Overview & Outlook for Commercial P/C Insurance:

An Industry at the Crossroads

Insurance Information InstituteFebruary 1, 2012

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

3

What in the World Is Going On?

Is the World Becoming a Riskier Place?

What Are the Implications for Insurance and Risk Management?

4

We Are Living in an Age of Elevated Global Economic UncertaintyECONOMIC & POLITICAL CONCERNS European Sovereign Debt, Bank & Currency Crises Global Economic Slowdown Echoes of the Financial Crisis & Financial Market Volatility Collapse of Major Financial Institutions U.S. Debt and Budget Crisis, S&P Downgrade & Tax Uncertainty Housing Crisis Persistently High Unemployment Inflation/Deflation Energy & Commodity Prices Volatility Political Upheaval in the Middle East (Arab Spring, Iran) Regulation & Regulatory Uncertainty New World Order: China’s Economic and Military Ascendency 2012 US Elections & Political BrinksmanshipCATASTROPHIC LOSS Japan, New Zealand, Chile, Haiti Earthquakes Nuclear Fears (Japan, Germany, US) Floods (Thailand, US) U.S.: Tornadoes, Flooding, Wildfires, Hurricanes, Winter Storms Manmade Disasters (e.g., Deepwater Horizon) Cyber Attacks Resurgent Terrorism Risk (Bin Laden, Gadhafi, Kim Jong Il deaths)

Are “Black Swans”

everywhere or does it just seem that way?

109.4110.2

118.8

109.5

112.5

110.2

107.6

104.1

109.7 110.2

102.5

105.4

91.2

93.7

104.1

98.9

102.7

108.2

102.0

111.1112.3

122.3

$7

.30

$6

.49

$1

3.9

1

$1

3.1

5

$1

1.9

4

$1

1.5

5

$1

0.6

8

$1

0.3

5

$1

0.0

2

10

.25

$1

1.9

5

$8

.30

$1

3.5

0

$8

.42

$4

.83

$5

.20

$5

.71

$5

.25

$5

.70

$7

.70

$6

.40

$6

.10

90

95

100

105

110

115

120

125

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

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

$0

$2

$4

$6

$8

$10

$12

$14

Co

st

of

Ris

k/$

10

00

Re

ve

nu

e

CommercialCombined RatioCost of Risk

*Insurance Information Institute cost of risk estimate for 2011.Source: 2011 RIMS Benchmark Survey; A.M. Best; Insurance Information Institute

Cost of Risk vs. Commercial Lines Combined Ratio

The cost of risk cannot continue to fall as actual

results deteriorate

8

P/C Insurance Industry Financial Overview

Profit Recovery Was Set Back in 2011 by High Catastrophe

Loss & Other Factors

P/C Net Income After Taxes1991–2011:Q3 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

4,6

70

$7

,97

9

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$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*

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 5.6% 2011:Q3 ROAS1 = 1.9%

P-C Industry 2011:Q3 profits were down 71% to $8.0B vs. 2010:Q3,

due primarily to high catastrophe losses and as non-cat

underwriting results deteriorated

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for 2011:Q3, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

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

Combined Ratio / ROE

* 2008 -2011 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011:Q3 combined ratio including M&FG insurers is 109.9, ROAS = 1.9%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.099.3

100.8

108.2

95.7

3.0%

7.5%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:Q3*0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

A combined ratio of about 100 generated ~5.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

-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

*

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011*

*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS through Q3 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 1.9% 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

2011:3.0%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

12

ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2011:Q3*

* Excludes Mortgage & Financial Guarantee in 2008 - 2011.Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11:Q3

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

13

ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2011*

* Return on average surplus used as proxy for ROE in 2008-2011 and excluding mortgage and financial guaranty insurers for these years. Change in model methodology in 2011 increased cost of capital by approximately 90 basis points.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

.2 p

ts +1

.7 p

ts

+2

.3 p

ts

-9.0

pts

-6.4

pts

-3.2

pts

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 from 1991 to 2002, but on Target or Better

2003-07, Fell Short in 2008-2010

The Cost of Capital is the Rate of Return Insurers Need to

Attract and Retain Capital to the Business

(Percent)

-2.9

pts

-8.9

pts

Global Catastrophe Loss Developments and Trends

15

2011 Will Rewrite Catastrophe Loss and Insurance History

But Will Losses Turn the Market?

16

Global Catastrophe Loss Summary: 2011

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.

17Source: MR NatCatSERVICE

Natural Loss Events, 2011

World Map

23

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.

$10.0$11.9 $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)

ThailandFloods(2011)

Wilma(2005)

NewZealandQuake(2011)

Ike (2008)

Northridge(1994)

SpringTornadoes/

Storms(2011)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and

thunderstorm season would likely become the 5th

costliest event in global insurance history

5 of the top 14 most expensive

catastrophes in world history have occurred within the past 2 years

26

U.S. Insured Catastrophe Loss Update

2011 Was One of the Most Expensive Years on Record

27

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

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 – 2011Number of Events (Annual Totals 1980 – 2011)

Source: MR NatCatSERVICE 28

37

8

51

2

50

100

150

200

250

300

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

There were 117 natural disaster events in 2011

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

29

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)

31

$1

2.3

$1

0.7

$3

.7 $1

4.0

$1

1.3

$6

.0

$3

3.9

$7

.4 $1

5.9 $

32

.9

$7

1.7

$1

0.3

$7

.3

$2

8.5

$1

1.2

$1

4.1

$3

2.6

$1

00

.0

$1

3.7

$4

.7

$7

.8

$3

6.9

$8

.6

$2

5.8

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??

