andIncrease in Demand for Commercial Insurance is in its Earliest Stages and Will Accelerate in 2011

Includes workers comp, commercial auto, marine, many liability coverages, D&OLaggards: Property, inland marine, aviationPersonal Lines: Auto leads, homeowners lags

P/C Insurance Industry Will See Growth in 2011 for the First Time Since 2006Investment Environment Is/Remains Much More Favorable

3

Volatility, however, will persist and yields remain lowBoth are critical issues in long-tailed commercial lines like WC, Med Mal, D&O

Source: Insurance Information Institute.

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

P/C Insurance Industry Capacity as of 3/31/10 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 highRecord Capacity, Depressed Exposures Mean that Generally Soft Market Conditions Will Persist through 2010 and Potentially into 2011There is No Catalyst for a Robust Hard Market at the Current TimeHigh 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 TameInflation Outlook for US and Major European Economies and Japan is TameWill temper claims inflation

Financial Strength & Ratings of Global (Re)Insurance Industries Remained Strong Throughout the Financial Crisis in Sharp Contrast With Banksg g pInsurers Have Avoided (So Far) the Most Draconian Outcomes in Financial Services Reform LegislationTort Environment in US is Beginning to Deteriorate; No Tort Reform in US

4

Major Transformation of US Economy Underway with Major Opportunities for Insurers through 2020 in Health, Tech, Natural Resources, Energy

Source: Insurance Information Institute.

The Economic StormThe Economic Storm

Wh t th Fi i l C i i dWhat the Financial Crisis and Recession Mean for the Industry’s

E B G th dExposure Base, Growth and Profitability

5

Real GDP Growth*

%8%

Real GDP Growth (%) The Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4%

2.9%

1%4.

8%4.

8%

1.5% 2.

2%5.

6 %3.

0% 3.2%

2.9% 3.1%

3.0%

3.1%

3.2%

3.2%3.7%

.8% 1.6% 2.

5% 3.6%

3.1%

2%

4%

6%

8%

0.1

-0.2

%-0

.7%

7% -0.7

%

0

-4%

-2%

0%

2%

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump,Economic growth up sharply

in Q4:09 with rebuilding of

-2.7

-5.4

%-6

.4%-8%

-6%

0

1

2

3

4

5

6

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

in Q4:09 with rebuilding of inventories and stimulus.

More moderate growth expected in 2010/11

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

07:2

07:3

07:4

08:1

08:2

08:3

08:4

09:1

09:2

09:3

09:4

10:1

10:2

10:3

10:4

11:1

11:2

11:3

11:4

Personal and Commercial Lines Exposure Base Have Been Hit Hardand Will Be Slow to Come Back

6

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 5/10; Insurance Information Institute.

and Will Be Slow to Come Back

Length of US Business Cycles,1929–Present*

120120

Length of Expansions Greatly Exceeds

Contractions

Duration (Months)

80

106

9290

100110120 Contraction Expansion Following

Average Duration**Recession = 10.4 Mos

50

3745

39

58

73

4350607080 Expansion = 60.5 Mos

10 1116

616

8 819

37 39

2436

12 12138 11 10 810

203040

010

Aug1929

May1937

Feb1945

Nov1948

Jul1953

Aug1957

Apr1960

Dec1969

Nov1973

Jan1980

Jul1981

Jul1990

Mar2001

Dec2007

Month Recession Started

7

Month Recession Started

* Through June 2010. Assumes “official” end of recession was June 2009. ** Post-WW II period through end of most recent expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.

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

% 3%25% 8%R l NWP G th R l GDP

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

18.6

%20

.3

13.7

%%

15%

20%

25%

owth

4%

6%

8%

Real

Real NWP Growth Real GDP

4.3% 5.

8%0.

3% 3.1%

1.1%

0.8%

0.4%

0.6% 1.6%

5.6% 7.

7%1.

2%

5.2%

1.8%

0%

5%

10%

eal N

WP

Gro

0%

2%

l GD

P Grow

-1.6

%-1

.0%

-1.8

%-1

.0%

-0.4

%-0

.3%

-2.9

% -0.5

%-3

.8%

-4.4

%-3

.3%

-3.6

%-0.9

%.4

%6.

5%-1

.5%

-10%

-5%

0%Re

-4%

-2%

wth

-7 -6

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910

E

P/C I I d t ’ G th i I fl d M d tl

8Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 5/10; Insurance Information Institute

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

Regional Differences Will Significantly Impact P/C Markets

Recovery in Some Areas Will Begin Years Ahead of OthersBegin Years Ahead of Others

and Speed of Recovery Will Differ by Orders of Magnitude

9

y g

State Economic Growth Varied Tremendously in 2008

Mountain, Plains States Growing the Fastest

Percent Change in Real GDP by State, 2007–2008

Rocky Mountain2.2

Plains2.0 Great Lakes

-0.4

New England1.0

WA2.0

OR

MT1.8

ND7.3 MN

2 0 WI

ME1.4

NH1 8

VT1.7 MA

Mideast1.3

1.6

CA

NV-0.6

ID0.0

WY4.4

UT1.4 CO

NE1.3

SD3.5

2.0

IA2.1

WI0.7

IL0.3

MI-1.5

IN-0.6

OH-0.7

NY1.6

PA1.1

NJ0.6

MDDE

1.8 MA1.9

RI-0.9CT

-0.4

Highest Quintile

Far West0.6 US = 0.7

CA0.4

CO2.9

AZ-0.6 NM

2.0

OK2.7

KS2.2

MO1.3

MD1.3

-1.6DC3.0VA

1.3

WV2.5KY

-0.1NC0.1

SC

TN0.5AR

0 7 Highest Quintile

Fourth Quintile

Third Quintile

Second Quintile

L t Q i til

TX2.0

0.60.7

LA0.3

MS1.7

AL0.7

GA-0.6

FL-1.6

AK-2.0

HI

10US Bureau of Economic Analysis

Lowest Quintile

Southwest1.7

Southeast0.0

HI0.7

Fastest Growing States in 2008:Plains, Mountain States Lead

8%

Real State GDP Growth (%)

7.3%

6%

7%

8%

2 1% 2 0%

4.4%

3.5%2.9% 2.7% 2.5%3%

4%

5%

2.1% 2.0%

0%

1%

2%

0%ND WY SD CO OK WV IA TX, MN,

NM, WA

Natural Resource and Agricultural States Have Done Better Than Most

11Source: US Bureau of Economic Analysis; Insurance Information Institute.

Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas

Slowest Growing States in 2008: Diversity of States SufferingReal State GDP Growth (%)

KY CT AZ GA IN NV RI MI DE FL OH AK

-0.1%

-0.4%-0.5%

0.0%KY CT AZ GA IN NV RI MI DE FL OH AK

-0.9%

-0.6% -0.6% -0.6% -0.6%

-1.0%

-1.5% -1.6% -1.6% -1.7%

-2.0%-2.0%

-1.5%

States in the North South East and West All Represented Among

2.0%

-2.5%

12Source: US Bureau of Economic Analysis; Insurance Information Institute.

States in the North, South, East and West All Represented Among Hardest Hit, But for Differing Reasons

Labor Market TrendsLabor Market Trends

Fast & Furious:Massive Job Losses Sap theMassive Job Losses Sap the

Economy and Commercial/Personal Lines Exposure

13

Lines Exposure

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

18 Traditional Unemployment Rate U 3 U 6 went from

January 2000 through May 2010, Seasonally Adjusted (%)

14

16

18 Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

U-6 went from 8.0% in March

2007 to 17.5% in Oct 2009; Stood at 16.6% in May

2010Recession ended in

Unemployment kept rising for Recession

12

14

Unemployment rate was 9.7% in

M

2010November 2001

kept rising for 19 more months

began in December

2007

8

10 MayUnemployment peaked at 10.1%

in Oct. 2009, highest monthly

4

6

May10

g est o t yrate since 1983.Peak rate in the last 30 years: 10.8% in Nov -

Dec 1982

14

2Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10

10 Dec 1982

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

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

16

The unemployment rate has been rising across the country, but in April just 6 out

of 50 states recorded increases,

4.8 5661.5

12.0

.9.0.01.21.6

13.7

12.6

12.514

.0

12

14

16

%)

,compared to 24 in March.

10.4

10.010 10

. 510

.610

.6

9.4

9.2

9.2

9.09.

5

9.1

9.29.

8

1 1011111 11

8

10

12

ent R

ate

(%

4

6

8

empl

oym

e

0

2

4

Un

15

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

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

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

10

The unemployment rate has been rising across the country, but in April just 6 out

of 50 states recorded increases,

9.1.27.3 .1.2

8.38.4

7.57.

88.08.18.

49.0

8.7

8.59.

0

8

10

%)

,compared to 24 in March.

6.7

6.7

6.6

6.56.

97.77

4.75.

06.

47.7

6.7

6

ent R

ate

(%

43.

8

4

empl

oym

e

0

2Une

16

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

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

US Unemployment Rate

0%11.0% Rising unemployment

2007:Q1 to 2011:Q4F*

%

9.3% 9.

6% 10. 0

9.7%

9.6%

9.4%

9.2%

9.0%

8.8%

8.6%

9.4%

9.0%

10.0%eroded payrolls

and workers comp’s exposure base.

Unemployment likely

% 6.9%

8.1 % 8

7.0%

8.0%

p y ypeaked at 10% in late 2009.

Unemployment

5% 5% .6%

4.8% 4.9% 5.

