Overview & Outlook for the Commercial P&C Insurance

IndustryInsurance Information Institute

August 12, 2015

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

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

2

Insurance Industry:Financial Update & Outlook

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

2

P/C Industry Net Income After Taxes1991–2015:Q1 2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013 ROAS1 = 10.2% 2014 ROAS1 = 8.4% 2015:Q1 ROAS = 10.8%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

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

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$6

3,7

84

$5

5,5

01

$1

8,1

72

$3

8,5

01

$2

0,5

59

$4

4,1

55

$6

5,7

77

-$6,970

$2

8,6

72

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

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

15:Q

1

Net income fell modestly

(-12.5%) in 2014 vs. 2013

$ Millions

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

:Q1

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2015:Q1

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

1977:19.0%1987:17.3%

1997:11.6% 2006:12.7%

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

10 Years

10 Years

9 Years

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013 9.8%

2014 8.2%

2015:Q1 10.8%

5

ROE: Property/Casualty Insurance by Major Event, 1987–2015:Q1

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

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 1415:Q1

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Modestly higher CATs

-5%

0%

5%

10%

15%

20%

25%

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

14E

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

1977:19.0%

1987:17.3%

1997:11.6%

2006:12.7%

1984: 1.8%

1992: 4.5%2001: -1.2%

ROE

1975: 2.4%

2013 9.8%

2014 8.2%

Back to the Future: Profitability Peaks & Troughs in the P/C Insurance Industry, 1950 – 2014*

1969: 3.9%

1965: 2.2%1957: 1.8%

1972:13.7%

1966-67: 5.5%1959:6.8%

1950:8.0%

1950-70: ROEs were lower in this period. Low interest rates,

low inflation, “Bureau” rate regulation all played a role

1970-90: Peak ROEs were much higher in this period while troughs

were comparable. High interest rates, rapid inflation, economic

volatility all played roles

1990-2010s: Déjà vu. Excluding mega-

CATs, this period is very similar to the 1950-1970 period

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Note: Data through 1934 are based on stock companies only. Data include state funds beginning in 1998.Source: A.M. Best; Insurance Information Institute.

Economic Shocks, Inflation:

1976: 22.0%

Tort Crisis1985/86: 22.2%

Post-9/112002:15.3%

Twin Recessions; Interest Rate

Hikes1987: 3.7% Great

Recession:2010: -4.9%

ROE

2014 4.1%

NPW Premium Growth: Peaks & Troughs in the P/C Insurance Industry, 1926 – 2014

Great Depression1932: -15.9% max drop

Post WW II Peak:1947: 26.2%

Start of WW II1941: 15.8%

1950-70: Extended period of stability in growth and

profitability. Low interest rates, low inflation, “Bureau”

rate regulation all played a role

1970-90: Peak premium growth was much higher in this period while troughs were comparable. Rapid inflation, economic

volatility, high interest rates, tort environment all played roles

1988-2000: Period of

inter-cycle stability

2010-20XX? Post-

recession period of

stable growth?

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

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

Economic Shocks, Inflation:

1976: 22.2%Tort Crisis

1986: 30.5%

Post-9/112002: 22.4%

Great Recession:2009: -9.0%

ROE

2014E 4.0%

Commercial Lines NPW Premium Growth:1975 – 2014E

Recessions:1982: 1.1%

Commercial lines is prone to more cyclical volatility that personal

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

1988-2000: Period of

inter-cycle stability

2010-20XX? Post-

recession period of

stable growth?

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

Post-Hurricane Andrew Bump:

1993: 6.3%

Post Katrina Bump:

2006: 7.7%

9

P/C Insurance Industry Combined Ratio, 2001–2015:Q1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

96.7 97.296.0

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15:Q1

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

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

Best Combined

Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

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

Combined Ratio / ROE

* 2008 -2014 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2014 combined ratio including M&FG insurers is 97.0; 2013 = 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

96.7 97.295.7

102.4

106.5

95.7

14.3%

15.9%

12.7%

10.9%

7.4% 7.9%

4.7%6.2%

10.8%

8.2%9.6%

8.8%

4.3%

9.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015:Q10%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

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

10% in 2005 and 16% in 1979

Lower CATs helped ROEs in 2013-15:Q1

11

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

25

.6

18

.4

13

.4

13

.2

9.2

8.9

7.9

7.8

7.1

7.1

6.6

4.9

-1.0

-5

0

5

10

15

20

25

30

Fire

Inla

nd Mar

ine

All O

ther

Med

ical

Pro

f Lia

bility

Comm

Auto

Tota

l

Comm

erci

al MP

All Lin

es

Oth

er L

iabili

ty

Work

ers

Comp

PP Auto

Tota

l

Homeow

ners

MP

Farmow

ners

MP

Allied L

ines

Source: NAIC; Insurance Information Institute.

Commercial lines have tended to be more profitable than

personal lines over the past decade

12

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

20

.5

18

.4

14

.6

14

.3

13

.4

13

.3

12

.3

12

.1

12

.0

12

.0

11

.7

11

.4

11

.1

11

.1

10

.9

10

.8

10

.7

10

.7

10

.5

10

.5

10

.3

9.9

9.8

9.8

9.6

9.5

02468

1012141618202224

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

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region

Source: NAIC; Insurance Information Institute.

Profitability Benchmark: All P/C

US: 7.9%

13

9.2

8.6

8.4

8.3

8.2

8.2

8.1

8.0

7.9

7.7

7.7

7.5

7.4

6.8

6.6

6.4

6.1

5.7

5.3

5.2

5.0

4.3

2.5

1.9

-6.9

-9.3

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

10

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

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

Source: NAIC; Insurance Information Institute.

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

by catastrophes

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

Reserve Change

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

Reserve releases are expected to gradually taper off, but will

continue to benefit the bottom line and combined ratio through

at least 2016

INVESTMENTS: THE NEW REALITY

15

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

15

Property/Casualty Insurance Industry Investment Income: 2000–2015E1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.3$46.2 $46.7

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15E

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

1 Investment gains consist primarily of interest and stock dividends. *2015 figure is estimated based on annualized data through Q1.Sources: ISO; Insurance Information Institute.

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

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

Stocks, 22%

Bonds, 62%All Other, 10%

Cash, Cash Equiv. & ST Investments, 6%

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

Total Invested Assets = $1.5

Trillion

$ Billions

18

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2015*

*Monthly, constant maturity, nominal rates, through July 2015.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

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 '13 '14 '15

Recession2-Yr Yield10-Yr Yield

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.

U.S. Treasury yields plunged to historic lows in 2013. Longer-

term yields rebounded then sank fell again.

18

Book Yield on Property/Casualty Insurance Invested Assets, 2007–2015*

4.38

4.174.02

3.87

3.63 3.643.74

3.82

3.44

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

07 08 09 10 11 12 13 14 15*

The yield on invested assets remains low relative to pre-crisis yields. The Fed’s plan to raise interest rates in late 2015 has already pushed up some yields, albeit quite modestly.

