Under Pressure: P/C Insurance Markets in an Era of High Catastrophe Losses, Low Interest Rates and Tort Liability Concerns

Robert P. Hartwig, Ph.D., CPCU President & EconomistInsurance Information Institute

P/C Insurance Industry Financial Overview

Industry Performance Has Been Affected by High CAT Losses and Low Interest Rates

P/C Net Income after Taxes

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$1

4,1

78

$5

,84

0 $1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$2

0,5

59

-$6,970

$3

,04

6

$3

0,0

29

$3

8,5

01

$4

4,1

55

$6

5,7

77

$6

2,4

96

$3

,04

3

$2

8,6

72

$3

5,2

04

$1

9,4

56 $

33

,52

2

• 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 = 5.9%

High catastrophe losses and low interest rate have impacted insurer earnings, contributing to

pricing pressure

1991–2012 ($ Millions)

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% 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.

A 100 Combined Ratio Isn’t What It Once Was:Investment Impact on ROEs

4

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 201280

85

90

95

100

105

110

0%

3%

6%

9%

12%

15%

18%

97.5100.6 100.1 100.8

92.795.7

101.299.5 101

106.5

102.4

14.3%15.9%

8.8% 9.6%

12.7%10.9%

4.3%

7.4% 7.9%

4.7%6.2%

Combined Ratio ROE*

Catastrophes and lower investment income pulled down

ROE in 2012

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012 combined ratio including M&FG insurers is 103.2, 2011 combined ratio including M&FG insurers is 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

Combined Ratios Must Be Lower in Today’s Depressed Investment Environment

to Generate Risk Appropriate ROEs

A combined ratio of about 100 generated a ROE of just ~7.0%

in 2012, ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979

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

12-5%

0%

5%

10%

15%

20%

25%

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012*

1977: 19.0%

1987: 17.3%

1997: 11.6%

2006: 12.7%

1984: 1.8%

1992: 4.5%

2001: -1.2%

10 Years10 Years

9 Years

History suggests next ROE peak will be in 2016-2017

1975: 2.4%

2012:5.9%

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

ROE

Near Record Catastrophe Losses Continue

to Pressure Rates

U.S. Catastrophe Losses in Recent Years Have Been Very High and Vulnerability Is Rising Globally

U.S. Insured Catastrophe Losses

2012 was likely the third most expensive

year ever for insured CAT losses

Record tornado losses caused 2011 CAT losses to surge

*Through 6/2/13. Includes $2.6B for 2013:Q1 (PCS) and $5.32B for the period 4/1 – 6/2/13 (Aon Benfield Monthly Global Catastrophe Recap).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/ISO; Insurance Information Institute.

($ Billions, 2012 Dollars)

2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the

6th Highest. YTD 2013 Running Below Average but Q3 Is Typically the Costliest Quarter.

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*$0

$20

$40

$60

$80

$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$1

2.6

$1

1.0

$3

.8 $1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6 $1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.6

$3

5.0

$7

.9

Top 16 Most Costly Disasters in U.S. History

Irene (2011) Jeanne (2004)

Frances (2004)

Rita (2005) Tornadoes/T-Storms (2011)

Tornadoes/T-Storms

(2011)

Hugo (1989) Ivan (2004) Charley (2004)

Wilma (2005)

Ike (2008) Sandy (2012)

Northridge (1994)

9/11 Attack (2001)

Andrew (1992)

Katrina (2005)

$0

$10

$20

$30

$40

$50

$60

$4.4 $5.6 $5.6 $6.7 $7.1 $7.5 $7.8 $8.7 $9.2 $11.1$13.4

$18.8

$23.9 $24.6 $25.6

$48.7Hurricane Sandy could become 5th costliest event

in US insurance history

Hurricane Irene in 2011 ranks as the 12th most expense hurricane in US

history

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have Occurred Over the

Past Decade

(Insured Losses, 2012 Dollars, $ Billions)

Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

The Past Two Years Have Not Been Kind to Insurers or Utilities Hurricane Irene: Aug. 27-29,

2011

Insured Losses: $4.3 Billion

Customers w/o Power: 5 Million

“Snowtober” Blizzard: Oct. 29, 2011

Insured Losses: ~$1 Billion

Customers w/o Power: 2.7 Million

Derecho: June 29, 2012

Insured Losses: ~$1+ Billion

Customers w/o Power: 3.7 Million

Superstorm Sandy: Oct. 29-30, 2012

Insured Losses: $18.8 Billion

Customers w/o Power: 8.1 Million

Source: Insurance Information Institute research.