US Insured Catastrophe Losses

*PCS estimate through Sept. 30, 2011.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

$100 Billion CAT Year is Coming Eventually

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2011 Dollars)

$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

Includes $1.65B in AL, mostly in the Tuscaloosa

and Birmingham

areas

Includes approximately $2B in losses

for May 22 Joplin tornado

34

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

9.0

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: 6.70*

Combined Ratio Points

U.S. Thunderstorm Loss Trends, 1980 – 2011

35Source: Property Claims Service, MR NatCatSERVICE

Average thunderstorm

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

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss. 2008-2011 are the most expensive

years on record.

Thunderstorm losses in 2011 totaled a record

$25.8 billion

Source: Property Claims Service, MR NatCatSERVICE

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

36

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

since the early 1980s

Source: National Forest Service, MR NatCatSERVICE

U.S. Acreage Burned by Wildfires, 1980 – 2011

37

8.3 millions acres were burned by wildfires in 2011, one of the worst years on record, causing

$855 in insured losses

39

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

41

2011: Nowhere to Run, Nowhere to Hide

Most of the Country East of the Rockies Suffered Severe Weather in 2011, Impacting

Most Insurers

Number of Federal Disaster Declarations, 1953-2011*

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 25

42

23

15

24

21

34

27 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

9

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

*

*Through December 31, 2011.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011

The number of federal disaster declarations set a

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

declarations.

There have been 2,049 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.

43

Federal Disasters Declarations by State, 1953 – 2011: Highest 25 States*

86

78

70

65 63

58

55 55 53 53 51 50 50 48 48 47 47 47 46 45 45 44 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 MS TN IA MN KS NE PA WV OH VA WV ND NC IN

Dis

aste

r Dec

lara

tions

*Through Dec. 31, 2011.

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

Over the past nearly 60 years,

Texas has had the highest number of Federal Disaster

Declarations

44

Federal Disasters Declarations by State, 1953 – 2011: Lowest 25 States*

39 39

36 36 35

33 33

28 27 26 26 25 25 24 24 23 22

20

17 17 16 15 14

11

9 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 RI UT WY

Dis

aste

r Dec

lara

tions

*Through Dec. 31. 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, Wyoming, Utah and Rhode Island had the fewest number of

Federal Disaster Declarations

45

SPRING 2011 TORNADO & SEVERE STORM OUTBREAK

2011 Losses Are Putting Pressure on US P/C Insurance and Reinsurance Markets

46

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

56 1,2

82

1,819 1,8

94

552

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 11P

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

Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.

Number of Tornadoes and Related Deaths, 1990 – 2011

Tornadoes claimed more than 550 lives in 2011, the most since 1925

There were 1,884 tornadoes recorded

in the US in 2011

Insurers Expect to Pay at Least $2 Billion Each for the April 2011 Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin

Insurers Making a Difference in Impacted Communities

Source: Insurance Information Institute 48

Destroyed home in Tuscaloosa. Insurers will pay some 165,000

claims totaling $2 billion in the Tuscaloosa/

Birmingham areas alone.

Presentation of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm

Recovery Fund

Location of Tornadoes in the US, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 49

1,894 tornadoes killed 552 people in 2011, including

at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in

Joplin on May 22

Location of Large Hail Reports in the US, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 50

There were 9,417 “Large Hail”

reports in 2011, causing extensive damage to homes,

businesses and vehicles

Location of Wind Damage Reports in the US, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 51

There were 18,685 “Wind Damage” reports through Dec. 27, causing

extensive damage to homes and,

businesses

Severe Weather Reports, 2011

52Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

There were 29,996 severe

weather reports in 2011;

including 1,894 tornadoes;

9,417 “Large Hail” reports

and 18,685 high wind events

The BIG Question:When Will the Market Turn?

54

Are Catastrophes and Other Factors Pressuring Insurance Markets?

55

Criteria Necessary for a “Market Turn”:All Four Criteria Must Be Met

Criteria Status Comments

Sustained Period of

Large Underwriting

LossesEarly Stage,

Inevitable

•Apart from 2011 CAT losses, overall p/c underwriting losses remain modest•Combined ratios (ex-CATs) still in low 100s (vs. 110+ at onset of last hard market)•Prior-year reserve releases continue to reduce u/w losses, boost ROEs, though more modestly

Material Decline in Surplus/ Capacity

Entered 2011 At Record

High; Since Fallen

•Surplus hit a record $565B as of 3/31/11•Fell by 4.6% through 9/30/11 (latest available)•Little excess capacity remains in reinsurance markets•Weak growth in demand for insurance is insufficient to absorb much excess capacity

Tight Reinsurance

MarketSomewhat in

Place

•Much of the global “excess capacity” was eroded by cats•Higher prices in Asia/Pacific•Modestly higher pricing for US risks

Renewed Underwriting

& Pricing Discipline

Some Firming esp. in

Property, WC

•Commercial lines pricing trends have turned from negative to flat or up in some lines (property, WC); Casualty is flat.•Competition remains intense as many seek to maintain market share

Sources: Barclays Capital; Insurance Information Institute.

1. UNDERWRITING

57

Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?