*2015 figure is the average of the four quarters ending in 2015:Q1.Sources: SNL Financial; Insurance Information Institute

(Percent) Book yield in 2015 is down 74 BP from pre-crisis levels

CAPITAL/CAPACITY

28

Capital Accumulation Has Multiple Impacts

28

29

Policyholder Surplus, 2006:Q4–2015:Q1

Sources: ISO, A.M .Best.

($ Billions)

$487

.1

$496

.6

$512

.8

$521

.8

$478

.5

$455

.6

$437

.1 $463

.0 $490

.8 $511

.5 $540

.7

$530

.5

$544

.8

$559

.2

$559

.1

$538

.6

$550

.3

$567

.8

$583

.5

$586

.9 $607

.7

$614

.0

$624

.4 $653

.4

$671

.6

$673

.9

$674

.7

$671

.7

$662

.0

$570

.7

$566

.5

$505

.0

$515

.6

$517

.9

$400

$450

$500

$550

$600

$650

$700

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

14:Q

2

14:Q

3

14:Q

4

15:Q

1

2007:Q3Pre-Crisis Peak

Surplus as of 3/31/15 stood at a near-record high $671.7B

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .

The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2015in very strong financial condition.

US P/C Insurance Industry Excess Capital Position: 1994–2016E

Source: Barclays Research estimates.

Su

rplu

s R

edu

nd

ancy

(D

efic

ien

cy)

The Industry’s Strong Capital Position Suggests Insurers Are in a Good Position to Increase Risk Appetite, Repurchase Shares

and Pursue Acquisitions

Per

cen

t R

ed

un

dan

cy (

Def

icie

ncy

)

Barclay’s suggests that surplus is approximately

$200B (~30%)

34

Alternative Capital

34

New Investors Continue to Change the Reinsurance Landscape

First I.I.I. White Paper on Issue Was Released in March 2015

Global Reinsurance Capital (Traditional and Alternative), 2006 - 2014

2014 data is as of June 30, 2014.Source: Aon Benfield Analytics; Insurance Information Institute.

Total reinsurance capital reached a record $570B in 2013, up 68% from

2008.

But alternative capacity has grown 210% since 2008, to $50B. It has more than doubled in the past three years.

Alternative Capital as a Percentage of Traditional Global Reinsurance Capital

2014 data is as of June 30, 2014.Source: Aon Benfield Analytics; Insurance Information Institute.

2006 2007 2008 2009 2010 2011 2012 2013 2014

-2%

0%

2%

4%

6%

8%

10%

12%

4.6%5.7% 5.9% 5.8% 5.4%

6.5%

8.4%

10.2%

11.5%

Alternative Capital’s Share of Global Reinsurance Capital Has More Than Doubled Since 2010.

Growth of Alternative Capital Structures, 2002 - 2014

2014 data is as of June 30, 2014.Source: Aon Benfield Analytics; Insurance Information Institute.

Collateralized Re’s Growth Has Accelerated in the Past Three Years.

Collateralized Reinsurance and Catastrophe Bonds Currently Dominate the Alternative Capital Market.

Catastrophe Bond Issuance and Outstanding: 1997-2015:Q1

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*0

5,000

10,000

15,000

20,000

25,000

948.2

874.2

1,062.5

1,142.0

966.9

989.5

1,988.2

1,142.8

1,499.0

4,614.7

7,187.0

3,009.9

3,396.0

4,599.9

4,107.1

5,855.3

7,083.0

8,026.7

1,490.0

4289

5085

7677

13416.4

12538.6

12508.2

12195.7

12342.8

14839.3

18576.9

22867.8

20813.4

New Issuance Outstanding

38

Risk Capital Amount ($ Millions)

2014 Has Seen the Largest Cat Bond Ever - $1.5 Billion (Florida Citizens). Bond Issuance Set a Record.

Source: Guy Carpenter.

43

Performance by Segment

43

10

9.4

11

0.2

11

8.8

10

9.5 1

12

.5

11

0.2

10

7.6

10

4.1

10

9.7

11

0.2

10

2.5 1

05

.4

91

.1

93

.6

10

4.2

98

.9

10

2.4

10

7.9

10

3.4

95

.2

95

.5

98

.1 99

.5 10

0.8

10

2.0

11

1.1

11

2.3

12

2.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

E

15

F

16

F

17

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2014E); Conning (2015-17F) Insurance Information Institute.

Commercial Lines Combined Ratio, 1990-2017F*

Commercial lines underwriting performance is expected to

improved in 2013/14 but higher cats, diminishing prior year

reserves an rising loss cost trends in some lines could push combined ratios higher

44

Commercial Auto Combined Ratio: 1993–2015F

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4

94

.1 96

.8 99

.1

97

.8

10

3.4 10

6.8

10

6.5

10

3.0

10

5.2

11

8.1

11

5.7

11

6.2

80

85

90

95

100

105

110

115

120

125

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

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

45Sources: A.M. Best (1990-2014E);Conning (2015F); Insurance Information Institute.

Commercial Property Combined Ratio: 2007–2016F

72.4

105.

8

83.3 86

.5

85.4 89

.4

90.1

106.

5

105.

8

82.7

70

75

80

85

90

95

100

105

110

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

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

Fluctuations in CAT Activity

Source: Conning Research and Consulting. 46

General Liability Combined Ratio: 2005–2015F

112.

9

95.1 99

.0

94.2

104.

1

101.

4

103.

0

103.

9107.

1 110.

8

99.8

80

85

90

95

100

105

110

115

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

Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years

Source: Conning Research and Consulting. 47

Workers Compensation Combined Ratio: 1994–2014P

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5

103.

5

104.

5 110.

6 115.

0

115.

0

108.

0

101.

0

98.0

121.

7

107.

0

115.

3

118.

2

80

85

90

95

100

105

110

115

120

125

130

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

Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-

2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2014P) and are for private carriers only; Insurance Information Institute. 48

WC results have improved markedly

since 2011

Commercial Multi-Peril Combined Ratio: 1995–2015F

119.

0

119.

8

108.

5

125.

0

116.

2

116.

1

104.

9

101.

9

105.

5

95.4 97

.6

94.2 96

.1

102.

1

94.1

103.

8

100.

7

116.

8

113.

6

115.

3 122.

4

115.

0

117.

0

97.3

89.0

97.7

93.8

83.8

89.8

108.

4

98.7 10

2.5

120.

1

111.

9

93.4 98

.9 101.

4

113.

1

115.

0 121.

