Catastrophic Risk & Insurability: Can the Insurance Industry Cope?

Los Angeles RIMS and the Center for Insurance Studies at California State University

Fullerton, CAOctober 15, 2012

Download 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

Global Catastrophe Loss Developments and Trends

2

Recent Catastrophe Losses Rewrote Insurance History, but Global

(Re)Insurance Markets Proved their Strength and Resilience

2

3

Global Catastrophe Loss Summary: 2011—Several Major Earthquakes

2011 Was the Highest Loss Year on Record for Economic Losses Globally

Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss

$380 Billion in Economic Losses Globally (New Record)

New record, exceeding the previous record of $270B in 2005

$105 Billion in Insured Losses Globally

2011 losses were 2.5 times 2010 insured losses of $42B

Second only to 2005 on an inflation adjusted basis (new record on a unadjusted basis)

Over 5 times the 30-year average of $19B

$72.8 Billion in Economic Losses in the US

Represents a 129% increase over the $11.8 billion amount through the first half of 2010

$35.9 Billion in Insured Losses in the US Arising from 171 CAT Events

Fifth highest year on record

Represents 51% increase over the $23.8 billion total in 2010

Source: Munich Re; Insurance Information Institute.

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Hydrological events(flood, mass movement)

Selection of significant loss events (see table)

Natural catastrophes

Earthquake, tsunami Japan, 11 March

EarthquakeNew Zealand, 22 Feb.

Cyclone Yasi Australia, 2–7 Feb.

Landslides, flash floodsBrazil, 12/16 Jan.

Floods, flash floods Australia, Dec. 2010–Jan. 2011

Severe storms, tornadoesUSA, 22–28 April

Severe storms, tornadoesUSA, 20–27 May

WildfiresUSA, April/Sept.

EarthquakeNew Zealand, 13 June

FloodsUSA, April–May

Climatological events(extreme temperature, drought, wildfire)

Number of Events: 820Number of Events: 820

DroughtUSA, Oct. 2010– ongoing

Hurricane IreneUSA, Caribbean22 Aug.–2 Sept.

WildfiresCanada, 14–22 May

DroughtSomaliaOct. 2010–Sept. 2011

FloodsPakistanAug.–Sept.

FloodsThailandAug.–Nov.

Earthquake Turkey23 Oct.

Flash floods, floodsItaly, France, Spain4–9 Nov.

Floods, landslidesGuatemala, El Salvador11–19 Oct.

Tropical Storm WashiPhilippines, 16–18 Dec.

Winter Storm JoachimFrance, Switzerland, Germany, 15–17 Dec.

4Source: MR NatCatSERVICE

Natural Loss Events, 2011

World Map

Natural Catastrophes Worldwide, 2011

© 2011 Munich Re 5

Overview and Comparison with Previous Years

Source: MR NatCatSERVICE

5 Costliest Natural Catastrophes Worldwide in Terms of Insured Losses, 2011 ($Mill)

Source: MR NatCatSERVICE © 2011 Munich Re 6

Natural Catastrophes Worldwide 2011Insured losses US$ 105bn - Percentage distribution per continent

Continent Insured losses US$ m

America (North and South

America)40,000

Europe 2,000

Africa Minor damages

Asia 45,000

Australia/Oceania 18,000

37%

2%

44%

17%

<1%

7Source: MR NatCatSERVICE

In 2011, 61% of insured natural catastrophe losses

were in the Asia/Pacific region, nearly 3.5 times the

average of 13% over the prior 30 years (1981-2010)

In 2011, just 37% of insured natural

catastrophe losses were in the

Americas, barely half the average of 66%

over the prior 30 years (1981-2010)

7

Natural Catastrophes Worldwide 1980 – 2011 Insured losses US$ 870bn - Percentage distribution per continent

Continent Insured losses US$ m

America (North and South

America)566,000

Europe 146,000

Africa 2,000

Asia 115,000

Australia/Oceania 41,000

66%

16%

<1%

13%

5%

8Source: MR NatCatSERVICE

In 2011, 61% of natural catastrophe losses were

in the Asia/Pacific region, nearly 3.5 times the

average of 13% over the prior 30 years (1981-2010)

8

9

Top 16 Most Costly World Insurance Losses, 1970-2011**

(Insured Losses, 2011 Dollars, $ Billions)

*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.**Figures do not include federally insured flood losses.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.

