The P/C Insurance Industry:Financial Update & Outlook

2016: OK, But A Little Worse Than 2015

2017 Could Be Better

Steven Weisbart, Ph.D., CLUI.I.I. Senior Vice President & Chief Economist

2

$49,400

$4,100

$16,200

$26,700

$8,000

$27,800

$42,700

$37,800

$44,100

$31,800

$0

$10,000

$20,000

$30,000

$40,000

$50,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Milli

on

sP/C Industry Net Income After Taxes,First Three Quarters of Each Year, 2007-2016

Sources: A.M. Best; ISO, a Verisk Analytics company; Insurance Information Institute.

The 2016 result is below the 2012-16

average of $36.8 billion

Highest 9-month total since 2007

3

14

,17

8

5,8

40

19

,31

6

10

,87

0 20

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4 36

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2

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,81

9

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,00091

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16:Q

3

Milli

on

sP/C Industry Net Income After Taxes1991-2016:Q3

*ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009

Sources: A.M. Best; ISO, a Verisk Analytics company; Insurance Information Institute.

2016 profits likely weaker than in recent

years

4

*Profitability = P/C insurer ROEs. 2011-16 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.

Sources: Insurance Information Institute; Natl. Assoc. of Insurance Comm.; ISO, a Verisk Analytics company; A.M. Best, Conning.

2.4%

19.0%

1.8%

17.3%

4.5%

11.6%

-1.2%

12.7%

9.8%

8.4%

8.4%

6.2%

-5%

0%

5%

10%

15%

20%

25%

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

RO

EProfitability Peaks & Troughs in the P/C Insurance Industry, 1975-2016

If historical patterns hold, next ROE peak

could be in 2017.

11 Years?

55

Policyholder Surplus, Quarterly,2006:Q4–2016:Q3

Sources: ISO, A.M .Best.

($ Billions)

$400

$450

$500

$550

$600

$650

$700

$750

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

14:Q

2

14:Q

3

14:Q

4

15:Q

1

15:Q

2

15:Q

3

15:Q

4

16:Q

1

16:Q

2

16:Q

3

2007:Q3Pre-Crisis Peak

Surplus as of 9/30/16 stood

at $688.3B

2010:Q1 data includes $22.5B of paid-in

capital from a holding company parent for

one insurer’s investment in a non-

insurance business.

The industry now has $1 of surplus for every $0.77 of NPW,close to the strongest claims-paying status in its history.

Drop due to near-record 2011 CAT

losses

The P/C insurance industry entered 2017in very strong financial condition.

Surplus has grown by only 2.5% over the last 9 quarters

Underwriting Performance

7

Commercial & Personal Lines NPW Growth:1996-2016E

Note: Data include state funds beginning in 1998. 16E is first three quarters.

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

-10%

-5%

0%

5%

10%

15%

20%

25%

96 98 00 02 04 06 08 10 12 14 16E

Commercial Lines Personal Lines

Commercial Lines is Prone toMuch More Cyclical Volatility Than Personal Lines.

-1.3%

5.7%

8

Net Written Premium Growth (All P/C Lines): First Three Quarters, 2006-2016

Sources: A.M. Best (1971-2013), ISO (2014-16).

3.8%

0.0%

-0.4%

-4.5%

0.8%

3.2%

4.2% 4.2%3.9% 4.1%

2.8%

-5.0%

-2.5%

0.0%

2.5%

5.0%

06 07 08 09 10 11 12 13 14 15 16*

Total Net Written Premiums for the first nine monthsrose more slowly in 2016 than in any year since 2010.

9

Net Premium Growth (All P/C Lines): Annual Change, 1971-2016:Q3

Shaded areas denote “hard market” periods *2016 is first nine months

Sources: A.M. Best (1971-2013), ISO (2014-15).

-4%

0%

4%

8%

12%

16%

20%

24%

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930–33.

2016.Q3: 2.8%2015: 3.4%2014: 4.1%2013: 4.4%2012: 4.2%

1975–78 1984–87 2000–03

Net Written Premiums rose more slowly in each of the last three years vs. the year before, despite strong increases in personal lines premiums

10

Net Underwriting Gains & Losses, First Three Quarters, 2007-2016

*Estimates through 12/31/15 in 2015 dollars.

Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars).

Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.

$18.1

-$19.9

-$3.2-$6.2

-$34.9

-$6.7

$10.5

$4.3$7.1

-$1.7

-$40

-$30

-$20

-$10

$0

$10

$20

$30

07 08 09 10 11 12 13 14 15 16

Billi

on

s (

$2

01

5)

2013/14/15 Were Welcome Respites from 2011/12, Which WereAmong the Costliest Years for Insured Disaster Losses in U.S. History.

Longer-term Trend is for More – Not Fewer – Costly Events.