58

P/C Insurance Industry Combined Ratio, 2001–2011:Q3*

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9 Sources: A.M. Best, ISO.

95.7

99.3100.8

108.2

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

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

Cyclical Deterioration

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

Underwriting Gain (Loss)1975–2011*

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

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011*

Cumulative underwriting deficit from 1975 through

2010 is $455B

($ Billions)Underwriting losses in

2011 at $34.9

through Q3 will be

largest since 2001

60

Number of Years with Underwriting Profits by Decade, 1920s–2010s

0 0

3

0

54

8

10

76

0

2

4

6

8

10

12

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**

* 2009 combined ratio excl. mort. and finl. guar.anty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit.**Data for the 2010s includes 2010 and 2011.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Number of Years with Underwriting Profits

Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –

But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

61

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

11

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2011E

Reserve Releases Are Remained Strong in 2010 But Taper Off in 2011

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: Barclay’s Capital; A.M. Best.

Prior year reserve releases totaled $8.8

billion in the first half of 2010, up from

$7.1 billion in the first half of 2009

P/C Estimated Loss Reserve Deficiency/ (Redundancy), Excl. Statutory Discount

Line of Business 12/31/09 12/31/10

Personal Auto Liability -$2.5B -$1.3B

Homeowners -$0.3 $1.2

Other Liab (incl. Prod Liab) $3.4 $3.7

Workers Compensation $1.8 $4.4

Commercial Multi Peril $0.9 $2.9

Commercial Auto Liability -$0.6 -$0.1

Medical Malpractice -$5.2 -$4.2

Reinsurance—Nonprop Assumed $2.6 $3.6

All Other Lines -$2.5 -$1.2

Total Core Reserves -$1.9 +$9.4

Asbestos & Environmental $13.7 $9.9

Total P/C Industry $11.8B $19.3B

Source: A.M. Best as of January 2012; Insurance Information Institute.

Financial Strength & Underwriting

63

Cyclical Pattern is P-C Impairment History is Directly Tied to

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–20118

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15 16 1

9 21

28

5

0

10

20

30

40

50

60

70

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

Source: A.M. Best Special Report “1969-2011 Impairment Review,” January 23, 2012; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

3 small insurers in Missouri did encounter

problems in 2011 following the May

tornado in Joplin. They were absorbed by a

larger insurer and all claims were paid.

66

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

67

Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010

2.0%4.4%

4.8%

6.5%

6.9%

7.7%

8.1%

10.9%

22.2%

26.6%

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

Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade

Workers Comp

Financial Guaranty

Pvt. Passenger Auto

Homeowners

Commercial Multiperil

Commercial Auto Liability

Other Liability

Med Mal

SuretyTitle

68

Number of Recessions Endured by P/C Insurers, by Number of Years in Operation

32

27

20

13

8

0

5

10

15

20

25

30

35

1-50 51-75 76-100 101-125 126-150

Sources: Insurance Information Institute research from National Bureau of Economic Research data.

Number of Recessions Since 1860

Many US Insurers Are Close to a Century Old or Older

Number of Years in Operation

Insurers are true survivors—not just of natural catastrophes but also economic ones

69

Performance by Segment:Commercial Lines

70

A.M. Best Commercial Lines Outlook: Negative (as of January 2012)

Underwriting Margins PressuredWill recent rate increases hold?

Loss Reserve Redundancies FadeHistorically Low Investment Yields

OFFSETTING FACTORSCapitalization Still SolidEmergence of Sophisticated Price Monitoring

and Underwriting Tools

109.4110.2

118.8

109.5

112.5

110.2

107.6

104.1

109.7 110.2

102.5

105.4

91.2

93.7

104.1

98.9

102.7

108.2

103.9

102.0

111.1112.3

122.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

P

12

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

Source: A.M. Best; Insurance Information Institute

Commercial Lines Combined Ratio, 1990-2012F

Commercial lines underwriting

performance in 2011 was the worst since 2002

Workers Compensation Combined Ratio: 1994–2011P

10

2.0

97

.0 10

0.0

10

1.0

11

0.9

11

0.0

10

7.0

10

2.7

98

.4

10

3.6

10

4.4 1

10

.6 11

6.8

11

8.012

1.7

10

7.0

11

5.3

11

8.2

80

85

90

95

100

105

110

115

120

125

130

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

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They

Have Been in a DecadeSources: A.M. Best (1994-2010); Insurance Information Institute (2011P).

Workers Compensation Operating Environment

77

The Weak Economy and Soft Market Have Made the Workers Comp Operating

Increasingly Challenging

$8

.2

$8

.9

$9

.4

$1

0.1

$1

1.1

$1

2.0

$1

3.3

$1

4.2

$1

6.2

$1

7.6

$1

8.9

$2

0.0

$2

1.8

$2

3.1

$2

4.5

$2

5.7

$2

7.1

$2

7.7

$8

.4

$8

.2

$5

$10

$15

$20

$25

$30

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

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002-2009: +6.6%

Accident Year

MedicalClaim Cost ($000s)

2010p: Preliminary based on data valued as of 12/31/20101991-2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies

Cumulative Change = 238%(1991-2010p)

Workers Comp Medical Claim Costs Continue to Rise

+2.0%+5.4%

+5.0%+6.1%

+6.1%+9.1%

+5.4%+7.7%

+8.8%+13.5%

+7.3%+10.6%

+8.3%+10.1%

+7.4%+5.1%+9.0%

-2.1%+1.3%+6.8%

Average Medical Cost per Lost-Time Claim

Does smaller pace of increase suggest that small

med-only claims are becoming lost-time claims?