$11.9$13.0 $13.0$13.1

$19.1$21.3

$24.0$25.0

$37.5

$47.6

$7.7 $8.1 $8.3 $8.5 $9.3 $9.7

$0$5

$10$15$20$25$30$35$40$45$50

Hugo (1989)

WinterStormDaria(1991)

ChileQuake(2010)

Ivan (2004)

TyphoonMirielle(1991)

Charley(2004)

Wilma(2005)

ThailandFloods(2011)

NewZealandQuake(2011)

Ike (2008)

Northridge(1994)

SpringTornadoes/

Storms(2011)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

5 of the top 14 most expensive

catastrophes in world history have occurred within the past 2 years

Taken as a single event, the Spring 2011 tornado and

thunderstorm season would likely become the 5th

costliest event in global insurance history

10

Global Catastrophe Loss Summary: First Half 2012

$12B in Insured Losses Globally (Down from 85% from $81.7B in 2011:H1)

Few extraordinarily severe natural catastrophe events experienced in 2011: Earthquakes, tsunami, floods and tornadoes

Despite drop from 2011, total is still 18% above 30-yr. average (in 2011 $) of $10.2B

There were 450 nat cat events globally and 3,500 fatalities

$26B in Economic Losses Globally (Down from Record $302B in 2011:H1)

Represents a 91% decline; Also 40% below 30-yr. average (in 2011 $) of $43.3B

$9.3 Billion in Insured Losses in the US Arising from 90 CAT Events

Down 62% from $24.4B in 2011:H1; Loss is close to long-term average

Represents 80%+ of global total

Mild winter helped keep first half losses down

Thunderstorm (includes tornado, hail and wind damage) accounted for $8.8B or 95% of first half insured losses and represent the third most expensive spring thunderstorm ever

$14.6 Billion in Economic Losses in the US

Down from approximately $75B in 2011:H1

Source: Munich Re; Insurance Information Institute.

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Hydrological events(flood, mass movement)

Selection of significant loss events (see table)

Natural catastrophes

Climatological events(extreme temperature, drought, wildfire)

Number of events: 450Number of events: 450

Severe storms, tornadoesUSA, 2–4 MarchFatalities: 41

Severe stormsUSA, 28–29 April

EarthquakeMexico, 20 March

Cyclone FunsoMozambique, 19–28 JanuaryFatalities: 46

Floods, flash floodsAustralia, Feb–March

Floods, landslidesChina, May–JuneFatalities: 127

Winter damage/avalanchesAfghanistan, Jan–MarchFatalities: 160

Cold waveEastern Europe, Jan–FebFatalities: 745

EarthquakeItaly, 20/29 MayFatalities: 18

Winter Storm AndreaEurope, 5–6 January

Source: MR NatCatSERVICE 11

Natural Loss Events:First Half 2012

World Map

12

U.S. Insured Catastrophe Loss Update

2012 Catastrophe Losses Were Close to “Average” in the First Half of 2012

2011 Was the 5th Most Expensive Year on Record

12

15

$1

2.3

$1

0.7

$3

.7

$1

4.0

$1

1.3

$6

.0

$3

3.9

$7

.4 $1

5.9

$3

2.9

$7

1.7

$1

0.3

$7

.3

$2

8.5

$1

1.2

$1

4.1

$3

2.3

$1

3.8

$1

3.7

$4

.7

$7

.8

$3

6.9

$8

.6

$2

5.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

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

US Insured Catastrophe Losses

*PCS figure for H1 2012 (stated in 2012 dollars).Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

US CAT Losses in 2011 Were the 5th Highest in US History on An Inflation-Adjusted Basis

H1 2012 CAT losses were down $11.9B or 49% from

$24.4B in H1 2011

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2011 Dollars)

15

Northridge

16

Top 14 Most Costly Disastersin U.S. History

(Insured Losses, 2011 Dollars, $ Billions)

*Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30.Sources: PCS; Insurance Information Institute inflation adjustments.