4%

6.1 %

5.0%

6.0%

p yforecasts are being

revised downward for the first time in years

4. 4. 4

4.0%

5.0%

7:Q

1

7:Q

2

7:Q

3

7:Q

4

8:Q

1

8:Q

2

8:Q

3

8:Q

4

9:Q

1

9:Q

2

9:Q

3

9:Q

4

0:Q

1

0:Q

2

0:Q

3

0:Q

4

1:Q

1

1:Q

2

1:Q

3

1:Q

4

17

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

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (5/10); Insurance Information Institute

Monthly Change Employment*

0 431600

January 2008 through April 2010* (Thousands)

64 14 3920

8 290 4

0

200

400

-72

-144 -122

-160 -137

-161 -128

-175

-321

-380

7 28 -387

15-3

46 -212

-225

-224 -1

09

-600

-400

-200

Monthly Losses in May’s gain of 431,000 jobs was -5

97-6

81-7

79 -726

-753

-52

-51

-1,000

-800

8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

distorted by the hiring of 411,000 temporary Census

workers. Private sector employment was up 41,000

Jan

08Fe

b 08

Mar

08

Apr

08

May

08

Jun

08Ju

l 08

Aug

08

Sep

08

Oct

08

Nov

08

Dec

08

Jan

09Fe

b 09

Mar

09

Apr

09

May

09

Jun

09Ju

l 09

Aug

09

Sep

09

Oct

09

Nov

09

Dec

09

Jan

10Fe

b 10

Mar

10

Apr

10

May

10

Job Losses Since the Recession Began in Dec. 2007 Total 8 4 Milli Th h M 2010

18

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

8.4 Million Through Mar. 2010; 15.0 Million People are Now Defined as Unemployed

Labor Underutilization: Broader than Just Unemployment

16 8% 17 0% 17.5% 17.2% 17.3%16 8% 16 9% 17.1%18%

% of Labor Force

16.4% 16.5% 16.3%16.8% 17.0%

16.5% 16.8% 16.9% 17.1%16.6%

14%15%16%17%

11.2%11%12%13%14%

10%Sep08

May09

Jun09

Jul 09 Aug09

Sep09

Oct09

Nov09

Dec09

Jan10

Feb10

Mar10

Apr10

May10

M i ll Att h d d U l d P A t f 16 6% f thMarginally Attached and Unemployed Persons Account for 16.6% of the Labor Force in May 2010 (1 Out 6 People). Unemployment Rate Alone was 9.7%. Underutilization Shows a Broader Impact on WC and Other

Commercial Exposures

19

NOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Source: US Bureau of Labor Statistics; Insurance Information Institute.

US Nonfarm Private Employment

Monthly, Nov 2007 – May 2010 (Millions)The US Economy Lost About

8.4 Million Jobs in the 2 Years from Dec 07 Dec 09Employment Peak;

38.0

38.1

38.0

37.9

37.8

37.8

37.7

37.6

37.6

7.4

.0 7139

Years from Dec. 07 – Dec. 09 .

As employment expands, workers comp insurers will

be among the first

Recession Starts

13 13 13 13 13 13 13 13 13 137

137

136.

713

6.2

135.

133

.58135

136137138

gbeneficiaries

1313

2.8

132.

113

1.5

131.

213

0.6

130.

330

.129

.929

.629

.79.

629

.629

.629

.813

0.1

130.

6

131132133134

1 1 12 12 12 12 1 2 12 12 1

129130

ov 0

7ec

07

an 0

8eb

08

Mar

08

Apr

08

May

08

June

Jul 0

8ug

08

ep 0

8O

ct 0

8ov

08

ec 0

8an

09

eb 0

9M

ar 0

9A

pr 0

9M

ay 0

9un

09

Jul 0

9ug

09

ep 0

9O

ct 0

9ov

09

ec 0

9an

10

eb 1

0M

ar 1

0A

pr 1

0M

ay 1

0

20

N De J Fe M A M J A Se O N De J Fe M A M J J A Se O N De J F e M A M

Seasonally adjusted. Source: US Bureau of Labor Statistics

US Unemployment Rate Forecasts

11.0% 10 Most PessimisticC /Mid i t

Quarterly, 2010:Q1 to 2011:Q4

9.6% 9.5% 9 4%9.7%

9.9% 9.8%9.8%

9 6%

10.0%

10.5%Consensus/Midpoint10 Most Optimistic

9.4%

9.0%8.8%

8 6%

9.2%

9.6%9.4% 9.4%

8 6%8.9%

9.4%

8.5%

9.0%

9.5%

8.6%8.3%

8.1%7.8%

8.6%8.3%

7.5%

8.0%Unemployment will remain high even under

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

7.0%10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4

g

Stubbornly High Unemployment Will Slow the Recovery of the

21Sources: Blue Chip Economic Indicators (5/10); Insurance Information Institute

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

Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums

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

7/90-3/91 3/01-11/01 12/07-?

$6,000

$7,000

$35$40

$45

$3,000

$4,000

$5,000

$20

$25$30

$0

$1,000

$2,000

$0

$5$10

$15Wage & SalaryDisbursements

WC NPW

Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums

$0

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

$0

22

* Average Wage and Salary data as of 10/1/2009. Shaded areas indicate recessionsSource: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books

ea e g ay o s a e oded $ o e s Co p e u s

Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)y ( p p )

8.5%10% Recessions in the 1970s and 1980s saw smaller exposure impacts

because of continued wage

The Dec. 2007 to mid-2009 recession

caused the largest

(Percent Change)

(All Post WWII Recessions)

3.7%4.6%

3.5%4%

6%

8% because of continued wage inflation, a factor not present

during the 2007-2009 recession

caused the largest impact on WC

exposure in 60 years

1 1%

1.1%2.1%

-0.5%2%

0%

2%

-4.4%

-2.0%-1.1%

-3.6%-6%

-4%

-2%

1948-1949

1953-1954

1957-1958

1960-1961

1969-1970

1973-1975

1980 1981-1982

1990-1991

2001 2007-2009

Recession Dates (Beginning/Ending Years)

*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).

Frequency: 1926–2008A Long-Term Drift DownwardManufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers

25

30

15

20

10

15

0

5

24

Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research

'26 '29 '32 '35 '39 '42 '45 '48 '52 '55 '58 '61 '65 '68 '71 '74 '78 '81 '84 '87 '91 '94 '97 '00 '04 '07

Insurance Industry Employment Trends

Soft Market, Difficult Economy, Outsourcing Have Contributed toOutsourcing Have Contributed to

Industry’s Job Losses

25

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

Thousands

520

500500

480As of Apr. 2010, P/C insurance industry employment

was down by 27 700 or 5 6% to 463 400 since the

460

was down by 27,700 or 5.6% to 463,400 since the recession began in Dec. 2007 (compared to overall

US employment decline of 7.2%)

26

*As of April 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.

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

U.S. Employment in the DirectLife Insurance Industry: 1990–2010*

Thousands575

As of Apr. 2010, Life insurance industry employment was down by 10,400 or 2.9% to 343,900 since the recession began in

Dec. 2007 (compared to overall US

500

525

550Dec. 2007 (compared to overall US

employment decline of 7.2%)

425

450

475

500

375

400

425

300

325

350

27


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

U.S. Employment in the Direct Health-Medical Insurance Industry: 1990–2010*

Thousands450

375

400

425

300

325

350

375

250

275

300

As of Apr. 2010, Health-Medical insurance industry employment was

down by 4,400 or 1.0% to 437,500 i th i b i D

175

200

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

28


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

U.S. Employment in the Reinsurance Industry: 1990–2010*

Thousands

48

40

44As of Apr. 2010, US employment in the reinsurance industry was down by 1 800 or 6 7% to 25 100

36

40 down by 1,800 or 6.7% to 25,100 since the recession began in Dec.

2007 (compared to overall US employment decline of 7.2%)

32

24

28

29

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

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

Thousands

700

650

600

550

As of Apr. 2010, employment at insurance agencies and

brokerages was down by 49,600 or 7.3% to 630,000 since the

500

,recession began in Dec. 2007

(compared to overall US employment decline of 7.2%)

30

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

U.S. Employment in Insurance Claims Adjusting: 1990–2010*

Thousands

60

55 Katrina, Rita, Wilma

50

45 As of Apr. 2010, claims adjusting employment was down by 8,500 or 16.3%

to 43 500 since the recession began in

40

n-90

p-90

y-91

n-92

p-92

y-93

n-94

p-94

y-95

n-96

p-96

y-97

n-98

p-98

y-99

n-00

p-00

y-01

n-02

p-02

y-03

n-04

p-04

y-05

n-06

p-06

y-07

n-08

p-08

y-09

n-10

to 43,500 since the recession began in Dec. 2007 (compared to overall US

employment decline of 7.2%)

31

Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

Sep

May Jan

*As of April 2010; Not seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

U.S. Employment in Third-Party Administration of Insurance Funds: 1990–2010*

Thousands

135

125

115

95

105

85

95

32

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

Crisis-Driven Exposure pDrivers

Economic Obstaclesto Growth in P/C Insurance

33

Auto/Light Truck Sales, 1999-2011F

9917.5

17.8

7.4

1819

(Millions of Units)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

16.9

16.5

16.116

.9

16.617

.1 7117

15161718 1999-2007 average of 17

million units

13.1

11.8

13.2

12131415

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

10.3

1

9101112

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

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

999 00 01 02 03 04 05 06 07 08 09 10F 11F

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

34Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/10); Insurance Information Institute.

High Unemployment, Tight Credit Are Still Restraining Sales; Gas Prices Could Once Again Become a Factor, Too

New Private Housing Starts, 1990-2011F

(Millions of Units)

1 .85 1.96 2.

07

801 9

2.1

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

through 2009 was

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1 1.8

1.36

1.351.

46

.29

09

1.5

1.7

1.9g

72% (est.); A net annual decline of 1.49 million units,

lowest since records began

0.90

69

0.94

1

1.2

1.01

1.1

0.9

1.1

1.3 in 1959

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

0.56 0.

6

0 3

0.5

0.7

,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 billion0.3

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F

Little Exposure Growth Likely for Homeowners InsurersD t W k H C t ti F t f 2010 2011


Due to Weak Home Construction Forecast for 2010-2011.Also Affects Commercial Insurers with Construction Risk Exposure, Surety

Average Square Footage of Completed New Homes in U.S., 1973-2010:Q1

2 700Square Ft

Average size of completed new homes often falls in recessions

(yellow bars), but historically bo nces back in e pansions

6 324

320

330

,349 2,

434

2,46

92,

521

2,51

92,

438

2,38

92,500

2,700 bounces back in expansions

95 ,035 2,08

02,

075

2,09

52,

095

2,10

02,

095

2,12

02,

150

2,19

02,

223

2,26

62,

32,

3 2,3 2,

2 100

2,300

60 695

5 700

,720 1,75

51,

760

1,74

0,7

2071

0,7

25 1,78

01,

785

1,82

5 1,90

5 1,9 9 2,

1,900

2,100

The trend to building larger homes reversed in 2009 affecting exposure growth beyond

1,66 1,

61,

645

1,7 1, 1 1, 1, 1

1,500

1,700in 2009, affecting exposure growth beyond

the decline in number of units built

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: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute. 36

Auto/Light Truck Sales, 1999-2011F

9917.5

17.8

7.4

1819

(Millions of Units)2010 forecast

revised upwards to

16.9

16.5

16.116

.9

16.617

.17117

15161718 11.8 million units

13.1

11.8

13.2

12131415

“Cash for Clunkers” generated about $300M in net new personal auto premiums in 2009

10.3

1

9101112 New auto/light truck sales fell by nearly 6

million units in 2009 vs. 2007, to the lowest level since the late 1960s.

