The Rough and Tumble Recovery

How the Great Recession Upset the Workers Comp Apple CartNCCI Annual Issues Symposium

Orlando, FL May 8, 2014

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

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

2

P/C Insurance Industry Financial Overview

2013: Best Year in the Post-Crisis Era

Lower CATs, Strong MarketsWorkers Comp Improvement

Helped Too2

P/C Net Income After Taxes1991–2013 ($ Millions)

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 6.1% 2013 ROAS1 = 10.3%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.8% ROAS in 2013, 6.3% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

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

$14,

178

$5,8

40

$19,

316

$10,

870 $20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$62,

496

$3,0

43

$35,

204

$19,

456

$35,

074

$63,

784

$28,

672

-$6,970

$65,

777

$44,

155

$20,

559

$38,

501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

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

2013 ROAS was 10.3%

Net income in 2013 was up substantially

(+81.9%) from 2012

-5%

0%

5%

10%

15%

20%

25%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

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

*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2011: 4.7%

ROE

1975: 2.4%

2013: 9.8 %

5

P/C Insurance Industry Combined Ratio, 2001–2013*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

96.7

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

Underwriting Gain (Loss)1975–2013*

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

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Cumulative underwriting deficit from 1975 through

2013 is $493B

($ Billions) Underwriting profit in 2013

totaled $15.5B

High cat losses in 2011 led to the highest

underwriting loss since 2002

7

Policyholder Surplus, 2006:Q4–2013:Q4

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8$559.2 $559.1

$538.6$550.3

$567.8$583.5$586.9

$607.7$614.0$624.4

$653.3

$570.7$566.5

$505.0$515.6$517.9

$400

$450

$500

$550

$600

$650

$700

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

2007:Q3Pre-Crisis Peak

Surplus as of 12/31/13 stood at a record high $653.3B

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 $0.73 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 2014in very strong financial condition.

8

-5%

0%

5%

10%

15%

20%

25%

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Net Premium Growth (All P/C Lines): Annual Change, 1971—2014F(Percent)

1975-78 1984-87 2000-03

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

Net Written Premiums Fell 0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

2014F: 4.0%2013: 4.6%

2012: +4.3%

9

Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2012*

27.9

21.7

18.8

12.4

4.0

0.8

0.2

-0.3

-1.1

-1.8

-2.5

-2.7

-3.6

-3.9

-4.7

-5.4

-6.8

-9.1

-9.2

-9.7

-10.

2

-10.

8

-11.

6

-30-25-20-15-10-505

1015202530

OK IA SD NY

KS

CT CA

NE IN WI

NJ MI

MN IL VA PA NH VT US AK

NM TX MD

Pece

nt c

hang

e (%

)

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 StatesOnly 5 states showed positive

growth in the workers comp line from 2007 – 2012, the result of

large job and payroll losses and a soft market. Even through

2013, fewer than half the states will have recouped DPW losses

10

Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2012*

-12.

1

-12.

9

-14.

3

-15.

4

-15.

5

-15.

9

-16.

0

-16.

6

-16.

9

-17.

8

-18.

3

-19.

9

-20.

8

-21.

9

-24.

6

-25.

5

-26.

0

-27.

4

-31.

8

-33.

9

-35.

1

-38.

3

-43.

4

-49.

1

-60-55-50-45-40-35-30-25-20-15-10

TN DC

MA RI

MS

GA

AR ID LA ME

NC SC AL

MO

MT

CO KY AZ

UT

OR FL HI

DE NV

Pece

nt c

hang

e (%

)

Bottom 25 States

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.

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

the past 5 years

Winners, Losers and the “Great Recession”

11

Reshuffling the Workers Comp Exposure Deck

11

12

Labor Force Participation Rate,Jan. 2002—April 2014*

*Defined as the percentage of working age persons in the population who are employed or actively seeking work.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/; National Bureau of Economic Research (recession dates); Insurance Information Institute.

62

63

64

65

66

67

68

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

Large numbers of people are exiting (or not returning to the

labor force)

Labor force participation

continues to shrink despite a falling

unemployment rate

Labor Force Participation as a % of Population

14

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Men Women

Labor Force Participation Rate by Gender, 1948—2013(Percent)

Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

86.6% or working age men participated in the

labor force in 1948 compared to 32.7% or

women

By 2013, 57.2% of working age women participated in the

labor force, up from 32.7% in 1948 but down from its all time

high of 60.0% in 1999

By 2013, the labor force participation rate for men had

declined to 69.7% while the participation rate for women

had risen to 57.2%

15

50%

55%

60%

65%

70%

75%

80%

55 60 65 70 75 80 85 90 95 00 01 02 03 04 05 06 07 08 09 10 11 12

Gender Wage Gap: Ratio of Median Annual Earnings of Women to Men, 1955 – 2012*

(Percent)

*Latest available.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

In 1955, women earned 63.9% of what men

earned

In 2012, women earned 76.5% of what

men earned on an annual basis

Over the next 20+ years the gender gap narrowed

substantially but reached a plateau of about 77% of men’s earnings where it

remains today

Full-Time, Year-Round Workers

But by 1975, women were earning just

58.8% of what men earned

17

Unemployment Rates by Gender and Education: 2006, 2010 and 2013

4.1%2.2%

9.6%10.5%

8.6%

13.9%

11.5%

6.0%7.6% 7.1%

9.7%7.9%

5.0%4.6% 4.6% 4.6%5.9%

7.4%

0%2%4%6%8%

10%12%14%16%

All Men Women Less than HSDiploma

HS Diploma,No College

Bachelor'sDegree or

Higher

2006 2010 2013

Unemployment Rate (%)

Men were hit harder and continue to do worse than women in the job market.

