Workers Compensation and the New Economy:

Trends, Challenges and Opportunities

Minnesota Workers’ Comp Insurers AssociationMinneapolis, MN

April 27, 2015Download at www.iii.org/presentations

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

Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

Insurance Industry:Financial Update & Outlook

2014 Was a Reasonably Good Year2015: A Repeat of 2014?

2

P/C Industry Net Income After Taxes1991–2014E 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% 2013 ROAS1 = 10.3% 2014 ROAS1 = 7.6%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS through 2014:Q2, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

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

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$6

3,7

84

$5

0,2

03

$3

8,5

01

$2

0,5

59

$4

4,1

55

$6

5,7

77

-$6,970

$2

8,6

72

-$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

14E

Net income rose strongly (+81.9%) in 2013 vs. 2012 on lower cats, capital gains

$ Millions

-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

14

15

F1

6F

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2016F

*Profitability = P/C insurer ROEs. 2011-14 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best, Conning

1977:19.0%1987:17.3%

1997:11.6% 2006:12.7%

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

10 Years

10 Years

9 Years

History suggests next ROE peak will be in 2016-2017, but that seems unlikely

ROE

1975: 2.4%

2013 10.4%

2014E 7.6%

2015F=6.5%

2016F=6.3%

6

ROE: Property/Casualty Insurance by Major Event, 1987–2014E

* Excludes Mortgage & Financial Guarantee in 2008 – 2014. 2014 figure is through Q3:2014. Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Modestly higher CATs

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

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

Economic Shocks, Inflation:

1976: 22.2%Tort Crisis

1986: 30.5%

Post-9/112002: 22.4%

Great Recession:2009: -9.0%

ROE

2014E 4.0%

Commercial Lines NPW Premium Growth:1975 – 2014E

Recessions:1982: 1.1%

Commercial lines is prone to more cyclical volatility that personal

lines. Recently, growth has stabilized in the 4% to 5% range.

1988-2000: Period of

inter-cycle stability

2010-20XX? Post-

recession period of

stable growth?

Note: Data include state funds beginning in 1998.Source: A.M. Best; Insurance Information Institute.

Post-Hurricane Andrew Bump:

1993: 6.3%

Post Katrina Bump:

2006: 7.7%

10

P/C Insurance Industry Combined Ratio, 2001–2014:Q3*

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014:9M = 97.7. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

96.797.9

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 2014

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

PremiumsRelatively 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

Best Combined

Ratio Since 1949 (87.6)

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

Combined Ratio / ROE

* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014:9M combined ratio including M&FG insurers is 97.7; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

96.797.9

102.4

106.5

95.7

14.3%

15.9%

12.7%

10.9%

7.4% 7.9%

4.7%6.2%

7.4%

9.6%8.8%

4.3%

9.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014:Q30%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~7.0% in 2012/13, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Lower CATs helped ROEs

in 2013

12

RNW All Lines by State, 2004-2013 Average:Highest 25 States

20

.5

18

.4

14

.6

14

.3

13

.4

13

.3

12

.3

12

.1

12

.0

12

.0

11

.7

11

.4

11

.1

11

.1

10

.9

10

.8

10

.7

10

.7

10

.5

10

.5

10

.3

9.9

9.8

9.8

9.6

9.5

02468

1012141618202224

HI AK VT ME WY ND VA ID NH UT WA SC MA NC OH DC CA OR RI WV CT IA NE SD MT MD

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region

Source: NAIC; Insurance Information Institute.

Profitability Benchmark: All P/C

US: 7.9%

13

9.2

8.6

8.4

8.3

8.2

8.2

8.1

8.0

7.9

7.7

7.7

7.5

7.4

6.8

6.6

6.4

6.1

5.7

5.3

5.2

5.0

4.3

2.5

1.9

-6.9

-9.3

-14-12-10-8-6-4-202468

10

NM FL TX WI KS MN CO PA US AR IL IN AZ MO KY TN NV NJ GA NY DE MI AL OK MS LA

RNW All Lines by State, 2004-2013 Average: Lowest 25 States

Source: NAIC; Insurance Information Institute.

Some of the least profitable states over the past decade were hit hard

by catastrophes

14

Return on Net Worth (RNW) All Lines:2004-2013 Average

25

.6

18

.4

13

.4

13

.2

9.2

8.9

7.9

7.8

7.1

7.1

6.6

4.9

-1.0

-5

0

5

10

15

20

25

30

Source: NAIC; Insurance Information Institute.

Commercial lines have tended to be more profitable than

personal lines over the past decade, though WC has

lagged behind

15

RNW Workers Comp: MN vs. U.S.,2004-2013

Source: NAIC, Insurance Information Institute

0%

2%

4%

6%

8%

10%

12%

04 05 06 07 08 09 10 11 12 13

US Wcomp MN Wcomp

(Percent)

Average 2004-2013US: 7.1%MN: 6.8%

Workers Comp: 10-Year Average RNW MN & Nearby States

8.4%

6.8%

5.9%

3.5%

3.40%

7.1%

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

IN US MN

SD WI IL

Source: NAIC, Insurance Information Institute

2004-2013Minnesota Workers Comp profitability is comparable to the US average and regional average

Source: A.M. Best; Barclays research for estimates.