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperatureextremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2012

41

19

121

3

50

100

150

200

250

300

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

There were 184 natural disaster events in the US

in 2012

Number of Events (Annual Totals 1980 – 2012)

Source: MR NatCatSERVICE

(2012 Dollars, $ Billions)

Losses Due to Natural Disasters in the US, 1980–2012(Overall and Insured Losses)

Source: MR NatCatSERVICE

20

40

60

80

100

120

140

160

180

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Overall losses (in 2012 values) Insured losses (in 2012 values)

2012 was the 2nd most

expensive year on record for

insured catastrophe

losses in the US (incl. NFIP flood).

Approximately 57% of the

overall cost of catastrophes in

the US was covered by

insurance in 2012

2012 LossesOverall : $101.1B

Insured: $57.9B

13

42.0%

33.9%

7.3%

6.3%

4.7%3.8%

1.6%

Other (5), $1.40.4%

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1992–20111

Insured cat losses from 1992-2011

totaled $384.3B, an average of $19.2Bper

year or $1.6B per month

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Wind losses are by far cause the most

catastrophe losses, even

if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Hurricanes & Tropical Storms

$161.3

Fires (4), $6.0

Tornadoes (2), $130.2

Winter Storms, $28.2

Terrorism, $24.4

Geological Events, $18.2

Wind/Hail/Flood (3), $14.8

U.S. Thunderstorm Loss Trends, 1980 – 2012

14

Average thunderstorm

losses are up 7 fold since the early 1980s. The 5-year

running average loss

is up sharply.

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss. 2008-2012 are

the most expensive years on record.

Thunderstorm losses in 2012 totaled $14.9 billion, the 2nd

highest on record

Source: Property Claims Service, MR NatCatSERVICE

Top 16 Most Costly World Insurance Losses, 1970-2012*

Hugo (1989)

Winter Storm Daria (1991)

Chile Quake (2010)

Ivan (2004)

Charley (2004)

Typhoon Mirielle (1991)

Wilma (2005)

Thailand Floods (2011)

New Zealand Quake (2011)

Ike (2008)

Sandy (2012)

Northridge

(1994)

WTC Terror Attack (2001)

Andrew (1992)

Japan Quake,

Tsunami (2011)

Katrina (2005)

$0

$10

$20

$30

$40

$50

$60

$7.8 $8.1 $8.5 $8.7 $9.2 $9.6 $11.1 $13.4 $13.4 $13.4$18.8

$23.9 $24.6 $25.6

$38.6

$48.7

5 of the top 14 most expensive catastrophes

in world history have occurred within the past 3 years (2010-

2012)Hurricane Sandy is now the 6th costliest event in global

insurance history

2012 insured CAT Losses totaled $60B; Economic losses totaled $140B, according to Swiss Re

*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

(Insured Losses, 2012 Dollars, $ Billions)

200

400

600

800

1 000

1 200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperatureextremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters Worldwide, 1980 – 2013*

41

19

121

3

There were 460 natural disaster events globally in the first half of 2013 and 905 for full-year 2012

Number of Events

Source: MR NatCatSERVICE

Outlook for 2013 Hurricane Season: Above Average Activity Expected

Hurricanes and Tropical Storms Drive Some of the Largest Losses Utilities Experience Each Year

Top 12 Most Costly Hurricanes in U.S. History

Irene (2011)

Jeanne (2004)

Frances (2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley (2004)

Wilma (2005)

Ike (2008)

Sandy* (2012)

Andrew (1992)

Katrina (2005)

$0

$10

$20

$30

$40

$50

$60

$4.4 $5.6 $5.6 $6.7 $7.8 $8.7 $9.2 $11.1 $13.4$18.8

$25.6

$48.7

Hurricane Sandy became

the 3rd costliest hurricane

in US insurance history

Hurricane Irene became the 12th most expensive

hurricane in US history in 2011

10 of the 12 most costly hurricanes in insurance history occurred over the past 9 years (2004 - 2012)

*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

(Insured Losses, 2012 Dollars, $ Billions)

Hurricane Sandy: Claim Payments to Policyholders, by State

21

NY NJ PA CT MD VA OH MA RI DE WV NC NH DC ME VT$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$9,600

$6,300

$700 $500 $410 $295 $292 $210 $103 $84 $58 $57 $55 $37 $36 $13

Insurers Will Pay at Least $18.75 Billion to 1.52 Million Policyholders across 15 States

and DC in the Wake of Hurricane Sandy

At $9.6B and $6.6B, respectively, NY and NJ suffered, by far, the largest losses from Hurricane

Sandy

TOTAL = $18.75 Billion*

($ Thousands)

Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 - 31, 2012) from PCS as of Jan. 18, 2013; Insurance Information Institute .