$9.0$11.9 $13.1

$19.1$21.3

$24.0 $25.0

$47.6

$8.5$7.7$6.5$5.5$4.4$4.3

$0$5

$10$15$20$25$30$35$40$45$50

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

SpringTornadoes& Storms*

(2011)

9/11Attack(2001)

Andrew(1992)

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and storm season are

is the 4th costliest event in US insurance history

Hurricane Irene became the 11th most expense

hurricane in US history

17

Estimated Insured Losses For The Top Ten Historical Hurricanes Based On Current Exposures (1)

(Insured Losses, $ billions)

(1) Based on 2012 exposures, as calculated by Karen Clark & Company.

Source: Karen Clark & Company, August, 2012.

$40 $35$25 $20

$40$50$50$50

$65

$125

$0

$20

$40

$60

$80

$100

$120

$140

Great Miami(1926)

LakeOkeechobee

(1928)

Galveston(1900)

FortLauderdale

(1947)

Andrew(1992)

Galveston(1915)

Katrina(2005)

Great NewEngland(1938)

Donna (1960) Hazel (1954)

Residential and commercial development and rising property values imply significant insured losses for major past hurricanes

when adjusted to current exposure levels

18

The Ten Most Costly U.S. Earthquakes, by Insured Losses (1)

(Insured Losses, 2011 dollars, $ millions (2))

(1) Costliest U.S. earthquakes occurring from 1900 to 2011, based on insured losses when occurred. (2) Based on property losses including, if applicable, agricultural, offshore, marine, aviation and National Flood Insurance Program losses in the United States and may differ from data shown elsewhere. Adjusted to 2011 dollars by Munich Re. (3) Adjusted to 2011 dollars based on 1913 Bureau of Labor Statistics data (earliest year available).

Source: © 2012 Munich Re, Geo Risks Research, NatCatSERVICE.

$105 $65 $55 $50$150$325$380$1,745

$4,100

$23,260

$0

$5,000

$10,000

$15,000

$20,000

$25,000

Northridge(1994)

SanFrancisco(1906) (3)

Loma Prieta(1989)

Olympia(2001)

Anchorage(1964)

LosAngeles,Whittier(1987)

San Diego(2010)

Napa (2000) Hawaii: BigIsland (2006)

Paso Robles(2003)

19

Estimated Insured Losses For The Top Ten Historical Earthquakes Based On Current Exposures (1)

(Insured Losses, $ billions)

(1) Modeled loss to property, contents, and business interruption and additional living expenses for residential, mobile home, commercial and auto exposures as of December 31, 2008. Losses include demand surge and fire following earthquake. Policy conditions and earthquake insurance take up rates are based on estimates by state insurance departments and client claims data.

Source: AIR Worldwide Corporation.

$8 $6 $5 $4

$21$21$27

$37

$96$100

$0

$20

$40

$60

$80

$100

$120

New Madrid(1812)

SanFrancisco

(1906)

Charleston(1886)

SanFrancisco

(1838)

Northridge(1994)

Hayward(1868)

Fort Tejon(1857)

Loma Prieta(1989)

Long Beach(1933)

Calaveras,CA (1911)

Residential and commercial development and rising property values imply significant insured

losses for major past earthquakes when adjusted to current

exposure levels

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2012:H1Number of Events (Annual Totals 1980 – 2011 and First Half 2012)

Source: MR NatCatSERVICE 20

22

6

61

1

50

100

150

200

250

300

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

There were 90 natural disaster events in the first

half of 2012

For whatever reason, geophysical events in the US were common in the period from 1985-1995

Losses Due to Natural Disasters in the US, 1980–2011 (Overall & Insured Losses)

21

Overall losses (in 2011 values) Insured losses (in 2011 values)

Source: MR NatCatSERVICE © 2011 Munich Re

(2011 Dollars, $ Billions)

2011

Overall Losses: $72.8 Bill

Insured Losses: $35.9 Bill

2011 was the 5th most expensive year on record for insured

catastrophe losses in the US.