Reserve Change

P/C Insurance Loss Reserve Development, 1992 – 2016E*

Reserve releases are expected to gradually taper off, but will

continue to benefit the bottom line and combined ratio through

at least 2016

19

Policyholder Surplus, 2006:Q4–2014:Q4E

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

$671

.6

$675

.0

$662

.0

$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

14:Q

1

14:Q

2

14:Q

4

2007:Q3Pre-Crisis Peak

Surplus as of 12/31/14 stood at a record high $675B

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 2015in very strong financial condition.

INVESTMENTS: THE NEW REALITY

24

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

24

Property/Casualty Insurance Industry Investment Income: 2000–20141

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4$45.7

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Due to persistently low interest rates,investment income fell in 2012, 2013 and 2014.

1 Investment gains consist primarily of interest and stock dividends. *2014 figure is estimated based on annualized data through Q3.Sources: ISO; Insurance Information Institute.

($ Billions) Investment earnings are still below their 2007 pre-crisis peak

Distribution of Invested Assets: P/C Insurance Industry, 2013

Stocks, 22%

Bonds, 62%All Other, 10%

Cash, Cash Equiv. & ST Investments, 6%

Source: Insurance Information Institute Fact Book 2015, A.M. Best.

Total Invested Assets = $1.5

Trillion

$ Billions

Book Yield on Property/Casualty Insurance Invested Assets, 2007–2016F

4.42

4.19

3.95

3.71

3.283.20

3.13

3.74

3.523.38

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

07 08 09 10 11 12 13 14E 15F 16F

The yield on invested assets continues to decline as returns on maturing bonds generally still exceed new money yields. The end of the Fed’s QE program in Oct. 2014 should allow some increase

in longer maturities while short term interest rate increases are unlikely until mid-to-late 2015

Sources: Conning.

(Percent)

Book yield in 2014 is down 114 BP from pre-crisis levels

31

-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%

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*

31

35

Performance by Segment

35

10

9.4

11

0.2

11

8.8

10

9.5 1

12

.5

11

0.2

10

7.6

10

4.1

10

9.7

11

0.2

10

2.5 1

05

.4

91

.1

93

.6

10

4.2

98

.9

10

2.4

10

7.9

10

3.4

98

.3 99

.9

98

.9

10

2.0

11

1.1

11

2.3

12

2.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

F

14

F

15

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2014F); Conning (2015F) Insurance Information Institute.

Commercial Lines Combined Ratio, 1990-2015F*

Commercial lines underwriting

performance is expected to improve as

improvement in pricing environment persists

36

Workers Compensation Combined Ratio: 1994–2014E

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5

103.

5

104.

5 110.

6 115.

0

115.

0

108.

0

101.

0

96.0

121.

7

107.

0

115.

3

118.

2

80

85

90

95

100

105

110

115

120

125

130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F

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. Sources: A.M. Best (1994-2009); NCCI (2010-2014F) and are for private carriers only; Insurance Information Institute. 37

WC results have improved markedly

since 2011

Commercial Property Combined Ratio: 2007–2016F

72.4

105.

8

83.3 86

.5

85.4 89

.4

90.1

106.

5

105.

8

82.7

70

75

80

85

90

95

100

105

110

07 08 09 10 11 12 13 14E 15F 16F

Commercial Property Underwriting Performance Has Been Volatile in Recent Years, Largely Due to

Fluctuations in CAT Activity

Source: Conning Research and Consulting. 38

Commercial Auto Combined Ratio: 1993–2015F

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4

94

.1 96

.8 99

.1

97

.8

10

3.4 10

6.8

10

6.5

10

6.4

10

5.2

11

8.1

11

5.7

11

6.2

80

85

90

95

100

105

110

115

120

125

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

Commercial Auto is Expected to Improve Only Slowly as Rate Gains Barely Offset Adverse Frequency and Severity Trends

39Sources: A.M. Best (1990-2014E);Conning (2015F); Insurance Information Institute.

General Liability Combined Ratio: 2005–2015F

112.

9

95.1 99

.0

94.2

104.

1

101.

4

103.

0

103.

9107.

1 110.

8

99.8

80

85

90

95

100

105

110

115

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

Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years

Source: Conning Research and Consulting. 40

Workers Compensation Operating Environment

43

Workers Comp Results Have Improved Substantially in Recent Years

43

Workers Compensation Premium: Third Consecutive Year of IncreaseNet Written Premium

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 130

10

20

30

40

50

31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3

25.0 26.129.2 31.1

34.737.8 38.6 37.6

33.830.3 29.9

32.335.1 37.0

35.3 35.734.3 35.4

33.6

30.128.5

26.9 25.9 25.0

28.6

32.1

37.7

42.3

46.547.8

46.544.3

39.3

34.6 33.836.4

39.641.9

State Funds ($ B)

Private Carriers ($ B)

Pvt. Carrier NWP growth was +5.4% in 2013 and

8.7% in 2012

$ Billions

Calendar Yearp Preliminary

Source: 1990–2013p Private Carriers, Annual Statement Data, NCCI.1996–2013p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

46

2013 Workers Compensation Direct Written Premium Growth, by State*

PRIVATE CARRIERS: Overall 2013 Growth = +5.4%

*Excludes monopolistic fund states (in white): OH, ND, WA and WY.Source: NCCI.