22

Hurricane Sandy: Insured Loss by Claim Type*Although

Commercial Lines accounted for

only 13% of total claims,

they account for 48%

of all claim dollars paid.

In most hurricanes, Commercial Lines accounts for about

1/3 of insured losses.

Total Claim Value = $18.75 Billion*

($ Millions)

*PCS insured loss estimates as of 1/18/13. Catastrophe modeler estimates range up to $25 billion. All figures exclude losses paid by the NFIP.Source: PCS; Insurance Information Institute.

Auto$2,729

15%

Commercial$9,024

48%

Homeowner$6,997

37%

Outlook for 2013 Hurricane Season: 75% Worse Than Average

Forecast ParameterMedian

(1981-2010) 2013FNamed Storms 12.0 18

Named Storm Days 60.1 95

Hurricanes 6.5 9

Hurricane Days 21.3 40

Major Hurricanes 2.0 4

Major Hurricane Days 3.9 9

Accumulated Cyclone Energy 92.0 165

Net Tropical Cyclone Activity 103% 175%

Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 2013, accessed at http://tropical.atmos.colostate.edu/forecasts/2013/jun2013/jun2013.pdf; Insurance Information Institute.

Landfall Probabilities for 2013 Hurricane Season: Above Average

Average* 2013F

Entire US East & Gulf Coasts 52% 72%

US East Coast Including Florida Peninsula 31% 48%

Gulf Coast from Florida Panhandle to Brownsville 30% 47%

Caribbean 42% 61%

*Average over the past century.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 2013.

Connecticut: Sandy (2012)Texas: Rita (2005)

New Jersey: Irene (2011)Katrina: Katrina (2005)New York: Irene (2011)

Mississippi: Katrina (2005)Alabama: Ike (2008)

Pennsylvania: Sandy (2012)Florida: Charley (2004)

New York: Sandy (2012)Texas: Ike (2008)

New Jersey: Sandy (2012)Florida: Wilma (2005)

Florida: Frances (2004)

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.000.63

0.780.81

0.910.94

11.07

1.271.6

2.12.47

2.623.25

3.5

Sources: US Dept. of Energy, Vertyx, AP analysis; Insurance Information Institute.

Selected Large Outages Associated with Tropical Systems, by State

Hurricanes and tropical storms have produced significant losses for

insurers in recent years, including with Sandy in

2012

(Millions of Customers)

New YorkFloridaTexas

MassachusettsNew Jersey

ConnecticutLouisiana

S. CarolinaVirginia

MaineNorth Carolina

AlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

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

$2,923.1$2,862.3

$1,175.3$849.6

$713.9$567.8

$293.5$239.3

$182.3$164.6$163.5

$118.2$106.7

$81.9$64.0$60.6$58.3

$17.3

Source: AIR Worldwide.

Total Value of Insured Coastal Exposure in 2012(2012 Dollars, $ Billions)

$2.923 trillion insured coastal exposure in New York in 2012

In 2012, New York ranked as the #1 most exposed state to hurricane loss, overtaking Florida with $2.862 trillion. Texas is very exposed too, and ranked #3

with $1.175 trillionin insured coastal exposure

The insured value of all coastal property was $10.6 trillion in 2012 , up 20% from $8.9 trillion in 2007 and up

48% from $7.2 trillion in 2004

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012E

0

2

4

6

8

10

0.8 1.1

1.1

0.1 0

.93.6

0.4 1

.20.4 0.8 1

.30.3 0.4 0.7 1

.51.0

0.4

0.4 0.7

1.8

1.1

0.6 1

.4 2.0

1.3 2

.00.5

0.5 0.7

3.0

1.22.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6 3

.48.7 9

.4

Combined Ratio Points

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.