Net Underwriting Losses Have Been “the Norm.”

3 Consecutive Years of U/W Profits; 1st

time since 1971-73

11

P/C Insurance Industry Combined Ratio, 2001-2016*

*Excludes Mortgage & Financial Guaranty insurers 2008-2014. 2016 is first nine months Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0.

Sources: A.M. Best; ISO, a Verisk Analytics company; 2010-2015E is from A.M. Best P&C Review and Preview, February 16, 2016.

115.8

107.5

100.1

98.4

100.8

92.6

95.7

101.0

99.3

101.1

106.5

102.5

96.4 97.097.8

99.5

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16*

This is actually an

underwriting loss.

Heavy Use of Reinsurance Lowered Net

Losses.

Best Combined

Ratio Since 1949 (87.6)

Higher CAT Losses, Shrinking Reserve Releases, Toll of

Soft Market

Sandy

3 Consecutive Years of U/W Profits; 1st time

since 1971-73

12

U.S. Insured Catastrophe Losses

*2016 is first nine months

Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars).

Sources: Property Claims Service, a Verisk Analytics business; Insurance Information Institute.

$14.7

$5.1$8.4

$39.6

$9.3

$27.7

$13.2$11.5

$4.0

$15.1

$12.1

$6.4

$36.4

$7.9

$17.1

$35.3

$77.1

$11.1$7.8

$30.7

$12.0$15.2

$35.2$36.8

$13.3

$15.8$15.3

$18.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16*

Bil

lio

ns

, 2

01

6 $

2013/14/15 Were Welcome Respites from 2011/12, Which WereAmong the Costliest Years for Insured Disaster Losses in U.S. History.

Longer-term Trend is for More – Not Fewer – Costly Events.

2012 was the 3rd Most Expensive Year Ever for

Insured Cat Losses.

Investments

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

1414

US Treasury Note 10-Year Yields:A Long Downward Trend, 2000–2017*

*Monthly, constant maturity, nominal rates, through February 2017.

Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm; National Bureau of Economic Research (recession dates); Insurance Information Institute.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Recession

10-Yr Yield

Yields on 10-Year US Treasury Notes have been below 3% for over 5 years: 10-year bonds bought in 2007 at 5% will be

reinvested at 2.5% for 10 more years

Since nearly 50% of P/C bond/cash investments are in 5-year or longer maturities, most P/C insurer portfolios will have low-yielding bonds for years to come.

The end of the downtrend?

14

15

4.85

4.44

4.03

4.59 4.50 4.494.20

3.933.73 3.83

3.683.43

3.65

3.18

0%

1%

2%

3%

4%

5%

6%

02 03 04 05 06 07 08 09 10 11 12 13 14 15

P/C Insurer Portfolio Yields,2002-2015

Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

Even as Prevailing Rates Rise in the Next Few Years, Portfolio Yields Are Unlikely to Rise Quickly,

Since Low Yields of Recent Years Are “Baked In” to Future Returns.

P/C Carrier Yields Have Been Falling for Over a Decade, Reflecting the Long Downtrend in

Prevailing Interest Rates.

16

Property/Casualty Insurance Industry Investment Gain: 1994-20161

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.

*2005 figure includes special one-time dividend of $3.2B **2016 is first nine months, annualized

Sources: ISO, a Verisk Analytics company; NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

42.8

47.2

52.3

58.0

51.9

56.9

44.4

36.0

45.348.9

59.455.7

64.0

31.7

39.2

53.456.2

54.2

58.756.2 56.6

51.0

$0

$10

$20

$30

$40

$50

$60

$70

95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13 14 15 16**

Bil

lio

ns

If the industry portfolio yield were 4%, the investment gains

would be $15 billion higher

Total Investment Gains through the first nine months of 2016 were downdue to lower results in both investment income and realized capital

gains.

17

P/C Insurance Industry Net Investment Gain1

First Three Quarters, 2007-2016

1Investment gains consist primarily of bond interest, stock dividends and realized capital gains and losses.

*Sources: ISO, a Verisk Analytics company; NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

$47.8

$28.3$26.2

$39.4$42.0

$38.1$40.3

$43.1 $43.7

$38.6

$0

$10

$20

$30

$40

$50

$60

07 08 09 10 11 12 13 14 15 16

Bil

lio

ns

The ($5.1B) 11.6% drop in 2016 vs. 2015 reversed a small upward trend from 2012-2015. The drop was due to lower results in both investment

income and realized capital gains.