Approximately 50% of the overall cost of

catastrophes in the US was covered by insurance in 2011

(Overall and Insured Losses)

Northridge

22

The Ten Most Significant Flood Events, Ranked By National Flood Insurance Program Payouts (1)

(Amount paid, $millions)

(1) Includes events from 1978 to July 31, 2012. Defined by the National Flood Insurance Program as an event that produces at least 1,500 paid losses. Stated in dollars when occurred.

Source: U.S. Department of Homeland Security, Federal Emergency Management Agency.

$493 $472 $462 $435$585$1,104$1,279$1,587$2,661

$16,262

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

HurricaneKatrina (2005)

Hurricane Ike(2008)

Hurricane Ivan(2004)

HurricaneIrene (2011)

TropicalStorm Allison

(2001)

Louisianaflood (1995)

HurricaneIsabel (2003)

Hurricane Rita(2005)

HurricaneFloyd (1999)

TropicalStorm Lee

(2011)

$500

$530

$830

$975

$980

$1,000

$1,200

$1,400

$1,510

$2,000

$5,000

$6,900

$7,300

$840

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000

Flooding, April*

Wildfire, Sep. 4-19

Thunderstorms, Apr. 19-20

Thunderstorms, Aug. 18-19

Winter Storm, Jan. 31-Feb. 3

Thunderstorms, Jul. 10-14

Texas Drought, 2011*

Thunderstorms, Jun. 16-22

Thunderstorms, Apr. 14-16

Thunderstorms, Apr. 8-11

Thunderstorms, Apr. 3-5

Hurricane Irene, Aug. 26-28**

Thunderstorms, May 20-27

Thunderstorms, Apr. 22-26

**Includes $700 million in flood losses insured through the National Flood Insurance Program.Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute.

2011’s Most Expensive Catastrophes, Insured Losses

The Midwest was hard hit by catastrophes in 2011, especially thunderstorms,

including tornadoes, hail and high winds

U.S. Thunderstorm Loss Trends, 1980 – 2012:H1

24Source: Property Claims Service, MR NatCatSERVICE

Average thunderstorm

losses are up more than 5 fold since the early 1980s.

2012 will likely be among the top 5 years on record.

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss. 2008-2012 are the most expensive

years on record.

Thunderstorm losses in 2012:H1 totaled $8.8 billion, the 3rd highest

first half on record

*Through June 30.Source: National Forest Service, MR NatCatSERVICE

U.S. Acreage Burned by Wildfires, 1980 – 2012*

25

1.7 millions acres were burned by wildfires in the first half of 2012.

Most of the insured losses were in CO totaling close to $500 mill.

26

Top Wildfire Years by Losses in The United States, 2002-2011 (1)

(2011 dollars, $ millions)

(1) Adjusted for inflation. Ranked by losses.

Source: Munich Re NatCatSERVICE.

$200 $194$35 $8

$217

$559$633$854

$2,492$2,714

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2007 2003 2011 2008 2006 2010 2002 2009 2005 2004

Wildfires are a big driver of insured loss in California and more recently

in several other Western states

such as CO, TX, AZ and NM

27

Wildfire Losses In The United States, 2002-2011 (1)

(2011 dollars, $ millions)

(1) Adjusted for inflation.

Source: Munich Re NatCatSERVICE.