Avg. CAT Loss Component of the Combined Ratio

by Decade1960s: 1.04 1970s: 0.85 1980s: 1.31

1990s: 3.39 2000s: 3.52 2010s: 7.20*

Catastrophe losses as a share of all losses reached a record

high in 2012

Federal Disaster Declarations Patterns: 1953-2013

Disaster Declarations Set New Records in Recent Years

53

55

57

59

61

63

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

0

20

40

60

80

100

12013 17 18

16

16

7 712

12

22

20 2

525

11

11

19

29

17

17

48

46

46

38

30

22 25

42

23

15

24

21

34

27 28

23

11

31 3

8 43 45

32 36

32

75

44

65

50

45

45 49 5

669

48 52

63

75

59

81

99

47

27

Number of Federal Disaster Declarations, 1953-2013*

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011. Hurricane Sandy Produced 13 Declarations in 2012/13.

*Through July 7, 2013.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.

The number of federal disaster declarations set a new record in 2011, with

99, shattering 2010’s record 81 declarations.

There have been 2,117 federal disaster

declarations since 1953. The average

number of declarations per year is 35 from 1953-2012,

though there few haven’t been

recorded since 1995.

27 federal disasters were declared so far in 2013*

Severe Weather Report Update: 2013

Damage from Tornadoes, Large Hail and High Winds Keep Insurers Busy

Severe Weather Reports, 2012

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012 annual summary.html#

There were 22,503 severe

weather reports in

2012; including 1,119

tornadoes; 7,033 “Large Hail” reports and 14,351 high wind

events

Location of Tornado Reports: through July 3, 2013

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013 annual summary.html#; PCS.

There were 630 tornadoes through July 3,

causing extensive property damage in several states

The storm system that spawned the

deadly EF-5 tornado on May 19 in Moore, OK, produced insured losses of $1.575

billion

Location of Large Hail Reports: through July 3, 2013

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013 annual summary.html#

Large hail reports were heavily concentrated

in the Plains states

There were 3,716 “Large Hail” reports

through July 3, causing

extensive property and

vehicle damage

Location of High Wind Reports: through July 3, 2013

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013 annual summary.html#

Wind damage reports were more

heavily concentrated

in the Southeast

There were 7,371 “Wind

Damage” reports through July 3, causing

extensive property damage

Severe Weather Reports: through July 3, 2013

There were 11,717 severe

weather reports through July 3; including 630 tornadoes; 3,716 “Large Hail” reports

and 7,371 high wind events

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013 annual summary.html#

38

2013 count is running well

below average

There were 1,897 tornadoes in the U.S. in 2011 far above average,

but well below 2008’s record

*Through July 6, 2013. Source: http://www.spc.noaa.gov/wcm/.

U.S. Tornado Count, 2005-2013*

Investments: The New Reality

Investment Performance Is a Key Driver of Profitability

Depressed Yields Will Necessarily Impact Underwriting & Pricing

0 1 2 3 4 5 6 7 8 9 10 11 12 13*$30

$35

$40

$45

$50

$55

$60

$38.9$37.1 $36.7

$38.7 $39.6

$49.5$52.3

$54.6$51.2

$47.1 $47.6$49.2

$47.7$45.5

Investment earnings are running 16.7% below their

2007 pre-crisis peak

-16.7%*

Property/Casualty Insurance Industry Investment Income: 2000–2013*1

($ Billions)

1 Investment gains consist primarily of interest and stock dividends..*Estimate based on annualized actual Q1:2013 investment income of $11.385B.Sources: ISO; Insurance Information Institute.

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

41

P/C Insurer Net Realized Capital Gains/Losses, 1990-2013:Q1

Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital

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

($ Billions)

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

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13:Q1

-$25

-$15

-$5

$5

$15

$2

.9

$4

.8 $9

.9

$9

.8

$1

.7 $6

.0 $9

.2

$1

0.8 $1

8.0

$1

3.0

$1

6.2

$6

.6

-$1

.2

$6

.6

$9

.1

$9

.7

$3

.5 $8

.9

-$1

9.8

-$7

.9

$5

.9

$7

.0

$6

.2

$1

.4

Realized capital gains in 2012 were down 12% from 2011 and

down 30% from 2007

94 95 96 97 98 99 0 1 2 3 4 05* 6 7 8 9 10 11 12 13:Q1

$0$10$20$30$40$50$60$70

$35.4$42.8

$47.2$52.3

$58.0$51.9

$56.9

$44.4$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7$39.2

$53.4$56.2$53.9

$12.8Investment gains in 2012 were

approximately 16% below their pre-crisis peak

-16%*

Property/Casualty Insurance Industry Investment Gain: 1994–2013:Q11

($ Billions)

1 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.