$1

0.0

$9

.7

$9

.4

$9

.9

$1

0.1

$1

0.7

$1

1.5

$1

2.5

$1

3.8

$1

5.2

$1

6.6

$1

7.1

$1

7.9

$2

2.8

$2

3.0

$2

2.3

$2

0.8

$1

9.9

$1

8.2

$1

8.8

+5.9%

+1.0%-3.1%-2.8%+4.9%+1.7%+5.9%

+7.7%+9.0%

+10.1%

+10.1%

+9.2%+3.1%+4.6%+1.6%

+3.4%+5.6%

5

7

9

11

13

15

17

19

21

23

25

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p

IndemnityClaim Cost ($ 000s)

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2009:+4.1%

2010p: Preliminary based on data valued as of 12/31/20101991–2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies

Accident Year

-3%

Workers Comp Indemnity Claim Costs Decline in 2010

+8.2%+0.8%

Claiming behavior has changed significantly. Large numbers of lost time,

low severity claims have entered the system—claims that previously were medical only, driving down average

indemnity costs per claim.

Average Indemnity Cost per Lost-Time Claim

Workers Compensation Premium Continues Its Sharp DeclineNet Written Premium

$ Billions

Calendar Yearp Preliminary

Source: 1990–2009 Private Carriers, Best's Aggregates & Averages; 2010p, NCCI1996–2010p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

81

Nonfarm Payroll (Wages & Salaries):Quarterly, 2005–2011:Q3

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

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,75020

05-0

1-01

2005

-04-

01

2005

-07-

01

2005

-10-

01

2006

-01-

01

2006

-04-

01

2006

-07-

01

2006

-10-

01

2007

-01-

01

2007

-04-

01

2007

-07-

01

2007

-10-

01

2008

-01-

01

2008

-04-

01

2008

-07-

01

2008

-10-

01

2009

-01-

01

2009

-04-

01

2009

-07-

01

2009

-10-

01

2010

-01-

01

2010

-04-

01

2010

-07-

01

2008

-10-

01

2009

-01-

01

2009

-04-

01

2009

-07-

01

Peak was 2008:Q1 at $6.60 trillion.

Latest (2011:Q3) was $6.64 trillion,

a new peak

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

5% from prior peak.

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

$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

82

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 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.

Resumption of payroll growth and rate increases suggests WC NWP will grow again in 2012

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

$Billions $Billions

WC premium volume dropped two years before

the recession began

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

$33.8B in 2010 after peaking at $47.8B

in 2005

Workers Comp Rate Changes,2008:Q4 – 2011:Q4

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

-5.5%-4.6%

-4.0%-4.6%

-3.7% -3.9%

-5.4%

-3.7% -3.4%

-1.6%

2.6%

4.1%

7.5%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

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

The Q4 2011 WC rate change was the largest

among all major commercial lines

(Percent Change)

84

Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*

34

.4

23

.1

14

.2

10

.2

9.0

4.6

1.4

-3.7

-7.3

-9.3

-10

.0

-10

.3

-10

.9

-10

.9

-13

.0

-14

.7

-15

.3

-15

.9

-16

.9

-17

.8

-19

.8

-21

.4

-21

.7

-35-30-25-20-15-10-505

10152025303540

OK

MT ID LA

SD IA KS

NY WI

PA

MS IL

NM NJ

NE

MD

NC AL

CT VA

SC

AR

MN

Pe

ce

nt

ch

an

ge

(%

)

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Only 7 (small) states showed growth in workers

comp premium volume between 2005 and 2010

85

Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*

-22

.6

-23

.7

-24

.2

-25

.0

-25

.2

-25

.2

-25

.3

-26

.8

-26

.9

-28

.1

-28

.3

-28

.7

-29

.0

-30

.1

-32

.5

-32

.6

-33

.8

-34

.7

-36

.1

-42

.7

-45

.4

-50

.7

-51

.2

-57

.7

-70

-60

-50

-40

-30

-20

-10

0

AZ

ME

GA

KY IN NH

OR

DC

MA

TN VT

US

TX

AK

MO MI

UT RI

CO

DE

NV HI

CA

FL

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

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

the past 5 years

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.

Sources: SNL Financial LC.; Insurance Information Institute.

Workers Comp DPW plunged 28.7% from

between 2005 and 2010

Average Approved BureauRates/Loss Costs

12.1

7.4

10.0

2.9

-6.4

-3.2

-6.0

-8.0

-5.4

-2.6

3.5

1.2

4.9

6.6

-6.0-5.1

-5.7-6.6

-3.1-2.0

-1.1

0.2

-10

-5

0

5

10

15

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

Percent

Calendar Year* States approved through 4/23/2010Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating organization

Cumulative1990–1993

+36.3%

Cumulative 2000–2003

+17.1%

Cumulative 2004–2011

-26.2%

Cumulative 1994–1999

-27.8%

*States approved through 4/8/11.Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.

History of Average WC Bureau Rate/Loss Cost Level Changes

2. SURPLUS/CAPITAL/CAPACITY

92

Have Large Global Losses Reduced Capacity in the Industry, Setting

the Stage for a Market Turn?