While growth rates varied widely, all states experienced positive growth in 2013

47

Workers Comp. DWP Growth: MN vs. U.S., 2005-2013

Source: SNL Financial.

-0.8

%

-3.7

%

-11

.6%

-12

.4%

-3.4

%

9.6

%

10

.7%

8.5

%

-0.3

%

-0.7

%

-8.7

%

-7.6

%

-6.3

%

10

.2%

10

.6%

5.3

%

2.7

%

5.7

%

-20%

-10%

0%

10%

20%

30%

40%

05 06 07 08 09 10 11 12 13

US DWP Wcomp MN DWP Wcomp

(Percent)

Average 2005-2013US: -0.04%MN: 1.7%

Workers Compensation Lost-Time Claim Frequency Declined in 2013Lost-Time Claims

48

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

-8

-6

-4

-2

0

2

4

6

8

10

12

-4.2 -4.4

-9.2

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5

-6.9

-4.5 -4.1 -3.7

-6.6

-4.5

-2.2

-4.3

-5.7

11

-4

-6.1

-2.0

3.5

-1

AdjustedIndicated

Frequency Change: 2007—2012

Contracting: 7.97.1 -9.3%

Manufacturing: 13.612.0 -11.8%

Percent

Accident Year*Adjustments primarily due to significant audit activity.2013p: Preliminary based on data valued as of 12/31/20131991–2012: Based on data through 12/31/2012, developed to ultimateBased on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policiesFrequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost levelSource: NCCI.

Cumulative Change of –55.4%(1991–2011 adj.)

Workers Compensation Medical SeverityModerate Increase in 2013

49

Accident Year

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2010: +6.0%

Average Medical Cost per Lost-Time ClaimMedicalClaim Cost ($000s)

$8

.1

$8

.2

$8

.1

$8

.8

$9

.1

$9

.8

$1

0.8

$11

.7

$1

2.9

$1

3.9

$1

5.7

$1

7.1

$1

8.4

$1

9.4

$2

1.0

$2

2.2

$2

3.5

$2

5.1

$2

6.1

$2

6.4

$2

7.1

$2

7.9

$2

8.8

+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%+5.8%

+6.1%

+6.8%+4.0%+1.2%

+2.6%+3.0%

+3%

5

10

15

20

25

30

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

2013p: Preliminary based on data valued as of 12/31/2013.1991-2012: Based on data through 12/31/2012, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Cumulative Change = 256%(1991-2013p)

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2013: +5.2%

Accident Year

Workers CompensationChange in Medical Severity Comparison to Change in Medical Consumer Price Index (CPI)

50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013p

0

2

4

6

8

10

12

14

16

5.1

7.4

10.1

8.3

10.6

7.3

13.5

8.8

7.7

5.4

7.8

5.8 6.16.8

4.0

1.2

2.63.0 3

4.5

3.52.8

3.2 3.54.1

4.6 4.74.0

4.4 4.2 4.04.4

3.73.2 3.4

3.03.7

2

Change in Lost-Time Medical Claim Severity

Change in US Medical CPI

Change in lost-time medical claim severity, 2013p: Preliminary based on data valued as of 12/31/20131995–2012: Based on data through 12/31/2012, developed to ultimate; excludes high deductible policiesAverage severity for the states where NCCI provides ratemaking services, including state funds; excluding WVSources: NCCI from US Medical CPI: US Bureau of Labor Statistics (BLS)

Percent Change

Year

4.5%

3.5%2.8%

3.2%3.5%4.1%

4.6%4.7%4.0%

4.4%4.2%4.0%4.4%

3.7%3.2%3.4%

3.0% 3.0%

5.1%

7.4%

10.1%10.6%

13.5%

5.4%

7.8%

6.1%6.8%

4.0%

3.0%

2.0%

4%

3%

1.2%

5.8%

8.8%

7.7%

7.3%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

Change in Medical CPI

Change Med Cost per Lost Time Claim

WC Medical Severity Generally Outpaces the Medical CPI Rate

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

Average annual increase in WC medical severity form 1995 through 2011 was well above the medical CPI (6.8% vs. 3.8%), but

the gap is narrowing.

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

53

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.

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?

55

Growth Analysis by State and Business Segment

Post-Crisis Paradox? Premium Growth Rates Vary

Tremendously by State

55

56

-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 1415

F14

F

Net Premium Growth: Annual Change, 1971—2016F

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

*2014 figure is estimate based on actual data through Q3:2014.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.

