2012 hartwig texas

7/29/2019 2012 Hartwig Texas

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After the Cycle Turns:

Overview and Out look forUS and Texas P/C Insurance Markets

Insurance Council of Texas

Annual Insurance SymposiumAustin, TX

July 12, 2012Robert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org


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2

Presentation Outline

U.S. Economic Overview and Outlook

Economy as a Growth Engine for P/C Insurers Labor Market Review

Summary of P/C Financial Performance

Catastrophe Loss Developments & Trends

Global, US

Will the Market Turn? Four Necessary Criteria: Underwriting Loss Trends

Capital/Capacity

Reinsurance Markets

Pricing Discipline

Analysis by Key Line

Other Contributing Factors to the Underwriting Cycle

Investment Environment

Tort/Casualty Environment

Inflation

Q&A


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3

Economics 2012:

The World Is Changing2012 Is the First Year Since 2005

Where Economic Perceptions andReality in the US Will Be Positive

Potent ial ly Eno rmous Benef its for

P/C Insurers 3


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4

Economic Outlook for 2012

Economic Growth Will Continue 2012/13, Albeit Modestly and Unevenly

No Double Dip Recession Economy remains more resilient than most pundits presume

Consumer Confidence Could Ebb, But Wont Collapse

Consumer Spending/Investment Will Continue to Expand Modestly

Consumer and Business Lending Continue to Expand Modestly

Business Bankruptcies Fall, New Business Formations Grow

Housing Market Remains Weak, but Some Improvement Expected by 2013 Inflation Remains Tame

Runaway inflation highly unlikely but energy spike possible; Fed has things under control

Private Sector Hiring Remains Consistently Positive But Anemic Unemployment is about 8% by years end

Sovereign Debt, Euro Currency/Economy European Recession in Milder than Commonly Presumed

Soft Landing in China

Threat from Oil Price Shock, Middle East Turmoil Has Subsided

Interest Rates Remain Low by Historical Standards; Fear & Fed Factors

Stock and Bond Market Stability Has Given Way to Fear Trading

Congress & President Agree on Tax Cut Extensions Before Year-End


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5

P/C Insurance Exposures Grow Modestly

Personal and commercial exposure growth is certain in 2012; Strongest since 2004/5

But restoration of destroyed exposure will take until mid-decade

P/C Industry Growth in 2012 Will Be Strongest Since 2004

Growth likely to exceed A.M. Best projection of +3.8% for 2012

No traditional hard market emerges in 2012

Underwriting Fundamentals Deteriorate Modestly

Some pressure from claim frequency, in some severity in key lines

Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures

Wage growth is also positive and could modestly accelerate

WC will prove to be tough to fix from an underwriting perspective

Increase in Demand for Commercial Insurance Will Accelerate in 2012

Includes workers comp, property, marine, many liability coverages Laggards: inland marine, aviation, commercial auto, surety

Personal Lines: Auto leads, homeowners lags (though HO leads in NPW growth due to rates)

Investment Environment Is Remains Relatively Stable

Return of realized capital gains as a profit driver

Interest rates remain low; Some upward pressure if economic strength surprises

Industry Capacity Hits New Records by Year-End 2012 (Barring Mega-CAT)

Insurance Industry Predictions for 2012


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The Strength of the Economy

Will Influence P/C InsurerGrowth Opportunities

6

Growth Will Expand Workers Comp

Payroll Exposure Base

6

Americas Manufacturing Renaissance?

Construct ion Ac t iv i ty Sti l l Depressed?


7/2407

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 6/12; Insurance Information Institute.

2.7

%

0.9

%3.2

%

2.3

%2.9

%

-0.7

%

0.6

%

-4.0

%

-6.8

% -4.9

%

-0.7

%

1.6

%

5.0

%

3.9

%

3.8

%

2.5

%

2.3

%

0.4

%1.3

%1.8

% 3.0

%

1.9

%

2.1

%

2.2

%

2.4

%

2.1

%2.5

%2.8

%

2.9

%4.1

%

1.1

%1.8

%2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2000

2001

2002

2003

2004

2005

2006

07:1Q

07:2Q

07:3Q

07:4Q

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

Demand for Insurance Continues To Be Impacted by Sluggish EconomicConditions, but the Benefits of Even Slow Growth Will Compound and

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec.2007. Economic toll ofcredit crunch, housing

slump, labor marketcontraction has been

severe but modestrecovery is underway

The Q4:2008 decline was

the steepest since theQ1:1982 drop of 6.8%

2012 is expected to seea slow and choppy

acceleration in growthcontinuing into 2013


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Percent Change in Real GDPby State, 2011

Source: Bureau of Economic Analysis at http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm;Insurance Information Institute. 8

Growth variedconsiderablyacross states

but in total wasweak in 2011

with US overallgrowth at just

1.7%

TX has been aneconomic

growth leader
http://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htmhttp://www.bea.gov/newsreleases/regional/gdp_state/gsp_glance.htm


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74.4

73.6

73.6

72.2

73.6 7

6

67.8

68.9

68.2

67.7 7

1.6 7

4.5

74.2 7

7.5

67.5 6

9.8

74.3

71.5

63.7

55.7 59

.4

6

0.9 6

4.1

69.9

75.0

75.3

76.2

76.4 7

9.3

73.2

40

45

50

55

60

65

70

75

80

85

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Consumer Sentiment Survey (1966 = 100)

January 2010 through June 2012

Consumer confidence has been low for years amid highunemployment, falling home prices and other factors adversely impact

consumers, but improved substantially in late 2011 and early 2012

Source: University of Michigan; Insurance Information Institute

Optimism among consumers isfell in June, but remains well

above year-ago levels;Suggests concern, but not fear

on the part of consumers.

9


10/24010

16

.9

16

.5

16

.1

13.2

10

.41

1.6 1

2.7

14

.4 14

.9

14

.715

.115

.4

15

.5

15

.416

.9

16

.617

.117

.517

.8

17

.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 18-

22F

(Millions of Units)

Auto/Light Truck Sales, 1999-2022F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 6/12); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point,Bolstering the Auto Insurer Growth and the Manufacturing Sector.

New auto/light truck sales fell tothe lowest level since the late

1960s. Forecast for 2012-13 isstill far below 1999-2007 average

of 17 million units, but arecovery is underway.