94

Policyholder Surplus, 2006:Q4–2011:Q3

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$556.9 $559.1

$538.6

$564.7

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

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

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2011:Q1 Peak

11:Q2: -$5.6B (-1.0%)

11:Q3: -$26.1B (-4.6%)

Surplus as of 9/30/11 was down 4.6% below its all

time record high of $564.7B set as of 3/31/11. Further

declines are possible.

*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.

The Industry now has $1 of surplus for every $0.83 of NPW, close to the strongest claims-

paying status in its history.

Implied Excess (Deficit) Capital Assuming Premium/Surplus Ratio = 0.9:1

Excess/(Deficit) Capital (Policyholder Surplus)

($10.6)

($65.4)

($124.6)

($103.0)

($76.5)

($10.8)

$22.9$42.6

($49.2)

$41.7

$81.9

($32.7)

-1.5%

8.2%

13.4%

-5.1%

-8.8%

21.6%

14.4%

6.2%

-12.0%

12.3%8.9%

-4.6%

-150

-100

-50

0

50

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Capital Excess (Deficit) Annual Change in CapitalRecord Policyholder Surplus (Capital) Resulted in Significant Excess Capital in the P/C

Insurance Sector in 2010. Deteriorating Underwriting Losses, Higher CAT Activity, More Modest Market Returns Shrank Excess Capital in 2011 by Nearly Half.

Annual Change in Policyholder Surplus

2000-2002: Tech bubble bursts,

9/11, high underwriting losses erode capital base

2005: Katrina, Rita, Wilma produce record CAT losses

2006/07: Low CAT losses, strong underwriting results since 1940s

increase capital

2008: Financial crisis causes sharp drop in

capital

2009-10: End of financial crisis,

rising asset prices. modest

u/w losses push capital to record levels

Note: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has $74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1.Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written

High cats, u/w losses push capital down

96

$1

2,1

30

.5

$3

9,5

07

.0

$1

8,1

42

.5

$1

0,6

46

.5

$9

84

.0

$4

18

.7

$2

2,0

29

.6

$5

86

.3

$1

0,3

89

.9

$4

,75

7.7

$1

7,3

46

.9

$1

6,1

14

.4

$5

,55

2.5

$6

,97

4.1

$8

,86

9.7

74

87

66

48 47

24

53

69

51

5656

5552

42

40

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

(Va

lue

of

De

als

$ M

ill)

0

10

20

30

40

50

60

70

80

90

100

Nu

mb

er o

f De

als

Value of Deals $ Mill)

Number of Deals

*2011 data are through December 1.Source: SNL Securities; Insurance Information Institute.

M&A Activity in the US P/C Insurance Industry, 1997-2011*

P/C M&A activity in 2011 is up 60% since 2008, its highest level (in $ terms) since 2008

M&A Activity in the P/C Insurance Industry Remains Well Below its 1990s Peak

98

Paid-in Capital, 2005–2011:Q3

Source: ISO; Insurance Information Institute.

($ Billions)

$14.4

$3.8 $3.2

$12.3$1.5$4.9$6.6

$22.5

$0

$5

$10

$15

$20

$25

$30

2005 2006 2007 2008 2009 2010 2011:Q3

Paid-in capital for insurance operations rose by $27.4B in 2010, the largest on record

dating back to 1959

In 2010 One Insurer’s Paid-in Capital Rose by $22.5Bas Part of an Investment in a Non-insurance Business

$27.4

Virtually no new capital entered the industry in

2011

101

2.1

1.9

2.7

2.5

2.3

1.8

1.7

1.7

1.9

1.9

1.9

1.9

1.7

1.6

1.6

1.4

1.4

1.3

1.3

1.1

1.1

0.9

0.8

3

1.1

30

.94

0.8

60

.84

1.2

91

.17

1.0

70

.99

0.8

40

.91

0.7

60.9

50

.82

1.6

2.0

2.52.5

1.8

2.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98 0

02

04

06

08

10

The Premium-to-Surplus Ratio in 2011:Q3 Implies that P/C Insurers Held $1 in Surplus Against Each $0.83 Written in Premiums. In 1974, Each $1

of Surplus Backed $2.70 in Premium.*2011 data are as of 9/30/11.Sources: Insurance Information Institute calculations from A.M. Best data.

Ratio of Net Premiums Writtento Policyholder Surplus, 1970-2011*

The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.76:1 in 2010. It has decreased as PHS grows

more quickly than NPW, with the effect of holding down profitability.

Record High P-S Ratio was 2.7:1

in 1974

Record Low P-S Ratio was 0.76:1 as of 12/31/10, rising

slightly to 0.83:1 as of 9/30/11

102

3. REINSURANCE MARKET CONDITIONS

Record Global Catastrophes Activity is

Pressuring Pricing

104

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%

Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011.

Global Property Catastrophe Rate on Line Index, 1990-2011 YTD (6/1/11)

A modest increase in global property catastrophe reinsurance pricing was evident in June 1 renewals in

the wake of record global catastrophe losses.

Jan. 1, 2012 renewals were up modestly (+10%) in the US but higher in CAT-impacted areas.

Source: Guy Carpenter, GC Capital Ideas.com, November 23, 2011.

Historical Capital Levels of Guy Carpenter Reinsurance Composite, 1998—2Q11

Most excess reinsurance capacity was removed from the market in 2011, but there does not

appear to be a shortage, leading relatively flat 2012

reinsurance renewals except in areas hit

hard by CATs.