999 00 01 02 03 04 05 06 07 08 09 10F 11F

Car & Truck Sales Are Beginning to Recover but Weak Economy, Credit Woes Are Still Restraining Sales;


Economy, Credit Woes Are Still Restraining Sales; Gas Prices Could Once Again Become a Factor Too, But Overall

Exposure Trend is Becoming More Favorable

Unemployment’s Effect on Percent of Uninsured Motorists, 1989-2014F

19% 12%

Uninsured Motorist Percentage National Unemployment PercentageUnemployment

% Uninsured

The unemployment rate appears to be closely

l t d ith th In 2010 roughly 18% of

17%

18%

9%

correlated with the uninsured motorist

percentage.

In 2010 roughly 18% of motorists are expected to be driving without

insurance as high unemployment

prompts some people

15%

16%

prompts some people to drop coverage

13%

14%6%

12%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

E

2010

F

2011

F

2012

F

2013

F

2014

F

3%

Source: Uninsured Motorists, 2008 Edition, Insurance Research Council; Blue Chip Economic Indicators (Unemployment data, including forecasts); Insurance Information Institute. 38

New Boat Sales Symptomatic of Decline in Insured Exposure Growth for Luxury/Discretionary Items

30$1,000,000 $12.5New Boats Sold Value of Boats Sold

880,

300

844,

100

837,

900

870,

650

864,

450

912,

1 3

841,

820

$850 000

$900,000

$950,000

$11.5

$12.0

Valu8 8 8

04,8

20

$750,000

$800,000

$850,000

Boa

t Sal

es

$10 0

$10.5

$11.0

ue of Boats

593,

000

71,4

00

82,5

00

76,8

00

7 0

$600 000

$650,000

$700,000

New

B

$9.0

$9.5

$10.0 Sold ($ Bill)Boat sales fell by 16% in

2008 d h l f h5

57 5 5 7

$500,000

$550,000

$600,000

97 98 99 00 01 02 03 04 05 06 07 08$8.0

$8.5

$ )

2008 and the value of those sales plunged by 21%

39

97 98 99 00 01 02 03 04 05 06 07 08

Sources: National Marine Manufacturers Association, 2008 Abstract (latest available as of Feb. 2010); Insurance Information Institute.

Business Bankruptcy Filings,1980-2010:Q1

00 277

81,2

3582

,446

3 549

64390,000

% Change Surrounding Recessions

1980-82 58.6%1980-87 88 7%

694

8,12

569

,30

62,4

3664

,004 71,2 8

63,8

5363

,235

64,8

5371

,570

,662

,304

52,3

7451

,959

53,5

4954

,027

367

4 99 0 1 546 60

,837

60,000

70,000

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

43,6 48

5 5

44,3

37,8

8435

,472

40,0

938

,540

35,0

3734

,317

39,2

0,6

95 28,3

2243

,5

0730,000

40,000

50,000

19

14,6

0

10,000

20,000 There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:Q1 bankruptcies totaled 14,607, up 18% from Q1:2009

0

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910

:Q1

Significant Exposure Implications for All Commercial Lines

40Source: American Bankruptcy Institute; Insurance Information Institute

g p p

Private Sector Business Starts,1993:Q2 – 2009:Q3*

6 220 22

322

022

022

1

18220

230

(Thousands)

4 199 20

420

295 96 96

206

206

201

198

206

206

203

211

205

212

200 20

520

420

497

203 20

920

1

320

1 204

202

210 21

220

921

6 2 2 221

0 212

204

2120

920

719

93

203

200

210

220

175

186

7418

018

6 192

188

187 18

918

6 190 19

419

1 19 19 19

192 1

192

192

193

191 19

317

7

180

190

200

169,000 businesses started in

1 17

171

169

160

1702009:Q3, actually declining during

form the prior quarter. The figure is the lowest level since 1993.

15093 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,

41

y ,Holding Back Most Types of Commercial Insurance Exposure

*Latest available as of June 7, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

Net New Business Formations*1999:Q1-2008:Q4*

3136343639

40

50Thousands 2008-2009

recession

14222020

2524

136

2

13

2317

126 6

142225

1824

3125 26

14

2819

3

15

210

20

30

2

-1-5 -3

3 2

-3

20

-10

0

10

-28-32

50

-40

-30

-20 March-November

2001 recession

In 2008, over 110,000 more businesses

disappeared than started

-48-50

99:Q

1

00:Q

1

01:Q

1

02:Q

1

03:Q

1

04:Q

1

05:Q

1

06:Q

1

07:Q

1

08:Q

1

Net Business Formations Likely Were Positive Again

42

Net Business Formations Likely Were Positive Again,at Least in the Second Half of 2009 and into 2010.

*Business “births” minus business “deaths.” Latest data on business “deaths” is for 2008:Q4.Sources: Bureau of Labor Statistics at http://www.bls.gov/news.release/cewbd.t07.htm ; Insurance Information Institute.

FDIC-Insured Banks AreReducing Credit: 2008, 2009, 2010:Q1

$Billions

$2 500

Down $128.5B (-6.3%)

April 2010: Many banks are maintaining tight loan standards; some are tightening further; virtually no one loosening; Hurts

business formation/expansion and commercial exposure

$1,916.7$1,887.37

$1 494 0

$2,045.2$2,000

$2,500 200820092010

Down $273.2B (-18.3%)

( 6.3%)

$1,220.8$1,187.61

$590 9

$1,494.0

$1,000

$1,500 Down $139.4B (-13.1%)

$451.5 $417.97$590.9

$0

$500

FDIC-Insured Institutions Had $541.1B (-13.1%) Less in Outstanding L i Th Th C t i t Y d 2009 2008

Construction andDevelopment Secured by

Real Estate

Commercial and Industrial 1-4 Family ResidentialMortgages

43Source: FDIC Quarterly Banking Profile, First Quarter 2010, Table II-A

Loans in These Three Categories at Year-end 2009 vs. 2008,and Even Less at End of 2010:Q1

Business Fixed Investment2008:Q1 to 2011:Q4F

9.0%

%

5%

20%

Structures Equipment & Software

1.0% 3.

0% 4.5%

5.0%

1.5%

1

5.7% 6.5% 7.6% 9.2% 10

.3%

9.7%

9.6%

9.3%

6.8%

14.

-0.1

%

0%

10%

20%

9% % .0% -5

.0%

-3.5

%

-0.5

%

-5.0

%

-9.4

% -4.9

%

-7.2

%

20%

-10%

0%

-18.

4% -13.

9

-15.

0

-11-

-25.

9%

%-1

7.3%

-40%

-30%

-20%

Investment in Structures is forecast to be down in 2010

Investment in Equipment &

Software is forecast to be positive in

-36.

4%-4

3.6%-50%

40%

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

forecast to be down in 2010 and low in 2011. This will

hold exposure in many commercial lines down

both 2010 and 2011.

44Source: Wells Fargo Securities Economics Group, Monthly Outlook, April 7, 2010

08:Q

08:Q

08:Q

08:Q

09:Q

09:Q

09:Q

09:Q

10:Q

10:Q

10:Q

10:Q

11:Q

11:Q

11:Q

11:Q

Total Industrial Production

6.4% 6.6% 6.3% 5.3% 5 0% 5 0% 4 4%

2007:Q1 to 2011:Q4F (%)

5.3% 5.0% 5.0% 4.4% 4.2% 4.1% 3.9%1.5%

3.2% 3.6%

0.3% 0.2%0.0%

5.0%

-9.0%-10.4%

-4.6%

-10.0%

-5.0%Industrial Production is Aided

by a Rebuild of Inventories, Gradual Economic Recovery

SI d t i l P d ti -13.0%

-19.0%-20.0%

-15.0%and Stimulus Program (Q2:09 through 2010)

Industrial Production Began to Contract Sharply in Late 2008 and Plunged

in 2009:Q1

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

End of Recession in mid-2009, Stimulus Program Are Benefiting

45Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/10); Insurance Information Institute

Industrial Production and Therefore Insurance Exposure Both Directly and Indirectly, Albeit Very Modestly

State & Local Government Finances in Dire Straits

Large, Long-Term Cuts Necessary to Align Spending with Shrinking

Tax Revenues

46

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

% 9.9% .5%

% 2% % % 12.4

%% % % %

15%

20%2.

4% 4.7% 5.6 %

9 94.

4%1.

8%0.

4%%

0.0% 1.

6%%

0.1% 4.

0% 4.7% 5.7 % 8.

23.

4% 6.0% 7.0%

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%

2.4%

0%

5%

10%

-1.3

%-1

.7%

-3.0

%-7

.6%

0.7%

-0.6

%

-3.9

%

0.9%

-4.1

%

.6%-15%

-10%

-5% 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 th t t t i d i fi l li f

-10

-10

-16.

4%-11 .

-25%

-20%

99 99 99 99 00 00 00 00 01 01 01 01 02 02 02 02 03 03 03 03 04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09

the amount states gained in fiscal relief from the federal stimulus package

1Q9

2Q9

3Q9

4Q9

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

1Q0

2Q0

3Q0

4Q0

States Revenues Were Down 4.4% in Q4 2009, the 5th Consecutive Quarter of Revenue Decline This Will Impact Public Infrastructure

47Source: US Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/.

Quarter of Revenue Decline. This Will Impact Public Infrastructure Spending Significantly and Related Insurance Exposures and Demand.

Inflation Trends:Concerns Over Stimulus Spending

and Monetary Policy

M ti P Cl i

y y

Mounting Pressure on Claim Cost Severities?

48

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

3 3 3 43.8 3.8

5.14.9

4.0

5.0

6.0 commodity bubble have reduced inflationary pressures

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.33.0 2.8

2.0 1.9

2.92.4

3.23.0

2.0

3.0

0 4

0.0

1.0

-0.4-1.090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F

There is So Much Slack in the US Economy That Inflation Should Not Be a

49Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, May 10, 2010 (forecasts).

There is So Much Slack in the US Economy That Inflation Should Not Be a Concern Through 2010/11, but Depreciation of Dollar is Concern Longer Run

Forecasts of Annual Inflation Rates(CPI-U, %), 2010–2015FAnnual Inflation Rates (%) Even the pessimistic forecasts

don’t see the CPI rising much above 3% in the next five years

3.13.03.03.02.92.83.0

4.0

Blue Chip AvgPessimistic

Bl Chi A2.2

1.92.1 2.2 2.3 2.4

1.7

1 21.4

1.6 1.72.0

Blue Chip AvgMedian

Blue Chip AvgOptimistic

1.01.2

1.0

0.02010 2011 2012 2013 2014 2015

Inflation Will Accelerate Modestly through 2015 but Should Is Not

50Sources: Blue Chip Economic Indicators, Oct. 2009 and Mar. 2010.