Investment Gains Slipped in 2012 as Low Interest Rates Reduced Investment Income and Realized Investment Gains Fell; The Financial Crisis Caused

Investment Gains to Fall by 50% in 2008. Reduced investment earnings are pressuring rates/pricing.

94 95 96 97 98 99 0 1 2 3 4 05* 6 7 8 9 10 11 12 13E$0

$20

$40

$60

$80

$54.8$64.5

$69.1$74.8

$81.7

$71.5$75.9

$57.6

$45.9$56.5$59.4

$69.8$63.4

$70.9

$33.8$42.0

$56.2$57.4$53.9$50.0

1994-2012 average yearly gain: $61B hasn’t been achieved since

2007

-24%*

P/C Industry Investment Gains, Inflation-Adjusted: 1994–2013E1

($ Billions)

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.*2005 figure includes special one-time dividend of $3.2B; 2013F figure is I.I.I. estimate for 2013:Q1, annualized.Sources: ISO; Insurance Information Institute.

Because the Federal Reserve Board aims to keep interest rates exceptionally low until the unemployment rate hits 6.5%—likely well into 2014—maturing

bonds will be re-invested at still low rates even once “tapering” begins.

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2013*

'90'90'90'90'90'90'90'90'90'90'90'90'91'91'91'91'91'91'91'91'91'91'91'91'92'92'92'92'92'92'92'92'92'92'92'92'93'93'93'93'93'93'93'93'93'93'93'93'94'94'94'94'94'94'94'94'94'94'94'94'95'95'95'95'95'95'95'95'95'95'95'95'96'96'96'96'96'96'96'96'96'96'96'96'97'97'97'97'97'97'97'97'97'97'97'97'98'98'98'98'98'98'98'98'98'98'98'98'99'99'99'99'99'99'99'99'99'99'99'99'00'00'00'00'00'00'00'00'00'00'00'00'01'01'01'01'01'01'01'01'01'01'01'01'02'02'02'02'02'02'02'02'02'02'02'02'03'03'03'03'03'03'03'03'03'03'03'03'04'04'04'04'04'04'04'04'04'04'04'04'05'05'05'05'05'05'05'05'05'05'05'05'06'06'06'06'06'06'06'06'06'06'06'06'07'07'07'07'07'07'07'07'07'07'07'07'08'08'08'08'08'08'08'08'08'08'08'08'092/29/2009'08'09'09'09'09'09'09'09'09'09'10'10'10'10'10'10'10'10'10'10'10'10'11'11'11'11'11'11'11'11'11'11'11'11'122/30/2012'12'12'12'12'12'12'12'12'12'12'132/30/2013'13'13'13'131%

2%

3%

4%

5%

6%

7%

8%

9%

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

full decade.

Yields on 10-Year U.S. Treasury Notes recently plunged to

record modern-era lows and remain low by historical

standards

*Monthly, through June 2013. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

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 Security Yields:A Long Downward Trend, 1990–2013*

'90'90'90'90'90'90'90'90'90'90'90'90'91'91'91'91'91'91'91'91'91'91'91'91'92'92'92'92'92'92'92'92'92'92'92'92'93'93'93'93'93'93'93'93'93'93'93'93'94'94'94'94'94'94'94'94'94'94'94'94'95'95'95'95'95'95'95'95'95'95'95'95'96'96'96'96'96'96'96'96'96'96'96'96'97'97'97'97'97'97'97'97'97'97'97'97'98'98'98'98'98'98'98'98'98'98'98'98'99'99'99'99'99'99'99'99'99'99'99'99'00'00'00'00'00'00'00'00'00'00'00'00'01'01'01'01'01'01'01'01'01'01'01'01'02'02'02'02'02'02'02'02'02'02'02'02'03'03'03'03'03'03'03'03'03'03'03'03'04'04'04'04'04'04'04'04'04'04'04'04'05'05'05'05'05'05'05'05'05'05'05'05'06'06'06'06'06'06'06'06'06'06'06'06'07'07'07'07'07'07'07'07'07'07'07'07'08'08'08'08'08'08'08'08'08'08'08'08'092/29/2009'08'09'09'09'09'09'09'09'09'09'10'10'10'10'10'10'10'10'10'10'10'10'11'11'11'11'11'11'11'11'11'11'11'11'122/30/2012'12'12'12'12'12'12'12'12'12'12'13'13'13'13'136/31/20130%

2%

4%

6%

8%

Recession 2-Yr Yield 10-Yr Yield

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

full decade.