18

March 2017: Quarterly Yield Forecastsfor 10-Year US Treasury Bonds in 2017-18

2.4 2.42.5 2.5

2.7 2.7 2.72.8

2.52.6

2.7

2.93.0

3.13.2

3.3

2.5

2.8

3.0

3.2

3.43.5

3.8

4.0

2

2.5

3

3.5

4

4.5

2017:Q1 2017:Q2 2017:Q3 2017:Q4 2018:Q1 2018:Q2 2018:Q3 2018:Q4

10 Most Pessimistic Median 10 Most Optimistic

18

Yield (%)

Virtually all of the 53 forecasts in the Blue Chip survey expectcontinual increases in the yield of 10-year T-bonds in 2017-18.

Sources: Blue Chip Economic Indicators (3/17); Insurance Information Institute

On March 14 the yield was 2.60%.

The Economic Environment for the U.S. P/C Insurance Business

The Strength of the Economy Will Affect the Exposure Base Across Most Lines

20

1.4

5.0

2.3

2.2

2.6

2.4

0.1

2.5

1.3

4.1

2.0

1.3

3.1

0.4

2.7

1.8

4.5

3.5

-0.9

4.6

4.3

2.1

2.0

2.6

2.0

0.9

0.8

1.4

3.5

1.9

1.2

-1%

0%

1%

2%

3%

4%

5%

6%

09:3

Q

10:3

Q

11:3

Q

12:3

Q

13:3

Q

14:3

Q

15:3

Q

16:3

Q

Rea

l G

DP

Gro

wth

U.S. Post-Recession Real GDP Growth,* Quarterly (Seasonally-Adjusted at an Annual Rate)

Sources: U.S. Department of Commerce; estimate for 2017:Q1 from Atlanta Federal Reserve Bank GDPnow, March 8, 2017, at https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1 ; Insurance Information Institute.

Since the Great Recession ended, the economy (as measured by real GDP) grew faster than 3% (at an annual rate) in a calendar quarter

only 8 times in 31 quarters. Only once in the last 10.

21

Yearly U.S. Real GDP Growth: Range of Forecasts, 2017-2021

Sources: Blue Chip Economic Indicators, March 2017 issue; Insurance Information Institute.

2.5%

2.9%

2.5% 2.5% 2.5%

2.3%2.4%

2.1%2.0% 2.0%2.0% 2.0%

1.5%1.6%

1.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2017 2018 2019 2020 2021

Top 10 Avg Median Bottom 10 Avg

All Forecasts Expect U.S. Growth to be Fairly Steady in 2019-21;The Main Difference Among Them is the Level of Economic Activity.

22

The Economy Drives the P/C Insurance Industry:Net Premium Growth (All P/C Lines) vs. Nominal GDP: Annual Change, 1971-2015

Sources: A.M. Best (1971-2013), ISO (2014-15); U.S. Commerce Dept, Bureau of Economic Analysis; I.I.I.

-4%

0%

4%

8%

12%

16%

20%

24%

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

NWP GDP

Except for the three “hard markets” in this 45-year period,Net Written Premiums track Nominal GDP—not year by year but fairly well.

23

Does the Economy Drive Business Property Insurance Premiums?Direct Written Premium Growth (CMP Non-Liability)vs. Year-Earlier Change in Nominal GDP

Sources: A.M. Best 2016 Aggregates & Averages, p. 568; U.S. Commerce Dept, Bureau of Economic Analysis; I.I.I.

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

04 05 06 07 08 09 10 11 12 13 14 15

DWP GDP

Direct Written Premiums for the Non-Liability portion of Commercial Multiple Peril Insurance track one-year-earlier Nominal GDP—not year by year but fairly well.

24

State-by-State Leading Indicatorsthrough June 2017

Sources: Federal Reserve Bank of Philadelphia at www.philadelphiafed.org/index.cfm , released February 1, 2017; Next release is April 6, 2017; Insurance Information Institute.

Near-term

growth forecasts

vary widely by

state.

Strongest

growth = blue

(over 4.5%);

dark green

(1.5%-4.5%);

then light green;

then gray;

weakest = yellow

25

ISM Manufacturing Index (Values > 50 Indicate Expansion), January 2010-February 2017

Sources: Institute for Supply Management; Insurance Information Institute.

The manufacturing sector expanded in 67 of the 70 months from January 2010 through October 2015. It contracted in November 2015 through February 2016 and

again in August but is expanding again.