0

80

85

90

95

100105

110

115

120

125

130

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

CMP-Liability CMP-Non-Liability

Commercial Multi-Peril Underwriting Performance is Expected to Improve in 2013 Assuming Normal Catastrophe Loss Activity

*2014E-2015F figures are Conning figures for the combined liability and non-liability components..Sources: A.M. Best; Conning; Insurance Information Institute. 49

Inland Marine Combined Ratio: 2004–2015F

82.5

89.9

77.3 79

.5

97.1

96.1

83.7

87.2 89

.5

93.3

89.3

86.2

70

75

80

85

90

95

100

04 05 06 07 08 09 10 11 12 13 14E 15F

Inland Marine Underwriting Performance Has Been Consistently Strong for Many Years

Source: A.M. Best (2004-2014E); Conning Research and Consulting (2015F). 50

Workers Compensation Operating Environment

51

Workers Comp Results Have Improved Substantially in Recent Years

51

52

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2015:Q1

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

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,250

$7,500

$7,75005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

13:Q

213

:Q3

13:Q

414

:Q1

14:Q

214

:Q3

14:Q

415

:Q1

Prior Peak was 2008:Q3 at $6.54 trillion

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

5.3% from prior peak

Growth rates2011:Q1 over 2010:Q1: 5.5%2012:Q1 over 2011:Q1: 4.2%2013:Q1 over 2012:Q1: 2.5%2014:Q1 over 2013:Q1: 4.3%2015:Q1 over 2014:Q1: 4.4%

52

Latest (2015:Q1) was $7.66 trillion, a new peak--$1.34 trillion above 2009 trough

$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 12 13 14

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

53

Payroll Base* WC NWP

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

*Private employment; Shaded areas indicate recessions. WC premiums for 2014 are from NCCI.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2015

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

$Billions $Billions

WC premium volume dropped two years before

the recession began

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

$33.8B in 2010 after peaking at $47.8B

in 2005

Workers Compensation Premium: Fourth Consecutive Year of IncreaseNet Written Premium

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14P0

10

20

30

40

50

31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3

25.0 26.129.2 31.1

34.737.8 38.6 37.6

33.830.3 29.9

32.335.1 36.9 38.5

35.3 35.734.3 35.4

33.6

30.128.5

26.9 25.9 25.0

28.6

32.1

37.7

42.3

46.547.8

46.544.3

39.3

34.6 33.836.4

39.541.8

44.2

State Funds ($ B)

Private Carriers ($ B)

Pvt. Carrier NWP growth was +4.3% in 2014, +5.1% in 2013 and 8.7% in 2012

$ Billions

Calendar Yearp Preliminary

Source: NCCI from Annual Statement Data.Includes state insurance fund data for the following states: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT.Each calendar year total for State Funds includes all funds operating as a state fund that year.

56

2014 Workers Compensation Direct Written Premium Growth, by State*

PRIVATE CARRIERS: Overall 2014 Growth = +4.6%

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

While growth rates varied widely, most states experienced positive growth in

2014

58

Workers Compensation Components of Written Premium Change, 2013 to 2014

Written Premium Change from 2013 to 2014

Net Written Premium—Countrywide +4.6%

Direct Written Premium—Countrywide +4.6%

Direct Written Premium—NCCI States +4.5%

Components of DWP Change for NCCI States

Change in Carrier Estimated Payroll +4.7%

Change in Bureau Loss Costs and Mix -1.4%

Change in Carrier Discounting +0.4%

Change in Other Factors +0.8%

Combined Effect +4.5%

Sources: Countrywide: Annual Statement data.NCCI States: Annual Statement Statutory Page 14 for all states where NCCI provides ratemaking services.Components: NCCI Policy data.

Growth is now almost entirely payroll driven

WC Approved Changes in Bureau Premium Level (Rates/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 -6.5

-8.8-7.8

-3.2-2.1

-1.2

0.4

8.4

2.2

0.5

-2.2

-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 12 13 14 15p

Percent

Calendar Year

Cumulative1990–1993

+36.3%

Cumulative 2000–2003

+17.1%

Cumulative 2004–2011

-30.8%

Cumulative 1994–1999

-27.8%

*States approved through 4/24/15.Note: Bureau premium level changes are countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization, relative to those previously approved.Source: NCCI.

By Effective Date for Total Market

Approved rates/loss costs are down for the first time since 2010

Cumulative 2011–2014

+11.8%

60

WC Approved or Filed and Pending Change in NCCI Premium Level by State

Latest Change for Voluntary Market

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

While growth rates varied widely, most states experienced positive growth in

2014

Workers Compensation Lost-Time Claim Frequency Declined in 2014

62

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p-10

-8

-6

-4

-2

0

2

4

6

8

10

12

-4.4

-9.2

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5

-6.9

-4.5 -4.1 -3.7

-6.6

-4.5

-2.2

-4.3-4.9

10.6

-3.8

-6

-2.9-2.0

3.6

-0.8

Adjusted*Indicated

Frequency Change: 2007—2012

Contracting: 7.97.1 -9.3%

Manufacturing: 13.612.0 -11.8%

Percent

Accident Year*Adjustments primarily due to significant audit activity.2014p: Preliminary based on data valued as of 12/31/2014.Source: NCCI Financial Call data, developed to ultimate and adjusted to current wage an voluntary loss cost level; Excludes high deductible policies; 1994-2013: Based on data through 12/31/13. Data for all states where NCCI provides ratemaking services, excluding WV.Frequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost level

Cumulative Change of –51.1%(1994–2013 adj.)

$9

.8

$9

.5

$9

.2

$9

.7

$9

.8

$1

0.4

$1

1.2

$1

2.2

$1

3.5

$1

4.8

$1

6.1

$1

6.6

$1

7.4

$2

2.3

$2

2.5

$2

2.2

$2

2.2

$2

2.6

$2

3.6

$1

8.1

$1

7.5

$1

9.2

$2

0.8

$2

1.9

+0.0%-2.5%

+1.0%+9.1% +1.3%

+5.9%+3.1%

+1.0%+4.6%+3.1%+9.2%

+10.1%

+10.1%

+9.0%+7.7%

+5.9%+1.7%+4.9%

-2.8%-3.1%+1.0%

+6.6%

5

7

9

11

13

15

17

19

21

23

25

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

IndemnityClaim Cost ($ 000s)

Accident Year

Workers Comp Indemnity Claim Costs: Modest Increase in 2014

Average indemnity costs per claim were up 4% in

2014 to $23,600, the largest increase since 2008

Average Indemnity Cost per Lost-Time Claim

+4%+1.9%

Cumulative Change = 141%(1991-2014p)

2014p: Preliminary based on data valued as of 12/31/2014.1991-2013: Based on data through 12/31/2013, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Workers Compensation Medical Severity:Moderate Increase in 2014

65

Accident Year

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

Average Medical Cost per Lost-Time ClaimMedical

Claim Cost ($000s)

$8

.1

$8

.2

$8

.1

$8

.8

$9

.1

$9

.8

$1

0.8

$11

.7

$1

2.9

$1

3.9

$1

5.7

$1

7.1

$1

8.4

$1

9.4

$2

0.9

$2

2.1

$2

3.4

$2

5.0

$2

6.0

$2

6.1

$2

6.8

$2

7.4

$2

8.3

$2

9.4

+6.8%+1.3%-2.1%+9.0%+5.1%

+7.4%+10.1%

+8.3%+10.6%

+7.3%

+13.5%

+8.8%+7.7%

+5.4%

+7.8%+5.8%

+5.9%

+6.9%+4.0%+0.5%

+2.4%+2.4%

+3.2%+4%

5

10

15

20

25

30

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

2014p: Preliminary based on data valued as of 12/31/2014.1991-2013: Based on data through 12/31/2013, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Cumulative Change = 263%(1991-2014p)

Accident Year

Medical severity for lost time claims was up 4% in 2014, the

largest increase since 2009

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

68

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14p0

2

4

6

8

10

12

14

16

5.1

7.4

10.1

8.3

10.6

7.3

13.5

8.8

7.7

5.4

7.8

5.8 5.9

6.9

4.0

0.5

2.4 2.4

34.0

4.5

3.52.8

3.2 3.54.1

4.6 4.74.0

4.4 4.2 4.04.4

3.73.2 3.4

3.03.7

3 2.4

Change in Lost-Time Medical Claim Severity

Change in US Medical CPI

Percent Change

Year

Average Annual Change: 1994—2014

Lost-Time Medical Severity: +6.4%

US Medical CPI: +3.7%

2014p: Preliminary based on data valued as of 12/31/2014.Sources: Severity: 995-2013: Based on data through 12/31/2013, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.US Medical CPI: US Bureau of Labor Statistics.