2015-16F: 4.0%

2014E: 4.0%*

2013: 4.6%

2012: +4.3%

61

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013

91

.1

42

.1

41

.4

33

.7

26

.3

25

.8

23

.6

19

.1

15

.6

14

.0

11

.3

10

.0

9.8

6.8

6.7

6.5

4.1

3.2

3.1

3.0

2.7

2.2

2.0

1.7

1.3

0.6

0

10

20

30

40

50

60

70

80

90

100

ND

OK

SD VT

NE IA KS ID AK

TX

WY

MN IN AR

TN W

I

OH

MA

CT

NM LA

MS

NJ

NY

US

MO

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LLC.; Insurance Information Institute.

Top 25 States

Only 30 states showed any

commercial lines growth from 2007

through 2013

Growth Benchmarks: Commercial

US: 1.3%

62

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013

0.5

0.4

0.2

0.1

-0.5

-0.8

-0.9

-1.0

-1.1

-1.1

-1.9

-2.0

-2.1

-2.7

-3.3

-3.7

-4.3

-4.9

-10

.7

-11

.4

-11

.7

-12

.6

-12

.7

-13

.6

-22

.4

-25

.1

-30

-25

-20

-15

-10

-5

0

5

MD

NH PA

CO IL

WA

VA

KY

NC

ME RI

MI

SC AL

GA

CA

UT

DC

OR

MT HI

DE FL AZ

WV

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LLC.; Insurance Information Institute.

States with the poorest performing economies also produced the most negative

net change in premiums of the past 6 years

Nearly half the states have yet to see commercial lines premium

volume return to pre-crisis levels

63

Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2013*

32.

9

30.

8

24.

3

21.

5

13.

4

11.

5

11.

0

10.

6

8.1

4.8

4.5

3.0

1.5

-0.3

-0.6

-1.0

-2.3

-2.4

-2.9

-3.0

-3.7

-4.1

-5.7

-5.8

-8.0

-15

-10

-5

0

5

10

15

20

25

30

35

OK IA SD

NY

CA

CT

NJ

KS

NE IN MI

VT

MN

DC WI

IL

NH

US

NM TX PA

VA

MD

TN AR

Pe

ce

nt

ch

an

ge

(%

)

*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 States

Only 13 states have seen works comp premium volume

return to pre-crisis levels

64

Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2013*

-8.1

-8.4

-8.7

-8.8

-11

.1

-11

.3

-12

.0

-14

.7

-15

.3

-15

.4

-16

.0

-16

.3

-17

.1

-22

.1

-23

.0

-26

.5

-27

.5

-32

.5

-33

.3

-33

.5

-43

.8

-71

.0

-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50

MS

MA RI

GA

NC

AK ID CO LA

ME AZ

MO

SC AL

KY

UT FL

OR

DE HI

NV

MT

Pe

ce

nt

ch

an

ge

(%

)

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 some of the most

negative net change in premiums of the past 6 years

65

Commercial Lines Pricing Trends

Survey Results Suggest Commercial Pricing Has

Flattened Out

65

66

Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2015)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

% -8.2

%-4

.6% -2

.7%

-3.0

%-5

.3%

-9.6

%-1

1.3

%-1

1.8

%-1

3.3

%-1

2.0

%-1

3.5

%-1

2.9

%-1

1.0

%-6

.4%

-5.1

%-4

.9%

-5.8

%-5

.6%

-5.3

%-6

.4%

-5.2

%-5

.4% -2

.9%

2.7

% 4.4

%4

.3%

3.9

% 5.0

%5

.2%

4.3

%3

.4%

2.1

%1

.5%

-0.5

%0

.1%

-0.7

%-1

.5%-0

.1%

0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

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

KRW Effect

Pricing as of Q1:2015 had turned (slightly) negative for only the 3rd time in 3 years

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

67

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2014:Q4

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Percentage Change (%)

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

KRW : No Lasting Impact

Pricing turned positive in Q3:2011, the first increase in

nearly 8 years; Q1:2014 renewals were up 1.5%; Some insurers posted

stronger numbers.

Peak = 2001:Q4 +28.5%

68

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2014:Q4

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

1999:Q4 = 100 Despite several years of gains, pricing today for midsized

accounts is where is was in late 2001 (around 9/11), suggesting

additional rate need going forward, esp. in light of record

low interest rates

70

Change in Commercial Rate Renewals, by Line: 2015:Q1

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

Major Commercial Lines Renewals Were Mixed to Flat in Q1:2015; EPL and Commercial Auto Led the Way

Percentage Change (%)

-0.2%

1.4% 1.5%

2.4%

-4.0%

-2.2% -2.2% -2.1%

-0.7% -0.4%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Co

mm

erc

ial

Pro

pe

rty

Bu

sin

ess

Inte

rru

ptio

n

Ge

ne

ral

Lia

bili

ty

Um

bre

lla

Co

nst

ruct

ion

Wo

rke

rsC

om

p

Su

rety

D&

O

Co

mm

erc

ial

Au

to EP

L

Employment Practices rate increases are large

than any other line, followed by Commercial

Auto and D&O

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

*States approved through 4/8/2014Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating

organization, relative to the previously filed rates

Workers Compensation Approved Changesin Bureau Rates/Loss CostsAll States

71

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

-10

-5

0

5

10

1512.1

7.4

10.0

2.9

-6.4

-3.2

-6.0

-8.0

-5.4

-2.6

3.5

1.2

4.9

6.6

-6.0 -6.5

-8.8-7.8

-3.2-2.1

-1.2

0.4

8.4

2.20.6

Percent Change

Calendar Year

Changes > 0

Changes < 0

Current NCCI Voluntary MarketRate/Loss Cost ChangesApproved or Pending Rate/Loss Cost ChangesExcludes Law-Only Filings