58

.35

7.1

60

.45

9.6

57

.85

5.3

55

.15

5.2

55

.35

6.9

58

.25

8.5

60

.8 61

.45

9.7

59

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55

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1.45

2.5

52

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52

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1.9

53

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53

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51

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0.7

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0.9

55

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5.7 56

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6.4 57

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6.5

51

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3.2 53

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5.3

57

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9.0

56

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9.0

58

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5.5

53

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2.9

51

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1.5

52

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2.7

51

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0.2

50

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8.6

48

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8.2

49

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1.8

50

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3.2

52

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9.4

51

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1.9

53

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4.7

56

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7.7

45

50

55

60

65

Ap

r 10

Au

g 1

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Dec 1

0

Ap

r 11

Au

g 1

1

Dec 1

1

Ap

r 12

Au

g 1

2

Dec 1

2

Ap

r 13

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g 1

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Dec 1

3

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g 1

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Dec 1

4

Ap

r 15

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g 1

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Dec 1

5

Ap

r 16

Au

g 1

6

Latest 6 months: strengthening

26

ISM Non-Manufacturing Index (Values > 50Indicate Expansion), January 2010-February 2017

Sources: Institute for Supply Management via https://research.stlouisfed.org/fred2/data/NMFCI.txt; Insurance Information Institute.

The non-manufacturing sector expanded in every month After January 2010. The pace of expansion roared ahead in 2014-15, slowed a bit in 2016,

but ended strong.

49

.65

0.8

53

.25

5.6

55

.55

4.6

54

.85

2.7

53

.65

5.3

56

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57

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5.8

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5.5

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3.8

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4.4

52

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3.9

55

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6.3 56

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7.9

56

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56

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6.9

57

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6.9 5

7.5

55

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9.6

58

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6.7

58

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3.5

53

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4.5

55

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2.9

56

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5.5

51

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7.1

54

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7.2

57

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6.5

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48

50

52

54

56

58

60

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2727

Business Bankruptcy Filings: Three Yearsat Remarkably Low Levels (1994:Q1 – 2016:Q4)

13.9

13.6

12.9

12.0

13.1

12.2 12.6

12.9 13.4 14.0

13.2

12.9 1

3.8

14.0

13.5

12.7

12.4

11.6

10.3

9.9

9.2

10.4

9.0

9.0 9

.59.2

8.2 8.4

10.0

10.3

9.5 1

0.0

9.8

9.7

9.4 9.5

8.8 9

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8.3

10.6

8.2

7.6 7.8 8.18.7

9.5

12.8

4.1

4.9 5

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8.0

8.7

9.7

11.5

12.9

14.3

16.0

14.2 1

5.0

14.6

14.5

14.0

13.0

12.4

12.3

11.7

11.1

11.0

10.4

9.2 9.3

8.5 8.9

8.1

7.6

7.0 7.3

6.4

6.2

6.2

6.2 6.3

6.0 6.2 6.5

5.6 5.7

8.4

0

2

4

6

8

10

12

14

16

18

94

:Q1

94

:Q3

95

:Q1

95

:Q3

96

:Q1

96

:Q3

97

:Q1

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:Q3

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99

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:Q1

15

:Q3

16

:Q1

16

:Q3

Business bankruptcies in 2014-16 were below both the Great Recession levels and the 2003:Q3-2005:Q1 period (the best five-quarter stretch in the last 20 years).

Bankruptcies restrict exposure growth in all commercial lines.

Sources: U.S. Courts at http://www.uscourts.gov/uscourts/Statistics/BankruptcyStatistics/BankruptcyFilings/2013/1216_f2q.pdf ; Insurance Information Institute

(Thousands of filings) New Bankruptcy Law Takes

EffectRecessions in orange

Below pre-recession

level

The Labor Market

Key Driver of Profitability

29

The Fed’s Labor Market Conditions IndexCombines 19 Labor Market Indicators

Source: https://fred.stlouisfed.org/series/FRBLMCI#0

Since 1976, we’ve had a recession whenever the Index drops below -20.

Latest value: 1.3 in Jan. 2017.

30

455

654

423

555

834

277

514

524

627

585

573

517

613

879

712

794

558

812

511

832

588

493

716

445

709

0

100

200

300

400

500

600

700

800

900

1,000

20

11

:Q1

20

11

:Q2

20

11

:Q3

20

11

:Q4

20

12:Q

1

20

12

:Q2

20

12

:Q3

20

12

:Q4

20

13

:Q1

20

13

:Q2

20

13

:Q3

20

13

:Q4

20

14

:Q1

20

14

:Q2

20

14

:Q3

20

14

:Q4

20

15

:Q1

20

15

:Q2

20

15

:Q3

20

15

:Q4

20

16

:Q1

20

16

:Q2

20

16

:Q3

*

20

16

:Q4

*

20

17

:Q1

Nonfarm Employment, Quarterly Change, 2011 – 2017*

Thousands

After a strong 2014-15, the pace of job growth has slowed somewhat.