U.S. Treasury security yields

recently plunged to record lows

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. *Monthly, constant maturity, nominal rates, through June 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y0%

2%

4%

6%

0.03% 0.05% 0.09% 0.14% 0.33% 0.58%1.20%

1.71%2.30%

3.07%3.40%

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

Treasury Yield Curves: Pre-Crisis (July 2007) vs. June 2013

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

Investment income is falling as a result. If as Fed I “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.

2006

2007

2008

2009

2010

2011

2012

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

16.0%

15.2%

15.7%

16.2%

16.3%

15.2%

16.5%

29.5%

30.0%

32.4%

36.2%

39.5%

41.4%

40.4%

34.1%

33.8%

31.2%

28.7%

26.7%

26.8%

27.6%

13.1%

12.9%

12.7%

11.7%

11.1%

10.3%

9.8%

7.4%

8.1%

8.1%

7.3%

6.4%

6.3%

5.7%

Under 1 year1-5 years5-10 years10-20 yearsOver 20 years

Distribution of Bond Maturities,P/C Insurance Industry, 2003-2012

The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. Since 2006, the industry trimmed its holdings of bonds with maturities greater than 10 years from 20.5% in 2006 to 15.5% in 2012 and then trimmed bonds in the 5-10-year category from

34.1% in 2006 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.

Sources: SNL Financial; Insurance Information Institute.

50

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

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.

Pe

rso

na

l L..

.

Pvt

Pa

ss .

..

Pe

rs P

rop

Co

mm

erc

ial

Co

mm

l A

uto

Cre

dit

Co

mm

Pro

p

Co

mm

Ca

s

Fid

elity

/Su

...

Wa

rra

nty

Su

rplu

s L

...

Me

d M

al

WC

Re

insu

ran

...

-8%

-6%

-4%

-2%

0%

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-1.9

%

-2.1

%

-3.1

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3

%

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

14F

-1.00.01.02.03.04.05.06.0

$4.9$5.1

$3.0$3.2$2.4$2.9$2.8$2.6

$1.5$1.9

$3.3$3.4

$1.3

$2.5$2.3$3.0

$3.8

$2.8

$3.8

-$0.4

$1.6

$3.2

$2.1$1.5

$1.9

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

2009/10

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

Annual Inflation Rates (%)

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 7/13 (forecasts).

The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and

commodity prices, plus U.S. debt burden, remain longer-run concerns

Inflationary expectations remain quite low,

allowing the Fed to continue its QE3 program

into 2014

Workers Compensation Operating Environment

Rising Medical and Indemnity Lost Time Claim Severities Continue to Rise

Persistently Low Interest Rates Have a Larger Impact on Long Tail Lines Like WC

94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12$80

$90

$100

$110

$120

$130

$102.0

$97.0$100.0$101.0

$107.0

$115.3$118.2

$121.7

$112.6$108.6

$105.1$102.7

$98.5

$103.5$104.5

$110.6

$115.0$115.0

$109.0

WC showed a better-than-expected improvement for private carriers in

2012

Workers Compensation Combined Ratio: 1994–2012P

Sources: A.M. Best (1994-2009); NCCI (2010-2012P) and are for private carriers only; Insurance Information Institute.

Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-2010/11 and Were the Worst They Had Been

in a Decade.

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p0.0

5.0

10.0

15.0

20.0

25.0

30.0

$8

.1

$8

.2

$8

.1

$8

.8

$9

.2

$9

.9

$1

0.9

$1

1.8

$1

3.1

$1

4.0

$1

5.9

$1

7.3

$1

8.7

$1

9.7

$2

1.2

$2

2.3

$2

3.7

$2

5.3

$2

6.4

$2

6.7

$2

7.7

$2

8.5

+6.8%+1.3% 2.1% +9.0%+5.1%+7.4%+10.1%+8.3%+10.6%+7.3%

+13.5%+8.8%

+7.7%+5.4%+7.8%+5.4%

+6.3%+6.6%+4.1%+1.4%+3.6% +3%

Workers Compensation Medical SeverityModerate Increase in 2012

Average Medical Cost per Lost-Time Claim

2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Medical Claim Cost ($000s)

Accident Year

Cumulative Change = 252%(1991-2012p)

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2011: +5.7%

Annual Change 1991–1993: -1.7%Annual Change 1994–2001: +7.3%Annual Change 2002–2011: +3.2%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p0.0