73

States approved or pending as of 4/8/2014

IN and NC filed in cooperation with state rating bureau

-7.6

-3.6

+0.9

-4.8

-14.6

-5.1

+3.8

-7.9

-7.0

+0.7

-7.7

+2.3

+0.1

+3.0

-0.9

-1.1

-1.4

+3.3

-7.4

+4.1

+0.3

+3.2

-4.5

-2.0

+11.6

-6.5

+3.2

+1.4

+4.0

+3.2

-8.8

+1.2

+3.0

-8.3

-7.7

-2.6

+2.8

+6.2

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

74

Growth Will Expand Insurer Exposure Base Across Most Lines

74

75

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/15; Insurance Information Institute.

2.7%

1.8%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

0.4%

2.7%

1.8%

3.5%

-2.1

%4.

6% 5.0%

2.2%

2.4% 3.

1%3.

0%2.

9%2.

8%2.

8%2.

8%2.

7%

-8.9%

4.5%

1.4%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

   2

00

7   

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

14

:1Q

14

:2Q

14

:3Q

14

:4Q

15

:1Q

15

:2Q

15

:3Q

15

:4Q

16

:1Q

16

:2Q

16

:3Q

16

:4Q

Demand for Insurance Should Increase in 2015 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

Recession began in in June

2009

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

Q1 2014 GDP data were hit hard by this

year’s “Polar Vortex” and harsh

winter

State-by-State Leading Indicatorsthrough August 2015

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 76

Growth in the West is

finally beginning to pick up

The economic outlook for most of the US is generally

positive, though flat-to-negative for

2 states

77

Real GDP by State Percent Change, 2013:Highest 25 States

9.7

7.6

5.1

4.2

4.1

3.8

3.8

3.7

3.1

3.0

3.0

2.9

2.8

2.7

2.7

2.4

2.3

2.2

2.1

2.0

2.0

1.9

1.9

1.9

1.8

1.8

0

1

2

3

4

5

6

7

8

9

10

ND WY WV OK ID CO UT TX SD NE MT IA MN OR WA AR NC FL IN MI CA VT KS HI GA US

Pe

rce

nt

Ch

an

ge

(%

)

Sources: U.S. Bureau of Economic Analysis; Insurance Information Institute.

North Dakota was the economic growth juggernaut of the US

in 2013—by far

Only 9 states experienced growth in excess of 3% in 2013, which is what we would see nationally in a

more typical recovery

Growth Benchmarks: Real GDP

US: 1.8%

78

1.8

1.7

1.6

1.6

1.6

1.6

1.5

1.4

1.3

1.2

1.1

1.1

1.0

0.9

0.9

0.9

0.9

0.8

0.8

0.8

0.7

0.7

0.1

0.0

-0.5

-2.5

-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5

OH WI MA DE KY MS NM RI LA SC NJ AZ NV CT ME NH IL MO AL TN NY PA VA MD DC AL

Pe

rce

nt

Ch

an

ge

(%

)Real GDP by State Percent Change, 2013: Lowest 25 States

Sources: US Bureau of Economic Analysis; Insurance Information Institute.

DC and Alabama were the only

states to shrink in 2013

Growth rates in 11 states were still below 1% in

2013

NFIB Small Business Optimism Index

Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 85

Small business optimism has dropped somewhat

since reaching post-crisis highs in late 2014

January 1985 through March 2015

87

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

26,9

83

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 14

Business Bankruptcy Filings,1980-2014

Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013-14 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

2014 bankruptcies totaled 26,983, down 18.8% from 2013—the 5th 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%

87

89

Labor Markets Trends: RECOVERY CONTINUES

2014Largest Increase in Jobs Since 1997Unemployment Rate Fell to Lowest

Level Since 2008Payrolls Expanded to Record High

89

90

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

Jan15

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 5.5% in Mar. 2015. 4.5% to

5.5% is “normal.”

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

January 2000 through March 2015, Seasonally Adjusted (%)

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

90

U-6 soared from 8.0% in March

2007 to 17.5% in October 2009; Stood at 10.9%

in Mar. 2015.8% to 10% is

“normal.”

91

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%

6.6

%6

.2%

6.1

%5

.7%

5.6

%5

.4%

5.3

%5

.2%

5.1

%5

.0%

5.0

%4

.9%

9.6

%

4%

5%

6%

7%

8%

9%

10%

11%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

:Q4

15

:Q1

15

:Q2

15

:Q3

15

:Q4

16

:Q1

16

:Q2

16

:Q3

16

: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 (4/15 edition); Insurance Information Institute.