*Seasonally adjusted; 2017:Q1 is January + February x 3/2 and is preliminarySources: US Bureau of Labor Statistics; Insurance Information Institute

31

Full-time vs. Part-time Employment,Quarterly, 2003-2016

110

113

116

119

122

125

20

03

.1

20

03

.3

20

04

.1

20

04

.3

20

05

.1

20

05

.3

20

06

.1

20

06

.3

20

07

.1

20

07

.3

20

08

.1

20

08

.3

20

09

.1

20

09

.3

20

10

.1

20

10

.3

20

11

.1

20

11

.3

20

12

.1

20

12

.3

20

13

.1

20

13

.3

20

14

.1

20

14

.3

20

15

.1

20

15

.3

20

16

.1

20

16

.3

24.0

24.5

25.0

25.5

26.0

26.5

27.0

27.5

28.0

28.5

Full-time Part-time

Data are seasonally-adjusted. Sources: US Bureau of Labor Statistics, US Department of Labor; Insurance Information Institute.

The Great Recession shifted employment from full-time to part-time.Full-time employment is finally above its pre-recession peak,

but part-time hasn’t receded.

Full time,

millions

Part-time,

millionsRecession

Recession shifted

employment growth from full-time to part-time

Pre-recession, most new jobs were full-time

New full-time peak

3232

Opposite Trends for Componentsof Part-time Employment, 1990-2017

Data are seasonally adjusted. Red-outlined box shows the Great Recession.

Sources: https://fred.stlouisfed.org/series/LNS12032197 and https://fred.stlouisfed.org/series/LNS12032200

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

Ja

n-0

3

Ja

n-0

4

Ja

n-0

5

Ja

n-0

6

Ja

n-0

7

Ja

n-0

8

Ja

n-0

9

Ja

n-1

0

Ja

n-1

1

Ja

n-1

2

Ja

n-1

3

Ja

n-1

4

Ja

n-1

5

Ja

n-1

6

Ja

n-1

7

Non-Economic Reasons Economic Reasons

Both lines are now moving in good directions. People who work part-time “for economic reasons” would prefer full-time work. People who work part-

time “for non-economic reasons” want (or need) part-time work.

Thousands

New peak at 21.2 million in Dec. 2016

Nearly back to pre-recession

levels

Recession

3333

Opposite Trends for Componentsof Part-time Employment, 1990-2017

Data are seasonally adjusted. Red-outlined boxes are recessions.

Sources: https://fred.stlouisfed.org/series/LNS12032197 and https://fred.stlouisfed.org/series/LNS12032200

0

3,000

6,000

9,000

12,000

15,000

18,000

21,000

Ja

n-9

0

Ja

n-9

1

Ja

n-9

2

Ja

n-9

3

Ja

n-9

4

Ja

n-9

5

Ja

n-9

6

Ja

n-9

7

Ja

n-9

8

Ja

n-9

9

Ja

n-0

0

Ja

n-0

1

Ja

n-0

2

Ja

n-0

3

Ja

n-0

4

Ja

n-0

5

Ja

n-0

6

Ja

n-0

7

Ja

n-0

8

Ja

n-0

9

Ja

n-1

0

Ja

n-1

1

Ja

n-1

2

Ja

n-1

3

Ja

n-1

4

Ja

n-1

5

Ja

n-1

6

Ja

n-1

7

Non-Economic Reasons Economic Reasons

Both lines are moving in good directions. People who work part-time “for economic reasons” would prefer full-time work. People who work part-time

“for non-economic reasons” want (or need) part-time work.

Thousands

New peak at 21.2 million

Nearly back to pre-

recession levels

3434

Number of “Discouraged Workers”:Back Near a “Normal” Range Jan. 1994 – Jan. 2017

Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted.

Sources: Bureau of Labor Statistics; National Bureau of Economic Research (recession dates).

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

'94 '97 '00 '03 '07 '10 '13 '16

In recent good times, the number of discouraged workers ranged from 200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007).

Latest reading: 532,000

in Jan. 2017.

ThousandsA “discouraged worker” in a month did not

actively look for work in the prior month

for reasons such as

--thinks no work available,

--could not find work,

--lacks schooling or training,

--thinks employer thinks too young or old,

and other types of discrimination.

Normal

3535

Unemployment andUnderemployment Rates: Back to Normal?

2

4

6

8

10

12

14

16

18

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12

Jan

13

Jan

14

Jan-

15

Jan-

16

Jan-

17

"Headline" Unemployment Rate U-3

Unemployment + UnderemploymentRate U-6

“Headline” unemployment

was 4.7% in Feb. 2017. 4.5%

to 5.5% is “normal.”

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

U-6 was 9.2% in Feb. 2017.

January 2000 through February 2017, Seasonally Adjusted (%)

Based on the latest readings,it appears that the job market is now back to “normal”

-

U-6 went from 8.0%in March 2007 to 17.5%

in October 2009

For U-6, 8.0% to 9.5% is “normal.”

3636

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2016:Q4

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.

Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

$5,500

$6,000

$6,500

$7,000

$7,500

$8,000

$8,5000

5:Q

10

5:Q

20

5:Q

30

5:Q

40

6:Q

10

6:Q

20

6:Q

30

6:Q

40

7:Q

10

7:Q

20

7:Q

30

7:Q

40

8:Q

10

8:Q

20

8:Q

30

8:Q

40

9:Q

10

9:Q

20

9:Q

30

9:Q

41

0:Q

11

0:Q

21

0:Q

31

0:Q

41

1:Q

11

1:Q

21

1:Q

31

1:Q

41

2:Q

11

2:Q

21

2:Q

31

2:Q

41

3:Q

11

3:Q

21

3:Q

31

3:Q

41

4:Q

11

4:Q

21

4:Q

31

4:Q

41

5:Q

11

5:Q

21

5:Q

31

5:Q

41

6:Q

11

6:Q

21

6:Q

31

6:Q

4

Prior Peak was 2008:Q3 at $6.54 trillion

Latest (2016:Q4) was $8.34 trillion, a new peak--$2.11T

above 2009 trough

Recent trough (2009:Q1) was $6.23 trillion, down

5.3% from prior peak

Y-o-Y Growth rates2011:Q3 over 2010:Q3: 4.1%2012:Q3 over 2011:Q3: 3.2%2013:Q3 over 2012:Q3: 3.5%2014:Q3 over 2013:Q3: 5.2%2015:Q3 over 2014:Q3: 5.0%2016:Q3 over 2015:Q3: 4.5%

36

37

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Ma

r-0

7

Ju

n-0

7

Se

p-0

7

Dec-0

7

Ma

r-0

8

Ju

n-0

8

Se

p-0

8

De

c-0

8

Ma

r-0

9

Ju

n-0

9

Se

p-0

9

De

c-0

9

Ma

r-1

0

Ju

n-1

0

Se

p-1

0

De

c-1

0

Ma

r-1

1

Ju

n-1

1

Se

p-1

1

De

c-1

1

Ma

r-1

2

Ju

n-1

2

Se

p-1

2

De

c-1

2

Ma

r-1

3

Ju

n-1

3

Sep-1

3

De

c-1

3

Ma

r-1

4

Ju

n-1

4

Se

p-1

4

De

c-1

4

Ma

r-1

5

Ju

n-1

5

Se

p-1

5

De

c-1

5

Ma

r-1

6

Ju

n-1

6

Job switchers

Job stayers

Core PCE

Since 2012-13, Wages Have Grown Faster Than Inflation,* 2007-2016

*Seasonally adjusted; year-over-year; Shaded area indicates recession.

Sources: NBER (recessions); https://www.frbatlanta.org/chcs/wage-growth-tracker.aspx?panel=1 ; I.I.I.

The Fed raised rates for the first time in 7 years

Wage growth accelerating

Y-o-Y Change

The Housing Market

Key Driver of Profitability

39

Private Housing Starts, 1990-2021F

Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (3/17); Insurance Information Institute.

1.19

1.01

1.201.29

1.461.35

1.481.47

1.621.64

1.571.60

1.71

1.851.96

2.07

1.80

1.36

0.91

0.550.590.61

0.78

0.92

1.101.111.17

1.271.361.40

1.43 1.47

0.0

0.5

1.0

1.5

2.0

2.5

90 92 94 96 98 00 02 04 06 08 10 12 14 16 18F 20F

Un

its

(M

illi

on

s)

Insurers Continue to See Exposure Growth Associated with Home Construction: Construction Risk Exposure, Surety, Commercial Auto.It is Also a Potent Driver of Workers Comp Exposure.

Job Growth, Low Inventories of Existing Homes, Still-low

Mortgage Rates and Demographics, Should Continue to Stimulate

Housing Unit Construction for Several More Years.

New Home Starts Plunged 72% from 2005–2009; A Net Annual Decline of 1.49 Million

Units, Lowest Since Records Began in 1959.

4040

Number of Owner-Occupied & Renter-Occupied Housing Units, US, Quarterly, 1990:Q1-2016:Q4

32

34

36

38

40

42

44

46

90:Q

1

91:Q

1

92:Q

1

93:Q

1

94:Q

1

95:Q

1

96:Q

1

97:Q

1

98:Q

1

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

09:Q

1

10:Q

1

11:Q

1

12:Q

1

13:Q

1

14:Q

1

15:Q

1

16:Q

1

55

60

65

70

75

80

Number of renter-occupied housing unitsNumber of owner-occupied housing units

Sources: US Census Bureau at http://www.census.gov/housing/hvs/data/histtabs.html , Table 8; Insurance Information Institute.

Since 2004 the number of renter-occupied housing units has grownby about 11 million units (+34.5%), but there has been no growth in the number of owner-

occupied housing units in 12 years. When will this end?