Women are likely to do better than men for the

indefinite future.

Source: U.S. Bureau of Labor Statistics; Insurance Information Institute.

Workers lacking a college degree suffer from much

higher rates of unemployment

18

Labor Force Participation Rate by Age: 2006, 2010 and 2013

17.0

%

6.4%

64.7

%

35.0

%

71.4

% 82.2

%

31.5

%

18.0

%

7.4%

34.4

%

82.0

%

81.0

%

32.1

%

19.2

%

7.9%

66.2

%

43.7

%

74.6

% 82.9

%

29.0

%

63.2

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

All 16-19 20-24 25-54 65-69 70-74 75+

2006 2010 2013

Labor Force Participation Rate (%)

Source: U.S. Bureau of Labor Statistics; Insurance Information Institute.

Age

Labor force participation rates remain below pre-

recession levels for young and middle-

age workersLabor force

participation rates have increased for

older workers

19

Labor Force Participation Rates for Workers Age 62-74 by Gender and Education*

25%

39%

52%

32%

49%

65%

0%

10%

20%

30%

40%

50%

60%

70%

HS Diploma Bachelors Degree Professional Degree or Doctorate

Women Men

Better educated workers are far more likely to work in their 60s and 70s

Participation Rate

*Data are for 2009-10.Source: Gary Burtless, Brookings Institution and The Economist, April 24, 2014.

A worker with a bachelors degree is

about 50% more likely to be working

A worker with an professional or doctoral degree is twice as likely

likely to be working

20

Unemployment Rates by Age and Race: 2006, 2010 and 2013

5.2%

4.0%

9.6%

24.9

%

18.0

%

16.0

%

12.5

%

8.7%

22.9

%

13.5

%

13.1

%

9.1%

6.5%

4.6%

15.3

%

10.0

%

9.0%

7.4%

0%

5%

10%

15%

20%

25%

30%

All 16-19 16-24 Black orAfrican

American

Hispanic orLatino

White

2006 2010 2013

Unemployment Rate (%)

Unemployment among younger workers remains

a chronic problem

Source: U.S. Bureau of Labor Statistics; Insurance Information Institute.

Unemployment among some minority groups remains far above pre-

recession levels

21

The BIG PictureLabor Market Trends

RECOVERY MODEThe Last Job Lost During the

Recession Was Recouped in March Where Do the Economy and Workers Comp Go From Here?

21

23

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/14; Insurance Information Institute.

2.7%

0.5%

3.6%

3.0%

1.7%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

1.4%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

1.1% 2.

5%4.

1%2.

4%0.

1%3.

0%3.

0%3.

1%3.

0%3.

0%3.

0%2.

9%

0.4%

-8.9%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   20

00   

   20

01   

   20

02   

   20

03   

   20

04   

   20

05   

   20

06   

07:1

Q07

:2Q

07:3

Q07

:4Q

08:1

Q08

:2Q

08:3

Q08

:4Q

09:1

Q09

:2Q

09:3

Q09

:4Q

10:1

Q10

:2Q

10:3

Q10

:4Q

11:1

Q11

:2Q

11:3

Q11

:4Q

12:1

Q12

:2Q

12:3

Q12

:4Q

13:1

Q13

:2Q

13:3

Q13

:4Q

14:1

Q14

:2Q

14:3

Q14

:4Q

15:1

Q15

:2Q

15:3

Q15

:4Q

Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

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

market contraction was severe

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

The remainder of 2014 into 2015 are expected

to see a modest acceleration in growth

24

Unemployment and Underemployment Rates: Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 6.3% in April 2014. 4% to 6% is

“normal.”

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

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 12.3%

in Apr. 2014.8% to 10% is

“normal.”

January 2000 through April 2014, Seasonally Adjusted (%)

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

24

25

US Unemployment Rate Forecast4.

5%4.

5% 4.6% 4.8% 4.9% 5.

4%6.

1%6.

9%8.

1%9.

3% 9.6% 10

.0%

9.7%

9.6%

9.6%

8.9% 9.1%

9.1%

8.7%

8.3%

8.2%

8.0%

7.8%

7.7%

7.6%

7.3%

7.0%

6.7%

6.5%

6.4%

6.2%

6.1%

6.0%

5.9%

5.8%

9.6%

4%

5%

6%

7%

8%

9%

10%

11%

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

15:Q

115

:Q2

15:Q

315

:Q4

Rising unemployment

eroded payrolls

and WC’s exposure base.Unemployment peaked at 10%

in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (4/14 edition); Insurance Information Institute.

2007:Q1 to 2015:Q4F*

Unemployment forecasts have been revised slightly

downwards. Optimistic scenarios put the

unemployment as low as 6.0% by Q4 of this year.

Jobless figures have been revised

slightly downwards for 2014/15

231

5217

052

126

573

-71

32 64 81 553

-115

-106

-221

-215

-206

-261

-258

-422

-486

-776 -6

93-8

21-6

98-8

10-8

01-2

94-4

26-2

72 -232

-141

-271

-15

-232

20-3

819

294 11

012

011

710

7 199

149

94 7222

323

1 320

166

186 21

912

526

817

719

1 222

364

228

246

102 131

7517

213

615

9 255

211

215

219 26

316

4 188 22

220

117

018

015

3 247 272

8616

6 201

202 27

3

113

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan-

07Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

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

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

Monthly Change in Private Employment

January 2007 through April 2014 (Thousands, Seasonally Adjusted)

Private Employers Added 9.18 million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

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

Monthly losses in Dec. 08–Mar. 09

were the largest in the

post-WW II period

273,000 private sector jobs were

created in April. In March 2014, the last of the jobs lost

in the Great Recession were

recovered

26

Jobs Created2013: 2.368 Mill2012: 2.294 Mill2011: 2.400 Mill2010: 1.277 Mill

842,000 jobs created so far

in 2014

0.05

50.