5.0

10.0

15.0

20.0

25.0

$9

.8

$9

.5

$9

.2

$9

.7

$9

.8

$1

0.4

$1

1.2

$1

2.2

$1

3.5

$1

4.8

$1

6.2

$1

6.7

$1

7.5

$1

7.7

$1

8.2

$1

9.2

$2

0.4

$2

2.2

$2

2.4

$2

1.7

$2

2.2

$2

2.4

1.0% -3.1%-2.8% 4.9% 1.7% 5.9% 7.7%9.0%

10.1%10.1%

9.2% 3.1% 4.6% 1.0% 3.1%5.6%

6.2%8.8% 0.7% -3.0% 2.2% 1.0%

Workers Comp Indemnity Claim Costs: Small Increase in 2012

Average Indemnity Cost per Lost-Time Claim

2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Indemnity Claim Cost ($ 000s)

Accident Year

Average indemnity costs per claim were up 1% in

2012 to $22,400

p PreliminarySource:1990–20102p Private Carriers, Annual Statement Data, NCCI.1996–2012p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual StatementsState Funds available for 1996 and subsequent

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12p0.0

10.0

20.0

30.0

40.0

50.0

31

.0

31

.3

29

.8

30

.5

29

.1

26

.3

25

.2

24

.2

23

.3

22

.3

25

.0

26

.1

29

.2

31

.1

34

.7

37

.8

38

.6

37

.6

33

.8

30

.3

29

.9

32

.3

35

.2

31.0 31.3 29.8 30.5 29.126.3 28.2 26.9 25.9 25.0

28.632.1

37.742.3

46.5 47.8 46.544.3

39.334.6 33.8

36.439.6

Private Carriers ($B) State Funds ($B)

Workers Compensation Premium: Second Consecutive Year of Increase

Net Written Premium($ Billions)

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2011: +5.7%

Pvt. Carrier NWP growth was +9.0% in 2012, as pricing reacts to poor underwriting results

and low interest rates

Cyber Risk

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and Small in Every Industry

NEW III White Paper: http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf

Data Breaches 2005-2013, By Number of Breaches and Records Exposed

65

2005 2006 2007 2008 2009 2010 2011 20120

100200300400500600700

0

60

120

180

240

157

321

446

656

498

662

419 447

66.9

19.1

127.7

35.7

222.5

16.2 22.9 17.3

# Data Breaches # Records Exposed (Millions)

# Data Breaches/Millions of Records Exposed

*2013 figures as of March 19, 2013.Source: Identity Theft Resource Center

The total number of data breaches and number of records exposed fluctuates from year to year and over time.

2012 Data Breaches By Category, By Number of Records Exposed

Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC%20Breach%20Report%202012.pdf.

Govt/Military7.7 million (44.4%)

Medical/Healthcare

2.2 million (12.9%)

Banking/Credit/Financial470,048

(2.7%)

Educational2.3 million (13.3%)

Business4.6 million (26.7%)

Government/Military and Business organizations accounted for the majority of records exposed by data breaches during 2012.

Main Causes of Data Breach

Source: 2011 Cost of Data Breach Study: United States, Ponemon Institute, March 2012

Negligent employees and malicious attacks are most often the cause of the data breach. Some 39 percent of incidents involve a negligent employee or contractor, while 37 percent

concern a malicious or criminal attack.

Negligence39%

System Glitch 24%

Malicious or Criminal Attack

37%

2011

2010

2009

2008

$0 $2 $4 $6 $8 $10

$5.50

$7.20

$6.80

$6.70

*Findings of this benchmark study pertain to the actual data breach experiences of 49 U.S. companies from 14 different industry sectors, all of which participated in the 2011 study. Total breach costs include: lost business resulting from diminished trust or confidence of customers ;costs related to detection, escalation, and notification of the breach; and ex-post response activities, such as credit report monitoring. Source: 2011 Annual Study: U.S. Cost of a Data Breach, the Ponemon Institute.

Average Organizational Cost of a Data Breach, 2008-2011*

Government/Military and Business organizations accounted for the majority of records exposed by data breaches during 2012.