2007:Q1 to 2016:Q4F*

Unemployment forecasts have been revised modestly

downwards. Optimistic scenarios put the

unemployment as low as 5.0% by Q4 of 2015.

Jobless figures have been revised

downwards for 2015/16

92

Unemployment Rates by State, March 2015:Highest 25 States*

7.7

7.1

6.8

6.7

6.6

6.6

6.5

6.5

6.5

6.4

6.3

6.3

6.3

6.2

6.1

6.0

5.9

5.8

5.7

5.7

5.7

5.6

5.6

5.6

5.5

5.4

5.4

0

2

4

6

8

DC NV MS SC LA WV AK CA NJ CT GA RI TN AZ NM IL WA IN AL FL NY AR MI MO US MD NC

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for March 2015, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In March, 23 states and the District of Columbia had over-the-month

unemployment rate decreases, 12 states had increases, and 15 states

had no change.. 

93

5.4

5.3

5.1

5.1

4.8

4.8

4.8

4.6

4.6

4.2

4.2

4.2

4.1

4.1

4.1

4.0

3.9

3.9

3.8

3.8

3.7

3.5

3.4

3.1

2.6

0

1

2

3

4

5

6

OR PA KY OH ME MA VA DE WI CO KS TX HI MT WY IA NH OK ID VT MN SD UT ND NE

Un

em

plo

ym

en

t R

ate

(%

)

Unemployment Rates by State, March 2015: Lowest 25 States*

*Provisional figures for March 2015, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In March, 23 states and the District of Columbia had over-the-month

unemployment rate decreases, 12 states had increases, and 15 states

had no change.

23

15

21

70

52

12

65

73

-71

32 6

4 81

55

3-1

15

-10

6-2

21

-21

5-2

06

-26

1-2

58

-42

2-4

86

-77

6 -69

3-8

21

-69

8-8

10

-80

1-2

94

-42

6-2

72

-23

2 -14

1-2

71

-15

-23

22

0-3

81

92

94 11

01

20

11

71

07

19

91

49

94

72

22

32

31 3

20

16

61

86 21

91

25

26

81

77

19

12

22

36

42

28

24

61

02

13

17

51

72

13

61

59

25

52

11

21

52

19 26

31

64

18

82

22

20

11

70

18

01

53

24

72

72

86

18

31

75 22

33

13

23

8 27

22

43

20

92

35

21

84

14

31

92

02 2

64

12

9

11

3

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-0

7Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9S

ep-0

9O

ct-0

9N

ov-0

9D

ec-0

9Ja

n-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

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

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

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

-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15F

eb-1

5M

ar-1

5

Monthly Change in Private Employment

January 2007 through Mar. 2015 (Thousands, Seasonally Adj.)

Private Employers Added 11.20 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

129,000 private sector jobs were

created in March. In March 2014, the last of the private jobs lost in the Great Recession were

recovered

94

Jobs Created2014: 2.722 Mill2013: 2.368 Mill2012: 2.294 Mill2011: 2.400 Mill2010: 1.277 Mill

2,722,000 jobs were created

in 2014

95

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2014:Q4

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

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,250

$7,500

$7,75005

: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

14:Q

214

:Q3

14:Q

4

Prior Peak was 2008:Q3 at $6.54 trillion

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

5.3% from prior peak

Growth rates2011:Q4 over 2010:Q4: 2.6%2012:Q4 over 2011:Q4: 6.7%2013:Q4 over 2012:Q4: 1.7%2014:Q4 over 2013:Q4: 5.1%

95

Latest (2014:Q4) was $7.57 trillion, a new peak--$1.34 trillion above 2009 trough

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

96

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2014P

*Private employment; Shaded areas indicate recessions. WC premiums for 2014 are I.I.I. estimates..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 2015

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

101

POSITIVE LABOR MARKET DEVELOPMENTS

Key Factors Driving Workers Compensation Exposure

101

102

Average Weekly Hours of All Private Workers, Mar. 2006—Mar. 2015

*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.

33.5

33.6

33.7

33.8

33.9

34.0

34.1

34.2

34.3

34.4

34.5

34.6

34.7

34.8

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Hours worked totaled 34.5 per week in March,

just shy of the 34.6 hours typically worked

before the “Great Recession”

Hours worked plunged during the recession,

impacting payroll

exposures

(Hours Worked)

103

Average Hourly Wage of All Private Workers, Mar. 2006—Mar. 2015

*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 '15

The average hourly wage was $24.86 in Mar. 2015,

up 17.2% from $21.22 when the recession began in Dec. 2007

Wage gains continued during the

recession, despite massive job losses

(Hourly Wage)

104

ADVERSE LONG-TERMLABOR MARKET DEVELOPMENTS

Key Factors Harming Workers Compensation Exposure and the

Overall Economy

104

105

Labor Force Participation Rate,Jan. 2002—March 2015*

*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 '15

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

106

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.