40

Millions of Owner-

Occupied Housing

Units

Number of owner-occupied units has been stuck atroughly 75 million units

since 2005:Q4

Millions of Renter-

Occupied Housing

Units

Trough in 2004:Q2 at 32.61 million

units.

Latest renter-occupied was 43.04 million units

in 2016:Q4.

41

Rental-occupied Housing Units as % of Total Occupied Units, Quarterly, 1990:Q1-2016:Q4

Sources: U.S. Census Bureau, Residential Vacancies & Home Ownership in the Fourth Quarter of 2016 (released Jan 31, 2017) and earlier issues; Insurance Information Institute.

30%

31%

32%

33%

34%

35%

36%

37%

38%

90:Q1 92:Q1 94:Q1 96:Q1 98:Q1 00:Q1 02:Q1 04:Q1 06:Q1 08:Q1 10:Q1 12:Q1 14:Q1 16:Q1

Since the Great Recession Ended in June 2009,Renters Occupied 5.7 Million More Units (+15.6%).

Trough in 2004:Q2 and Q4 at 30.8%

Latest was 36.3% in 2016:Q4.

Increasing Percent of Renters

Trend Down Began in 1994:Q3 from 36.2% in Q2.

Increasing Percent of Owners

4242

Rental Vacancy Rates,Quarterly, 1990-2016:Q4

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

90

:Q1

91

:Q1

92

:Q1

93

:Q1

94

:Q1

95

:Q1

96

:Q1

97

:Q1

98

:Q1

99

:Q1

00

:Q1

01

:Q1

02

:Q1

03

:Q1

04

:Q1

05

:Q1

06

:Q1

07

:Q1

08

:Q1

09

:Q1

10

:Q1

11

:Q1

12

:Q1

13

:Q1

14

:Q1

15

:Q1

16

:Q1

Sources: US Census Bureau, http://www.census.gov/housing/hvs/data/histtabs.html Table 1; Insurance Information Institute.

Peak vacancy rate 11.1% in

2009:Q3

Before the 2001 recession, rental vacancy rates were 7.0-7.5%.We’re below those levels now. => More multi-unit construction?

42

Percent vacant

Latest vacancy rate was 6.9%

in 2016:Q4Vacancy

rate 10.4% in 2004:Q1

43

Units in Multiple-Unit Projectsas Percent of Total

US: Pct. Of Private Housing Unit StartsIn Projects of 5+ Units, 1990-2017*

21

.4%

23

.1%

21

.4%

20

.6%

21

.5%

20

.6%

20

.3%

18

.9%

17

.7%

17

.0%

18

.6% 22

.8%

31

.3%

19

.7%

19

.7%

29

.3%

31

.4%

33

.3%

36

.0%

35

.0%

32

.4%

32

.5%

20

.5%

17

.7%

12

.6%

14

.2%

17

.1%

25

.0%

0%

10%

20%

30%

40%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*

*2017 is January and February, annualized; preliminary. Based on seasonally-adjusted data.Sources: U.S. Census Bureau; Insurance Information Institute calculations.

For the U.S. as a whole, the trend toward multi-unit housing projects (vs. single-unit homes) is recent. Commercial insurers with Workers Comp,

Construction risk exposure, and Surety benefit.

A NEW NORMAL?In 7 of the last 9 years, over 30% of housing

unit starts were in 5+-unit projects

Auto Insurance

Lately: Adverse Loss Trends

45

America is Driving More Again: 2000-2016

Percent Change, Miles Driven*

*2000-2016: Moving 12-month total vs. prior year.Sources: Federal Highway Administration; National Bureau of Economic Research (recession dates); Insurance Information Institute.

2.5%

1.8%2.1%

1.2%

2.5%

0.8% 0.8%0.6%

-1.8%

-0.7%

0.4%

-0.5%

0.6% 0.6%

1.3%

3.4%

2.8%

2000 2002 2004 2006 2008 2010 2012 2014 2016

-2.5%

-1.5%

-0.5%

0.5%

1.5%

2.5%

3.5%

Fastest Growth

Since 2000

In the last few years, sharp growth in miles driven.The more people drive, the more often their cars crash.

The “Great Recession”

46

Why Are People Driving More Miles?Is it Jobs? 2006:Q1-2016:Q4

Billions of Miles Driven in Prior Year

Note: miles driven for 2016 is through Q3 (latest available as of 1/12/2017)Sources: Federal Highway Administration; Seasonally Adjusted Employed from Bureau of Labor Statistics (Series ID CES0000000025); Insurance Information Institute.

People Drive to and from Work and Drive to Entertainment. Out of Work, They Curtail Their Movement.