Job growth and improvedcredit market conditionswill boost auto sales in

2012 and beyond


11/24011

Monthly Change* in Auto InsurancePrices, 19912012*

*Percentage change from same month in prior year; through May 2012; seasonally adjusted

Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-2%

0%

2%

4%

6%

8%

10%

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

Cyclical peaks in PP

Auto tend to occurapproximately every 10years (early 1990s, early

2000s and likely theearly 2010s)

Hard marketstend to occur

duringrecessionary

periods

Pricing peakoccurred in 2010 at

5.1%, falling to2.8% by Mar. 2012

The May 2012

reading of 3.0%was well belowthe 3.8% recorded

in May 2011


12/24012

(Millions of Units)

New Private Housing Starts, 1990-2022F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

71

.601

.71 1

.851.9

62.0

7

1.8

0

1.3

6

0.9

1

0.5

50

.59

0.6

1 0.7

3 0.8

7

1.3

4

1.2

31

.32

1.3

81

.42

1.3

51.4

6

1.2

9

1.2

0

1.011

.19

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F 18-22F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 6/12); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until at least 2014.Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New homestarts plunged

72% from2005-2009; Anet annual

decline of 1.49million units,lowest since

records beganin 1959

The plunge and lack of recovery inhomebuilding and in construction in general

is holding back payroll exposure growth

Job growth,improved credit

market conditionsand demographics

will eventually boosthome construction


13/24013

Construction Employment,Jan. 2010May 2012*

*Seasonally adjusted

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

5,5

93

5,5

29 5

,552

5,5

59

5,5

18

5,5

07

5,4

91 5

,511

5,4

92

5,4

99

5,4

88

5,4

77

5,4

56

5,4

89

5,4

96

5,4

95

5,4

98

5,4

95

5,5

08

5,4

98 5

,528

5,5

19

5,5

20 5

,546

5,5

64

5,5

63

5,5

49

5,5

44

5,51

6

5,400

5,450

5,500

5,550

5,600

5,650

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

2/30/2102

Mar-12

Apr-12

May-12

Construction employment is

still below where it was inJan. 2010. In a normalrecovery, constructionemployment would be

growing robustly

(Thousands)
http://bls.gov/mls/http://bls.gov/mls/


14/24014

Value of Construction Put in Place,May 2012 vs. May 2011*

-3.9%

-29.4%

-3.0%

7.0%

13.1%7.5%

18.6%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Total

Construction

Total Private

Construction

Residential--

Private

Non-

Residential--

Private

Total Public

Construction

Residential-

Public

Non-

Residential--

Public

Overall Construction Activity is Up, But Growth Is Entirely in the PrivateSector as State/Local Government Budget Woes Continue

Growth (%)

Private sectorconstruction activity is upin both the residential andnonresidential segments

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

Private: +13.1% Public: -3.9%

Public sectorconstruction activityremains depressed
http://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.html


15/24015

Value of Private Construction Put in Place,by Segment, May 2012 vs. May 2011*

11.1%11.2%

27.4%

-14.6%

10.4%

17.4%

-4.2%

35.2%

26.8%

13.1%7.5%

18.6%

29.4%

6.5%

-20%

-10%

0%

10%

20%

30%

40%

TotalPrivate

Const

ruction

Resi

dential

Total

Nonresi

dential

L

odging

Office

Comm

ercial

Healt

hCare

Educ

ational

Re

ligious

Amusement&

Re

c.

Transpo

rtation

Commun

ication

Power

Manufacturing

Private Construction Activity is Up in Most Segments, IncludingResidential Construction but Led by Power

Growth (%) Led by the Power industry, Private sector construction

activity is up by double digits in many segments afterplunging during the Great Recession

http://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.html


16/24016

Value of Public Construction Put in Place,by Segment, May 2012 vs. May 2011*

-4.9%-7.1%

1.5%

-3.7%-6.5%

1.6%

-0.9%

2.9%

-13.2%

-0.2%-3.9%

-29.4%

-3.0%

-11.4%-11.3%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

TotalPublic

Construction

Resid

ential

Total

Nonresid

ential

Office

Comm

ercial

Health

Care

Educational

Public

Safety

Amusem

ent&

Rec.

Transportation

Power

High

way&

St

reet

Sewag

e&

WasteDisposal

WaterS

upply

Conserva

tion&

Develop.

Public Construction Activity is Up Down in Many Segments as State, Cityand County Budgets Remain Under Stress

Growth (%)


Public sector constructionactivity is down by

substantially in manysegments
http://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.htmlhttp://www.census.gov/construction/c30/c30index.html


17/24017

$200,000

$300,000

$400,000

$500,000

Jan-9

2

Jan-9

3

Jan-9

4

Jan-9

5

Jan-9

6

Jan-9

7

Jan-9

8

Jan-9

9

Jan-0

0Jan0

1Jan0

2Jan0

3Jan0

4Jan0

5Jan0

6Jan0

7Jan0

8Jan0

9Jan1

0Jan1

1Jan1

2

Dollar Value* of ManufacturersShipments Monthly, Jan. 1992May 2012

*seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, andOrders, http://www.census.gov/manufacturing/m3/

Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession).Trough in May 2009. Growth from trough to March 2012 was 31%. Manufacturing is an

energy intensive activty and growth leads to gains in many commercial exposures: WC,Commercial Auto, Marine, Property and Various Liability Coverages

ENERGY INTENSIVE

The value of ManufacturingShipments in May 2012 was up 32%to $469B from its May 2009 trough.May figure is only 3.4% below its

previous record high in July 2008.

$ Millions

17
http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/


18/24018

Manufacturing Growth for SelectedSectors, 2012 vs. 2011*

7.5%

4.1%

12.0%

4.4% 4.2%

7.9%

1.7%

7.8%5.9%6.7%

9.5%

6.7%

23.5%

7.5%

0%

5%

10%

15%

20%

25%

All

Manufa

cturing

DurableMfg.

W

ood

Products

P

rimary

M

etals

Fabricated

Metals

Mac

hinery

Ele

ctrical

E

quip.

Transpo

rtation

Equ

ip.

Non-D

urable

Mfg.