Inflation Will Accelerate Modestly through 2015 but Should Is Not Expected to Become a Major Concern or Threat

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

5 5%6.2%

6%

8%(Percent)

2.7% 3.0% 3.1%3.8%

4.3%5.5%

4%

6%

0%

2%

-0.4%-2%

Overall Legal US Tort Medical Motor Bodily WC Med No-FaultCPI Services Costs Care Vehicle

BodyWork

InjurySeverity

Severity ClaimSeverity

Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are

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.

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

51

WC Insurers Experience Inflation More Intensely than 2009 CPI Suggests

6.9%8%

(Percent increase Dec 08 to Dec 09)

Excludes

Inpatient Services Rose 6.7%;

O t ti t S i

6%

Excludes Food and Energy

Outpatient Services Rose 7.4%

2.7% 3.0% 3.0%3.4% 3.1% 3.4%4%

1.8%2%

0%Overall CPI "Core" CPI Hospital

ServicesPhysicians'

ServicesDental

ServicesPrescription

DrugsMedical CareCommodities

Medical CPI

H lth C t A M j WC I C t D i Th A

Source: Bureau of Labor Statistics; Insurance Information Institute.

Healthcare Costs Are a Major WC Insurance Cost Driver. They AreLikely to Increase Faster than the CPI for the Next Few Years, at Least

52

WC Medical Severity Risingat Twice the Medical CPI Rate

13.6%14%

16% Average annual increase in WC medical severity form 1995 through 2008 was

more than twice the medical CPI (8.1%

10.1% 10.6%12%

14%(

vs. 4.0%). New healthcare reform legislation is unlikely to have any

impact on the gap.

7.4%8.3%

7.3% 7.6% 7.2%6 2%

9.2%8.6%

6 0%8%

10%

4.5% 4 1% 4.6% 4.7% 4 4% 4 2% 4 4%

5.1%6.2% 5.8% 6.0%

4%

6%

4.5%3.5%

2.8% 3.2% 3.5%4.1% 4.0% 4.4% 4.2% 4.0% 4.4%

3.7% 3.4%

0%

2%Change in Medical CPIChange Med Cost per Lost Time Claim0%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

Top Concerns/Risks for Insurersif Inflation Is Reignited

ConcernsThe Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Gov’t Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary.

What are the potential impacts for insurers?What can/should insurers do to protect themselves from the risks of inflation?

p y y

Rising Claim SeveritiesCost of claims settlement rises across the board (property and liability)

Key Risks From Sustained/Accelerating Inflation

(p p y y)Rate Inadequacy

Rates inadequate due to low trend assumptions arising from use of historical data Reserve Inadequacy

Reserves may develop adversely and become inadequate (deficient)Reserves may develop adversely and become inadequate (deficient)Burn Through on Retentions

Retentions, deductibles burned through more quicklyReinsurance Penetration/Exhaustion

54Source: Insurance Information Institute.

Higher costs risks burn through their retentions more quickly, tapping into reinsurance more quickly and potentially exhausting their reinsurance more quickly

Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2009E*

14% Tort system is an inflation Tort costs move with inflation

but at twice the rate of inflation

10%

12%

%amplifier

Avg. Ann. Change: 1961-2009E*Tort costs: +8.4%Med costs: +5 9%

8%

10% Med costs: +5.9%Overall inflation: +4.2%

4%

6%

Are there healthcare reform spillover effects?

0%

2%Tort Costs Medical Costs CPI

reform spillover effects?

1961-70 1971-80 1981-90 1991-2000 2001-09E* CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast.Source: U.S. Bureau of Labor Statistics; Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; I.I.I.

Claim Trends in A t IAuto Insurance

Ri i C t H ld i Ch k bRising Costs Held in Check by Falling Frequency:

Can That Pattern Be Sustained?

56

Bodily Injury: Severity Trends Generally Above Decline in Frequency

Annual Change, 2005 through 2009

4.7%5.9% 6.1%

6%

8%

Severity Frequency

2.9%2.1%

0%

2%

4%

-3.8%-3.1% -3.2%-4%

-2%

0%

-5.4%3.8%

-5.0%-6%2005 2006 2007 2008 2009

Cost Pressures Will Increase if Current BI Frequency

57Source: ISO/PCI Fast Track data; Insurance Information Institute

Cost Pressures Will Increase if Current BI Frequency and Severity Trends Continue

Property Damage Liability: Frequency and Severity Trends Nearly Offset in 2009


2.9%3.6%

2.1%3%

4%

Severity Frequency

0.8% 0.6%1.4%

0%

1%

2%

-1.6%

-0.3%

-3%

-2%

-1%

-3.5% -3.4%-4%2005 2006 2007 2008 2009*

Favorable Severity/Frequency Trends Keeping PD Costs in


Favorable Severity/Frequency Trends Keeping PD Costs in Check, But Are TheseTrends Sustainable?

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


5.9%4.7%

6.3% 6.4% 6.4%6%

8%

Severity Frequency

2.4%

0%

2%

4%

-4.8%-5 7%

-2.7%

-6%

-4%

-2%

-5.7%-6.9%-8%

2005 2006 2007 2008 2009*

Multiple States Are Experiencing Severe Fraud and Abuse

59

*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT.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

Collision Coverage: Frequency and Severity Trends Have Been Favorable

Severity Frequency


2.3%

3.9%3.1%

3%

4%

5%

y q y

0.7% 0.4%0%1%

2%

-1.8%

3 %

-2.4%-1.6%

-2.3%

4%

-3%

-2%

-1%

-3.5%-4%2005 2006 2007 2008 2009*

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


Frequency and Temper Severity, But this Trend Will Likely Be Reversed Based on Evidence from Past Recoveries

Comprehensive Coverage: Frequency and Severity Trends Favorable in 2009

Severity Frequency


15.5%13.0%

10%

15%

20%

y q y

1.6%0%

5%

10%

-3.1%

-9.8%-6.6%

-1.6%-1.4% -1.4% -2.0%

15%

-10%

-5%

-15%2005 2006 2007 2008 2009*

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


Recession Has Helped Push Down Frequency and Temper Severity, But This Factors Will Weaken as Economy Recovers

Fraud & Abuse in Private Passenger Auto InsurancePassenger Auto InsuranceSk k ti N F lt (PIP) Cl iSkyrocketing No-Fault (PIP) Claim

Costs Are a Major Concern in S l St tSeveral States

62

Average No-Fault Claim Severity, 2009:Q4

89

$50,000MI, NJ, NY and FL currently are the

largest states that have the most severe problems in their no-fault system

$37,

48

$35,000

$40,000

$45,000 problems in their no fault system$1

7,72

7

2 0 6

$20,000

$25,000

$30,000

$8,8

62

$8,6

70

$5,5

17

$5,1

98

$4,8

87

$4,3

27

$4,1

21

$4,0

31

$2,9

98

$2,8

95

$2,9

91

$2,5

51

$2,2

19

$1,7

49$8,1

86

$7,5

38

$6,9

44

$5,000

$10,000

$15,000

$0MI NJ NY DC DE FL MN KY ND HI WA PA OR TX MD KS SC UT MA

Several States Have Severe and Growing Problems With Rampant Fraud

63

g pand Abuse in their No-Fault Systems. Claim Severities Are Up Sharply.

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

Increase in No-Fault Claim Severity: 2004-2009*

$32 778$35 000

+34.4% 8.25% annual average compound

growth rate$32,778

$17 198

$24,385

$20 000

$25,000

$30,000

$35,000

+41.7%

+48 5% +18 6%**$17,198

$8,716 $7,524$6,674$5,871

$12,136

$5 000

$10,000

$15,000

$20,000 +48.5% +18.6%**

$0

$5,000

Michigan New Jersey New York Florida

2004 2009

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

64

*2009 figure is for the 4 quarters ending 2009:Q4.**Since 2006 the increase in Florida was 17.3% (average severity that year was $6,344). Sources: Insurance Information Institute research from ISO/PCI Fast Track data.

Critical Differences Between P/C Insurers and Banks

Superior Risk Management Model and L L M k Bi DiffLow Leverage Make a Big Difference

65

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 li t t i ti i t t dclient to insurer – continues uninterrupted

This means that insurers continue to:Pay claims (whereas 246 banks have gone under as of 5/28/10)y ( g )

– The promise is being fulfilledRenew existing policies (banks are reducing and eliminating lines of credit)W it li i (b k t i l d b i hWrite 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)

66

Compete intensively (banks are consolidating, reducing consumer choice)

Source: Insurance Information Institute

Reasons Why P/C Insurers Have Fewer Problems Than Banks

Emphasis on Underwritingf ( )

A Superior Risk Management Model

Matching of risk to price (via experience and modeling)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk

Strong Relationship Between Underwriting and Risk BearingI l i i k i h b i h d i k i “ ki i hInsurers always maintain a stake in the business they underwrite, keeping “skin in the game” at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences – straightforward moral hazard problem from Econ 101

Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry

Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid

Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds private equity complex securitized instruments credit derivatives – CDS’s)

67

funds, private equity, complex securitized instruments, credit derivatives – CDS s)

Greater TransparencyInsurance companies are an open book to regulators and the public

Source: Insurance Information Institute

Obama Administration Proposal to Scale Back Terrorism Risk Insurance Program

Administration’s Budget Proposal for FY 2011:

I l d l t l b k f d l t f t i i k

5Includes proposal to scale back federal support for terrorism risk insurance program

Proposal projects savings of $249 million from 2011-2020j g

Administration’s justification is that this would “encourage the private sector to better mitigate terrorism risk through other means, such as developing alternative reinsurance options and building saferdeveloping alternative reinsurance options and building safer buildings.”

Key Concerns Among Industry Observers Over Proposed Reduction in Federal Support

S ti f h t l ld h d t i t l ff tSuggestion of changes to law would have detrimental effect on availability and affordability of terrorism insurance

A 2009 Aon study estimated some 70-80 percent of the commercial

68Source: Budget of the U.S. Government Fiscal Year 2011

property insurance market would revert to absolute exclusions for terrorism, if TRIA is changed.