73

Growth Analysis by State and Business Segment

Post-Crisis Paradox? Premium Growth Rates Vary

Tremendously by State

73

74

-5%

0%

5%

10%

15%

20%

25%

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*

Net Premium Growth (All P/C Lines): Annual Change, 1971—2015:Q1

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

Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013), ISO (2014-15).

Net Written Premiums Fell 0.7% in 2007 (First Decline

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

2015:Q1: 3.7%

2014: 4.1%

2013: 4.4%

2012: +4.2%

77

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2014

80

.4

36

.8

33

.3

29

.4

24

.8

22

.5

21

.0

20

.6

15

.2

14

.6

13

.9

11

.8

10

.3

8.7

8.5

8.4

8.0

7.9

7.6

7.1

6.6

5.9

5.9

5.8

5.4

4.5

0

10

20

30

40

50

60

70

80

90

ND

SD VT

OK

NE IA KS

TX

WY

AK IN

MN WI

MA

AR

CT

NY

NJ

CO

NM

OH LA

US

MS

NH

MO

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LLC.; Insurance Information Institute.

Top 25 States

43 states showed commercial lines growth from 2007

through 2014

Growth Benchmarks: Commercial

US: 5.9%

78

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2014

4.5

4.4

4.2

4.1

3.9

3.8

3.7

3.3

3.3

3.2

3.1

2.8

2.8

2.2

2.1

1.4

0.9

-1.3

-3.2

-5.3

-6.5

-6.9

-9.2

-10

.7

-19

.9

-22

.2

-25

-20

-15

-10

-5

0

5

10

MI

TN

MD

MT

CA RI

WA

GA

PA

UT IL KY VA

NC

ME

SC ID AL

DC HI

FL

OR AZ

DE

NV

WV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LLC.; Insurance Information Institute.

States with the poorest performing economies also produced the most negative

net change in premiums of the past 6 years

Nearly half the states have yet to see commercial lines premium

volume return to pre-crisis levels

81

Commercial Lines Pricing Trends

Survey Results Suggest Commercial Pricing Has

Flattened Out

81

82

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

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

% -8.2

%-4

.6% -2

.7%

-3.0

%-5

.3%

-9.6

%-1

1.3

%-1

1.8

%-1

3.3

%-1

2.0

%-1

3.5

%-1

2.9

%-1

1.0

%-6

.4%

-5.1

%-4

.9%

-5.8

%-5

.6%

-5.3

%-6

.4%

-5.2

%-5

.4% -2

.9%

2.7

% 4.4

%4

.3%

3.9

% 5.0

%5

.2%

4.3

%3

.4%

2.1

%1

.5%

-0.5

%0

.1%

-0.7

%-1

.5%-0

.1%

0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

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

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

KRW Effect

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

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

M&A UPDATE: A PATH TO GROWTH?

84

Are Capital Accumulation, Drive for Growth and Scale Stimulating

M&A Activity?

84

85

U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2014 (1)

$5,1

00

$11,

534

$8,0

59

$30,

873

$19,

118

$40,

032

$1,2

49

$486

$20,

353

$425

$9,2

64

$35,

221

$13,

615

$16,

294

$3,5

07 $6,4

19

$12,

458

$4,6

51

$4,3

97

$6,7

23

$55,825

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

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

Tra

ns

ac

tio

n v

alu

es

0

20

40

60

80

100

120

140

Nu

mb

er o

f tran

sa

ctio

ns

($ Millions)

(1) Includes transactions where a U.S. company was the acquirer and/or the target.

Source: Conning proprietary database.

M&A activity in the P/C sector was up

sharply in 2014 but remains well

below pre-crisis or late 1990s levels.

M&A activity in 2015 will likely

reach its highest level since 1998

Update: Alleghany Corp. announced in May 2015 that it is considering the sale of TransAtlantic Holding Co. (TransRe).*Source: Conning; Insurance information Institute.

Top Global P&C M&As in 2014 - YTD 2015

Acquirer TargetTransaction

Value

ACE (Switzerland) Chubb (US) $28,300Exor (Italy) PartnerRe Ltd. (Bermuda) $6,900

Zurich (Switzerland) RSA (UK) 8,000

XL Group plc (Ireland) Catlin Group Ltd. (Bermuda) 4,200

RenaissanceRe Holdings Ltd. (Bermuda) Platinum Underwriters Holdings Ltd. (Bermuda) 1,900

Fairfax Financial Holdings Ltd. (Canada) Brit Insurance Holdings NV (Netherlands) 1,880

Desjardins Financial Corp. (Canada)

State Farm's property/casualty and life insurance

operations in Canada (Canada) 1,500

TPG Capital LP The Warranty Group, Inc. (Canada) 1,500

Fosun International Ltd. (China) Caixa Seguros e Saude SGPA SA (Portugal) 1,360

Progressive Corp. ARX Holding Corp. 875

Assured Guaranty Ltd. (Bermuda) Radian Asset Assurance, Inc. 810

Mapfre S.A. (Spain)

German and Italina operations of Direct Line Insurance

Group plc (Germany/Italy) 701

Validus Holdings Ltd. (Bermuda) Western World Insurance Group, Inc. 690

ACE Ltd. (Switzerland) P&C business from Itau Seguros S.A. (Brazil) 685

88

What’s Driving Global Insurance M&A Activity and Will It Continue? Excess Capital in Global Reinsurance and Primary Commercial

Insurance in US (Re)Insurers, like corporations in many industry, are sitting are large

amounts of cash accumulated since the Global Financial Crisis that earns very little

Alternative Capital

Slow Top Line (Premium) Growth

Slowdown in Pace of Earnings Growth/ROE

Low Interest Rates Make Debt Financing for Acquisitions Attractive Concern that interest rates in US may soon rise so best to act now

Desire to Achieve Economies of Scale

Peer Pressure/Momentum Management concerns about being “left out”

94

Insured Catastrophe Losses

2013/14 and YTD 2015 Experienced Below Average CAT Activity After Very High CAT

Losses in 2011/12Winter Storm Losses Far Above Average in

2014 and 201594

95

$1

3.0

$1

1.3

$3

.9

$1

4.8

$1

1.9

$6

.3

$3

5.8

$7

.8

$1

6.8

$3

4.7

$1

0.9

$7

.7

$3

0.1

$1

1.8

$1

4.9

$3

4.6

$3

6.1

$1

3.1

$1

5.5

$8

.2

$75.7

$1

4.4

$5

.0 $8

.2

$3

8.9

$9

.1

$2

7.2

$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 13 14 15*

U.S. Insured Catastrophe Losses

*Through 6/30/15 in 2015 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; AonBenfield Insurance Information Institute.