F

ood

Products

Petroleum&

Coal

Ch

emical

Plastics&

Rubber

T

extile

Products

Manufacturing Is Expanding Across a Wide Range of Sectors that WillContribute to Growth in Energy Demand and Insurable Exposures Including:WC, Commercial Property, Commercial Auto and Many Liability Coverages

Growth (%)

Manufacturing of durablegoods has been

especially strong in 2012

*Seasonally adjusted; Date are YTD comparing data through May 2012 to the same period in 2011.Source: U.S. Census Bureau, Full Report on Manufacturers Shipments, Inventories, andOrders, http://www.census.gov/manufacturing/m3/

Durables: +9.5% Non-Durables: +4.4%

R i C it Utili ti i
http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/http://www.census.gov/manufacturing/m3/


19/240

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar01

Jun01

Sep01

Dec01

Mar02

Jun02

Sep02

Dec02

Mar03

Jun03

Sep03

Dec03

Mar04

Jun04

Sep04

Dec04

Mar05

Jun05

Sep05

Dec05

Mar06

Jun06

Sep06

Dec06

Mar07

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Dec08

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

Jun11

Sep11

Dec11

Mar12

Recovery in Capacity Utilization is aPositive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 19

Percent of Industrial Capacity

HurricaneKatrina

March 2001-November 2001

recession

Full Capacity

The closer the economy isto operating at full

capacity, the greater theinflationary pressure

The US operated at 79.0% ofindustrial capacity in May2012, above the June 2009

low of 68.3% and the highestlevel since April 2008

December 2007-June 2009 Recession

March 2001 through May 2012

19
http://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htmhttp://www.federalreserve.gov/releases/g17/Current/default.htm


20/240

20

Manufacturing Employment,Jan. 2010Apr. 2012*

11,4

58

11,4

62

11,4

70

11,5

02

11,5

36

11,5

46

11,5

66

11,5

49

11,5

51

11,5

51

11,5

60

11,5

75

11,6

27

11,6

64

11,6

90

11,7

18

11

,726

11

,738

1

1,7

68

1

1,7

71

1

1,7

68

1

1,7

77

1

1,7

80

11,8

08

11,8

60

11,8

90

11,9

31

11,9

47

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

2/30/2102

Mar-12

Apr-12

Manufacturing employmentis up by nearly 500,000 or4.3% since Jan. 2010a

surprising source ofstrength in the economy


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

(Thousands)

ISM Non Manufacturing Index


21/240

50

.7 52.75

4.1

54.6

54.8

53.5

53.7

52.85

3.9

54.65

6 57.1

59.4

59.7

56.3

54.4

53.3

53.4

53.8

52.6

52.6

52.6

52.6

53.0

56.8

57.3

56.0

53.5

53.7

52.1

40

45

50

55

60

65

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

ISM Non-Manufacturing Index(Values > 50 Ind icate Expans ion )

January 2010 through June 2012

Non-manufacturing industries have been expanding and addingjobs. The question is whether this will continue.

Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.

Optimism among non-manufacturers was

stable in late 2011 andincreased in early 2012

21

B i B k t Fili
http://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfmhttp://www.ism.ws/ismreport/nonmfgrob.cfm


22/240

22

43

,694

4

8,1

25

69,3

00

62,4

36

64,0

04

71,2

77

81,2

3

5

82,4

4

6

63,8

53

63,2

35

64,8

53

71,5

49

70,6

43

62,3

04

52,3

74

51,9

59

53,5

49

54,0

27

44

,367

37,8

84

35,4

7

2

40,0

99

38,5

40

35,0

37

34,3

17

39,2

01

19,6

95

28,3

22 4

3

,546

60,8

37

56,2

82

4

7,8

06

10,9

98

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

80

81

82

83

84

8586

8788

89

90

91

92

93

9495

96

9798

99

00

01

02

03

040506

0708

09

10

11

12:Q1

Business Bankruptcy Filings,1980-2012: Q1

Sources: American Bankruptcy Institute athttp://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633;Insurance Information Institute

Significant Exposure Implications for All Commercial Lines asBusiness Bankruptcies Begin to Decline

2011 bankruptcies totaled 47,806, down 15.1%from 56,282 in 2010the second consecutiveyear of decline. Business bankruptcies more

than tripled during the financial crisis. Through

Q1:2012, filings are down 11.1% vs. Q1:2011

% Change SurroundingRecessions

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

22

P i t S t B i St t
http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633


23/240

23

Private Sector Business Starts,1993:Q2 2011:Q3*

175

186

174

180

1861

92

18818718

9

18619

0194

191

1992

04

202

195

196

196

206

206

201

1

92

198

206

206

203

211

205

212

2002

05

204

204

197

203

209

201

1

92

1

92

193

2012

04

202

2102

12

209

2162

202

23

220

220

210

221

212

204

218

209

207

207

199

1911

93

1721

76

169

184

1751

79

188

200

1831

87191

203

150

160

170

180

190

200

210

220

230

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

Business Starts Were Down Nearly 20% in the Recession,Holding Back Most Types of Commercial Insurance Exposure, But

Are Recovering Slowly

* Data through June 30, 2011 are the latest available as of July 10, 2012; Seasonally adjusted. **Annualized based on data through Q3:2011.Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up 3.5% to 561,000 inthe first 9 months of 2011 vs. first 9

months of 2011. 722,000 new businessstarts were recorded in 2010, up 3.6% from

697,000 in 2009, which was the slowest

year for new business starts since 1993

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,0002010: 722,0002011: 748,000**

23
http://www.bls.gov/news.release/cewbd.t08.htmhttp://www.bls.gov/news.release/cewbd.t08.htmhttp://www.bls.gov/news.release/cewbd.t08.htm


24/240

NFIB Small Business Optimism Index

January 1985 through April 2012

Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif; Insurance Information Institute. 24

Small business optimism has

increased but is still only atthe level it was when theFinancial Crisis began

12 I d t i f th N t 10 Y
http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gifhttp://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gifhttp://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gifhttp://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gifhttp://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gifhttp://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gifhttp://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif


25/240

25

12 Industries for the Next 10 Years:Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Manyindustries are

poised for

growth,though

insurersability to

capitalize onthese

industriesvaries widely

Shipping (Rail, Marine, Trucking)


26/240

26

Presidential Politics & the P/C

Insurance Industry

How Is Profitability Affected bythe Presidents Political Party?