Terrorism: Insurance Concerns Resurface

Reasons Why Concerns Are Mounting in 2010

Perception (Reality) that U.S. vulnerability is risingThwarted Christmas Day attack by “underwear bomber”

And new bin Laden tape claiming al Qaeda is responsibleAnd new bin Laden tape claiming al Qaeda is responsibleFoiled NYC Subway Bomber Plot (Zazi case)Failed Times Square Car Bombing on May 1Trials of Guantanamo 9/11 suspects in Manhattan Court (?)U.K. in January Raised Terror Alert Status to 2nd Highest LevelIncreased anti-terror efforts, including full-body scans, g yEffort by government to appear more vigilant, preparedRise of groups such al Qaeda in the Arabian PeninsulaU S military surge in Afghanistan operations

69

U.S. military surge in Afghanistan operationsMost buyers/producers haven’t thought about coverage recentlyObama Administration’s Intent to Reduce Support for TRIA

2010 Property and Casualty InsuranceReport Card

ME

NH

ND

MN

WA

AL

VTMT

AK

B-B-

B

C -

AB

F NH

MA

CT

PA

NE

MN

MI

IL

IA

IDOR

NJRI C

DE

NY

MD

SD WI

INOH

NV

WY

= A= B= C= D

A-

B-

B

B-B-

B-

B- C-A

B+B+

BB

C+

C+

C

D+F

WVVA

NC

OK

IL

AZSC

TN

ARNM

KYMOKS

IN

CA

NV

UTCO

D= F= NG

A- A-

B-B-

B

B-

B-

B-C-

C-

D-D-

AB

B

C+

D+D+D

Source: James Madison Institute, February 2008.

LATX

HI GAAL

FL

MS

NM

B- B-B-C-

C-A B+ BNG

NGN t G d d Di t i t f C l bi

Source: Heartland Institute, May 2010

D FNot Graded: District of ColumbiaMississippiLouisiana

Shifting Legal Liability & g g yTort Environment

Is the Tort PendulumSSwinging Against Insurers?

71

Important Issues & Threats Facing Insurers: 2010–2015

Emerging Tort Threat

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

Erosion of recent reforms is a certaint (alread happening)Erosion of recent reforms is a certainty (already happening)

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

T t t i th ll t f i fl tiTorts twice the overall rate of inflation

Influence personal and commercial lines, esp. auto liability

Historically extremely costly to p/c insurance industry

Bottom Line: Tort “crisis” is on the horizon and will be

Leads to reserve deficiency, rate pressure

72Source: Insurance Information Institute

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

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

$300 2.50%Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

$250

2.25%

To

y

$150

$200

stem

Cos

ts

2.00%

ort Costs as

$100Tort

Sys

1.75%

% of G

DP

2009–2010 Growth in Tort

$0

$50

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

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

Part to Shrinking GDP

73

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

* 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

The Nation’s Judicial Hellholes: 2010

West VirginiaIllinoisCook County

Watch List

California

New York City

AlabamaMadison County, ILJefferson County, MSTexas Gulf CoastTexas Gulf CoastRio Grande Valley, TX

Dishonorable Mention

AR Supreme CourtMN Supreme Court

S C

New JerseyAtlantic County (Atlantic City)

New MexicoAppellate

ND Supreme CourtPA GovernorMA Supreme Judicial Court

74Source: American Tort Reform Association; Insurance Information Institute

South Florida

Appellate CourtsSacramento County

Average Jury Awards 1999 - 2008

$1,200

$1,018 $1,022$1,077

$1,046

$1 000

$1,100

$800 $799

$950

$900

$1,000

$725 $747 $756$800 $799

$700

$800

$500

$600

$5001999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Jury Verdict Research; Insurance Information Institute.

Avg. Jury Awards 1999 vs. 2003 and 2008

$7,000

$4,8

38

64 $4,8

85$5,4

46

$5 000

$6,000

38 $2,8

87

$

$4,1

$3,4

99

$3,7

17

$3,7

22

$

$

$4,000

$5,0001999 2003 2008

44 9

$2,3 $

99 901

1,04

6

49$2,000

$3,000

$64

$201 $5

89$79

$208

$9$

$327 $8

$0

$1,000

Overall Vehicular Premises Wrongful Medical ProductsOverall Vehicularliability

Premisesliability

Wrongfuldeath*

Medicalmalpractice

Productsliability

*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.

Sum of Top 10 Jury Awards 2004-2009

$6,000

$5,159$5,000

$2,954$3,000

$4,000

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

$3,000

$815$616

$0

$1,000

$02004 2005 2006 2007 2008 2009

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

Financial Strength & RatingsFinancial Strength & Ratings

Industry Has Weathered the Storms Well

78

P/C Insurer Impairments, 1969–2009p

60 5860

70 5 of the 11 are Florida companies (1 of these

5 is a title insurer)

649 50 48

55

541

49 5047

40

50

6034

19 6

36

3134

296

3118 19

351820

30

40

815

127

11 9 913 12

19

16 14 13

1 612

1 1 114 15

711

5

0

10

20

0

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09p

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

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

p g yCycle, With Peaks Occurring Well into Hard Markets

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009p

115

120

1.8

2.0Combined Ratio after Div P/C Impairment Frequency

110

115

Rat

io

1.2

1.4

1.6

Impair

100

105

Com

bine

d

0.6

0.8

1.0

rment R

ate

90

95

0 0

0.2

0.4

0.6

2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969

90

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* 0.0

g

Impairment Rates Are Highly Correlated With Underwriting Performance

80*Combined ratio of 101.7 is through Q3:09; 0.36% 2009 impairment rate is III estimate based on preliminary A.M. Best data.Source: A.M. Best; Insurance Information Institute

p g y gand Reached Record Lows in 2007/08

Summary of A.M. Best’s P/C Insurer Ratings Actions in 2009

Despite financial market turmoil and a soft market

in 2009, 76% of ratings ti b A M B t

11 9%

actions by A.M. Best were affirmations;

just 2.9% were downgrades and 3.2%

were upgradesOther – 216

3.8%2.4%

11.9%75.7%

were upgrades

Affirm – 1,375

Initial 44Under Review – 69

2.9%3.2%

Downgraded –53

Upgraded – 59Initial – 44

P/C Insurance is by Design a Resilient Business. The Dual Threat of Financial Disasters and Catastrophic Losses

81

.Source: A.M. Best.

pAre Anticipated in the Industry’s Risk Management Strategy

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

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

3.7%4 2%

Investment Catastrophe Losses Play a Much Smaller Role

Reinsurance Failure

Mi

Sig. Change in Business

4.2%9.1%

7.0% 38.1% Deficient Loss Reserves/In adequate Pricing

Investment Problems

Misc.

7.9%

38.1% In-adequate Pricing

Affiliate Impairment

7.6%

8.1% 14.3%Catastrophe Losses

82Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2008

Rapid GrowthAlleged Fraud

P/C Insurance Financial Performance

A Resilient Industry in Challenging Times

83

ProfitabilityProfitability

Historically Volatiley

84

P/C Net Income After Taxes1991–2009 ($ Millions)

,496

65,7

77

$70 000

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

P-C Industry profits for full-year 2009 were up sharply from 2008, but are still well

below pre crisis levels

19

$62$6

44,1

55

501

$50,000

$60,000

$70,000 2007 ROE = 10.9%2008 ROE = 0.3%2009 ROAS1 = 5.8%

below pre-crisis levels

78 ,316

0,59

8

$24,

404 $3

6,81

$30,

773

1,86

5

$30,

029

$28,

311$4

0,55

9

$38,

5

$30,000

$40,000

$50,000

$14,

17

$5,8

40

$19,

$10,

870 $20 $ $2

$3,0

46

$3,0

43

$20

$10,000

$20,000

$ $

-$6,970-$10,000

$0

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.3% ROAS for 2009 and 4.4% for 2008. 2009 net income was $34.5 billion and $20.8 billion in 2008 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

ROE: P/C vs. All Industries1987–2009*

20%P/C Profitability is

Cyclical and Volatile Katrina,

(Percent)

15%

y at a,Rita, Wilma

%

10%

Hugo

Sept. 11

0%

5%g

Andrew

Northridge

Lowest CAT Losses in 15 Years

4 Hurricanes

Fi i l

-5%87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

US P/C Ins rers All US Ind stries

Northridge Financial Crisis*

86

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

US P/C Insurers All US Industries

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2009*

18%The P/C Insurance Industry Fell WellShort of Its Cost of Capital in 2008/09

(Percent)

12%

14%

16%p

6%

8%

10%

ts

-1.7

pts

+2.3

pts

0 pt

s

-6.4

pts

-3.2

pts

2%

4%

6%

-13.

2 pt -9.0 -

US P/C Insurers Missed Their Cost of Capital by an Average 6 7 Points from 1991

The Cost of Capital is the Rate of Return Insurers Need to

-2%

0%

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

Capital by an Average 6.7 Points from 1991 to 2002, but On Target or Better 2003-07,

but Fell Well Short in 2008/09

Insurers Need to Attract and Retain

Capital to the Business

87

* Return on average suplus in 2008/09 excluding mortgage and financial guaranty insurers.Source: The Geneva Association, Insurance Information Institute

ROE Cost of Capital

Median ROE for Insurers vs. Financial Firms & Other Key Industries 2009(Profits as a % of Stockholders’ Equity)

21%Food Consumer Products

14%14%

19%21%21%Food Consumer Products

PharmaceuticalsComputers, Office Equip.

Health Insurance & Mgd. CareSpecialty Retailers

9%9%

10.5%12%

14%Specialty RetailersEnergy

All IndustriesDiversified FinancialsT l i ti

Stock P/C insurers earned a 7% ROE in 2009, below the

10 5% d b th9%9%

7%7%

TelecommunicationsUtilities

P/C Insurance (Stock)L/H Insurance (Stock)

10.5% earned by the Fortune 500 as a whole and well below health insurers’ 14%. P/C Mutuals’ average

ROE was 3 5%5%4%

0%3.5%

EntertainmentCommercial Banks

P/C Insurance (Mutual)*L/H Insurance (Mutual)

ROE was 3.5%.

Commercial bank ROE was 4% in 2009

88Source: Fortune, May 3, 2010; Insurance Information Institute.