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

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

There were 738,000

discouraged workers in March 2015

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—March 2015

Large numbers of people are exiting

(or not returning to) the labor force

107

ProPublica/NPR Attack on Workers Compensation In March 2015, ProPublica/NPR published a series

entitled “The Demolition of Workers Comp”

Thesis: WC benefits have been hollowed out and that workers were often no longer well served by the system

Series relied on a number of anecdotal cases of claimants who believed they were adversely impacted

Claims 33 states have watered down benefits under the guise of “reform”

I.I.I. made forceful rebuttal, demonstrating that: Insurers spend $40B+ each year treating injured workers Workplace is materially safer, in part due to WC incentives Application of managed care to WC reduces cost with no

adverse impact on outcome (“blank check” unsustainable)

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

108

The Construction Sector Is Critical to the Economy and the P/C Insurance Industry

108

109

Value of New Private Construction: Residential & Nonresidential, 2003-2015*

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 14 15*

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)

2014: Value of new pvt. construction hits $698.2B as of Feb. 2015, up 40%

from the 2010 trough but still 23% below 2006 peak

109

$261.8

$238.8

$348.4

$349.9

*2015 figure is a seasonally adjusted annual rate as of February.Sources: US Department of Commerce http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

110

Value of Construction Put in Place, Feb. 2015 vs. Feb. 2014*

3.1%

13.9%

2.9%2.1% 1.8%

-2.1%

5.9%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up, But Growth In the Private Sector Slowed in Late 2014 While Picking in the State/Local Sector Government

Sector as Budget Woes Ease in Some Jurisdictions

Growth (%)

Private sector construction activity is up in the

residential and nonresidential segments but

growth is sluggish

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

Private: +1.8% Public: +3.1%Public sector

construction activity is finally beginning to pick up after years of

decline

111

Value of Private Construction Put in Place, by Segment, Feb. 2015 vs. Feb. 2014*

13.1%

-0.1%

-1.7%

-10.3%

16.2%

-15.3%-16.8%

38.7%

21.4%

1.8%

-2.1%

5.9%9.6%

22.8%

-20%

-10%

0%

10%

20%

30%

40%

50%

To

tal

Pri

vate

Co

nstr

ucti

on

Resid

en

tial

To

tal

No

nre

sid

en

tial

Lo

dg

ing

Off

ice

Co

mm

erc

ial

Healt

h C

are

Ed

ucati

on

al

Reli

gio

us

Am

usem

en

t &

Rec.

Tra

nsp

ort

ati

on

Co

mm

un

icati

on

Po

wer/

Uti

lity

Man

ufa

ctu

rin

g

Private Construction Activity is Up in Many Segments, though the Key Residential Construction Sector Weakened in Late 2014/Early 2015; Mixed

Outlook for 2015, though Expansion Should Continue

Growth (%) Led by the Manufacturing and Office segments, Private nonresidential

sector construction activity continues to rising after plunging during the

“Great Recession.” Residential weakened.

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

114

$314.9$304.0

$286.4 $279.0 $271.4$280.0

$268.9

$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 2015*

($ Billions)

Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Contracted As State/Local Governments Grappled with

Deficits and Federal Sequestration

Value of New Federal, State and Local Government Construction: 2003-2015*

*2014 figure is a seasonally adjusted annual rate as of December; 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 MAY be turning a corner; still down

$46.0B or 14.6% since 2009 peak

115

(Millions of Units)

New Private Housing Starts, 1990-2021F

1.4

81

.47 1

.62

1.6

41

.57

1.6

0 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

60

.91

0.5

50

.59

0.6

1 0.7

8 0.9

21

.01 1

.16 1.3

0 1.4

11

.46

1.4

91

.52

1.5

2

1.3

51.4

61

.29

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15F 16F 17F 18F 19F20F 21F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/15 and 3/15); 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

116

Construction Employment,Jan. 2010—March 2015*

*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

5,62

95,

628

5,62

75,

608

5,62

35,

632

5,64

15,

649

5,66

85,

684

5,72

45,

746 5,79

85,

815

5,81

35,

833

5,85

65,

854

5,86

65,

893

5,91

85,

953

5,93

7 6,00

66,

032

6,06

2 6,10

36,

114

6,12

16,

152

6,16

96,

191

6,20

16,

231 6,27

5 6,31

66,

345

6,34

4

5,400

5,500

5,600

5,700

5,800

5,900

6,000

6,100

6,200

6,300

6,400

Jan-

10F

eb-1

0M

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

-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

0M

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

-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Construction employment is +990,000 above

Jan. 2011 (+16.7%) trough

(Thousands)

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

117

Construction Employment, Jan. 2003–March 2015

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 '15

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

The Construction Sector Was 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

117

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of Mar. 2015 totaled 6.344 million, an

increase of 990,000 jobs or 16.7% from

the Jan. 2011 trough

Gap between pre-recession

construction peak and today: 1.38 million jobs

MANUFACTURING SECTOR OVERVIEW & OUTLOOK

118

The U.S. Is Experiencing a Mini Manufacturing Renaissance but Headwinds from Weak Export

Markets and Strong Dollar Have Hurt

118

120

Manufacturing Growth for Selected Sectors, 2015 vs. 2014*

-0.5%

2.0%

-2.2%

6.3%

-9.7%

2.3%

-34.0%

-4.1%-2.4%

8.8%

-3.7%

3.0%

9.7%

0.1%3.1%

-40%-35%-30%-25%-20%-15%-10%

-5%0%5%

10%15%

All

Ma

nu

fact

uri

ng

Du

rab

le M

fg.