058

-0.0

57-0

.163

-0.3

84-0

.599

-0.8

05-1

.066

-1.3

24-1

.746

-2.2

32-3

.008

-3.7

01-4

.522

-5.2

20-6

.030

-6.8

31-7

.125

-7.5

51-7

.823

-8.0

55-8

.196

-8.4

67-8

.482

-8.7

14-8

.694

-8.7

32-8

.619

-8.4

27-8

.333

-8.2

23-8

.103

-7.9

86-7

.879

-7.6

80-7

.531

-7.4

37-7

.365 -6.9

11-6

.591

-6.4

25-6

.239

-6.0

20-5

.895

-5.6

27-5

.450

-5.2

59-5

.037

-4.6

73-4

.445

-4.1

99-4

.097

-3.9

66-3

.891

-3.7

19-3

.583

-3.4

24-3

.169

-2.9

58-2

.743

-2.5

24-2

.261

-2.0

97-1

.909

-1.6

87-1

.486

-1.3

16-1

.136

-0.9

83-0

.736

-0.4

64-0

.378

-0.2

12-0

.011

0.19

10.

464

-7.1

42-10

-8

-6

-4

-2

0

2

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Apr

-14

Mill

ions

Cumulative Change in Private Employment: Dec. 2007—Apr. 2014December 2007 through April 2014 (Millions)

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

Cumulative job losses peaked at 8.765 million

in February 2010

It took more than 6 ½ years (79 months) to

recover all of the private sector jobs lost in the Great Recession

27

Private Employers Added 9.18 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

Pvt. employment hit 116.4 million in April 2014—

580,000 above its pre-crisis peak of 115.8 million

0.02

0-0

.018

0.09

50.

287

0.38

10.

491

0.61

10.

728

0.83

51.

034

1.18

31.

277

1.34

91.

572

1.80

32.

123

2.28

92.

475

2.69

42.

819

3.08

73.

264

3.45

53.

677

4.04

14.

269

4.51

54.

617

4.74

84.

823

4.99

55.

131

5.29

05.

545

5.75

65.

971

6.19

06.

453

6.80

57.

027

7.22

87.

398

7.57

87.

731

7.97

88.

250

8.33

68.

502

8.70

38.

905

9.17

8

6.61

7

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

Cumulative Change in Private Sector Employment: Jan. 2010—Apr. 2014 (Millions)

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

Cumulative job gains through Apr. 2014

totaled 9.18 million

28

Job gains and pay increases have added more than $750 billion to payrolls

since Jan. 2010

Private Employers Added 9.18 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

29

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2014:Q1

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

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,250

$7,50005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

13:Q

213

:Q3

13:Q

414

:Q1

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2014:Q1) was $7.29 trillion, a new peak--$1.04 trillion above 2009 trough

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

5.3% from prior peak

Payrolls are 16.6% above

their 2009 trough and up 3.6% over

the past year

29

30

Net Change in Government Employment: Jan. 2010—Apr. 2014

-611

-380

-79-152

-700

-600

-500

-400

-300

-200

-100

0

Total Local State Federal

(Thousands)

Local government employment shrank by 380,000 from Jan.

2010 through Apr. 2014, accounting for 62% of all government job losses,

negatively impacting WC exposures for those cities and counties that insure privately

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

State government employment fell by 1.5% since the end of 2009 but is

recovering while Federal employment is down by 5.3% and deteriorating

31

Unemployment Rates by State, March 2014:Highest 25 States*

8.7

8.5

8.4

8.1

7.9

7.6

7.5

7.5

7.3

7.2

7.0

7.0

7.0

6.9

6.9

6.9

6.7

6.7

6.7

6.7

6.6

6.3

6.3

6.3

6.3

6.2

6.1

0

2

4

6

8

10

RI NV IL CA KY MS DC MI AZ NJ CT GA NM AR NY OR US ALMO TN AK FL MA NC WA CO OH

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for March 2014, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In March,  21 states had over-the-month unemployment rate

decreases, 17 states and the District of Columbia had increases,

and 12 states had no change.

Residual impacts of the housing collapse, weak economies are holding

back several states

32

6.1

6.0

5.9

5.9

5.9

5.9

5.6

5.5

5.5

5.2

5.1

5.0

4.9

4.9

4.8

4.5

4.5

4.5

4.5

4.1

4.0

3.7

3.7

3.4

2.6

0

1

2

3

4

5

6

7

WV PA DE IN ME WI MD SC TX ID MT VA KS OK MN HI IA LA NH UT WY NE SD VT ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, March 2014: Lowest 25 States*

*Provisional figures for March 2014, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In March,  21 states had over-the-month unemployment rate

decreases, 17 states and the District of Columbia had increases,

and 12 states had no change.

Energy-fueled

employment boom in ND

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

33

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2013P

*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2013 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2014; +8.6% Growth Estimated for 2013

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

$Billions $Billions

WC premium volume dropped two years before

the recession began

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

$33.8B in 2010 after peaking at $47.8B

in 2005

34

POSITIVE LABOR MARKET DEVELOPMENTS

Key Factors Driving Workers Compensation Exposure

34

35

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8247

,806

40,0

7533

,212

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Business Bankruptcy Filings,1980-2013

Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013 data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.