26

P/C Insurance Industry ROE by


27/240

15.10%

9.40%

8.93%

8.65%

8.35%

7.98%7.68%

6.98%

6.97%

6.65%

5.43%

5.03%4.83%

4.43%

3.55%

16.43%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Carter

Reagan II

G.W. Bush II

Nixon

Clinton I

G.H.W. Bush

Clinton IIReagan I

Nixon/Ford

Truman

Obama

Eisenhower I

Eisenhower IIG.W. Bush I

Johnson

Kennedy/Johnson

*Truman administration ROE of 6.97% based on 3 years only, 1950-52; ROEs for the years 2008 forward exclude mortgage and financial guaranty segments.Estimated ROE for 2012 = 7.0%.Source: Insurance Information Institute

OVERALL RECORD:1950-2012*

Democrats 7.67%Republicans 7.97%

Party of President hasmarginal bearing onprofitability of P/Cinsurance industry

P/C Insurance Industry ROE byPresidential Administration, 1950- 2012*

P/C insurance Industry ROE by


28/240

-5%

0%

5%

10%

15%

20%

25%

50

52

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12E

BLUE = Democratic President RED = Republican President

Truman Nixon/Ford

Kennedy/

Johnson

Eisenhower

Carter

Reagan/Bush I Clinton Bush II

P/C insurance Industry ROE byPresidential Party Affiliation, 1950- 2012*

*ROEs for the years 2008 forward exclude mortgage and financial guaranty segments; Estimated 2012 ROE = 7.0%Source: Insurance Information Institute

Obama


29/240

29

Labor Market Trends

Massive Job Losses Sapped the

Economy and Commercial/PersonalLines Exposure, But Trend is

Improving

29

Unemployment and Underemployment


30/240

30

Unemployment and UnderemploymentRates: Stubbornly High in 2012, But Falling

2

4

6

8

10

12

14

16

18

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemploymentstood at 8.2% in

May 2012

Unemploymentpeaked at 10.1%in October 2009,highest monthlyrate since 1983.

Peak rate in the

last 30 years:10.8% in

November -December 1982

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

U-6 went from

8.0% in March2007 to 17.5% inOctober 2009;Stood at 14.9%in June 2012

January 2000 through June 2012, Seasonally Adjusted (%)

Recessionended in

November2001

Unemploymentkept rising for

19 moremonths

Recessionbegan in

December2007

Stubbornly high unemployment and underemployment constrain overall

economic growth, but the job market is now clearly improving30

Jun12


31/240

186

79

213

65

127

42

15

-109

-14

65 9

7

23

-12

-85 -5

8

-161

-253-23

0

-257

-347

-456

-547

-734 -6

67

-806

-707

-744 -

649

-334

-452

-297 -2

15

-186

-262

75

-83

16 6

2

229

516

11

17

143

112

193

128 1

67

119

2572

61264

108

102 1

75

52

216

139 1

78 2

34 2

77254

147

85 1

05

84

144

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Monthly Change in Private Employment

January 2008 through June 2012 (Thousands)

Private Employers Added 4.48 million Jobs Since Jan. 2010 AfterHaving Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (Stateand 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 inDec. 08Mar. 09 Were

the Largest in thePost-WW II Period

84,000 private sector jobswere created in June

31

Cumulative Change in Private
http://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htm


32/240

0.0

23

0.0

11

-0.0

74

-0.1

32

-0.2

93

-0.5

46

-0.7

76

-1.0

33

-1.3

80

-1.8

36

-2.3

83

-3.1

17

-3.7

84

-4.5

90

-5.2

97

-6.0

41

-6.6

90

-7.0

24

-7.4

76

-7.7

73

-7.9

88

-8.1

74

-8.4

36

-8.3

61

-8

.444

-8.4

28

-8.3

66

-8.2

22

-7.9

93

-7.9

42

-7.8

81

-7.7

64

-7.6

21

-7.5

09

-7.3

16

-7.1

88

-7.0

21

-6.9

02

-6.3

84

-6.1

20

-6.0

12

-5.9

10

-5.7

35

-5.6

83

-5.4

67

-5.3

28

-5.1

50

-4.9

16

-4.6

39

-4.3

85

-4.2

38

-4.1

53

-4.0

48

-3.9

64

-6.6

45

-10

-8

-6

-4

-2

0

2

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-

Jun-12

Millions

Cumulative Change in PrivateEmployment: Dec. 2007June 2012

December 2007 through June 2012 (Millions)


Cumulative job lossespeaked at 8.444 million

in December 2009

Cumulative job lossesas of June 2012 totaled

3.964 million

32

All of the jobs lostsince President

Obama took office inJan. 2009 have been

recouped


Cumulative Change in Private Sector
http://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htm


33/240

0.0

16

0

.078

0.2

22

0.4

51

0.5

02

0.5

63

0.6

80

0.8

23

0.9

35

1.1

28

1.2

56

1.4

23

1.5

42

1.7

99

2.0

60 2.324

2

.432

2.5

34

2.7

09

2.7

61

2.9

77

3.1

16

3.2

94

3.5

28

3.8

05

4.0

59

4.2

06

4.2

91

4.3

964

.480

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

M

illions

Cumulative Change in Private SectorEmployment: Jan. 2010June 2012

January 2010 through June 2012* (Millions)


Cumulative job gainsthrough June 2012

totaled 4.480 million

33


Job gains and payincreases have added morethan $600 billion to payrolls

since Jan. 2010

Cumulative Change in Government
http://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htmhttp://www.bls.gov/ces/home.htm


34/240

0

-8

40 8

6

518

259

109

-70

-212

-188

-201

-221

-230

-267

-282

-295

-349

-367

-446

-413

-427

-454

-475

-486

-488

-483

-487

-491

-519

-536

-700

-500

-300

-100

100

300

500

700

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Cumulative Change in GovernmentEmployment: Jan. 2010June 2012

January 2010 through June 2012* (Millions)

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

Cumulative joblossesthrough June2012 totaled 536,000

34

Governments at All Levels are Under Severe Fiscal Strain As TaxReceipts Plunged and Pension Obligations Soared During the

Financial Crisis, Causing Them to Reduce Staff

Government at all levels hasshed more than a half

million jobs since Jan. 2010even as private employerscreated 4.48 million jobs.

TemporaryCensus hiringdistorted 2010

figures

Net Change in Government
http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/


35/240

35

Net Change in GovernmentEmployment: Jan. 2010June 2012*

-536

-405

-72 -59

-600

-500

-400

-300

-200

-100

0

Total Local State Federal

(Thousands)

Local government employmentshrank by 405,000 from Jan.