127

129

131

133

135

137

139

141

143

145

147

2,850

2,900

2,950

3,000

3,050

3,100

3,150

3,200

3,250

06

:Q1

06

:Q3

07:Q

1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10:Q

3

11

:Q1

11

:Q3

12

:Q1

12

:Q3

13

:Q1

13

:Q3

14:Q

1

14

:Q3

15

:Q1

15

:Q3

16

:Q1

16

:Q3

Miles Driven (left axis)

# Employed (right axis)

Millions Employed

Recession

4747

More People Working and Driving=> More Collisions, 2006:Q1-2016:Q4

Sources: Seasonally Adjusted Employed from Bureau of Labor Statistics; Rolling Four-Qtr Avg. Frequency from Insurance Services Office; Insurance Information Institute.

Number Employed,Millions

128

130

132

134

136

138

140

142

144

146

06

:Q1

06

:Q3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

12

:Q3

13

:Q1

13

:Q3

14

:Q1

14

:Q3

15

:Q1

15

:Q3

16

:Q1

16

:Q3

5.5

5.6

5.7

5.8

5.9

6.0

# Employed (left axis) Collision Claim Frequency (right axis)

Overall Collision Claims Per 100 Insured

Vehicles

When people are out of work, they drive less. When they get jobs,they drive to work, helping drive claim frequency higher.

Recession

There are not only more accidents, but accidents per 100

insured vehicles is up too. This is what matters to insurers.

48

US Pvt. Passenger Auto Net Combined Ratio, 2005-2015

95

.1%

95

.6%

98

.3%

100.2

%

10

1.3

%

10

1.0

%

10

2.0

%

10

2.1

%

10

1.6

%

10

2.5

%

10

4.6

%

90%

95%

100%

105%

110%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

The increase in frequency and severity of claims is

driving up insurer payouts relative to premiums

48

Private Passenger Auto net combined ratioshave been rising every year for a decade.

Sources: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence;

Insurance Information Institute.

49

Return on Net Worth: Personal Auto, 2005-2015*

4.2%

13.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Personal Auto Fortune 500

Rising claim costs has been a factor in keeping auto insurer

ROEs quite low

12/01/09 - 9pm49

Auto Insurance Profitability Remains Well Below Pre-Crisis Levels (12% vs. ~4%)

*2015 Personal Auto figure is estimated.

SOURCE: National Association of Insurance Commissioners.

Commercial Lines

Key Driver of Growth & Profitability

51

2.8%

1.9%

2.9%

0.3%

-1.0%

1.6%

2.8%

2.1% 2.0%2.3% 2.3%

-2%

-1%

0%

1%

2%

3%

4%

2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F 2022F

Continued Growth in Industrial Production Will Lead to a Modest Rise in Commercial Exposures

Industrial production growth depends on aggregate demand, which can rise or fall depending on the value of the U.S. dollar (which affects the price of

manufactures for export) and consumer purchasing power.

Sources: Blue Chip Economic Indicators, 3/2017; Insurance Information Institute.

Corporate tax reform could have a large impact on these forecasts.

52

9.0%

3.5%

6.0%

2.1%

-0.6%

3.1%

4.0%3.6%

3.2% 3.2% 3.1%

-2%

0%

2%

4%

6%

8%

10%

2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F 2022F

Continued Business Investment WillSpur Modest Commercial Exposure Growth

Business investment was a major drag on the economy in 2016 and adversely affected commercial property and liability insurance exposures.

Growth should begin a modest recovery in 2017.

Sources: Blue Chip Economic Indicators, 3/2017; Insurance Information Institute.

The level and direction of interest rates and tax policy

are likely to affect these growth rates.

53

Total (Public+Private) Infrastructure* Spending, Monthly, 2003-2017**: Is a Big Increase Coming in 2017?

*Infrastructure spending includes construction in these 7 categories: Public Safety, Transportation, Communication, Power, Highway and Street, Sewage and Waste Disposal, and Water Supply. **January data at seasonally-adjusted annual rates. Not inflation-adjusted.Sources: U.S. Department of Commerce, Census Bureau; Insurance Information Institute.

$160

$180

$200

$220

$240

$260

$280

$300

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17**

Billi

on

s

Spending on infrastructure construction can rise dramatically, as it did from 2003-2008, but it hasn’t risen much since the Great Recession.

Infrastructure spending went from

$170B in 2003 to $275B in 2008.

Will infrastructure spending cross the

$300B mark in 2017?

54

Commercial Auto Net Combined Ratio, 2005-2015

Source: National Association of Insurance Commissioners data, sourced from S&P Global Market Intelligence;Insurance Information Institute.

Just like Private Passenger Auto, Net Combined RatiosHave Been Rising Virtually Every Year for a Decade.

92.1% 92.5%

94.3%

96.8%

99.5%

98.1%

103.6%

107.0% 106.9%

103.4%

108.8%

90%

95%

100%

105%

110%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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