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

2013 bankruptcies totaled 33,212, down 17.1% from 2012—the fourth

consecutive year of decline. Business bankruptcies more than tripled during the financial crisis.

% Change Surrounding Recessions

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

35

36

Mass Layoff Announcements,Jan. 2002—May 2013*

*BLS discontinued series effective May 2013. Data are seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates); Insurance Information Institute.

500

1,000

1,500

2,000

2,500

3,000

3,500

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

Mass layoff announcements peaked at more than 3,000 per

month in Feb. 2009

There were 1,301 mass layoffs

announced in May 2013, similar to pre-

crisis levels

37

Average Weekly Hours of All Private Workers, Mar. 2006—Apr. 2014

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.

33.533.633.733.833.934.034.134.234.334.434.534.634.734.8

'06 '07 '08 '09 '10 '11 '12 '13 '14

Hours worked totaled 34.5 per week in April,

just shy of the 34.6 hours typically worked

before the “Great Recession”

Hours worked plunged during the recession,

impacting payroll exposures

(Hours Worked)

38

Average Hourly Wage of All Private Workers, Mar. 2006—Apr. 2014

*Seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recession dates); Insurance Information Institute.

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

'06 '07 '08 '09 '10 '11 '12 '13 '14

The average hourly wage was $24.31 in Apr. 2013,

up 14.4% from $21.25 when the recession began in Dec. 2007

Wage gains continued during the

recession, despite massive job losses

(Hourly Wage)

39

ADVERSE LONG-TERMLABOR MARKET DEVELOPMENTS

Key Factors Harming Workers Compensation Exposure and the

Overall Economy

39

40

Labor Force Participation Rate,Jan. 2002—April 2014*

*Defined as the percentage of working age persons in the population who are employed or actively seeking work.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/; National Bureau of Economic Research (recession dates); Insurance Information Institute.

62

63

64

65

66

67

68

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

Large numbers of people are exiting (or not returning to the

labor force)

Labor force participation

continues to shrink despite a falling

unemployment rate

Labor Force Participation as a % of Population

41

Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted.Sources: Bureau of Labor Statistics http://www.bls.gov/news.release/empsit.a.htm ; NBER (recession dates); Ins. Info. Inst.

0100200300400500600700800900

1,0001,1001,2001,3001,400

'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14In recent good times, the number of discouraged workers ranged from

200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007).

There were 783,000

discouraged workers in Apr. 2014

Thousands

“Discouraged Workers” are people who have searched for work for so long in vain

that they actually stop searching and drop out of

the labor force

Number of “Discouraged Workers,”Jan. 2002—April 2013

Large numbers of people are exiting

(or not returning to) the labor force

42

Change in Number of Discouraged Workers: Apr. 2013 vs. Apr. 2014

Source: US Bureau of Labor Statistics at http://www.bls.gov/cps/tables.htm#pnilf_m; Insurance Information Institute.

-6.2%

-8.5%

-12.7%

-18.0%

-1.6%

-13.0%

-20%

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Overall 16 to 24 25 to 54 55+ Men Women

Younger workers remain more

discouraged than older workers

(Percent Change)

AGE GENDER

The number of discouraged

workers fell by 52,000 over the

past year to 783,000, a

decline of 6.2%

Men remain much more discouraged

about their job prospects

43

Discouraged Workers by Gender(as of April 2014)

38%

62%

Source: Bureau of Labor Statistics: at http://www.bls.gov/web/empsit/cpseea38.htm; Insurance Information Institute.

The overwhelming majority of discouraged workers are male, for a variety of reasons

Female = 295,000 Male = 488,000

Reasons for Lower Female Discouragement Rate

• Less likely to work in heavily impacted

industries such as construction

• More likely to retrain

• More likely to retrain quickly

• Better educated TOTAL = 783,000

Men account for 62% of

discouraged workers today, up from 59% a

year ago

CONSTRUCTION, MANUFACTURING & ENERGY

OUTLOOK

45

Key Sectors Critical to the Economy and the P/C

Insurance Industry45

46

Value of New Private Construction: Residential & Nonresidential, 2003-2013*

Billions of Dollars

$0$100$200$300$400$500$600$700$800$900

$1,000

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

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2013: Value of new pvt. construction hits $667.5B, up

33% from the 2010 trough but still

27% below 2006 peak

46

$261.8

$238.8

$311.5

$356.0

*2013 figure is a seasonally adjusted annual rate as of December.Sources: US Department of Commerce; Insurance Information Institute.

47

Value of Private Construction Put in Place, by Segment, March 2014 vs. March 2013*

9.3%

-3.2%

2.1%

-19.0%

19.8%

33.5%

2.8%7.9%10.7%12.5% 16.0%

8.6%

30.4%

13.5%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Tota

l Priv

ate

Cons

truct

ion

Resi

dent

ial

Tota

lNo

nres

iden

tial

Lodg

ing

Offi

ce

Com

mer

cial

Heal

th C

are

Educ

atio

nal

Relig

ious

Amus

emen

t &Re

c.

Tran

spor

tatio

n

Com

mun

icat

ion

Pow

er

Man

ufac

turin

g

Private Construction Activity is Up in Most Segments, Including the Key Residential Construction Sector; Bodes Well for the Remainder of 2014

Growth (%) Led by the Residential Construction, Lodging and

Communication segments, Private sector construction activity is

rising after plunging during the “Great Recession.”

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

48

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1.85 1.