2013/14 Were Welcome Respites from 2011/12, among the Costliest Years for Insured Disaster Losses in US History. Longer-term Trend is for

more—not fewer—Costly Events

2012 was the 3rd most expensive year ever for

insured CAT losses

$8.2B in insured CAT losses though 6/30/15, up slightly from $7.3B in 2014

($ Billions, $ 2014)

95

96

Top 16 Most Costly Disastersin U.S. History—Katrina Still Ranks #1

(Insured Losses, 2014 Dollars, $ Billions)

$8.1 $9.0 $9.4 $11.4$13.8

$19.3$24.6 $25.3$26.4

$50.2

$7.7$7.3$6.9$5.8$5.7$4.6

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Storm Sandy in 2012 was the last mega-CAT

to hit the US

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have Occurred Since 2004

Sources: PCS; Insurance Information Institute inflation adjustments to 2014 dollars using the CPI.

97

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2015F*

*2010s represent 2010-2014.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2010); A.M. Best (2011-15E) 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

3.4

9.4

8.0

3.9 4.

4 4.9

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

2012

2014

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: 5.82*

Combined Ratio Points Catastrophe losses as a share of all losses

reached a record high in 2011

98

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1995–20141

0.1%

1.5%5.4%

0.1%

6.2%

6.8%

39.2%

40.7%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2014 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, $161.2

Fires (4), $6.0

Events Involving Tornadoes (2), $154.9

Winter Storms, $26.9

Terrorism, $24.5

Geological Events, $0.5

Wind/Hail/Flood (3), $21.4

Other (5), $0.2

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1995-2014

totaled $395.6B, an average of $19.8B per year or $1.65B

per month

Winter storm losses were much above average in 2014/15 are

will push this share up

**Losses adjusted to inflation based on country CPI

*Winter storms include winter damage, blizzard, snow storm and cold wave 100

1 000

2 000

3 000

4 000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Source: Property Claim Services, MR NatCatSERVICE.

$ Billions, in 2014 Dollars

2015 insured winter storm losses totaled $2.3B, similar to 2014 and about double the

long-run average

Three of the four most costly years ever for insured losses from winter storms and

damage occurred in the 1990s, led by the “Storm of the Century” in 1993.

5-year running average

Winter Storm and Winter Damage Events in the US, 1980-2015 (2014 US$)

Natural Disaster Losses in the U.S.,First Half 2015

As of July 1, 2015

Number of

Events FatalitiesEstimated Overall Losses (US $m)

Estimated Insured Losses (US $m)*

Severe Thunderstorm 38 66 7,000 5,100

Winter Storms & Cold Waves 11 80 3,800 2,900

Flood, Flash Flood 10 4 500 150

Earthquake & Geophysical 1 - - -

Tropical Cyclone 2 4 Loss est. in progress Loss est. in progress

Wildfire, Heat Waves, & Drought

18 - 1,300 Minor market loss

Totals 80 154 12,600 8,200

101

*Source: Property Claim Services (PCS) as of 7/7/2015; Munich Re.

103

The World is Warmer...With One Big Exception!

HIGHLIGHTS

• 2014 was the warmest year across global land and ocean surfaces since records began in 1880.

• 9 of the 10 warmest years in the 135-year period of record have occurred in the 21st century. 1998 currently ranks as the fourth warmest year on record.

• January to May 2015 warmest first five months on record!

Source: NOAA; Munich Re.

50

100

150

200

250

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Loss events in the US, 1980 – 2014Number of events

106

Meteorological events(Tropical storm, extratropical storm, convective storm, local storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami,

volcanic activity)

Number of Events

7

72

24

16

2014 Total:119 Events

Source: Geo Risks Research, NatCatSERVICE

The number of loss events surged from 2006 – 2010,

though insured losses remained elevated through 2012

2015 First Half:80 Events

Loss Events in the US, 1980 – 2014Overall and Insured Losses

107

Overall losses (in 2013 values)*

Insured losses (in 2013 values)*

*Losses adjusted to inflation based on CPI.

Overall losses totaled $25bn; Insured losses totaled $15.3bn

50

100

150

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Source: Property Claim Services, MR NatCatSERVICE.

$ Billions 2015 First Half:$8.2 Billion Insured Losses

$12.0 Overall Losses

Convective Loss Events in the USOverall and insured losses, 1980 – 2014

108

$ Billions

Analysis contains: severe storm, tornado, hail, flash flood and lightning

10

20

30

40

50

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

*Losses adjusted to inflation based on CPI

Source: Geo Risks Research, NatCatSERVICE

Overall losses (in 2014 values)*

Insured losses (in 2014 values)* The period from 2008-2014 has

been the most expensive on record for insured losses from “Convective Events” (severe thunderstorms, tornado, hail,

lightning and flash flood)

2015 First Half:$5.1 Billion Insured Losses

$7.0 Overall Losses

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

115

Growth Will Expand Insurer Exposure Base Across Most Lines

115

116

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 8/15; Insurance Information Institute.

2.7%

1.8%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

0.4%

2.7%

1.8%

3.5%

-0.9

%4.

6%4.

3%2.

1%0.

6%2.

3% 2.7%

2.8%

2.7%

2.7%

2.7%

2.6%

-8.9%

4.5%

1.4%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

   2

00

7   

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

13

:1Q

13

:2Q

13

:3Q

13

:4Q

14

:1Q

14

:2Q

14

:3Q

14

:4Q

15

:1Q

15

:2Q

15

:3Q

15

:4Q

16

:1Q

16

:2Q

16

:3Q

16

:4Q

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

Real GDP Growth (%)

Recession began in in June

2009

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

Q1 2014/15 GDP data were hit hard by this

year’s “Polar Vortex” and harsh

winter

State Leading Economic Indicators through November 2015

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 117

Growth in the West is

finally beginning to pick up

The economic outlook for most of the US is generally

positive, though flat-to-negative for 10 states, several

of them energy dependent

118

Real GDP by State Percent Change, 2014*:Highest 25 States

6.3

5.2

5.1

5.1

4.7

3.6

3.1

3.0

2.8

2.8

2.7

2.7

2.5

2.3

2.3

2.3

2.2

2.2

2.1

1.9

1.9

1.9

1.8

1.8

1.8

1.7

0

1

2

3

4

5

6

7

ND TX WY WV CO OR UT WA OK CA ID FL NY GA NH MA US SC OH MI MN LA MT KS PA TN

Pe

rce

nt

Ch

an

ge

(%

)

*Advance statisticsSources: U.S. Bureau of Economic Analysis; Insurance Information Institute.