2010 through June 2012,accounting for 76% of allgovernment job losses,

negatively impacting WCexposures for those cities andcounties that insure privately

*Cumulative change from prior month; Base employment date is Dec. 2009.Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

State government employment fell by

1.4% since the end of 2009 whileFederal employment is down by 2.1%
http://www.bls.gov/data/http://www.bls.gov/data/http://www.bls.gov/data/


36/240

36

Unemployment Rates by State, May 2012:Highest 25 States*

11.6

11.0

10.8

9.49.39.29.1

8.98.78.68.68.68.58.4

8

.3

8

.2

8

.2

8.1

7.9

7.9

7.8 7.87.47.47.4

0

2

4

6

8

10

12

14

NV RI CA NC DC NJ SC GA MS FL IL NY MI OR WA AZ KY CO IN TN CT ID AL ME PA

U

nemploymentR

ate(%)

*Provisional figures for May 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In May, 18 states had over-the-month

unemployment rate increases, 14 statesand the District of Columbia haddecreases, and 18 states had no

change.

U l t R t B St t M 2012


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37

7.3

7.3

7.3

7.2

7.0

6.9

6.9

6.8

6.8

6.8

6.7

6.3

6.3

6.1

6.0

6.0

5.6

5.6

5.2 5.1 5.0

4.8

4.6

4.3

3.9

3.0

0

2

4

6

8

AR MO OH LA AK TX WV DE MD WI NM HI MT KS MA UT MN VA WY IA NH OK VT SD NE ND

Un

emp

loymen

tRate

(%)

Unemployment Rates By State, May 2012:Lowest 25 States*

*Provisional figures for May 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In May, 18 states had over-the-month

unemployment rate increases, 14states and the District of Columbia had

decreases, and 18 states had nochange.

TXs unemploymentrate in May was 6.9%,well below 8.2% for

the US overall

T N f P i t E l t G th


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38

Texas Nonfarm Private Employment Growth,Jan. 1992May 2012 (3-month moving average)

*Provisional figures for May 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics from Wells Fargo Securities; Insurance Information Institute.

Employmentgrowth in Texas

easily outpacesthe US overall,favorably

impacting WCpayroll

exposures

Texas Employment Growth by Industry


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39

Texas Employment Growth, by IndustryMay 2011 to May 2012 (3-month moving avg.)

*Provisional figures for May 2012, seasonally adjusted.Sources: US Bureau of Labor Statistics from Wells Fargo Securities; Insurance Information Institute.

Everyindustry

group butGovernment

has beenposting

growth in TX


40/240

40

US Unemployment Rate Forecast

4.5%

4.5%

4.6

%

4

.8%

4.9

% 5.4

%6

.1%

6.9

%

8.1

%

9.3

%9

.6%1

0.0

%

9.7

%

9.6

%

9.6

%

8.9

%9

.1%

9.1

%

8.7

%

8.3

%

8.2

%

8.1

%

8

.0%

8

.0%

7.8%

7.7

%

7.6

%

9.6

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

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

Risingunemploymenteroded payrolls

and workerscomps

exposure base.

Unemploymentpeaked at 10% in

late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (6/12 edition); Insurance Information Institute.

2007:Q1 to 2013:Q4F*

Unemployment forecastshave been revised slightly

upwards for 2012 and 2013.Optimistic scenarios put the

unemployment as low as

7.9% by Q4 ofth isyear.

Jobless figures

have been revisedslightly upwards for2012


41/240

41

US Unemployment Rate Forecasts

8.3% 8.2% 8.1%

7.8% 7.7% 7.6%7.4%

7.2%7.0%

8.3%8.3% 8.3%8.3%

7.9%

8.2% 8.1%8.0%

7.6%7.8%7.9%

8.1%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4

10 Most Pessimistic

Consensus/Midpoint

10 Most Optimistic

Unemployment will remain high even underthe most optimistic of scenarios, but

forecasts are being revised downwards

Sources: Blue Chip Economic Indicators (5/12); Insurance Information Institute

Steadily Decreasing Unemployment Should Benefit theWorkers Comp Exposure Base at Least Through 2013

Quarterly, 2012:Q2 to 2013:Q4

Nonfarm Payroll (Wages and Salaries):


42/240

42

Nonfarm Payroll (Wages and Salaries):Quarterly, 20052012:Q1

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

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

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

05:Q1

05:Q2

05:Q3

05:Q4

06:Q1

06:Q2

06:Q3

06:Q4

07:Q1

07:Q2

07:Q3

07:Q4

08:Q1

08:Q2

08:Q3

08:Q4

09:Q1

09:Q2

09:Q3

09:Q4

10:Q1

10:Q2

10:Q3

10:Q4

11:Q1

11:Q2

11:Q3

11:Q4

12:Q1

Peak was 2008:Q1at $6.60 trillion

Latest (2011:Q4)

was $6.88 trillion, anew peak

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

5.3% from prior peak

Growth rates in 2011/12Q2 over Q1: 0.6%Q3 over Q2: 0.4%

Q4 over Q3: 1.3%Q1 over Q4: 1.0%

Pace of payrollgrowth isaccelerating

42

Payroll vs Workers Comp Net Written
http://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCUR


43/240

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

43

Payroll Base* WC NWP

Payroll vs. Workers Comp Net WrittenPremiums, 1990-2011

*Private employment; Shaded areas indicate recessions. Payroll and WC premiums for 2011 is I.I.I. estimateSources: 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 Increases Suggest WC NWP Will GrowAgain in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005

7/90-3/91 3/01-11/01

12/07-6/09

$Billions $Billions

WC premiumvolume droppedtwo years before

the recession began

WC net premiumswritten were down$14B or 29.3% to

$33.8B in 2010 afterpeaking at $47.8B

in 2005

+7.9% in2011
http://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCURhttp://research.stlouisfed.org/fred2/series/WASCUR


44/240

44

POSITIVE LABOR MARKET DEVELOPMENTS

Key Factors Driving WorkersCompensation Exposure

44

Mass Layoff Announcements


45/240

45

Mass Layoff Announcements,Jan. 2002Apr. 2012*

*Percentage change from same month in prior year; seasonally adjusted

Note: Recessions indicated by gray shaded columns.

Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates);Insurance Information Institute.

500

1,000

1,500

2,000

2,500

3,000

3,500

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

Mass layoffannouncements peakedat more than 3,000 per

month in Feb. 2009

There were 1,388 maylayoffs announced inApril 2012. The 1,273

mass layoffsannounced in Mar. 2012was the smallest since

Sept. 2007

Average Weekly Hours of All Private
http://www.bls.gov/mls/http://www.bls.gov/mls/


46/240

46

Average Weekly Hours of All PrivateWorkers, Mar. 2006May 2012



Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recessiondates); 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

34.734.8

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

Hours worked totaled34.4 per week in May,

still shy of the 34.6

hours typically workedbefore the GreatRecession

Hours workedplunged duringthe recession,

impacting payrollexposures

(Hours Worked)

Average Hourly Wage of All Private
http://www.bls.gov/data/http://www.bls.gov/data/


47/240

47

Average Hourly Wage of All PrivateWorkers, Mar. 2006May 2012



Sources: US Bureau of Labor Statistics at http://www.bls.gov/data/#employment; National Bureau of Economic Research (recessiondates); Insurance Information Institute.