96 2.07

1.80

1.36

0.91

0.55 0.59 0.61

0.78 0.

92 1.08

1.31 1.

44 1.50

1.51

1.50

1.351.

461.

291.

201.

011.

19

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

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

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/14 and 3/13); Insurance Information Institute.

Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk

Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

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

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction

for several more years

49

$314.9 $304.0$286.4 $279.0 $271.4 $262.9

$216.1 $220.2$234.2

$255.4

$289.1$308.7

$0

$50

$100

$150

$200

$250

$300

$350

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

($ Billions)

Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Continues to Contract As State/Local Governments

Grapple with Deficits and Federal Sequestration Takes Hold

Value of New Federal, State and Local Government Construction: 2003-2014*

*2014 figure is a seasonally adjusted annual rate as of March; http://www.census.gov/construction/c30/historical_data.html Sources: US Department of Commerce; Insurance Information Institute.

Construction across all levels of government

peaked at $314.9B in 2009

Austerity Reigns Govt. construction is still shrinking, down $52.0B or

16.5% since 2009 peak

50

Construction Employment,Jan. 2010—April 2014*

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

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

5 5,47

85,

485

5,49

75,

524

5,53

05,

547

5,54

65,

583

5,57

65,

577

5,61

25,

629

5,64

45,

640

5,63

65,

615

5,62

25,

627

5,63

05,

633

5,64

95,

673

5,71

15,

735 5,78

35,

799

5,79

25,

791

5,80

15,

804

5,80

55,

822

5,83

05,

849

5,87

6 5,92

75,

927 5,96

86,

000

5,400

5,500

5,600

5,700

5,800

5,900

6,000

6,100

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

Construction employment is +565,000 above

Jan. 2011 (+10.4%) trough

(Thousands)

Construction and manufacturing employment constitute 1/3 of all payroll exposure.

51

Construction Employment, Jan. 2003–April 2014

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

5,000

5,500

6,000

6,500

7,000

7,500

8,000

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

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

The Construction Sector Could Be a Growth Leader in 2014 as the Housing Market, Private Investment and Govt. Spending Recover. WC Insurers Will Benefit.

Construction employment troughed at 5.435 million in

Jan. 2011, after a loss of 2.291 million jobs, a 29.7% plunge

from the April 2006 peak

51

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of

Apr. 2014 totaled 6.0 million, an increase of 565,000 jobs or

10.4% from the Jan. 2011 trough

Gap between pre-recession

construction peak and today: 1.7 million jobs

52

MANUFACTURING SECTOR

A Potent Driver of Jobs, Workers Comp Payroll Exposure

America’s Manufacturing Renaissance52

53

Manufacturing Employment,Jan. 2010—April 2014*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

4111

,870

11,9

1011

,920

11,9

2611

,935

11,9

5711

,943

11,9

2511

,931

11,9

3811

,951

11,9

6511

,988

11,9

8411

,977

11,9

7211

,965

11,9

4811

,963

11,9

9312

,011

12,0

4612

,053

12,0

6112

,081

12,0

8812

,100

11,250

11,500

11,750

12,000

12,250Ja

n-10

Feb-

10M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb-

11M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

2/30

/2M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb-

13M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb-

14M

ar-1

44/

31/2

Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.

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

(Thousands) Since Jan 2010, manufacturing employment

is up (+640,000 or +5.6%)and still growing.

54

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Mar. 2014

* Seasonally adjusted; Data published May 2, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments in Mar. 2014 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial

exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.

$ Millions

54

The value of Manufacturing Shipments in Mar. 2014 was $494.9B—a new record high.

58.3

57.1

60.4

59.6

57.8

55.3

55.1

55.2

55.3 56

.9 58.2

58.5

60.8 61.4

59.7

59.7

54.2 55

.851

.4 52.5

52.5

51.8

52.2 53

.1 54.1

51.9 53

.3 54.1

52.5

50.2

50.5

50.7 51

.651

.749

.950

.253

.1 54.2

50.7

49.0 50

.955

.455

.7 56.2

56.4 57.0

56.5

51.3 53

.2 53.7 54

.9

51.3

40

45

50

55

60

65

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

ISM Manufacturing Index(Values > 50 Indicate Expansion)January 2010 through April 2014

The manufacturing sector expanded for 50 of the 52 months from Jan. 2010 through April 2014. Pace of recovery has been uneven due to

economic turbulence in the U.S., Europe and ChinaSource: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.

Manufacturing continues to expand in 2014

55

56

Manufacturing Growth for Selected Sectors, 2014 vs. 2013*

2.9%

-1.1%

4.3% 4.0%

0.1%

4.9%

-3.8%

-0.9%

3.9%

-0.5%

1.7%

3.5%

5.3%3.7%

1.8%

-6%

-4%

-2%

0%

2%

4%

6%

All

Man

ufac

turin

g

Dur

able

Mfg

.

Woo

dP

rodu

cts

Prim

ary

Met

als

Fabr

icat

edM

etal

s

Mac

hine

ry

Ele

ctric

alE

quip

.

Com

pute

rs &

Ele

ctro

nics

Tran

spor

tatio

nE

quip

.

Non

-Dur

able

Mfg

.