4. RENEWED PRICING DISCIPLINE

108

Is There Evidence of a Broad and Sustained Shift in Pricing?

109

-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

Soft Market Persisted into Early 2011 but Growth Returned: More in 2012?

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

*2011 and 2012 figures are A.M. Best EstimatesShaded 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.

NWP was up 4.1% (est.) in

20112012

expected growth is

4.2%

110

P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter

Sources: ISO, Insurance Information Institute.

Finally! Back-to-back quarters of net written premium growth(vs. the same quarter, prior year)

10.2

%15

.1%

16.8

%16

.7%

12.5

%10

.1%

9.7%

7.8%

7.2%

5.6%

2.9%

5.5%

-4.6

%-4

.1%

-5.8

%-1

.6%

10.3

%10

.2% 13

.4%

6.6%

-1.6

%2.

1%0.

0%-1

.9%

0.5%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

1.3% 2.

3%1.

3%3.

5%1.

6%4.

1%

-10%

-5%

0%

5%

10%

15%

20%

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

2011

:Q2

2011

:Q3

Through 2011:Q3, growth in personal lines

predominating cos. (+3.1%) and commercial lines predominating cos.

(+3.9%), diversified (+2.3%)

111

Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2011)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

% -8.2

%-4

.6% -2

.7%

-3.0

%-5

.3%

-9.6

%-1

1.3

%-1

1.8

%-1

3.3

%-1

2.0

%-1

3.5

%-1

2.9

% -11

.0%

-6.4

% -5.1

%-4

.9%

-5.8

%-5

.6%

-5.3

%-6

.4% -5.2

%-5

.4%

-2.9

%

2.8

%

-0.1

% 0.9

%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

Source: Council of Insurance Agents & Brokers (1Q04-4Q11); Insurance Information Institute

KRW Effect

Pricing as of Q3:2011 was positive for the first time

since 2003. Slightly stronger gains in Q4.

(Percent)

Q2 2011 marked the 30th consecutive quarter of price

declines

112

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q4

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

Percentage Change (%)

KRW Effect: No Lasting Impact

Pricing turned positive (+0.9%) in Q3:2011, the first increase in

nearly 8 years; Q4:2011 renewals were up 2.8%

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

113

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q4

1999:Q4 = 100

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

Despite Q4:2011 gain of 2.8%, pricing today is

where is was in late 2000 (pre-9/11)

Upward pricing pressure is small for large accounts, 1.8% in

Q4:2011, vs. 3.1% for small accounts and

3.5% for medium accounts

115

Change in Commercial Rate Renewals, by Line: 2011:Q4

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

Major Commercial Lines Renewed Uniformly Upward in Q4:2011 for Only the Second Time Since 2003; Property Lines

& Workers Comp Leading the Way

Percentage Change (%)

2.7% 3.0%

5.7%

7.5%

0.8%

2.0% 2.0% 2.1% 2.2% 2.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Su

rety

EP

L

Co

mm

l Au

to

D&

O

Ge

ne

ral

Lia

bili

ty

Um

bre

lla

Co

nst

ruct

ion

Bu

s.In

terr

up

tion

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

Property lines are showing larger increases than

casualty lines, with the exception of workers

compensation

118

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

44

.8

25

.4

19

.8

17

.3

16

.6

14

.2

13

.9

12

.4

12

.3

11

.9

9.1

8.1

8.1

7.1

6.8

5.4

5.2

4.7

3.8

3.7

3.1

3.0

1.5

1.2

1.1

0

5

10

15

20

25

30

35

40

45

ND

SD LA

WY

OK

WV

KS IA TX

MT

NE

DE

MS

NM SC

DC

UT

AR

NC ID WA

AL

WI

AK

TN

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

119

0.7

0.6

0.1

-0.1

-0.3

-0.5

-0.8

-1.4

-1.6

-1.7

-2.5

-2.8

-2.9

-3.4

-3.6

-4.1

-4.5

-4.7

-4.8

-5.7

-5.8

-8

-8.2

-8.3

-13

.5

-14

.2

-15

.5

-20

-15

-10

-5

0

5M

D

MO

KY IN NY

GA

MN

VA

US

PA

OR FL IL CT

VT

OH RI

CO

NJ HI

ME

NH

MA

AZ

NV MI

CA

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC; Insurance Information Institute.

Bottom 25 States

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

the past 5 years

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

US Direct Premiums Written declined by 1.6% between 2005

and 2010

INVESTMENTS: THE NEW REALITY

121

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting or Cyclicality?

Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q31

$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

$52.9

$42.0

$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:Q3

Investment Gains through Q3:2011 Were Surprisingly Robust. Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains;

The Financial Crisis Caused Investment Gains to Fall by 50% in 2008

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

($ Billions)

Investment gains through Q3:2011 were $2.1B above the

same period in 2010—a surprise given falling rates

and flat stock markets

123

P/C Insurer Net Realized Capital Gains/Losses, 1990-2011:3Q

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

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

98

-$5.

70

$5.5

0

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011:Q3

Insurers Are Posting Net Realized Capital Gains in 2011 for the First Time Since 2007. Realized Capital Losses Were the Primary Cause

of 2008/2009’s Large Drop in Profits and ROE

($ Billions)$11.2B positive swing

126

Treasury Yield Curves: Pre-Crisis (July 2007) vs. Dec. 2011

0.00% 0.01% 0.05% 0.12% 0.26%

1.43%

1.98%

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

0.89%

0.39%

2.98%2.67%

0%

1%

2%

3%

4%

5%

6%

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

November 2011 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve remains near its most depressed level

in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2014.