$18.00

$19.00

$20.00

$21.00

$22.00

$23.00

$24.00

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

The average hourlywage was $23.41, up

10.2% from $21.25 whenthe recession began in

Dec. 2007Wage gainscontinued during the

recession, despitemassive job losses

(Hourly Wage)

Manufacturing Employment
http://www.bls.gov/data/http://www.bls.gov/data/


48/240

48

Manufacturing Employment,Jan. 2010May 2012*

11,4

58

11,4

62

11,4

70

11,5

02

11,5

36

11,5

46

11,5

66

11,5

49

11,5

51

11,5

51

11,5

60

11,5

75

11,62

7

11,6

64

11,

690

11

,718

11

,726

11,7

38

1

1,7

68

11,7

71

1

1,7

68

11,7

77

11,7

80

11,8

08

11,8

60

11,8

90

11,9

32

11,9

41

11,9

53

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

2/30/2102

Mar-12

Apr-12

May-12

Manufacturing employment

is up by nearly 500,000 or4.3% since Jan. 2010a

surprising source ofstrength in the economy

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

(Thousands)

Construction Employment


49/240

49

Construction Employment,Jan. 2010Apr. 2012*

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

5,5

93

5,5

29 5

,552

5,5

59

5,5

18

5,5

07

5,4

91 5

,51

1

5,4

92

5,4

99

5,4

88

5,4

77

5,4

56

5,4

89

5,4

96

5,4

95

5,4

98

5,4

95

5,5

0

8

5,4

98 5

,528

5,519

5,520 5

,546

5,5

64

5,5

63

5,5

60

5,5

58

5,400

5,450

5,500

5,550

5,600

5,650

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

2/30/2102

Mar-12

Apr-12

Construction employment is

still below where it was inJan. 2010. In a normalrecovery, constructionemployment would be

growing robustly

(Thousands)


50/240

50

ADVERSE LONG-TERM

LABOR MARKET DEVELOPMENTS

Key Factors Harming WorkersCompensation Exposure and the

Overall Economy

50

Duration of Unemployment,


51/240

51

Duration of Unemployment,May 2011 vs. May 2012

Source: US Bureau of Labor Statistics at http://www.bls.gov/news.release/empsit.a.htm; Insurance Information Institute.

2,6872,912

1,994

6,204

2,5803,002

1,662

5,411

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Less Than 5 Weeks 5-14 Weeks 15-26 Weeks 27 Weeks +

May 2011 May 2012

The plight of the long-

term unemployedremains a serious issuefor the US. Skills

atrophy over timeimpact on WC claimfrequency/severity?

(Thousands)

-4.0% +3.1%

-16.6%

-12.8%

Labor Force Participation Rate
http://www.bls.gov/news.release/empsit.a.htmhttp://www.bls.gov/news.release/empsit.a.htmhttp://www.bls.gov/news.release/empsit.a.htm


52/240

52

Labor Force Participation Rate,Jan. 2002May 2012*

*Defined as the percentage of working age persons in the population who are employed or actively seeking work.


Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; 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

Large numbers ofpeople are exiting (ornot returning to the

labor force

Labor forceparticipation

continues to shrinkdespite a falling

unemployment rate

Labor Force Participation as a % of Population

Number of Discouraged Workers,
http://www.bls.gov/mls/http://www.bls.gov/mls/


53/240

53Notes: Recessions indicated by gray shaded columns. Data are seasonally adjusted.Sources: Bureau of Labor Statistics; National Bureau of Economic Research (recession dates).

0

100

200

300

400

500

600700

800

900

1,000

1,100

1,2001,300

1,400

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

In recent good times, the number of discouraged workers ranged from200,000-400,000 (1995-2000) or from 300,000-500,000 (2002-2007).

There were830,000

discouragedworkers inMay 2012

Thousands

Discouraged Workers arepeople who have searchedfor work for so long in vain

that they actually stopsearching and drop out of

the labor force

g ,Jan. 2002May 2012

Large numbers ofpeople are exiting

(or not returning to)the labor force


54/240

54

P/C Insurance Industry

Financial Overview

Profit Recovery Was Set Back

in 2011 by High CatastropheLoss & Other Factors

54

P/C Net Income After Taxes


55/240

19912012:Q1 ($ Millions)

$14

,178

$

5,8

40

$19

,316

$10

,870

$20

,598

$24

,404 $3

6,8

19

$30

,77

3

$21

,865

$3,0

46

$30

,02

9

$62

,496

$3,0

43

$35

,204

$19

,150

$10

,141

$28

,672

-$6,970

$65

,77

7

$44

,155

$20

,559

$3

8,5

01

-$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:Q1

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:Q1 ROAS1 = 7.2%

P-C Industry 2012:Q1

profits were up 29% from2011:Q1, due primarily tolower catastrophe losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS for

2012:Q1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

A 100 Combined Ratio Isnt What It


56/240

Once Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q1 combined ratio

including M&FG insurers is 99.0, ROAS = 7.2%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%.Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.099.3

100.9

97.6

106.4

95.7

8.2%

4.6%

7.6%7.4%4.4%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012:Q1

0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Todays DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates anROE of ~6.7% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Year Ago

2011:Q1 = 102.2,6.1% ROE

Profitability Peaks & Troughs in the P/C


57/240

-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:

Profitability Peaks & Troughs in the P/CInsurance Industry, 1975 2012:Q1*

*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. 2012:Q1 ROAS = 7.2% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

9 Years

2011:

4.6%*

History suggests next ROEpeak will be in 2016-2017

ROE

1975: 2.4%

2012:Q8.2%

ROE: Property/Casualty Insurance vs.