North Dakota was the economic growth juggernaut of the US

in 2014—by far

Only 7 states experienced growth in excess of 3% in 2014, which is a

growth rate we would see nationally in a more typical recovery

Growth Benchmarks: Real GDP

US: 2.2%

119

1.6

1.4

1.4

1.2

1.2

1.2

1.0

1.0

1.0

1.0

0.9

0.8

0.8

0.8

0.7

0.7

0.6

0.6

0.6

0.4

0.4

0.4

0.2

0.0

-1.2

-1.3-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

DC NC AZ IL RI DE WI KY NM NV MO AR HI MD NE AL SD VT CT IA IN NJ ME VA MS AK

Pe

rce

nt

Ch

an

ge

(%

)Real GDP by State Percent Change, 2014*: Lowest 25 States

*Advance statisticsSources: US Bureau of Economic Analysis; Insurance Information Institute.

Mississippi and Alaska were the

only states to shrink in 2014

Growth rates in 16 states were still below 1% in

2014

121

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend Has Greatly Improved

121

122

Unemployment and Underemployment Rates: Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

Jan15

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 5.3% in July 2015. 4.5% to

5.5% is “normal.”

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

January 2000 through July 2015, Seasonally Adjusted (%)

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is continuing to improve.

122

U-6 soared from 8.0% in March

2007 to 17.5% in October 2009; Stood at 10.4% in June 2015.8% to 10% is

“normal.”

23

15

21

70

52

12

65

73

-71

32 6

4 81

55

3-1

15

-10

6-2

21

-21

5-2

06

-26

1-2

58

-42

2-4

86

-77

6 -69

3-8

21

-69

8-8

10

-80

1-2

94

-42

6-2

72

-23

2 -14

1-2

71

-15

-23

22

0-3

81

92

94 11

01

20

11

71

07

19

91

49

94

72

22

32

31 3

20

16

61

86

21

91

25

26

81

77

19

12

22

36

42

28

24

61

02

13

17

51

72

13

61

59

25

52

11

21

52

19 26

31

64

18

8 22

22

01

17

01

80

15

32

47

27

28

61

83

17

5 22

33

13

23

8 27

22

43

20

92

35

21

84

14

31

92

02 2

61

11

7 18

9 25

22

27

21

0

11

3

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-

Jun-

07Ju

l-07

Aug

-S

ep-

Oct

-07

Nov

-D

ec-

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-

Jun-

08Ju

l-08

Aug

-S

ep-

Oct

-08

Nov

-D

ec-

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-

Jun-

09Ju

l-09

Aug

-S

ep-

Oct

-09

Nov

-D

ec-

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-

Jun-

10Ju

l-10

Aug

-S

ep-

Oct

-10

Nov

-D

ec-

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-

Jun-

11Ju

l-11

Aug

-S

ep-

Oct

-11

Nov

-D

ec-

Jan-

12F

eb-1

2M

ar-1

2A

pr-1

2M

ay-

Jun-

12Ju

l-12

Aug

-S

ep-

Oct

-12

Nov

-D

ec-

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-

Jun-

13Ju

l-13

Aug

-S

ep-

Oct

-13

Nov

-D

ec-

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-

Jun-

14Ju

l-14

Aug

-S

ep-

Oct

-14

Nov

-D

ec-

Jan-

15F

eb-1

5M

ar-1

5A

pr-1

5M

ay-

Jun-

15Ju

l-15

Monthly Change in Private Employment

January 2007 through July 2015 (000s, Seasonally Adj.)

Private Employers Added 12.84 Million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

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

Monthly losses in Dec. 08–Mar.

09 were the largest in the

post-WW II period

210,000 private sector jobs were created in July.

123

Jobs Created2014: 3.042 Mill2013: 2.452 Mill2012: 2.315 Mill2011: 2.396 Mill2010: 1.282 Mill

3,042,000 jobs were created in 2014, the most since 1997

125

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

7.4

7.0

6.9

6.8

6.6

6.6

6.4

6.4

6.3

6.1

6.1

6.1

5.9

5.9

5.9

5.8

5.8

5.7

5.7

5.7

5.5

5.5

5.5

5.5

5.4

5.3

0

2

4

6

8

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

Un

em

plo

ym

en

t R

ate

(%

)

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

In June, 21 states and the District of Columbia had over-the-month unemployment rate decreases, 12 states had increases, and 17 states had no change.

126

5.3

5.2

5.2

5.1

4.9

4.9

4.7

4.7

4.6

4.6

4.5

4.5

4.4

4.2

4.1

4.0

4.0

3.9

3.9

3.8

3.8

3.7

3.6

3.5

3.1

2.6

0

1

2

3

4

5

6

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

Un

em

plo

ym

en

t R

ate

(%

)

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

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

In June, 21 states and the District of Columbia had over-the-month unemployment rate decreases, 12 states had increases, and 17 states had no change.

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

127

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

127

128

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

Billions of Dollars

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

03 04 05 06 07 08 09 10 11 12 13 14 15*

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2015: Value of new pvt. construction hits

$766.4B as of June 2015, up 53.1% from the 2010 trough but

still 17.5% below 2006 peak

128

$261.8

$238.8

$394.8

$371.6

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

129

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

8.0%

29.2%

7.6%

12.0%13.7% 12.8%

14.6%

0%

5%

10%

15%

20%

25%

30%

35%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up Again After Languishing in Early 2015; State/Local Sector Government Sector May Be Recovering as Budget

Woes Ease in Some Jurisdictions

Growth (%)

Private sector construction activity is up in both the

residential and nonresidential segments

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

Private: +13.7% Public: +8.0%Public sector

construction activity is finally beginning to

create less drag up after years of decline

130

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

7.5%12.1%

-3.5%

4.7%

16.1%13.7%

-16.3%

62.0%

48.2%

13.7% 12.8%14.6%

41.9%

27.5%

-30%-20%-10%

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

To

tal

Pri

vate

Co

nst

ruct

ion

Res

iden

tial

To

tal

No

nre

sid

enti

al

Lo

dg

ing

Off

ice

Co

mm

erc

ial

Hea

lth

Car

e

Ed

uca

tio

nal

Rel

igio

us

Am

use

men

t &

Rec

.

Tra

nsp

ort

atio

n

Co

mm

un

icat

ion

Po

wer

/Uti

lity

Man

ufa

ctu

rin

g

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

Outlook for 2015, though Expansion Should Continue

Growth (%) Led by the Manufacturing, Lodging, Office and Amusement & Recreations segments, Private nonresidential sector construction

activity continues to rise after plunging during the “Great Recession.”

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

132

$314.9$304.0

$286.4 $278.2$269.0 $273.1

$298.2

$216.1 $220.2$234.2

$255.4

$289.1$308.7

$0

$50

$100

$150

$200

$250

$300

$350

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

($ Billions)

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

Deficits and Federal Sequestration; Only Now Recovering

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

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

Construction across all levels of government

peaked at $314.9B in 2009

Austerity Reigns

Govt. construction MAY finally be turning around; still down $16.7B

or 5.3% since 2009 peak

133

(Millions of Units)

New Private Housing Starts, 1990-2021F

1.4

81

.47 1

.62

1.6

41

.57

1.6

0 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

60

.91

0.5

50

.59

0.6

1 0.7

8 0.9

2 1.1

01

.12 1

.27 1.4

11

.46

1.4

91

.52

1.5

2

1.3

51.4

61

.29

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

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

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (8/15); Insurance Information Institute.

Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk

Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction

for several more years

137

Construction Employment,Jan. 2010—July 2015*

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

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

55,

478

5,48

55,

497

5,52

45,

530

5,54

75,

546

5,58

35,

576

5,57

75,

612

5,62

95,

629

5,62

85,

627

5,60

85,

623

5,63

25,

641

5,64

95,

668

5,68

45,

724

5,74

6 5,79

85,

815

5,81

35,

833

5,85

65,

854

5,86

65,

893

5,91

85,

953

5,93

7 6,00

66,

032

6,06

26,

103

6,11

46,

121

6,15

26,

169

6,19

16,

201

6,23

16,

275

6,31

66,

347

6,33

56,

365

6,37

76,

377

6,38

3

5,400

5,500

5,600

5,700

5,800

5,900

6,000

6,100

6,200

6,300

6,400

6,500

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

0M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

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2D

ec-1

2Ja

n-13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Jan-

14F

eb-1

4M

ar-1

4A

pr-1

4M

ay-1

4Ju

n-14

Jul-1

4A

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4D

ec-1

4Ja

n-15

Feb

-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

l-15

Construction employment is +948,000 above

Jan. 2011 (+17.4%) trough

(Thousands)

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

ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT

BUT VOLATILE

139

US Is Becoming an Energy Powerhouse but Fall in Prices

Will Have Negative Impact

139

5.19 5.08 5.00 5.35 5.47 5.656.49

7.44

8.679.31 9.53

5.09

0

2

4

6

8

10

12

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

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

Millions of Barrels per Day

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

Saudi Arabia as the world’s largest oil producer

142

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

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

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep

-13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep

-14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

150

160

170

180

190

200

210

156.

515

6.4

156.

715

7.6

158.

715

8.1

158.

415

9.7

160.

216

1.5

161.

416

1.0

162.

716

4.3

166.

616

9.2

170.

117

1.2

172.

617

4.0

176.

617

8.2

178.

718

0.6

181.

318

2.3

184.

718

5.2

186.

218

7.8

188.

618

9.3

189.

418

9.4

190.

519

2.2

193.

119

4.6

194.

019

3.8

193.

119

2.5

193.

019

3.4

193.

319

3.1

194.

019

4.0

194.

019

5.4

193.

719

4.6

196.

419

7.6

198.

619

8.4

199.

420

1.5

201.

020

1.2

199.

419

7.6

197.

719

4.4

194.

219

3.3

193.

8

Oil and gas extraction employment was up

28.8% by Oct. 2014 but falling energy prices have taken their toll

(000)

Employment in the O&G segment is down 3.8%

since its Oct. 2014 peak

MANUFACTURING SECTOR OVERVIEW & OUTLOOK

143

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

Markets and Strong Dollar143

147

Manufacturing Employment,Jan. 2010—July 2015*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

3411

,857

11,8

9911

,916

11,9

3011

,941

11,9

6511

,961

11,9

4811

,951

11,9

4711

,961

11,9

8012

,002

12,0

0612

,006

12,0

0712

,005

11,9

8312

,011

12,0

2212

,040

12,0

7212

,086

12,1

0212

,122

12,1

3112

,142

12,1

5412

,177

12,1

9112

,205

12,2

1412

,237

12,2

8212

,301

12,3

1812

,321

12,3

2712

,327

12,3

3312

,335

12,3

50

11,250

11,500

11,750

12,000

12,250

12,500Ja

n-1

0F

eb

-10

Ma

r-1

0A

pr-

10

Ma

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0Ju

n-1

0Ju

l-1

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ug

-10

Se

p-1

0O

ct-1

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ov-

10

De

c-1

0Ja

n-1

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eb

-11

Ma

r-1

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Ma

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n-1

1Ju

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Se

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De

c-1

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/30

/2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2S

ep

-12

Oct

-12

No

v-1

2D

ec-

12

Jan

-13

Fe

b-1

3M

ar-

13

Ap

r-1

3M

ay-

13

Jun

-13

Jul-

13

Au

g-1

3S

ep

-13

Oct

-13

No

v-1

3D

ec-

13

Jan

-14

Fe

b-1

4M

ar-

14

Ap

r-1

4M

ay-

14

Jun

-14

Jul-

14

Au

g-1

4S

ep

-14

Oct

-14

No

v-1

4D

ec-

14

Jan

-15

Fe

b-1

5M

ar-

15

Ap

r-1

5M

ay-

15

Jun

-15

Jul-

15

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

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

(Thousands) Since Jan 2010, manufacturing

employment is up (+890,000 or +7.8%)and still growing.

Profitability & Politics

152152

How Is Profitability Affected by the President’s Political Party?

15.10%

9.00%

8.93%

8.65%

8.35%

8.33%

7.98%

7.68%

6.98%

6.97%

5.43%

5.03%

4.83%

4.68%

4.43%

3.55%

16.43%

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

Carter

Reagan II

Obama II

Nixon

Clinton I

G.H.W. Bush

G.W. Bush II

Clinton II

Reagan I

Nixon/Ford

Truman

Eisenhower I

Eisenhower II

G.W. Bush I

Obama I

Johnson

Kennedy/Johnson

*Truman administration ROE of 6.97% based on 3 years only, 1950-52;. Source: Insurance Information Institute

OVERALL RECORD: 1950-2014*

Democrats 7.72%Republicans 7.85%

Party of President has marginal bearing on profitability of P/C insurance industry

P/C Insurance Industry ROE by Presidential Administration, 1950-2014*

-5%

0%

5%

10%

15%

20%

25%

50

52

54

56

58

60

62

64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10

12

14

BLUE = Democratic President RED = Republican President

Tru

man Nixon/Ford

Ken

ned

y/

Joh

nso

n

Eis

enh

ow

er

Car

ter

Reagan/Bush I Clinton Bush II

P/C insurance Industry ROE by Presidential Party Affiliation, 1950- 2014

Obama

. Source: Insurance Information Institute

CYBER RISK & CYBER INSURANCE

155

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and

Small in Every IndustryNonprofits Including Religious

Institutions Are Vulnerable155

Data Breaches 2005-2015, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed

*Figures as of June 30, 2015, from the Identity Theft Resource Center,http://www.idtheftcenter.org/images/breach/ITRCBreachReport2015.pdf

157

321

446

656

498

419470

614

400

783

662

117.6

85.692.0

17.522.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

800

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 *20150

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The total number of data breaches (+27.5%) hit a record high of 783 in 2014, exposing 85.6 million records. Through June 30, this year has

seen 117.6 million records exposed in 400 breaches.*

Millions

160

2014 Data Breaches By Business Category, By Number of Breaches

5.5%

11.7%

7.3%

42.5%

33.3%

Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC-Surveys-Studies/2014databreaches.html

The majority of the 783 data breaches in 2014 affected business and medical/healthcare organizations, according to the Identity Theft Resource Center.