Wo

od

Pro

du

cts

Pri

ma

ryM

eta

ls

Fa

bri

cate

dM

eta

ls

Ma

chin

ery

Ele

ctri

cal

Eq

uip

.

Co

mp

ute

rs &

Ele

ctro

nic

s

Tra

nsp

ort

atio

nE

qu

ip.

No

n-D

ura

ble

Mfg

.

Fo

od

Pro

du

cts

Pe

tro

leu

m &

Co

al

Ch

em

ica

l

Pla

stic

s &

Ru

bb

er

Te

xtile

Pro

du

cts

Manufacturing Is Expanding in Many Sectors But Declining Energy Prices Are Dragging Down Industry Figures. Continued Gortwh 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 is stronger than

nondurables in 2015

*Seasonally adjusted; Date are YTD comparing data through February 2015 to the same period in 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Durables: +3.0% Non-Durables: -9.7%

Impact of falling energy prices

Manufacturing Employment,January 2010—March 2015*

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-

12

Apr-1

2

Jul-1

2

Oct-1

2

Jan-

13

Apr-1

3

Jul-1

3

Oct-1

3

Jan-

14

Apr-1

4

Jul-1

4

Oct-1

4

Jan-

1511,250

11,500

11,750

12,000

12,250

12,50011,4

62

11,4

53

11,4

58

11,4

93

11,5

27

11,5

43

11,5

71

11,5

50

11,5

57

11,5

57

11,5

81

11,5

92

11,6

20

11,6

53

11,6

75

11,7

04

11,7

11

11,7

23

11,7

55

11,7

63

11,7

66

11,7

73

11,7

71

11,7

98

11,8

37

11,8

59

11,9

01

11,9

16

11,9

28

11,9

39

11,9

79

11,9

56

11,9

42

11,9

47

11,9

51

11,9

65

11,9

82

12,0

04

12,0

07

12,0

01

11,9

94

11,9

91

11,9

82

11,9

90

11,9

93

12,0

11

12,0

46

12,0

53

12,0

61

12,0

81

12,0

85

12,0

94

12,1

03

12,1

30

12,1

54

12,1

57

12,2

14

12,2

37

12,2

82

12,3

01

12,3

18

12,3

20

12,3

19

121

Thousands In the past 5 years (from January 2010) manufacturing employment

is up (+857,000 or +7.5%)and still growing.

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

*Seasonally adjusted; Feb. and Mar. 2015 are preliminarySources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT

BUT VOLATILE

126

US Is Becoming an Energy Powerhouse but Fall in Prices

Will Have Negative Impact

126

5.19 5.08 5.00 5.35 5.47 5.656.49

7.44

8.679.31 9.53

5.09

0

2

4

6

8

10

12

U.S. Crude Oil Production, 2005-2016P

Source: Energy Information Administration, Short-Term Energy Outlook (January 15, 2015) , Insurance Information Institute.

Millions of Barrels per Day

Crude oil production in the U.S. is expected to increase by 90.6% from 2008 through 2016—and could overtake

Saudi Arabia as the world’s largest oil producer

129

Oil & Gas Extraction Employment,Jan. 2010—March 2015*

*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.

6 169.

317

0.1

171.

017

2.5

173.

6 176.

317

8.2

178.

518

0.9

181.

318

2.3

184.

718

5.2

186.

218

7.8

188.

618

9.3

189.

418

9.4

190.

519

2.2

193.

119

4.6

194.

019

3.8

193.

119

2.5

193.

019

3.4

193.

319

3.1

194.

019

4.0

194.

019

5.4

193.

719

4.6

196.

419

7.6

198.

619

8.4

199.

420

1.5

201.

020

1.2

199.

419

8.0

198.

3

150

160

170

180

190

200

210

Jan-

10F

eb-1

0M

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

-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

1M

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

-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

ug-1

4S

ep-1

4O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Despite recent declines, Oil and gas extraction employment is

still up 26.8% since Jan. 2010 as the energy sector booms.

Domestic energy production is essential to any robust

economic recovery in the US.

(Thousands) After peaking at its highest level since 1986, O&G employment is

falling as oil and gas prices decline

130

Likelihood of small US businesses buying insurance online directly from the insurer, overall and by annual company revenue, in 2013

Source: Swiss Re from “Voice of the Small Commercial Insurance Consumer Survey.” Deloitte, March (2013)

Proportion of Businesses Interested in Buying Insurance Online

Interest diminishes

with account size

www.iii.org

Thank you for your timeand your attention!

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

Insurance Information Institute Online:

137