58/240

58

p y yFortune 500, 19872012:Q1*

* Excludes Mortgage & Financial Guarantee in 2008 2012. 2012 Fortune 500 figure is III estimate.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 1112:Q1

P/C Profitability Is Both byCyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CATLosses in15 Years

Sept. 11

Katrina,Rita, Wilma

4 Hurricanes

FinancialCrisis*

(Percent)

Record

TornadoLosses

ROE vs. Equity Cost of Capital:


59/240

59

q y pU.S. P/C Insurance:1991-2011*

* Return on average surplus in 2008-2011 excluding mortgage and financial guaranty insurers.Source: The Geneva Association, Insurance Information Institute

-2%

0%

2%

4%

6%

8%10%

12%

14%

16%

18%

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

ROE Cost of Capital

-13.2pts +

1.7pts

+2.3pts

-9.0pts

-6.4pts

-3.2pts

The P/C Insurance Industry Fell WellShort of Its Cost of Capital Every Year Since 2008

US P/C Insurers Missed Their Cost of

Capital by an Average 6.7 Points from1991 to 2002, but on Target or Better2003-07, Fell Short in 2008-2010

The Cost of Capitalisthe Rate of Return

Insurers Need toAttract and RetainCapital to the Business

(Percent)

-2.4pts

-7.3pts


60/240

60

Profitability Comparison in

Texas and Nearby States

Analysis by Line and NearbyState Comparisons

RNW All Lines: TX, OK, AR & NM vs.


61/240

61

U.S., 2001-2010

Sources: NAIC.

-20%

-15%

-10%

-5%

0%5%

10%

15%

20%25%

01 02 03 04 05 06 07 08 09 10

US All Lines TX All Lines OK All Lines AR All Lines NM All Lines

(Percent)

All Lines: 10 Year Average RNW


62/240

All Lines: 10-Year Average RNW

4.9%

7.1%

10.5%

4.0%

6.6%

0% 2% 4% 6% 8% 10% 12%

New Mexico

U.S.

Arkansas

Texas

Oklahoma

Source: NAIC, Insurance Information Institute

2001-2010

RNW PP Auto: TX, OK, AR & NM vs.


63/240

63

U.S., 2001-2010

Sources: NAIC.

-10%

-5%

0%

5%

10%

15%

20%

25%

01 02 03 04 05 06 07 08 09 10

US PP Auto TX PP Auto OK PP Auto AR PP Auto NM PP Auto

PP Auto: 10-Year Average RNW


64/240

PP Auto: 10-Year Average RNW

7.4%

7.6%

11.2%

7.1%

7.4%

0% 2% 4% 6% 8% 10% 12%

New Mexico

U.S.

Arkansas

Texas

Oklahoma


2001-2010

Top Ten Most Expensive And Least Expensive


65/240

65

States For Automobile Insurance, 2009 (1)

Rank Mostexpensive states Averageexpenditure Rank Leastexpensive states Averageexpenditure1 District of Columbia $1,128 1 North Dakota $510

2 New Jersey 1,101 2 South Dakota 521

3 Louisiana 1,099 3 Iowa 532

4 New York 1,057 4 Idaho 555

5 Delaware 1,021 5 Nebraska 559

6 Florida 1,006 6 Kansas 578

7 Rhode Island 969 7 Wisconsin 591

8 Connecticut 952 8 Maine 598

9 Nevada 944 9 North Carolina 610

10 Maryland 929 10 Ohio 616

(1) Based on average automobile insurance expenditures.

Source: 2012 National Association of Insurance Commissioners.

Texas ranked 13th most expensiv e: $860, Oklahoma ranked 29th

most expens ive: $680, Ark ansas ranked 32nd m os t expensive:

$656, & New Mexico ranked 26th most expensiv e: $713.

RNW Homeowners: TX, OK, AR & NM


66/240

66

vs. U.S., 2001-2010

Sources: NAIC.

-80%

-60%

-40%

-20%

0%

20%

40%

60%

01 02 03 04 05 06 07 08 09 10

US HO TX HO OK HO AR HO NM HO

(Percent)

RNW Homeowners: TX, LA, FL, AL, MS


67/240

67

vs. U.S., 2001-2010

Sources: NAIC; Insurance Information Institute.

-400%

-350%

-300%

-250%

-200%

-150%

-100%

-50%

0%

50%

100%

01 02 03 04 05 06 07 08 09 10

US HO TX HO LA HO FL HO AL HO MS HO

(Percent)

Impact ofHurricane Katrina

Homeowners: 10-Year Average RNW


68/240


-4.4%

5.0%

13.6%

-8.3%

0.4%

-10% -5% 0% 5% 10% 15%

New Mexico

U.S.

Texas

Arkansas

Oklahoma


2001-2010

Residential Building Code Ratings inH i P St t


69/240

Hurricane Prone States

Source: Rating the States, Dec. 31, 2011, Insurance Institute for Business and Home Safety; Insurance Information Institute. 69

Florida andVirginia were thetop ranked states

in termspreparedness of

residential

structures againsthurricane damage

Despite catastrophiclosses from Hurricane

Katrina in 2005, MS still

has no statewide buildingcode, putting it dead last

in the US;

AL and TX rank poorly aswell despite major post-

Andrew storms

Top Ten Most Expensive And Least ExpensiveSt t F H I 2009


70/240

70

States For Homeowners Insurance, 2009

Rank(1) Mostexpensive states HO averagepremium (2) Rank Leastexpensive states HO averagepremium (2)1 Texas (3) $1,511 1 Idaho $485

2 Florida (4) 1,460 2 Wisconsin 542

3 Louisiana 1,430 3 Oregon 544

4 Mississippi 1,185 3 Utah 544

5 Oklahoma 1,123 4 Washington 552

6 D.C. 1,069 5 Delaware 610

6 Rhode Island 1,069 6 Ohio 613

7 Massachusetts 1,035 7 Arizona 642

8 New York 1,021 8 Iowa 645

9 Connecticut 1,016 8 South Dakota 645

(1) States with the same premium receive the same rank.(2) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides all risks coverage (except those

specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.(3) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms.(4) Florida data excludes policies written by Citizen's Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly

comparable to other states.

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. TheNAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data.

Source: 2011 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictlyprohibited without written permission of NAIC.

Texas ranked as the most expensive: $1,511, Oklahoma ranked 5th most expensive: $1,123,Arkansas ranked 14th most expensive: $919, and New Mexico ranked 27th most expensive:

$751.