$0 $0 $0 $0 $0 $0

A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 is Where It’s At NowCombined Ratio / ROE

15.9%110 18%

Combined ratio of about 100 generated a 6% ROE in 2009, 10%

in 2005 and16% in 1979

97.5100.6 100.1 100.7

99.3101.0

9 6%

5 9%14.3%

12.7%

100

105

12%

15%

92.6 7.3%

9.6%

8.9%90

95

6%

9%

4.4%

80

85

1978 1979 2003 2005 2006 2008* 2009*0%

3%

1978 1979 2003 2005 2006 2008* 2009*

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s Depressed

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

Investment Environment to Generate Risk Appropriate ROEs

P/C Premium GrowthP/C Premium GrowthPrimarily Driven by the

I d t ’ U d iti C lIndustry’s Underwriting Cycle, Not the Economy

90

Strength of Recent HardMarkets by NWP Growth

25%

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

Good News

15%

20%

Good NewsP/C insurance

industry should see positive

growth in 2011

10%

15% growth in 2011 for the first time

since 2006

0%

5%

Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) b 2 0% in 2008 and 3 7%

-10%

-5%

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 F

Decline Since 1943) by 2.0% in 2008, and 3.7% in 2009, the First 3-Year Decline Since 1930-33

During the Great Depression. Expected decline of 1.6% in 2010.

91

7 72 73 74 75 76 77 78 79 80 8 8 2 83 84 85 86 87 88 89 90 9 9 2 93 94 95 96 97 98 99 00 0 0 2 03 04 05 06 07 08 09 10F

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

Average Expenditures on Auto Insurance

$950

$830 $842 $831$816 $816

$844

$878

$850

$900

$705$726

$786$816

$795$816

$703$750

$800

$651$668

$691$705

$690$685$703

$650

$700

$60094 95 96 97 98 99 00 01 02 03 04 05 06 07 08* 09* 10*

Countrywide Auto Insurance Expenditures Increased

92

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.

Monthly Change in Auto Insurance Prices*

(Percent)

6%

Auto Insurance Price Increases Seem to Have Leveled Off in Recent Months,

Averaging 4.5% for All of 2009

% .7% 4.0%

4.0% 4.

3% 4.4% 4.

7%4.

4% 4.7%

4.6% 4.7%

4.5% 4.6%

4.5% 4.

7%

4%

5%

%2.

6%2.

6% 2.7% 3.

0% 3.1% 3.

4 % 3.

3%

4%

0.8%

0.8%

0.5%

0.4%

0.3%

0.3% 0.

5% 0.6%

0.5%

1% 0.5% 0.

9% 1.1% 1.

3% 1.7%

2%

1%

2%

0 0 0 0.1 0.

0%

Jan

07eb

07

Mar

07

Apr

07

May

07

Jun

07Ju

l 07

Aug

07

ep 0

7O

ct 0

7N

ov 0

7D

ec 0

7Ja

n 08

eb 0

8M

ar 0

8A

pr 0

8M

ay 0

8un

08

Jul 0

8A

ug 0

8ep

08

Oct

08

Nov

08

Dec

08

Jan

09eb

09

Mar

09

Apr

09

May

09

Jun

09Ju

l 09

Aug

09

ep 0

9O

ct 0

9N

ov 0

9D

ec 0

9

93

* Percentage change from same month in prior year.Source: US Bureau of Labor Statistics

J F M A M J J A S O N D J F M A M Ju J A S O N D J F M A M J J A S O N D

Average Premium forHome Insurance Policies**

$950

$822 $835$854

$879

$804$764$800

$850

$900

$668

$764$729

$6 0

$700

$750

$

$508$536

$593

$550

$600

$650

$508$500

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

94

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

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

Q04

Q04

Q04

Q04

Q05

Q05

Q05

Q05

Q06

Q06

Q06

Q06

Q07

Q07

Q07

Q07

Q08

Q08

Q08

Q08

Q09

Q09

Q09

Q09

Q10

(Percent)-0

.1%

-2%

0%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

Magnitude of Price Declines Shrank

During Crisis,

-3.2

%% -4

.6%

-2.7

%-3

.0%

3% .1%

4.9% % 6% 3%-6%

-4%

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

-5.9

%-7

.0%

4% 7%-8

.2%

-

-5.

6%

-6.4

% -5 -4-5

.8%

-5.6 -5.

-10%

-8%

Underwriting Performance, Higher

Cat Losses and Costlier Reinsurance

-9.

-9.7

-9.6

-11.

3%-1

1.8%

.3% -12.

0%5% 2.

9% -11.

0%

-14%

-12%

KRW Eff t

Market Remains Soft as Capital

95

-13

-13. -1

2-16%

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

KRW Effectp

Restored and Underwriting Losses Fall

Change in Commercial Rate Renewals, by Line: 2010:Q1Percentage Change (%)

n

All Com

mercial

Comml P

ropGL Umbre

llaCom

ml Auto

Constr

uctio

nW

C

Bus. In

terrup

tion

EPL

D&O

Surety

0.4%

-1.0%

0.0%

1.0%

-3.9%

-2.9% -2.5%-2.1%

4 4%-3.9%

-4.0%

-3.0%

-2.0%

Most Major Commercial Lines Renewed Down in Q1:2010 by

-5.3% -5.4%-5.0%

-4.6% -4.4%

-6.0%

-5.0%

96Source: Council of Insurance Agents and Brokers; Insurance Information Institute.

j yRoughly the Same Margin as a Year Earlier

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q1Percentage Change (%)

Market has Been Soft for 6 years

Peak = 2004:Q4 +28.5%

Pricing Turned Soft for 6 years and Remains Soft

as Capital is Restored and Underwriting Losses Fall

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever SinceLosses Fall

KRW Effect

Trough = 2007:Q3 -13.6%


Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q1

1999:Q4 = 100

Pricing today is where is was inwhere is was in

Q4:2000 (pre-9/11)


Merger & AcquisitionMerger & Acquisition

Barriers to Consolidation Will Diminish in 2010

99

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

$56$60 140Transaction Values

$35$40

$40

$50

($ B

illio

n)

100

120

Num

be

Number of Transactions

$19 $20

$35

$16

$31

$20

$30

ctio

n Va

lue

60

80

er of Transa

$2$5

$1 $0 $0

$9$14

$16

$4$8

$12

$2$3 $3 $5$6

$10

$20

Tran

sac

20

40

ctions

$$0

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 090

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

100

Note: U.S. Company was the acquirer and/or target.Source: Conning Research & Consulting.

Record Capital, Slow Growth and Improved Financial Market Conditions

$in 2009, Volume Up 7%

Capital/Policyholderp ySurplus (US)

Shrinkage, but Not Enoughto Trigger Hard Market

101

US Policyholder Surplus:1975–2009*

$550

($ Billions)

Surplus as of 12/31/09 was $511.5B, up from $437 1B as of 3/31/09 Recent peak was $521 8

$

$400

$450$500

$437.1B as of 3/31/09. Recent peak was $521.8 as of 9/30/07. Surplus as of 12/31/09 is now

only 2.0% below 2007 peak; Crisis trough was as of 3/31/09 16.2% below 2007 peak.

$200

$250$300

$350

“Surplus” is a measure of

$50$100

$150

$200 underwriting capacity. It is analogous to “Owners

Equity” or “Net Worth” in non-insurance organizations

$0

$

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09*

organizations

The Premium-to-Surplus Ratio Stood at $0.82:$1 as of

* As of 9/30/09Source: A.M. Best, ISO, Insurance Information Institute.

The Premium to Surplus Ratio Stood at $0.82:$1 as of12/31/09, A Record Low (at Least in Recent History)

Policyholder Surplus, 2006:Q4–2009:Q4($ Billions)

$521 8 $$540

Capacity Peaked at $521.8 as of 9/30/07

Capacity as of 12/31/09 was just 2.0% below the 2007 peak and will likely

set a new record in

$487.1$496.6

$512.8$521.8

$478.5$463 0

$490.8

$511.5$505.0$515.6$517.9

$480

$500

$520set a new record in

2010

$455.6$437.1

$463.0

$420

$440

$460

$380

$400

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

Declines Since 2007:Q3 Peak

08:Q2: -$16.6B (-3.2%) 08:Q3: $43 3B ( 8 3%)

09:Q2: -$58.8B (-11.2%)09:Q3: $31 8B ( 5 9%)

103Source: ISO, AM Best.

08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%)09:Q1: -$84.7B (-16.2%)

09:Q3: -$31.8B (-5.9%)09:Q4: -$2.5B (-0.5%)

Global Reinsurance Capacity Shrankin 2008, Mostly Due to Investments

Global Reinsurance Capacity Source of Decline

$360

$350

$370 RealizedCapitalLosses

$310

$33031%

$300

$290

$310 55% 14%

Change inUnrealizedCapital Losses

Hurricanes

$2702007 2008

Global Reinsurance Capacity

Capital Losses

104Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute.

Global Reinsurance CapacityFell by an Estimated 17% in 2008

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

18%

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Over

(Percent)

13.8%

16.2%

15%

18% pthe Past 20+ Years

9.6%

6.9%

10.9%

6 2%

9%

12%

3.3%

6.2%

3%

6%

0%6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

105

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

Hugo Andrew Earthquake Hurricanes Katrina 3/31/09**

Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*

30%

(Percent)Surplus growth is now positive but premiums

continue to fall, a departure from the historical pattern

15%

20%

25%p

0%

5%

10%

15%

-10%

-5%

0%

-15%78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09E10P

NWP % change Surplus % change

Sharp Decline in Capacity is a Necessary but

106

* 2009 NWP and Surplus figures are % changes as of Q4:09 vs Q4:08Sources: A.M. Best, ISO, Insurance Information Institute

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

Investment PerformanceInvestment Performance

Investments Are a PrincipleS f D li i P fi biliSource of Declining Profitability

107

Property/Casualty Insurance Industry Investment Gain: 1994–20091

$64.0$70

($ Billions)

$42.8$47.2

$52.3

$44.4 $45.3$48.9

$59.4$55.7

$39 0

$58.0$51.9

$56.9

$50

$60

$35.4 $36.0$31.7

$39.0

$20

$30

$40

$0

$10

$20

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

Investment Gains Fell by 50% In 2008 Due to Lower Yields,Poor Equity Market Conditions. In 2009, the Lower Realized Capital Losses

Helped Offset Lo er In estment IncomeHelped Offset Lower Investment Income1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

P/C Insurer Net Realized Capital Gains, 1990-2009

1 18.0

2

02 6.21

($ Billions)$2

.88

$4.8

1 $9.8

9

$9.8

2

$10.

81 $1

$13.

0

$16

$6.6

3

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

$9.2

4

$6.0

0

$1.6

6

$0$5

$10$15$20

-$1.

21

-$7.