$633

$194 $217

$854

$2,714

$559

$35$8

$2,492

$200

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

28

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011*

*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

4.4

8.0

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

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

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.20*

Combined Ratio Points

Northridge

Source: Property Claims Service, MR NatCatSERVICE

U.S. Winter Storm Loss Trends, 1980 – 2011

29

Insured winter storm losses in 2011 totaled $2.0 billion. Average winter storm losses have nearly doubled

since the early 1980s

Slide 29

30

U.S. Insured Catastrophe Losses by Cause of Loss, 2011 ($ Millions)

2.8%

1.5%5.6%

72.1%

15.4%

.Source: ISO’s Property Claim Services Unit, Munich Re; Insurance Information Institute.

Hurricanes & Tropical Storms, $5,510

Wildfires, $855

Thunderstorms (Incl. Tornadoes , $25,813

Winter Storms, $2,017

Geological Events, $50, (0.1%)Flood , $535, (1.5%) Other, $1,000

2011’s insured loss distribution was

unusual with tornado and thunderstorm accounting for the

vast majority of loss

Thunderstorm/ Tornado losses were 2.5 times above the 30-year average

Geological account for 0.1% of insured losses

for 2011

31

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–2011:H11

0.2%

2.4%

3.4%4.9%

6.6%

8.0%

31.8%

42.7%

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

Hurricanes & Tropical Storms, $160.5

Fires (4), $9.0

Tornadoes (2), $119.5

Winter Storms, $30.0

Terrorism, $24.9

Geological Events, $18.5

Wind/Hail/Flood (3), $12.7

Other (5), $0.6

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Geological account for

4.9% of insured losses from 1990-2011

Life$1.2 (3%)

Aviation Liability

$4.3 (11%)

Other Liability

$4.9 (12%)

Biz Interruption $13.5 (33%)

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

Other$7.4 (19%)

Aviation Hull$0.6 (2%)

Event Cancellation

$1.2 (3%)Workers Comp

$2.2 (6%)

Total Insured Losses Estimate: $40.0B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.

**$32.5 billion in 2001 dollars.

Source: Insurance Information Institute.

Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2011)

($ Billions)

33

Federal Disaster Declarations Patterns:

1953-2012

33

Records Were Set for Federal Disaster Declarations in 2010 and

2011—Most Declarations Were Unrelated to Tropical Activity

Number of Federal Disaster Declarations, 1953-2012*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

93

3

43

0

20

40

60

80

100

120

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

*Through Oct. 15, 2012.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011

The number of federal disaster declarations set a

new record in 2011, with 99, shattering 2010’s record 81

declarations.

There have been 2,068 federal disaster

declarations since 1953. The average

number of declarations per year is 34 from

1953-2010, though that few haven’t been

recorded since 1995.

33 federal disasters were declared through

Oct. 15, 2012

34

35

Federal Disasters Declarations by State, 1953 – 2012: Highest 25 States*

86

78

72

65

64

59

57

56

53

53

51

51

51

49

48

48

48

47

47

46

46

46

42

40

39

0

10

20

30

40

50

60

70

80

90

100

TX CA OK NY FL LA AL KY AR MO IL TN MS WV IA MN KS NE PA VA OH WA ND NC IN

Dis

as

ter

De

cla

rati

on

s

Over the past nearly 60 years,

CA has had the 2nd highest number

of Federal Disaster

Declarations

*Through Sept. 28, 2012. Includes Puerto Rico and the District of Columbia.

Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

36

Federal Disasters Declarations by State, 1953 – 2012: Lowest 25 States*

39

39

37

36

36

34

34

29

28

27

26

26

25

24

24

23

23

22

17

17

17

15

14

12

10

9 9

0

10

20

30

40

50

ME SD AK GA WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC UT RI WY

Dis

as

ter

De

cla

rati

on

s

*Through Sept. 28, 2012. Includes Puerto Rico and the District of Columbia.

Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

Over the past nearly 60 years, Utah and Rhode Island had the fewest

number of Federal Disaster Declarations

38

1,1

33

1,1

32 1

,29

7

1,1

73

1,0

82 1,2

34

1,1

73

1,1

48

1,4

24

1,3

45

1,0

71 1,2

16

94

1

1,3

76

1,2

64

1,1

03

1,0

98

1,6

92

1,1

46 1,2

82

1,0

06

1,819

1,6

91

553

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

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

Nu

mb

er

of

To

rna

do

es

0

100

200

300

400

500

600

Nu

mb

er o

f De

ath

s

Number of Tornadoes

Number of Deaths

*Through Oct. 15, 2012.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.html

Number of Tornadoes and Related Deaths, 1990 – 2012*

Tornadoes claimed 553 lives in 2011, the most since 1925

1,006 tornadoes have been recorded so far this year, 68 deaths*

2012 Tornado Losses Got Off to an Ominous Beginning, but Slowed. First Half 2012 Insured Losses from Tornadoes and Thunderstorms Totaled $8.8B.

U.S. Tornado Count, 2005-2012*

39

*Through Oct. 8, 2012.Source: http://www.spc.noaa.gov/wcm/

There were 1,897 tornadoes in the US in 2011 far above

average, but well below 2008’s record

2012 count is running far behind 2011

Location of Tornadoes in the US, 2012*

*Through Oct. 4, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html# 41

998 tornadoes killed 68 people through Oct. 4

Location of Wind Damage Reports in the US, 2012*

45*Through Oct. 4, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html#

Extreme density due to late June derecho

There were 13,643 “Wind Damage” reports through Oct. 4, causing

extensive damage to homes and,

businesses

Severe Weather Reports, 2012*

47*Through Oct. 4, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html#

There were already 21,529 severe weather reports through Oct. 4; including 998 tornadoes;

6,886 “Large Hail” reports

and 13,643 high wind events

50

Financial Impacts of Catastrophes

High Catastrophe Losses Do Impact Industry Financial

Performance, but Generally Without Impairments or

Significant Market Dislocations50

51

ROE: Property/Casualty Insurance Industry, 1987–2012:H1*

* Excludes Mortgage & Financial Guarantee in 2008 – 2012. Sources: ISO; 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:H1

P/C Profitability Is Affected Both by Cyclicality and Ordinary Volatility,

Often Associated with Catastrophes

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

-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

*1

2:

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:H1*

*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:H1 ROAS = 5.9% 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%

10 Years

10 Years9 Years

2011:4.6%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2012:H1: 6.2%

53

P/C Insurance Industry Combined Ratio, 2001–2012:H1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:H1=102.2. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.4

101.1101.0

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:H1

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Lower CAT

Losses

54

Combined Ratios by Predominant Business Segment, 2012:H1 vs. 2011:H1

Source: ISO/PCI; Insurance Information Institute

109.4 109.3

107.3

112.1

101.1 101.5

98.8

103.4

96

98

100

102

104

106

108

110

112

114

All Lines Personal LinesPredominating

Commercial LinesPredominating

Diversified Insurers

2011:H1 2012:H1

(Percent)

The combined ratios for both personal and commercial lines

improved substantially in 2012:H1 due in large part to lower cat losses

Underwriting Gain (Loss)1975–2012:H1*

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

Large Scale Catastrophes Generally Produce Elevated Underwriting Losses

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

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

($ Billions)Underwriting losses in

2012 totaled $7.0B

High cat losses in 2011 led to the highest

underwriting loss since 2002

Andrew

Northridge

Sept. 11

INVESTMENTS: THE NEW REALITY

56

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence

Underwriting & Pricing 56

57

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2012*

*Monthly, through Sept. 2012. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

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

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

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

plunged to all time record lows

57

Property/Casualty Insurance Industry Investment Gain: 1994–2012F1

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$53.4$56.2

$50.8

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

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

Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce Investment Income and Lower Realized Investment Gains; The Financial

Crisis Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2012F figure is III estimate based on annualized actual H1:2012 result of

$25.424B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains in 2012 are running approximately 20% below their pre-crisis peak

61

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2011

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

1

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2011 impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated

Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

62

Reasons for US P/C Insurer Impairments, 1969–2010

3.6%4.0%

8.6%

7.3%

7.8%

7.1%

7.8%13.6%

40.3%

Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.

Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.

Investment and Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems (Overstatement of Assets)

Misc.

Sig. Change in Business

SURPLUS/CAPITAL/CAPACITY

63

The P/C Insurance Industry Is Well Capitalized and Capable of

Absorbing Large CAT Losses— But Pricing Must Reflect Risk

63

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

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

US Policyholder Surplus:1975–2012*

* As of 6/30/12.Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in

non-insurance organizations

($ Billions)

Surplus as of 6/30/12 was $567.8B, close to its record high. The industry’s strong

capital position allows it to absorb large financial shocks from major catastrophes.

65

REINSURANCE MARKET CONDITIONS

Reinsurance Industry Was Able to Absorb Record Global Losses in 2011

and Restore Most Capacity by Late 2012

65

66

Reinsurer Share of Recent Significant Market Losses

Source: Insurance Information Institute from reinsurance share percentages provided in RAA, ABIR and CEA press release, Jan. 13, 2011.

Billions of 2011 Dollars

$0$5

$10$15$20$25$30$35$40

JapanEarthquake/

Tsunami (Mar2011)

New Zealand Earthquake (Feb

2011)

Thailand Floods(Aug - Nov 2011)

Chile Earthquake(Feb. 2010)

AustraliaCyclone/ Floods(Jan-Feb 2011)

Reinsurer SharePrimary Insurer Share

40% Reinsurance share of total insured loss

Reinsurers Paid a High Proportion of Insured Losses Arising from Major Catastrophic Events Around the World in Recent Years

$0.4$4.0

$22.5$9.5

$15.0

$3.5

$37.5

$13.0

$6.0

$10.0

$7.9

$8.3

$2.2$2.8

$5.0

73%60%

95%44%

66

67

Global Property Catastrophe Rate on Line Index, 1990—2012 (as of July 1)

15%

-3%

-13%

-8%

-20% -18% -1

1%

3%

14%

-11%

-6%

-9%

-16%

10%

-12%

-3%

7%

14%

76%

68%

25%

20%

0%

115

141

230

200184

147

121

152

255

233

195

215

184

196

133111

108

237

100

154

173

145

190

-40%

-20%

0%

20%

40%

60%

80%

100%

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

Ye

ar

Ov

er

Ye

ar

% C

ha

ng

e in

RO

L

0

50

100

150

200

250

300

Cu

mu

lativ

e R

ate

on

Lin

e (1

99

0=

10

0)

Year Over Year % Change

Cumulative Rate on Line Index

Sources: Guy Carpenter; Insurance Information Institute.

Property-Cat reinsurance pricing is up about 7% as of

7/1/12 but much more over the past 7-12 years—a cost that

must be reflected in LPI rates

Source: Guy Carpenter, GC Capital Ideas.com, February 28, 2012.

Historical Capital Levels of Guy Carpenter Reinsurance Composite, 1998—3Q11

68

Most excess reinsurance capacity was

removed from the market in 2011, but capacity bounced

back in 2012

PRICE IMPACTS

69

Escalating CAT Losses Must Be Reflected in the Rate

69

70

-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

Net Premium Growth: Annual Change, 1971—2012:H1

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

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

Net Written Premiums Fell 0.7% in 2007 (First Decline

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

2012:H1 growth

was +3.6%

71

Change in Commercial Rate Renewals, by Line: 2012:Q2

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

Percentage Change (%)

4.7%5.1%

7.2%

8.3%

0.6%

3.0%3.8% 3.9% 4.1% 4.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Su

rety

Co

mm

l Au

to

Um

bre

lla

Bu

sin

ess

Inte

rru

ptio

n

Ge

ne

ral

Lia

bili

ty

EP

L

D&

O

Co

nst

ruct

ion

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

High CAT losses are driving commercial property insurance premiums higher

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72