Texas Windstorm Insurance Association (TWIA):E t L (B ildi & C t t O l ) ($ Billi )


71/240

Exposure to Loss (Building & Contents Only) ($ Billions)

Source: TWIA at 06/05/12, Texas Department of Insurance, Southwestern Insurance Information Services (SIIS)

$72.0$71.1$67.4

$64.4

$58.6$58.6

$38.3

$23.3$20.8$18.8

$16.0$13.2$12.1

$0

$10

$20

$30

$40

$50

$60

$70

$80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Mar31-

2012

TWIAs exposure to loss for building &

contents has surged by 495 percent in thelast 12 years from $12.1 billion in 2000 to$72.0 billion in 2012.

RNW Comm. Auto: TX, OK, AR & NM vs.U S 2001 2010


72/240

72

U.S., 2001-2010

Sources: NAIC.

-10%

-5%

0%

5%

10%

15%

20%

01 02 03 04 05 06 07 08 09 10

US Comm Auto TX Comm Auto OK Comm Auto

AR Comm Auto NM Comm Auto

(Percent)

Comm. Auto: 10-Year Average RNW


73/240

Comm. Auto: 10 Year Average RNW

7.6%

9.2%

11.7%

6.8%

8.1%

0% 5% 10% 15%

New Mexico

U.S.

Oklahoma

Arkansas

Texas


2001-2010

RNW Comm. Multi-Peril: TX, OK, AR &NM U S 2001 2010


74/240

74

NM vs. U.S., 2001-2010

Sources: NAIC.

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

01 02 03 04 05 06 07 08 09 10

US Comm M-P TX Comm M-P OK Comm M-P

AR Comm M-P NM Comm M-P

(Percent)

Comm. M-P: 10-Year Average RNW


75/240

Comm. M P: 10 Year Average RNW

4.3%

8.3%

13.6%

2.2%

7.1%

0% 5% 10% 15%

New Mexico

U.S.

Arkansas

Oklahoma

Texas


2001-2010

RNW Workers Comp: TX, OK, AR & NMU S 2001 2010


76/240

76

vs. U.S., 2001-2010

Sources: NAIC.

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

01 02 03 04 05 06 07 08 09 10

US WComp TX WComp OK WComp

AR WComp NM WComp

(Percent)

Workers Comp: 10-Year Average RNW


77/240

o e s Co p 0 ea e age

6.1%

9.5%

12.2%

2.4%

6.4%

0% 5% 10% 15%

Arkansas

Texas

New Mexico

U.S.

Oklahoma


2001-2010

All Lines DWP Growth: TX, OK, AR &NM vs U S 2002 2011


78/240

78

NM vs. U.S., 2002-2011

Source: SNL Financial.

-10%

-5%

0%

5%

10%

15%

20%

25%

02 03 04 05 06 07 08 09 10 11

US All Lines TX All Lines OK All Lines AR All Lines NM All Lines

(Percent)


79/240

79

Personal Lines

Profitability Analysis

Significant Variability OverTime and Across States

Return on Net Worth: Pvt. Passenger Auto,10 Y A (2001 2010*)


80/240

80

18.5

14.5

1

4.3

1

4.1

13

.5

12.4

12.1

11.8

11.7

11.6

11.3

11.2

11.1

11.0

10.8

10.7

10.7

10.5

10.4

10.2

9.89.79.69.29.1

0

2

46

8

10

12

14

16

18

20

22

HI VT ME ID DC NH ND MN SD OH KS NM CT IA RI OR WY VA AZ WI CA UT IN AL AK

RNWP

PA

*Latest available.

Sources: NAIC.

Hawaii was the most profitable statefor auto insurers from 2001-2010

10-Year Average (2001-2010*)

Top 25 States(Percent)

Return on Net Worth: Pvt. Passenger Auto,10 Y A (2001 2010*)


81/240

81

9.08.98.88.8

8.58.4

8.07.87.77.67.57.47.47.47.4

7.17.17.17.06.8

5

.4

5.3

5.1

4.2

3.4

2.7

-1.2-2

0

2

4

6

8

10

CO

NY

SC

WA

NE IL

MD

TN

MO

US

MT

AR

GA

TX

WV

NJ

OK

PA

NC

MA

KY

MS

DE

NV

FL

LA

MI

RNWAuto

10-Year Average (2001-2010*)

*Latest avaiiable.Sources: NAIC

Auto insurance

profitability in Texas isbelow the US average

(Percent) Bottom 25 States

Return on Net Worth: All P-C Lines vs.Homeowners 1990 2010*


82/240

82

Homeowners, 1990-2010*

*Latest available.

**Excluding Hurricane Andrew (1992); including 1992 produces an average homeowners RNW of 0.7%.Sources: NAIC.

-10%

-5%

0%

5%

10%

15%

20%

25%

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

US All Lines US Home(Percent)

Average RNW: 1990-2009*

All P-C Lines: 7.9%Homeowners: 3.5%**

Homeowners Insurance Is Considerably More Volatile than the Market OverallDue to Coastal Exposure and Interior Wind/Hail Events

Impact ofHurricane

Irene

Katrina, Rita,

Wilma

TexasMoldCrisis

RNW Homeowners: TX vs. U.S.,2001 2010


83/240

83

2001-2010

Sources: NAIC; Insurance Information Institute.

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

01 02 03 04 05 06 07 08 09 10

US HO TX HO

(Percent)The average return on networth in Texas from 2001

through 2010 was just 0.4%compared to 5.0% for the US

overall

Texas

MoldCrisis

Katrina, Rita,Wilma

Impact of

HurricaneIrene



84/240

g

-25.4%

-0.3%

0.4%

5.0%

-29.2%

-7.2%

-40% -30% -20% -10% 0% 10%

U.S.

Texas

Florida

Alabama

Louisiana

Mississippi

Source: NAIC; Insurance Information Institute

2001-2010

Home insurers in Texasearned an average annualreturn little different from

zero from 2001 through 2010

Homeowners Loss Ratio: TX, 2001-20101


85/240

85

86.7

125.3118.7

61.2

30.6

58.2

34.6 37.3

132.5

68.2

51.4

73.2

010

20

30

40

50

60

7080

90

100

110

120

130

140

150

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

(Ratio)

(1) Loss and loss adjustment expense ratio.

Source: SNL Financial; Insurance Information Institute.

The homeowners insuranceloss ratio in Texas is highly

volatile, sometimesfluctuating by approximately100 points in the span of just

a few years

Return on Net Worth: Homeowners Insurance,10-Year Average (2001-2010*)


86/240

86

45.5

22.3

20.6

20.3

19.5

18.6

18.4

18.1

17.6

16.5

15.4

15.3

14.6

13.1

12.7

2012 hartwig texas

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