Food

Pro

duct

s

Pet

role

um &

Coa

l

Che

mic

al

Pla

stic

s &

Rub

ber

Text

ileP

rodu

cts

Manufacturing Is Expanding—Albeit Slowly—Across a Number of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial

Property, Commercial Auto and Many Liability Coverages

Growth (%)

Manufacturing of durable goods was stronger than

nondurables in 2013

*Seasonally adjusted; Date are YTD comparing data through March 2014 to the same period in 2013.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Durables: +3.5% Non-Durables: +0.1%

57

2.5%

4.9%

6.3%

7.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2013 2014F 2015F 2016F

Business Investment: Expected to Accelerate, Fueling Commercial Exposure Growth

Accelerating business investment will be a potent driver of

commercial property and liability insurance exposures and should drive employment and WC payroll

exposures as well (with a lag)

Source: IHS Global Insights as of Jan. 13, 2014; Insurance Information Institute.

58

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking, Pipelines)

59

ENERGY SECTOR

America’s Energy Boom Is Potentially the Most Transformative Economic

Force in the Country TodayWorkers Comp and Commercial Insurers

in General Will Generate Billions in Premiums as Exposures Mushroom

59

60

Oil & Gas Extraction Employment,Jan. 2010—April 2014*

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

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

616

9.3

170.

117

1.0

172.

517

3.6

176.

317

8.2

178.

518

0.9

181.

918

3.1

184.

818

5.2

185.

718

6.8

187.

618

8.0

188.

018

8.2

190.

019

1.7

191.

919

3.4

192.

419

2.6

193.

119

3.3

195.

019

6.5 199.

720

0.6

203.

020

4.1

205.

320

7.8

207.

820

8.9

150

160

170

180

190

200

210

220

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

Oil and gas extraction employment is up 33.6% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in

the US.

(Thousands) Highest since Aug.

1986

20.2 19.9 20.0 19.5 18.9 19.420.2

21.1 21.622.4

24.025.3 25.6

20.6

10

12

14

16

18

20

22

24

26

28

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

U.S. Natural Gas Production, 2000-2013

Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.

Trillions of Cubic Ft. per Year

The U.S. is already the world’s largest natural gas producer—

recently overtaking Russia. This is a potent driver of commercial

insurance exposures

5.19 5.08 5.005.35 5.47 5.65

6.49

7.44

8.379.13

5.09

0

12

3

45

6

7

89

10

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

U.S. Crude Oil Production, 2005-2015P

Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.

Millions of Barrels per Day

Crude oil production in the U.S. is expected to increase by 82.6% from 2008 through 2015—and could overtake

Saudi Arabia as the world’s largest oil producer

Employment Trends in the Healthcare Industry

63

Health Sector Employment Will Continue to Outpace

Increasing Opportunities for Workers Comp Insurers

63

U.S. Health Care Expenditures,1965–2022F

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$42.

0$4

6.3

$51.

8$5

8.8

$66.

2$7

4.9

$83.

2$9

3.1

$103

.4$1

17.2

$133

.6$1

53.0

$174

.0$1

95.5

$221

.7$2

55.8

$296

.7$3

34.7

$369

.0$4

06.5

$444

.6$4

76.9

$519

.1$5

81.7

$647

.5$7

24.3

$791

.5$8

57.9

$921

.5$9

72.7

$1,0

27.4

$1,0

81.8

$1,1

42.6

$1,2

08.9

$1,2

86.5

$1,3

77.2

$1,4

93.3

$1,6

38.0

$1,7

75.4

$1,9

01.6

$2,0

30.5

$2,1

63.3

$2,2

98.3

$2,4

06.6

$2,5

01.2

$2,6

00.0

$2,7

00.7

$2,8

06.6

$2,9

14.7

$3,0

93.2

$3,2

73.4

$3,4

58.3

$3,6

60.4

$3,8

89.1

$4,1

42.4

$4,4

16.2

$4,7

02.0

$5,0

08.8

U.S. health care expenditures have been on a relentless climb for most of the past half century, far outstripping population growth,

inflation of GDP growth

65

From 1965 through 2013, US health care expenditures had

increased by 69 fold. Population growth over the same period increased by a factor of just 1.6. By 2022, health spending will have

increased 119 fold.

$ Billions

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

Healthcare is a labor intensive industry. Spending will rise

from $3 trillion today to $5 trillion in 2022

66

63.1%650.7%

2235.9%

6839.8%

0%

1000%

2000%

3000%

4000%

5000%

6000%

7000%

8000%

Population CPI GDP Health CareExpenditures

Rate of Health Care Expenditure Increase Compared to Population, CPI and GDP

Source: Insurance Information Institute research.

1965: 194.3 Mill2013: 317.0 Mill

1965: $719.1 Bill2013: $16,797.5 Bill

1965: $42.0 Bill2013: $2,914.7 Bill

Health care expenditures increased 68 fold since 1965—about 3 times the

pace of GDP growth

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22

National Health Care Expenditures as a Share of GDP, 1965 – 2022F*

Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

1965 5.8%

Health care expenditures as a share of GDP rose from 5.8% in 1965 to 18.0% in 2013 and are expected to

reach 19.9% of GDP by 2022

% of GDP

2022 19.9%

1980: 9.2%

1990: 12.5%

2000: 13.8%

2010: 17.9%

Since 2009, heath expenditures as a %

of GDP have flattened out at about 18%--the

question is why and will it last?

-1%

0%

1%

2%

3%

4%

5%

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

Change in Medical CPI CPI-All Items

Medical Cost Inflation vs. Overall CPI, 1995 - 2013

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

Average Annual Growth AverageHealthcare: 3.8%

Total Nonfarm: 2.4%

Though moderating, medical inflation will continue to exceed inflation in the overall economy

69

Projected Number of People with No Health Insurance, 2013—2022*

31

55

4437

30

5

15

25

35

45

55

65

2013E 2014F 2015F 2018F 2022F

Millions

The projected decline in the uninsured population is very sensitive to the enrollment rate under the Affordable Care Act

By 2018 the number of people under age 65 without

insurance is expected to drop by 25 million (~45%)

69

*Under age 65.Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.