The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through 2013 and Possibly into 2014

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

127

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

Warra

nty

Surplu

s Line

s

Med

Mal

WC

Reinsu

rance

**

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

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

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

Shifting Legal Liability & Tort Environment

128

Is the Tort PendulumSwinging Against Insurers?

129

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

$0

$50

$100

$150

$200

$250

$300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

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

Tort costs in dollar terms have remained high but relatively stable

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

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

130

Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010

Billions of Dollars

$0

$20

$40

$60

$80

$100

$120

$140

$160

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

Self (Un) Insured ShareInsurer Share

Tort Costs and the Share Retained by Risks Both Grew Rapidly from the mid-1970s to mid-2000s, When Tort Costs Began to Fall But Self-

Insurance Shares Continued to Rise

$9.5

$15.0

$6.0

1973: Commercial Tort Costs

Totaled $6.49B, 94% was insured,

6% self-(un)insured

1985: $46.6B 74.5% insured,

25.5% self-(un)insured

1995: $83.6B 69.5% insured,

30.5% self-(un)insured

2005: $143.5B 66.4% insured,

33.6% self-(un)insured

2009: $126.5B 64.4% insured,

35.6% self-(un)insured

Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4.

131

Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010

Percent

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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

Self (Un) Insured ShareInsurer Share

The Share of Tort Costs Retained by Risks Has Been Steadily Increasing for Nearly 40 Years. This Trend Contributes Has Left

Insurers With Less Control Over Pricing.

1973: 94% was insured,

6% self-(un)insured

1985:74.5% insured,

25.5% self-(un)insured

1995: 69.5% insured,

30.5% self-(un)insured

2005: 66.4% insured,

33.6% self-(un)insured

2010: $138.1B 56.6% insured, 44.4% self-(un)insured

(distorted by Deepwater Horizon event with most losses retained by BP)

Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4.

133

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

NevadaClark County

Watch List

Madison County, IL Atlantic County, NJ St. Landry Parish,

LA District of Columbia NYC and Albany,

NY St. Clair County, ILDishonorable

Mention

MI Supreme Court City of St. Louis CO Supreme Court

CaliforniaLos Angeles

and Humboldt Counties

Philadelphia

Inflation

136

Is it a Threat to Claim Cost Severities

137

Annual Inflation Rates, (CPI-U, %),1990–2017F

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.6

3.2

2.1 2.12.4 2.4 2.4 2.5

2.92.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 and 1/12 (forecasts).

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

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

Annual Inflation Rates (%)

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

commodity bubble reduced inflationary pressures in 2009/10

Higher energy, commodity and food

prices pushed up inflation in 2011, but

not longer turn inflationary

expectations.

P/C Personal Insurance Claim Cost Drivers Grow Faster Than the Core CPI Suggests

Sources: Bureau of Labor Statistics; Insurance Information Institute.

3.2%

1.7%

6.8%

5.1%

4.2%

3.0% 3.2%

5.0%

7.1%

0%

2%

4%

6%

8%

Overall CPI "Core" CPI InpatientHospitalServices

OutpatientHospitalServices

PrescriptionDrugs

Medical CareCommodities

LegalServices

Motor VehicleParts &

Equipment

ResidentialMaint. &Repair

Price Level Change, 2011 vs. 2010

Healthcare costs are a major liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least

138

Excludes Food and Energy

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

150

Growth Would Also Help Absorb Excess Capital

151

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 1/12; 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

% 3.1

%2

.0%

2.3

%2

.3%

2.7

%2

.6%

2.7

%2

.8%

3.0

%4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

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 Economic Conditions, 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 of credit crunch, housing

slump, labor market contraction has been

severe but modest recovery is underway

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

2011 got off to a sluggish start, but growth is

expected to proceed at a modest pace in 2012-2013

153

(Millions of Units)

New Private Housing Starts, 1990-2022F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

0 0.7

1 0.8

7

1.3

4

1.2

3

1.3

2

1.3

81

.42

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11F12F13F14F15F16F17F 18-22F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 1/12); Insurance Information Institute.

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

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

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

is holding back payroll exposure growth

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Jun 0

1

Sep 0

1

Dec 0

1

Mar

02

Jun 0

2

Sep 0

2

Dec 0

2

Mar

03

Jun 0

3

Sep 0

3

Dec 0

3

Mar

04

Jun 0

4

Sep 0

4

Dec 0

4

Mar

05

Jun 0

5

Sep 0

5

Dec 0

5

Mar

06

Jun 0

6

Sep 0

6

Dec 0

6

Mar

07

Jun 0

7

Sep 0

7

Dec 0

7

Mar

08

Jun 0

8

Sep 0

8

Dec 0

8

Mar

09

Jun 0

9

Sep 0

9

Dec 0

9

Mar

10

Jun 1

0

Sep 1

0

Dec 1

0

Mar

11

Jun 1

1

Sep 1

1

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 155

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 77.8% of industrial capacity in

Nov. 2011, above the June 2009 low of 68.3% and a

post-crisis high

December 2007-June 2009 Recession

156

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan 1992-Nov 2011

*seasonally adjusted Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, November 2011, Jan. 4, 2012

Monthly shipments are nearly back to peak (in July 2008, 6 months into the recession). Trough in May 2009. Growth from trough to November 2011 was 27.8%

$ Millions

The value of Manufacturing Shipments in Nov. 2011 is up 27.8% to $455B from its May 2009 trough. Nov. figure is only 6.2% below its

previous record high.