Business, 258 (33.3%)Govt/Military, 92 (11.7%)

Banking/Credit/Financial, 43 (5.5%)

Educational, 57 (7.3%)

Medical/Healthcare, 333 (42.5%)

161

State sponsored groups: Foreign government sponsored Sophisticated and well-funded

Organized cyber criminals: Traditional organized crime groups Loosely organized global hacker crews

Hacktivists: Politically-motivated hackers Increasing capabilities

Insiders: Easy access to sensitive information Difficult to detect

Terrorists: Destruction of physical and digital assets

Evolving Threats: Cyber Crime and Cyber Terrorism

Source: Lewis Brisbois, Practical Strategies to Address Cyber Risk in Your Business, November 2014

162

Main Causes of Data Breach Globally

30%

29%

42%

*The most common types of malicious or criminal attacks include malware infections, criminal insiders, phishing/social engineering and SQL injection.Source: 2014 Cost of a Data Breach Study: Global Analysis, the Ponemon Institute, sponsored by IBM, May 2014

Malicious or criminal attacks are most often the cause of data breach globally. Some 42 percent of incidents concern a malicious or criminal attack, while 30

percent concern a negligent employee or contractor (human factor).

Malicious or criminal attack*

Human error

System glitch

163

US: Most Costly Types of Cyber Crimes, Fiscal Year 2014

4%4%

6%

8%

10%

13%

14%

18%

23%

Source: 2014 Cost of Cyber Crime: United States, Ponemon Institute.

Malicious code, denial of service and web-based attacks account for more than 55 percent of the total annualized cost of cyber crime experienced by 59 U.S. companies.

Malicious code

Viruses, Worms, Trojans

Denial of service

Botnets

Malware

Malicious insiders

Stolen devices

Phishing + social engineering

Web-based attacks

164

US: External Cyber Crime Costs: Fiscal Year 2014

2%2%

18%

38%

40%

* Other costs include direct and indirect costs that could not be allocated to a main external cost categorySource: 2014 Cost of Cyber Crime: United States, Ponemon Institute.

Information theft (40%) and business disruption or lost productivity (38%) account for the majority of external costs due to cyber crime.

Information theft

Equipment damagesOther costs*

Revenue loss

Business disruption

166

Marsh: Percentage of U.S. Companies Purchasing Cyber Insurance Increased in 2014

*Take-up rate refers to the overall percentage of clients that purchased standalone cyber insurance.Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015

8%

12%

18%

21%

21%

22%

26%

32%

50%

16%

11%

13%

14%

17%

17%

16%

22%

45%

13%

6%Manufacturing

Communications, Media and Tech

Retail/Wholesale

Power and Utilities

Financial Institutions

Services

Hospitality and Gaming

Education

Health Care

All Industries

Take-up rate 2014* Take-up rate 2013

Ever larger numbers of insureds seek financial

protection via cyber insurance. The

percentage of U.S. companies buying cyber

insurance rose to 16 percent in 2014.

167

Marsh: Total Limits Purchased, By Industry – Cyber Liability, All Revenue Size

Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015

$22.0

$4.2

$9.9 $10.5$9.5

$11.1$10.2

$13.2

$19.7

$6.7

$23.5

$10.5$12.0

$14.9

$21.0

$4.4

$22.2

$12.8

All Industries Comms, Media& Technology

Education FinancialInstitutions

Health Care Manufacturing Power andUtilities

Retail/Wholesale Services

Avg. 2013 Limits Avg. 2014 Limits

Average limits purchased for cyber risk rose to $12.8 million for all industries and all company sizes in 2014. Power and utility companies witnessed the sharpest

percentage increase in average limits, at 59 percent.

($ Millions)

169

Cyber Liability: Historical Rate (price per million) Changes

4.2%

2.8%

2.3%

2.9%

2.7%

2.1%

2.7%

3.6%

14:Q1 14:Q2 14:Q3 14:Q4

Average Total Price Per Million Change

Average Primary Price Per Million Change

Cyber insurance premiums were generally volatile in 2014 due to increased frequency and severity of losses.

Average rate increases at renewal for both primary layers and total programs were lower in Q4 2014 than in

Q1.

Source: Benchmarking Trends: As Cyber Concerns Broaden, Insurance Purchases Rise, Marsh Risk Management Research Briefing, March 2015

Data/Privacy Breach:Many Potential Costs Can Be Insured

Source: Zurich Insurance; Insurance Information Institute

Forensic costs to discover

cause

170

Source: Insurance Information Institute research.

The Three Basic Elements of Cyber Coverage: Prevention, Transfer, Response

Loss Prevention

Post-Breach Response(Insurable)

Loss Transfer (Insurance)

Cyber risk management today involves three essential components, each designed

to reduce, mitigate or avoid loss. An increasing number of cyber risk products

offered by insurers today provide all three.

171

172

I.I.I. Will Release its Third Cyber Report in 2015: Cyber Risks Threat and Opportunity

I.I.I.’s 3rd report on cyber risk scheduled for Q3 2015

Provides information on cyber threats and insurance market solutions

Global cyber risk overview

Quantification of threats by type and industry

Cyber security and cost of attacks

Cyber terrorism

Cyber liability

Insurance market for cyber risk

173

INDUSTRY DISRUPTORS

Technology, Society and the Economy Are All

Changing at a Rapid PaceThoughts on the Future

173

175

Media is Obsessed with Driverless Vehicles: Often Predicting the Demise of Auto Insurance

By 2035, it is estimated that 25% of new vehicle

sales could be fully autonomous models

Source: Boston Consulting Group.

Questions

Are auto insurers monitoring these trends?

How are they reacting?

Will Google take over the industry?

Will the number of auto insurers shrink?

How will liability shift?

176

On-Demand/Sharing/Peer-to-Peer Economy Impacts Many Lines of Insurance The “On-Demand” Economy is or

will impact many segments of the economy important to P/C insurers

Auto (personal and commercial)

Homeowners/Renters

Many Liability Coverages

Professional Liability

Workers Comp Many unanswered insurance

questions

Insurance solutions are increasingly available to fill the many insurance gaps that arise

177

Labor on Demand: Huge Implications for the US Economy, Workers & Insurers

Will YOUR job be reduced to an app?

178

Send in the Drones: Potential Rapid Adoption in Industry; Media Loves It

Drones or Unmanned Aerial Vehicle (UAV) technology is seeing rapid adoption rate in many industries, including insurance

FAA granting Section 333 exemptions for commercial use and testing of UAS

At least 5 insurers have received permission to test

Wide variety of applications: claims, pre-event property inspections…

Insurers partnering with construction industry to guide R&D and regulation of UAV use via Property Drone Consortium: www.propertydrone.org

Shifting Legal Liability & Tort Environment

180

Will the Tort PendulumSwing Against Insurers?

180

181

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

185

The Nation’s Judicial “Hellholes”: 2014/2015

Source: American Tort Reform Association; Insurance Information Institute

West VirginiaIllinoisMadison County

New York City Asbestos Litigation

Watch List

Atlantic County, New Jersey

Mississippi Delta Montana Nevada Newport News, Virginia Philadelphia,

Pennsylvania

Dishonorable Mention

AL Supreme Court PA Supreme Court

California

Florida

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Insurance Information Institute Online:

186