70

Growth in Health Professions,1991-2013

Sources: Bureau of Labor Statistics, Insurance Information Institute.

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Health care

Total nonfarm

(Percent Annual Change)

Healthcare employment has continued to grow in good times and bad - including the Great Recession.

Average Annual Growth AverageHealthcare: 2.5%

Total Nonfarm: 1.0%

The U.S. economy lost more than 8 million jobs during the Great Recession, but health sector

employment expanded

Healthcare SupportHealthcare Practitioners

ConstructionPersonal Care and Service

Computer and MathSocial Service

Business & FinancialGroundskeeping/Janitorial

EducationAll Occupations

LegalLife, Phys and Social Science

RepairFood Preparation

TransportationFire, Police, Etc.

Architects and EngineersSales

ManagementArts and Media

Administrative SupportProduction

Farming

28.121.521.4

20.918

17.212.512.5

11.110.810.7

10.19.69.4

8.67.9

7.37.37.276.8

0.8-3.4

Source: Bureau of Labor Statistics, Insurance Information Institute.

Occupations Ranked by Projected Percentage Growth, 2012-2022F (%)

71

Healthcare professions are expected to grow at 2 to

nearly 3 times employment growth overall

72

Growth in Healthcare Profession by Skill Level, 2012 – 2022F

Source: Bureau of Labor Statistics, Insurance Information Institute.

5,00

5

2,89

3

2,49

2

1,77

1

6,02

0

3,59

0

3,24

2

2,19

6

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Practitioners, includingRNs

Technicians, includingLPNs

Aides Other

2012 2022

(Thousands of Jobs)

+1.015 Mill +20.3%

+697,000 +24.1% +750,000

+30.1% +425,000 +24.0%

Nearly 3 million new healthcare jobs are projected through 2022!

INVESTMENTS: THE NEW REALITY

73

Investment Performance is a Key Driver of Profitability

Low Yields Have an Especially Large Influence on Profitability of

Long-Tailed Lines Like WC73

Property/Casualty Insurance Industry Investment Income: 2000–20131

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4

$39.6

$49.5$52.3

$30

$40

$50

$60

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

Investment Income Fell in 2012 and 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing

1 Investment gains consist primarily of interest and stock dividends...Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings are running below their 2007

pre-crisis peak

Property/Casualty Insurance Industry Investment Gain: 1994–20131

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$53.4$56.2$54.2

$58.8$58.0$51.9

$56.9

$0

$10

$20

$30

$40

$50

$60

$70

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

Investment Income Continued to Fall in 2013 Due to Low Interest Rates but Realized Investment Gains Were Up Sharply; The Financial Crisis

Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2013 were their highest in the

post-crisis era

76

P/C Insurer Net Realized Capital Gains/Losses, 1990-2013

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

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

90

$5.8

5

$7.0

4

$6.1

8 $11.

43

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$25-$20-$15-$10

-$5$0$5

$10$15$20

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

Insurers Posted Net Realized Capital Gains in 2010 - 2013 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital

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

($ Billions) Realized capital gains were up sharply as equity markets rallied

77

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*

*Monthly, constant maturity, nominal rates, through March 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

Recession2-Yr Yield10-Yr Yield

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

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

U.S. Treasury yields plunged to historic lows in

2013. Only longer-term yields have rebounded.

77

78

Treasury Yield Curves: Pre-Crisis (July 2007) vs. March 2014

0.05% 0.05% 0.08% 0.13%0.40%

2.23%2.72%

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

1.64%

0.82%

3.62%3.35%

0%

1%

2%

3%

4%

5%

6%

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

March 2014 Yield CurvePre-Crisis (July 2007)

Treasury yield curve remains near its most depressed level in

at least 45 years. Investment income is falling as a result.

Even as the Fed “tapers” rates are unlikely to return to pre-crisis

levels anytime soon

The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Until Unemployment Drops Below 6.5% or Until Inflation Expectations

Exceed 2.5%; Low Rates Add to Pricing Pressure for Insurers.Source: Federal Reserve Board of Governors; Insurance Information Institute.

79

Distribution of Bond Maturities,P/C Insurance Industry, 2003-2013

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

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

14.4%

15.4%

16.0%

16.0%

15.2%

15.7%

15.6%

16.0%

14.9%

16.6%

16.5%

29.8%

29.2%

28.8%

29.5%

30.0%

32.4%

36.4%

39.5%

41.2%

40.4%

38.8%

31.3%

32.5%

34.1%

34.1%

33.8%

31.2%

29.0%

27.1%

27.3%

27.6%

29.3%

15.4%

15.4%

13.6%

13.1%

12.9%

12.7%

11.9%

11.2%

10.4%

9.8%

9.8%

9.2%

7.6%

7.6%

7.4%

8.1%

8.1%

7.1%

6.2%

6.2%

5.7%

5.7%

Under 1 year

1-5 years

5-10 years

10-20 years

over 20 years

Sources: SNL Financial; Insurance Information Institute.

The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds

(from 24.6% in 2003 to 15.5% in 2012) and then trimmed bonds in the 5-10-year category (from 31.3% in 2003 to 27.6% in 2012) . Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in investment income along with lower yields.