($ Millions)

The Ever Shifting Legal Liability & Tort Environment

Mixed Experience Depending on the Age of Claims

Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E

71

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

11E

12E

13E

$0

$50

$100

$150

$200

$250

$300

1.50%

1.75%

2.00%

2.25%

2.50%

Tort Sytem Costs Tort Costs as % of GDP

Tort

Syst

em

Cost

sTort C

osts a

s % o

f GD

P

Tort costs in dollar terms have remained high but relatively stable

since the mid-2000s., but are down substantially as a share of GDP

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003 = pre-

tort reform peak

($ Billions)

Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A

US

Canada

UK

Irela

nd

Italy

Germ

any

Spain

Euro

zone

France

Denm

ark

Port

ugal

Belg

ium

Neth

erl

ands0.0%

30.0%

60.0%

90.0%

120.0%

150.0%

180.0% 166.00%

119.00%105.00%

78.00% 77.00%68.00% 67.00% 63.00% 56.00%

46.00% 43.00% 42.00% 40.00%

Liability Costs as a Fraction of GDP, 2011

There US has by far the most costly tort system

in the industrialized world. The very long-tailed nature of many

liabilities is one reason.

Sources: US Chamber of Commerce; Insurance Information Institute.

Prior to 2003

3 4 5 6 7 8 9 10 11-$5

-$3

-$1

$1

$3 $2.3

-$0.4 -$0.6 -$0.7-$1.1

-$1.3

-$4.6

-$0.5-$0.9

-$4.2

Which Accident Years Generated Reserve Changes in 2012: Old Claims Still a ProblemReserves for older accident years (claims occurring many

years ago) are actually increasing in cost—requiring insurers to add $2.3 billion to their reserves in 2012 alone.

Old environmental claims are contributing to this deterioration.

Sources: SNL Financial; Insurance Information Institute.

($ Billions)

Insurance liabilities, especially in areas such as environmental claims, can be very long-lived and can develop adversely even decades later

19

33

19

35

19

37

19

39

19

41

19

43

19

45

19

47

19

49

19

51

19

53

19

55

19

57

19

59

19

61

19

63

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

100

200

300

1933: $343 million

2011 (est.): $253 billion (770 times more than 1933)

A clear flattening of tort cost has

occurred in recent years after 7 decades of increases

Claims that occurred in the “Tort Era” can and still do flare up

and adversely impact insurers today, decades later

Tort Costs: Rose for Seven Decades: Old Claims Can Be Problematic

Growth in Tort Costs, Current (Nominal) Dollars,1933-2011($ Millions)

* ProjectedSources: Trends in Tort Costs, Towers Watson; Insurance Information Institute.

19

34

19

36

19

38

19

40

19

42

19

44

19

46

19

48

19

50

19

52

19

54

19

56

19

58

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

-15.0%

-5.0%

5.0%

15.0%

25.0%

35.0%

Sources: Trends in Tort Costs, Towers Perrin, Insurance Information Institute.

Explosion in Tort Costs Lasted for Much of the 20th CenturyAnnual Change in Inflation-Adjusted Tort Costs

End of WWII The postwar era: In 40 years of 43, tort costs rose faster than inflation

Mid-80s liability crisis

Decline in 6 of last 7

Deepwater Horizon

1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s0.0%

4.0%

8.0%

12.0%

16.0%

2.00%

13.50%

11.60%

9.90%

11.90% 11.80%

3.20% 3.50%

1.10%

11.20%

6.00%7.00%

10.40%

7.60%

5.50%4.30%

Tort Costs Nominal GDP

From the 1940s through the 1980s, Tort Costs Grew Much Faster than GDP Some older liability

claims from the era of explosive tort costs continue to

suffer from adverse development,

requiring insurers to add to their reserves

Sources: Trends in Tort Costs, Towers Perrin, Insurance Information Institute.

1950s 1960s 1970s 1980s 1990s 2000s 2010s-20.0%

0.0%20.0%40.0%60.0%80.0%

100.0%120.0%140.0%160.0%

136%

66%

47%

71%

19%10%

-10%

Change in Tort Costs by Decade, Even After Adjusting for Inflation, Still Showed Rapid Growth

Liability claims from decades past grew with

explosive momentum and still increase in cost

today

Sources, Trends in Tort Costs, Towers Watson, Insurance Information Institute.

Change from Prior Decade

Energy Supply and Demand

The World Will Remain Energy Hungry and Demand Will Increase Steadily for Decades on a Global Scale Utilizing All Fuel Sources

Global Electricity Generation by Fuel Source, 2010-2040

79

Electricity demand will continue to

rise on a global scale

Billions of kWH

Source: Energy Information Administration, International Energy Outlook 2013.

Thank you for your timeand your attention!

Insurance Information Institute Online: www.iii.org

Twitter: twitter.com/bob_hartwig

Download at: www.iii.org/presentations

AEGIS2013 Policyholders’ Conference

Baltimore, MarylandJuly 29 – August 1