98

$20-$15-$10-$5$0

-$19

.81

-$25-$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09Q3

Realized Capital Losses Hit a Record $19.8 Billion in 2008 Due to Financial Market Turmoil, a $27.7 Billion Swing From 2007,

109Sources: A.M. Best, ISO, Insurance Information Institute.

Followed by an $8.0B Drop in 2009. This is a Primary Cause of 2008/2009’s Large Drop in Profits and ROE

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

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

3 31%

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

4.22%4.05%4%

5%

Treasury yield curve is near its most depressed level in at

2.75%

3.31%

2.10%2%

3%

most depressed level in at least 45 years. Investment

income is falling as a result

0.15% 0.16% 0.22% 0.34%0.76%

1.26%

1%

2%

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

0%1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y

Stock Dividend Cuts Have Further Pressured Investment Income

110

Stock Dividend Cuts Have Further Pressured Investment Income

*Week ending May 24, 2010.Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

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

l Line

sAutop cia

lAuto Prop Cas Sure

tyy Lin

es

nce*

*

1 0%0.0%

Person

al L

Pvt Pas

s APers

Prop

Commerc

iCom

ml Au

Credit

Comm P

roCom

m Ca

Fidelity

/Su

Warr

anty

Surplus

LiMed

Mal

WC

Reinsu

ran

-3.1%-3.3%-3.3% 3 7%

-1.8%-1.8%-2.0%

-3 6%

-1.9%-2.1%

-4.0%-3.0%-2.0%-1.0%

-3.7%-4.3%

-5.2%-5.7%

-3.6%

-7.0%-6.0%-5.0%

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

-7.3%-8.0%

111

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

Underwriting and Pricing Discipline

Distribution of P/C Insurance Industry’s Investment Portfolio

Portfolio Facts As of December 31, 2008

Invested assets totaled $1.214 trillion as of 12/31/08

68.4%

Bonds

Insurers are generally conservatively invested, with more than 2/3 of assets invested in bonds as of

68.4%

12/31/08

Only about 15% of assets were invested in common stock

f 12/31/08 8 0%14.8%6.1%

P f d St k

Other

as of 12/31/08

Even the most conservative of portfolios was hit hard in 2008

8.0%

0.9%1.8% Common

StockReal Estate

Cash and Short-term

Investments

Preferred Stock

112Sources: NAIC; Insurance Information Institute research.

Underwriting Trends –Underwriting Trends Financial Crisis Does Not

Directly Impact UnderwritingDirectly Impact Underwriting Performance: Cycle, Catastrophes

Were 2008’s DriversWere 2008’s Drivers

113

P/C Insurance Industry Combined Ratio, 2001–2009*

Best C bi d

As Recently as 2001, Insurers Paid Out

Relatively Low CAT C li l

2005 Ratio Benefited from H U f Combined

Ratio Since 1949 (87.6)

Insurers Paid Out Nearly $1.16 for Every

$1 in Earned Premiums

Low CAT Losses, Reserve Releases

Cyclical Deterioration

Heavy Use of Reinsurance

Which Lowered Net Losses

115.8120

99 3101.0100.8100.1

107.5110

95.7

99.3

92.6

98.4

90

100

114

* Excludes Mortgage & Financial Guaranty insurers in 2008/2009. Including M&FG, 2008=105.0, 2009=101.0 Sources: A.M. Best, ISO.

902001 2002 2003 2004 2005 2006 2007 2008 2009

Underwriting Gain (Loss)1975–2009*

$

$35 Cumulative underwriting deficit f 1975 th h

($ Billions)

$5

$15

$25 from 1975 through 2009 is $445B

-$25

-$15

-$5

$55

-$45

-$35

$ 5

The industry “improved” as of 2009:Q3 to an underwriting loss of $3.1 billion, compared to a

loss for all of 2008 of $21.2 billion.

Large Underwriting Losses Are NOT Sustainable

-$55

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

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

in Current Investment Environment

P/C Reserve Development, 1992–2011E

23.2

$20

$25

$30

e ($

B)

6

8 Impact o

Prior Yr. ReserveDevelopment ($B)

I t

2.3 1

11.7 13.79.9

7.3$5

$10

$15

$

rve

Rel

ease

2

4

on Com

bine

Impact onCombined Ratio

-2.1

-8.3

-2.6-6.6

-9 9 -9 8

-4.1

1

-6.7-9 5

-5-$10

-$5

$0

ior Y

r. R

ese

4

-2

0

ed Ratio (Po-9.9 -9.8 9.5

-14.6-16 -15-$20

-$15

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

10E

11E

Pri

-6

-4

oints)

1 1

Reserve Releases Will Expected to Taper Off in 2010 and Drop Significantly in 2011

116

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

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

.1 115.

9

114.

7

1.8

2 2 .0 2.3

4115.

7

4115

120

105.

6

107.

8

110.

107.

3

100.

1

8.3 10

0.9 10

5.1

101.

9 105.

9

1

107.

8 11

107.

4

108.

3

105.

3 109.

2

109.

2

110. 11

100.

8

6 0 100.

6

.4

105.

5

105.

7 109.

4

106.

9

108.

4

106.

4

105.

8

101.

6

105

110

115

1 98

92.4 95

.5

96. 6

96.0 1

93.9 97

.

90

95

100

80

85

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

Calendar Year Accident Year

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

117

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.

Number of Years with Underwriting Profits by Decade, 1920s–2000s

10

12Number of Years with Underwriting Profits

8

10

76

8

10

3

54

6

4

6

0 00

2

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

Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –

But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

118

* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Recorded in the 25 Years from 1979 Through 2003

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

Reinsurance

119

Calendar Year Combined Ratios by Segment: 2008-2010P

110

Personal lines combined ratio is expected to improve in 2010 while commercial lines

and reinsurance deteriorate

101.0 101.2100.3

103.7

100.599 8

107.2

103.6

102104106108110 and reinsurance deteriorate

92.2

99.8

949698

100

9092

Personal Lines Commercial Lines US Reinsurance

2008 2009E 2010P

Overall deterioration in 2010 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting

f l t d t th l d i l ft k t

120Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.

performance related to the prolonged commercial soft market

Calendar vs. Accident Year Combined Ratios by Segment: 2008-2010P*

106 4108

CY commercial lines combined ratios are lower than AY due to reserve releases

98 6

101.3100.3102.4

106.4104.0

100102104106108

98.6

92949698

100

9092

Commercial Lines-Calendar Year Commercial Lines-Accident Year

2008 2009E 2010P

The ability of reserves releases to favorably impact calendar year results will diminish over time reserved redundancies fall

121

*Normalized to reflect average/typical level of catastrophe losses.Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.

After-Tax Return on Surplus (ROE) by Segment: 2008-2010P

7 3% 7 1%8%

Personal lines ROEs should improve in 2010 and remain flat in commercial lines and

i5.3%

7.3%

5.2%

6.6% 7.1%

5.3%

3.9%4%5%6%7%8% reinsurance

1.7%

0%1%2%3%

-1.3%-2%-1%

Personal Lines Commercial Lines Reinsurance

2008 2009E 2010P

Profitability will rise or stabilize across most p/c lines, barring a


y p , gfinancial crisis relapse or major catastrophic losses

Change in Policyholder Surplus by Segment: 2008-2010P

21 0%25%

After a steep decline in capacity during the crisis, most of that capacity was

restored in 2009. Virtually is expected t b t d i 2010

8.0% 7.0%

19.0%

5 0% 6.0%

21.0%

10%15%20%25% to be restored in 2010.

5.0%

10%-5%0%5%

-12.3%-12.1%-11.5%-15%-10%


2008 2009E 2010P

Rapid growth in policyholder surplus to pre-crisis levels combined with ongoing slow growth or declines in premiums (esp. in

i l li ) i li b ild f it j


commercial lines) implies a build-up of excess capacity—a major factor in weak commercial lines and reinsurance pricing

Net Written Premium Growth by Segment: 2008-2010P

6%

Personal lines will return to growth in 2010 while commercial lines and reinsurance are

expected to continue to shrink

1.8%3.5%

0%2%4%6%

-1.1% -1.5%

-5.6%

-2.0%-4.0%

-0.7%

8%-6%-4%-2%

-7.9%-10%

-8%


2008 2009E 2010P

Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Low catastrophe losses and ample


gcapacity are holding down reinsurance prices while higher insurer

retentions impact premiums

Change in Net Investment Income by Segment: 2008-2010P*

15%

Net investment income is expected to begin to recover in all segments in 2010

1.9%3.4% 1.9%

10.7%

0%

5%

10%

15%

-4.1%

13 4%

-0.8%

12 8%-15%

-10%

-5%

0%

-16.1%-13.4%-12.8%

-20%

-15%


2008 2009E 2010P

Investment income consists primarily of interest on bonds and stock dividends. Both were hit hard during the financial crisis as the Fed slashed

interest rates to near zero and corporations cut dividends. A recovery in


investment asset values beginning in Q2 2009—which reduced realized capital losses—has helped offset some of the decrease in investment income.

Investment Yield by Segment: 2008-2010P*

5 0%

Investment yields are shrinking across all segments—down 10 to 100 bases points since 2008

3 5%3.7%

3.9%3.6%

3.8%3.9%

4.6%

3.8%4.0%

4.5%

5.0%

3.5%3.3%

2.5%

3.0%

3.5%

2.0%Personal Lines Commercial Lines Reinsurance

2008 2009E 2010P

The Fed slashed interest rates in 2008 and has kept them low since, eroding the yield on all types of bonds especially US Treasury securities Yields will


the yield on all types of bonds, especially US Treasury securities. Yields will not recover until the Fed begins monetary policy tightening.

Homeowners Insurance Combined Ratio: 1990–2010P

8.4170

158

77

140

150

160

113.

0

117.

7

113.

6

01.0 10

9.4

108.

2

111.

4 121.

7

109.

3

.3 00.1

7

117.

0

105.

5

105.

0118.

4

112.

7 121.

7

110

120

130

10 98

94.2 10

89.4 95

.7

80

90

100

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

Homeowners Line Is Expected to Be Marginally Profitable Overall in 2010, but in Many States Could Be Quite Profitable. Volatility Due to

Catastrophe Losses Will PersistCatastrophe Losses Will Persist

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

Private Passenger Auto Combined Ratio: 1993–2010P

9.5

9

115

101.

7

101.

3

101.

3

101.

0

109

107.

9

104.

2

.4 .3 100.

3

9.3 .59.5 101.

1

103.

5

105

110

98.