80

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Persona

l Line

s

Pvt Pass

Auto

Pers P

rop

Commerc

ial

Comml A

uto

Credit

Comm P

rop

Comm C

as

Fidelity

/Sure

ty

Warra

nty

Surplus

Line

s

Med M

al

WC

Reinsu

rance

**

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

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

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

80

81

Outlook for U.S. Treasury Bond Yields Through 2015

0.761.17

2.30

3.40

1.80

2.35

3.10

3.70

0.500.100.090.06

0.00.51.01.52.02.53.03.54.0

2012 2013 2014F 2015F

3-Month 5-Year 10-Year

% Yield

Longer-tail lines like MPL and workers comp will benefit the most from the normalization of yields

Long-term yields should begin to normalize in 2014 but short-term yields will

remain very low until 2015

81

Source: Federal Reserve Board of Governors (2012-2013), Blue Economic Forecasts (2014-2015 3-month and 10-yr; 4/14) Swiss Re (2014-2015, 5-yr yield; 4/14); Insurance Information Institute.

82

LOW YIELDS—A REINSURANCE ASIDE

Surge in Alternative Capital Is Fundamentally Transforming

Reinsurance Markets

82

Global Reinsurance Capital (Traditional and Alternative), 2007 - 2013

Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.

Total reinsurance capital reached a record $540B in 2013, up 58.8% from 2008. Of that, $50B (9.3%) is alternative capacity, up 163% from

$19B since 2008

Alternative Capacity as a Percentage of Global Property Catastrophe Reinsurance Limit

Source: Guy Carpenter

(As of Year End)

Alternative Capacity accounted for approximately 14% or $45 billion

of the $316 in global property catastrophe reinsurance capital as

of mid-2013 (expected to rise to ~15% by year-end 2013)

Reinsurance Pricing: Rate-on-Line Index by Region, 1990 – 2014*

*As of Jan. 1.Source: Guy Carpenter

Lower CATs and a flood of new

capital has pushed reinsurance pricing

down in most regions, including

the US

Terrorism Update

86

TRIA: An Unqualified SuccessExpiration or Scaling Back Will Result in

Impacts on the Workers Comp Market

86

Workers Comp

$2.2 (6%)

Event Cancellation

$1.2 (3%) Aviation Hull$0.6 (2%)

Property - Other

$7.4 (19%)

Property -WTC 1 & 2*$4.4 (11%)

Biz Interruption $13.5 (33%)

Other Liability

$4.9 (12%)

Aviation Liability

$4.3 (11%)

Life$1.2 (3%)

Total Insured Losses Estimate: $42.9B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.**$32.5 billion in 2001 dollars.Source: Insurance Information Institute.

Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2013)

($ Billions)

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Summary of President’s Working Group Report on TRIA (April 2014)

Insurance for terrorism risk is available and affordable Availability/affordability have has not changed appreciably since 2010

Prices for terrorism risk insurance vary considerably depending on the policyholder’s industry and location of risk

Prices have declined since TRIA was enacted

Take-up rates have improved since adoption of TRIA Overall take-up rate is steady at ~60% (62% in 2013 per Marsh) Effectively 100% for workers compensation

Market capacity is currently tightening given uncertainty over TRIA reauthorization

The private market does not have the capacity to provide reinsurance for terror risk to the extent currently provided by TRIA

In the absence of TRIA, terrorism risk insurance would likely be less available. Coverage that would be available likely would be more costly and/or limited in scope

Source: Report of the President’s Working Group on Financial Markets,The Long-Term Availability and Affordability of Insurancefor Terrorism Risk, April 2014.

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Terrorism Risk Insurance Program Industry Is Working Hard for Reauthorization At Least 4 Congressional Hearings in House & Senate 3 House Bills Introduced in 2013 Senate Bill 2244 Introduced in April

Increases mandatory recoupment from $27.5B to $37.5B Increase insurer co-share 20% from 15%

Senate Banking Committee, 9/25/13House Financial Services Subcommittee, 11/13/13

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I.I.I. White Paper (March 2014):Terrorism Risk: A Constant Threat

Detailed history of TRIA How TRIA works Assessing the threat of

terrorism Terrorism market

conditions Global perspective Download at

http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2014.html

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Terrorism Insurance Take-up Rates,By Year, 2003-2013

Source: Marsh Global Analytics, 2014 Terrorism Risk Insurance Report, April 2014 and earlier editions.

27%

49%

58% 59% 59% 57%61% 62% 64% 62% 62%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

The Take-Up Rate for Workers Compensation is 100%

TRIA’s high take-up rates, availability and affordability have benefitted businesses,

workers and the entire US economy since the program’s enactment

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*Data for 27 states with sufficient data.Source: Marsh 2014 Terrorism Risk Insurance Report; Insurance Information Institute.

The overall US take-up rate for terrorism coverage was 62% in 2013 and ranged from

a low of 41% in Michigan to a high of

84% in Massachusetts (where demand likely increased due to the

April 2013 Boston Marathon bombing)

Terrorism Insurance Take-Up Rates by State for 2013*

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Top 3 Key Facts About TRIA

1. TRIA costs taxpayers virtually nothing

2. TRIA as currently structured continues to provide tangible benefits to the U.S. economy in the form of: Terrorism insurance market stability, affordability and availability Smooth functioning of commercial lending activity Employment stimulus

3. TRIA is now clearly a critical part of the U.S. national economic security infrastructure A primary goal of terrorism is to destabilize the U.S. economy Terrorism risk insurance is critical to ensure a swift recovery in

the event of future attacks

Bottom Line: TRIA is an unambiguous, unmitigated success

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigDownload at www.iii.org/presentations

Insurance Information Institute Online:

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