58

.3

57

.1

60

.4

59

.6

57

.8

55

.3

55

.1

55

.2

55

.3 56

.9 58

.2

58

.5 60

.8

61

.4

61

.2

60

.4

53

.5 55

.3

50

.9

50

.6 51

.6

50

.8 52

.7 53

.9

54

.5

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through January 2012

The manufacturing sector has been expanding and adding jobs. The question is whether this will continue.

Source: Institute for Supply Management; January 2012 figure is Bloomberg consensus estimate. Insurance Information Institute.

Optimism among manufacturers was

increasing in late 2011

160

Value* of Construction Put In Place,Monthly, Nov ‘08-Nov ‘11

*Seasonally adjusted annual rate Source: http://www.census.gov/const/C30/release.pdf

Since the recession started, private residential and nonresidential construction together are down $302 billion (annual rate), a drop of 27%.

Public construction has hardly moved.

$225

$250

$275

$300

$325

$350

$375

$400

$425

Nonresidential Public Residential Nonresidential PrivateBillions

Total Construction Spending (Annual Rate)

Dec. 2007: $1,109B Nov. 2011: $807 B

163

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8236

,385

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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

Business Bankruptcy Filings,1980-2011:Q3

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

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

2010 bankruptcies totaled 56,282, down 7.5% from 60,837 in 2009—which were up 40% from 2008 and the most since 1993. As of

2011:Q3 filings are down 15.4% from 2010:Q3.

% Change Surrounding Recessions

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

164

Private Sector Business Starts, 1993:Q2 – 2011:Q1*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

119

219

219

320

1 204

202

210 21

220

921

6 220 22

322

022

021

022

121

220

421

820

920

720

719

919

1 193

172 17

616

918

417

5 179

188

200

183

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

* Data through March 31, 2011 are the latest available as of January 16, 2012; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

722,000 new business starts were recorded in 2010, up 3.6% from 697,000 in 2009, which was the slowest year for new business starts since 1993.

Business starts remained weak in early 2011.

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000

165

11 Industries for the Next 10 Years: Insurance Solutions Needed

Shipping (Rail, Marine, Trucking)

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Agriculture

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

Many industries are

poised for growth, but

many insurers do not write in

these economic segments

166

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

167

Unemployment and Underemployment Rates: Stubbornly High in 2011, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 8.5% in

December

Unemployment peaked at 10.1% in October 2009, highest monthly rate 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 March

2007 to 17.5% in October 2009; Stood at 15.2%

in Dec. 2011

January 2000 through December 2011, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market might finally be improving

Dec 11

186

7921

365

127

42 15-1

09-1

465 97

23-1

2-8

5 -58

-161

-253 -230

-257

-347

-456

-547

-734 -6

67-8

06-7

07-7

44-6

49-3

34-4

52-2

97 -215 -186

-262

75-8

316

62

229

51 6111

714

311

2 193

128 16

794

261

219

241

99 7517

372

220

120

134 21

2

144

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

7D

ec-

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

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8Ju

n-08

Jul-0

8A

ug-0

8S

ep-0

8O

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8N

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8D

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Jan-

09F

eb-0

9M

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9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9S

ep-0

9O

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9N

ov-0

9D

ec-

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-

Monthly Change in Private Employment

January 2008 through November 2011* (Thousands)

Private Employers Added 3.343 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs

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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

212,000 private sector jobs were created in

December

172

Unemployment Rates by State, December 2011:Highest 25 States*

12.6

11.1

10.8

10.4

10.4

9.9

9.9

9.8

9.7

9.5

9.3

9.1

9.0

9.0

8.9

8.7

8.7

8.5

8.5

8.4

8.2

8.1

8.1

8.0

8.0

7.9

0

2

4

6

8

10

12

14

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

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for December 2011, seasonally adjusted.

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

In December, 37 states and the District of Columbia reported over-the-month unemployment rate decreases, 3 had

increases, and 10 had no change.

173

7.9

7.8

7.7

7.6

7.4

7.3

7.1

7.0

6.8

6.8

6.8

6.7

6.6

6.6

6.3

6.2

6.1

6.0

5.8

5.7

5.6

5.1

5.1

4.2

4.1

3.3

0

2

4

6

8

10

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

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, December 2011: Lowest 25 States*

*Provisional figures for December 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In December, 37 states and the District of Columbia reported over-the-month

unemployment rate decreases, 3 had increases, and 10 had no change.

174

US Unemployment Rate

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

% 6.1

%

6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

9.7

%

9.6

%

9.6

%

8.9

%

9.1

%

9.1

%

8.7

%

8.7

%

8.7

%

8.6

%

8.5

%

8.7

%

8.7

%

8.6

%

8.5

%

9.6

%4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

Rising unemployment eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10% in

late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1/12); Insurance Information Institute

2007:Q1 to 2013:Q4F*

Unemployment forecasts remain stubbornly high

through 2012, but still imply millions of new

jobs will created.

Jobless figures have been revised

downwards for 2012

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