94.3

95.1

95.5 98

. 1 99 98.99

90

95

100

80

85

90

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

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


Commercial Multi-Peril Combined Ratio: 1995–2010P

0 8 5.0

2.4 .0130

119.

0

119.

8

08.5

125

116.

2

116.

1

.9 5.4

116.

8

113.

6

115.

3 122

115.

0

117.

0

08.011

3.1

115.

0 121

110115120

1251

104

101.

9

105

95.1 97

.6100.

7

97.3

0

97.7

93.8

.8

10

97.0 99

.5

95100105

110

89.0

83.8

89.

8085

9095

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

Commercial Multi-Peril is Expected to Continue to Perform Reasonably WellPerform Reasonably Well

*2009E and 2010P figures are for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.

Commercial Auto Combined Ratio: 1993–2010P

9 8.1

7 2125

112.

1

112.

0

113.

0

115.

9

2.7

118

115.

7

116.

2

110

115

120

102

95.2

92.9

92.1

92.4 94

.2 96.8

97.0 98

.5

95

100

105

9

80

85

90

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

Commercial Auto is Expected to Remain Reasonably Profitable in 2010Profitable in 2010


Inland Marine Combined Ratio: 1999–2010P

101.9105 0 9

92.8

100.2

93.289 9

95

100

83.8

79.5

86.088.5

80.882.5

89.9

80

85

90

77.3

70

75

80

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

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


Workers Compensation Combined Ratio: 1994–2010P

121.73 8.2125

.0 0

110.

9

110.

0

107.

0

2.7 3.5

04.3 10

9.0

112.

0

107.

0

115.

3

118

110

115

120

102.

97.0 10

0.0

101.

0

102

98.4 10

3

10

95

100

105

80

85

90

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

Workers Comp Underwriting Results Are Deteriorating MarkedlyDeteriorating Markedly


Catastrophic Loss –Catastrophe Losses Trends Are p

Trending Adversely

133

Natural Catastrophes: Jan – Mar 2010Worldmap

4

53

1

6

12The 12 Jan. Haiti

quake killed 225,500 people, caused $8B+ in economic damage, but little in the way of

insured losses

7

8

Chilean earthquake (mag. 8.8) on 27 Feb. produced at least $4 billion in insured losses, $20

billion in economic losses. MostSevere winter weather in the

Eastern US produced insured

Winter Storm Xynthia produced at least $2B in insured

insured losses

Geophysical events(earthquake, tsunami, volcanic activity)

Hydrological events(flood, mass movement)

Global natural catastrophes

billion in economic losses. Most costly insurance event in 2010

plosses of produced at least

$1B in insured losses and $2B in economic losses

least $2B in insured losses and $4B in economic losses

Meteorological events (storm)

Climatological events(extreme temperature, drought, wildfire)

Selection of significant natural catastrophes (see table)

© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 29 March 2010

Natural Catastrophes: January – March 2010Selection of Significant Events

No. Period Event Affected Area

Overall losses*

Insuredlosses* Fatal-

ities*S$US$ m, original values

1 7–12 January Winter damage, cold wave

United States: Midwest (MO, IA); South (AR, LA, OK, TX); Southeast (FL, AL, GA, MS, NC, SC, TN)

800 160 5

2 12 January Earthquake Haiti: South (esp. Port-au-Prince) >8,000 222,500

3 18–22 January Severe storms United States: Southwest (CA, AZ, UT) 180 120 203 18 22 January Severe storms United States: Southwest (CA, AZ, UT) 180 120 20

4 4–6 February Winter storm, blizzards United States: Northeast (DC, DE, MD, NJ, PA); Southeast (NC, VA, WV)

180 135 2

5 9–14 February Winter storm, blizzards, winter damage

United States. Canada 800 560

6 26–28 February Winter storm Xynthia, Belgium. France. Germany. Netherlands. Portugal. 4,500 >2,000 636 26 28 February Winter storm Xynthia, storm surge

Belgium. France. Germany. Netherlands. Portugal. Spain. Switzerland. United Kingdom

4,500 >2,000 63

7 27 February Earthquake, tsunami Chile: Central; South >20,000 >4,000 507

8 6–7 March Hailstorm, severestorms

Australia: Southeast (Victoria) 1,200 780

*Preliminary figures

First Quarter 2010 Insured Major Catastrophe Losses Were Among the Highest on Record for Q1, Totaling at least $7.755 Billion. Economic

L T t l t L t $35 66 M th 223 000 P l W Kill d i

© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 29 March 2010

Losses Total at Least $35.66. More than 223,000 People Were Killed in These Events.

Gulf Coast Near Deepwater Horizon Site

On April 20, 2010, an explosion and p

fire occurred on the offshore drilling rig Deepwater Horizon,

which had been drilling an g

exploratory well in approx. 5,000 ft of water in the Gulf of Mexico, 52 miles SE

of Venice, Louisiana.

The platform subsequently sank,

with 11 crewmemberscrewmembers

presumed dead, and the

uncompleted well leaking oil.

Sources: Energy Information Administration

Announced Deepwater Horizon Insured Losses

$600.0$600

$700

Insured losses are well-syndicated

(Millions)

$400

$500

$600 Insured losses are well syndicated and spread across a broad range of

global insurers and reinsurers.

$200

.0

$100

.0

70.0

3.0

5.0

0.0 .0 .0 .0 .0 .0 0 0 0 0.0$100

$200

$300

$ $7 $5 $45

$40

$30

$25

$25

$20.

$20.

$15.

$15.

$15.

$13.

$8.0

$7.5

$5.0

$20.

$0

$100

oyd's

*ss

Re

Re** erRe

Re***

usRe

Catlin

apita

lau

cer

shire AIG

st Re

er Re

icRe

Amlinox

****

apita

lAXISele

rsrkl

ey

*Lloyd’s estimates net loss to the market of $300 million to $600 million. Includes estimate across all Lloyd’s syndicates. Those syndicates that

Lloy

SwissMun

ich R

Partne

Hanov

er Re

Validu

s CaXL C

apCha

uLa

ncas

AEve

rest

Montpe

lier

Transa

tlanti

c AmHisc

oxArch

Cap A

Trave

W.R. B

erk

137

y y y yhave reported losses individually are also shown in this chart and included in the Lloyd’s total.**Munich Re expects low triple digit million euro loss***Hanover Re expects a Eur40 million loss ****Hiscox expects net claims of below GBP10 million ($14.8 million)Source: Insurance Information Institute (I.I.I.); Company disclosures, SNL Financial Citi research note 05/04/10; Barclays Capital research note 05/10/10

US Insured Catastrophe Losses

$100

.0$120

$100 Billion CAT Year is Coming Eventually($ Billions)

2000 A D d f Di t

$61.

9

$

$80

$100 2009 CAT Losses

Were Down 61% from

2008

2000s: A Decade of Disaster2000s: $193B (up 117%)

1990s: $89B

3 4 0.1

3

$26.

5

2.9 $2

7.5

$

2

$27.

1

0.6

5 $22.

9

16.9

$40

$60$8

.3

$7.4

$2.6 $1

0

$8.3

$4.6

$5.9 $1 $9. 2

$6.7 $10

$7.5

$2.7

$4.7

$5.5 $

$0

$20

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

2009 CAT Losses Were Less than Half of 2008. 2005 Was by Far the Worst Year Ever for Insured Catastrophe

Losses in the Decade of the 2000s Were More than Double the 1990s, But the Worst Has Yet to Come

138

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; Insurance Information Institute.

But the Worst Has Yet to Come

Global Natural Catastrophes 1980–2009Overall and insured losses with trend

300MEGATREND

Global natural catastrophe loss trends are ominous and

200

250loss trends are ominous and

portend an even more disastrous decade ahead. Terrorism and other man-

made disasters could

150US$

bn

made disasters could exacerbate the trend.

50

100

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

Overall losses (in 2009 values) Insured losses (in 2009 values)Overall losses (in 2009 values) Insured losses (in 2009 values)

Trend insured lossesTrend overall losses

Source: Munich Re NatCatSERVICE; Insurance Information Institute.

U.S. Significant Natural Catastrophes, 1950 – 2009Number of Events ($1+ Bill economic loss and/or 50+ fatalities)

There were 7 Significant Natural Catastrophes in

Sthe United States in 2009

Sources: MR NatCatSERVICE

Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*($ Billions)

$

Texas

$31.20 , 10%

$33.60 , 11%

Louisiana

$176 , 60% $57 10

Rest of US60% $57.10 ,

19%Florida

Florida Accounted for 19% of All US Insured CAT Losses

141

* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

from 1980-2008: $57.1B out of $297.9B

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

$45 3$50 Hurricane Katrina Remains, By Far, the

$23 8

$45.3

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

Most Expensive Insurance Event in US and World History

$11.3 $12.5$18.2

$22.8 $23.8

$8.5$8.1$7.3$6.2$5.2$4 2$10$15$20$25$

$5.2$4.2

$0$5

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

(2001)

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

8 f th T 12 Di t Aff t d FL

142Sources: PCS; Insurance Information Institute inflation adjustments.

8 of the Top 12 Disasters Affected FL

Total Value of Insured Coastal Exposure

(2007, $ Billions)

$2,458.6Florida

$635.5$772.8

$895.1$2,378.9

$2,458.6FloridaNew York

TexasMassachusetts

New Jersey $522B Increase$224.4

$191.9$158.8$146 9

$479.9ConnecticutLouisiana

S. CarolinaVirginia

M i

$522B Increase Since 2004,

Up 27%

$146.9$132.8

$92.5$85.6$60 6

MaineNorth Carolina

AlabamaGeorgia

Delaware

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, an Increase of $522B or 27% from $1.937 Trillion in 2004$60.6

$55.7$51.8$54.1

$14.9

DelawareNew Hampshire

MississippiRhode Island

Maryland

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

143Source: AIR Worldwide

$

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

y

US Residual Market Exposure to Loss

$900

Katrina, Rita, and Wilma

($ Billions)

$656.7

$771.9$696.4

$600

$700

$800

$900

4 Florida Hurricanes

$372.3$430.5 $419.5

$292.0$281 8$400

$500

$600Hurricane Andrew

$292.0$244.2$221.3

$281.8

$150.0

$54.7$100

$200

$300

$01990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in the Resid al Market (FAIR & Beach/Windstorm) Plans Has S rged from

144Source: PIPSO; Insurance Information Institute

the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from $54.7B in 1990 to $696.4B in 2008

Insurance Information Institute Online:

www iii orgwww.iii.org

Thank you for your timed tt ti !and your attention!

Twitter: twitter.com/bob_hartwig_ g

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