overview & outlook for the workers comp market: growth, performance & the economic...

Overview & Outlook for the Workers Comp Market:

Growth, Performance & the Economic Environment

Kentucky Associated General Contractors 2013 Information Exchange

February 18, 2013Download at: www.iii.org/presentations

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

Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

A Brief History of Workers Compensation Systems

2

Social Policy, History, Economics and Politics All Played Important Roles in the

Development of Modern WC Systems

3

Workers Compensation Timeline

Industrialization of US in the Late 19th/Early 20th Century Led to Increasing & Unacceptably High Number of Deaths and Injuries Among Workers

In 1912, an estimated 18,000 to 23,000 workers were killed on the job (compared to 4,609 in 2011) and approximately 4.7 million (12% or workforce) suffered a nonfatal illness or injury (compared to 3.1 million 2010)

The 1912 death/injury rates would imply 75,600 deaths and 17 million injuries today

More awareness of broader impacts on families of injured/killed workers

Workers Could Seek Redress Under Tort Law, But Seldom Prevailed

Employers usually won suits filed by injured workers by arguing:– Contributory Negligence: Employee was at least partially to blame for the accident– Assumed Risk: By taking the job, the employee understood the hazards involved– Fellow Servant Rule: A fellow worker caused the accident, so the employer was not at fault

European Countries Began to Implement Workers Compensation Programs

Germany (1884); England (1897)

Insurers Began to Sell Commercial Liability Coverage in the Late 1800s

Coverage for inadvertent errors became more commonplace

In the workforce, such policies became the first employer liability policies

Source: Insurance Information Institute.

4

Cumulative Number of WC Laws Passed, 1910-1920

1

1013

2224

32 32

37 38

42 43

0

5

10

15

20

25

30

35

40

45

1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920

No. of states

Source: http://eh.net/encyclopedia/article/fishback.workers.compensation; Insurance Information Institute.

New York was the first state to pass a WC law in 1910. By 1920, 43 of

the 48 states at that time had passed WC laws

Kentucky passed its first WC laws in 1914. These

were declared unconstitutional. New laws

were passed in 1916.

5

Key Workers Compensation Developments in the 1910s

Source: Insurance Information Institute.

6

Decade of Formation for P/C Insurers at Least 100 Years Old in 2010

39 10

22 2016

60

37

65

38

103

1 0 0 04 2

0

10

20

30

40

50

60

70

80

90

100

110

1750-59

1760-69

1770-79

1780-89

1790-99

1800-09

1810-19

1820-29

1830-39

1840-49

1850-59

1860-69

1870-79

1880-89

1890-99

1900-09

1910-19

Decade Of Formation

Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

The spike in insurer formations in the 1910s reflected, in large part, new

workers compensation that came into effect in 42 states from 1910-1919

Workplace Safety is the Paramount Concern

8

Workplace Safety Continues to Improve, in No Small Part Due to the

Efforts of Workers Comp Insurers

9

Workers Compensation Lost-Time Claim Frequency Continues to Decline*

-4.4

%

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

%

-4.5

%

-5.9

%

3.0

%

-1.0

%

-9.2

%

-4.2

%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

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

(Percent) Lost-Time Claims

Frequency resumed its

decline in 2011

Cumulative Change of -55.5%

(1991 – 2010)

2009p: Preliminary based on data valued as of 12/31/2011; *Frequency is the number of lost-time claims per $1M pure premium at current1991-2010: Based on data through 12/31/2010, developed to ultimate. wage and loss cost levels.Based on the states where NCCI provides ratemaking services including state funds; Excludes high deductible policies.

10

Frequency: 1926–2010A Long-Term Drift Downward

Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research.

Manufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers

0

5

10

15

20

25

30

'26

'28

'30

'32

'34

'36

'39

'41

'43

'45

'47

'49

'52

'54

'56

'58

'60

'62

'65

'67

'69

'71

'73

'75

'78

'80

'82

'84

'86

'88

'91

'93

'95

'97

'99

'01

'04

'06

'08

'10

The decades-long drop in the rate of occupational

injury and illness is something insurers and

employers can be proud of

12

P/C Insurance Industry Financial Overview

Catastrophe Losses Weighed Down Profits in 2012/2011;

WC Underwriting Improvements Will Benefit

2013 & Beyond12

P/C Net Income After Taxes1991–2012: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

5,2

04

$1

9,1

50

$2

6,9

81

$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 12:Q3

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:Q3 ROAS1 = 6.3%

P-C Industry 2012:Q3 profits were up 222% from 2011:Q3, due primarily to lower catastrophe losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.6% ROAS through 2012:Q3, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

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

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012:Q3 combined ratio including M&FG insurers is 100.9, ROAS = 6.3%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.099.3

100.9 100.0

106.4

95.7

6.6%

4.6%

7.6%7.4%4.4%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012:9M0%

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 ~6.6% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Year Ago

2011:Q3 = 108.1, 3.1% ROE

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

*1

2:

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012:Q3*

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:Q3 ROAS = 6.2% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2011:4.6%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2012:Q3: 6.6%

16

RNW: U.S. All P/C Lines vs. WC, 2002-2011

Sources: NAIC.

0%

2%

4%

6%

8%

10%

12%

14%

16%

02 03 04 05 06 07 08 09 10 11

US WComp US P/C: All Lines

(Percent)

Average 2002-2011

US WC: 4.9% All P/C Lines: 4.3%

Workers Comp has been less variable but

somewhat less profitable than the P/C insurance

industry overall over the past decade

4. RENEWED PRICING DISCIPLINE

17

Evidence of a Broad and Sustained Shift in Pricing

17

19

-5%

0%

5%

10%

15%

20%

25%

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

Net Premium Growth: Annual Change, 1971—2012:Q3

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

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

Net Written Premiums Fell 0.7% in 2007 (First Decline

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

2012:Q3 growth

was +4.2%

20

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

Sources: ISO, Insurance Information Institute.

Sustained Growth in Written Premiums(vs. the same quarter, prior year) Will Continue into 2013

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.

7% 3.5%

1.6%

4.1%

3.8%

3.1% 4.

2% 5.1%

-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

2011

:Q4

2012

:Q1

2012

:Q2

2012

:Q3

Premium growth in Q3 2012 was up 5.1% over Q3 2011, the strongest growth since Q4 2006

21

Growth in Net Written Premium by Segment, 2012:9 Mos. vs. 2011:9 Mos.*

*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute

3.2% 3.2%

4.0%

2.4%

4.2%

3.3%

6.1%

3.8%

0%

1%

2%

3%

4%

5%

6%

7%

All Lines Personal LinesPredominating

Commercial LinesPredominating

Diversified Insurers

2011: 9 Mos. 2012: 9 Mos.

(Percent)

22

Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2012)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9%

-11

.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%

-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

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 Q4:2012 was positive for the 6th consecutive

quarter. Gains are likely to continue through 2013.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

23

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2012:Q4

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


Percentage Change (%)

Trough = 2007:Q3 -13.6%

KRW : No Lasting Impact

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

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

nearly 8 years; Q4:2012 renewals were up 5.0%, the largest increase since late

2003; Some insurers posted stronger numbers.

UNDERWRITING

27

Underwriting Losses in 2011 and 2012 Are Elevated by High

Catastrophe Losses

27

28

P/C Insurance Industry Combined Ratio, 2001–2012:Q3*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:Q3=100.0. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.4

100.0101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012:Q3

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Lower CAT

Losses Before Sandy

29

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*

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 (1960-2011); A.M. Best (2012E) 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

8.7 9.

4

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

E

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: 7.20*

Combined Ratio Points Catastrophe losses as a share of all losses reached

a record high in 2012

30

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.1

$3

7.0

$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

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

US Insured Catastrophe Losses

*As of 1/2/13. Includes $20B gross loss estimate for Hurricane Sandy.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 2012 Will Likely Become the 2nd or 3rd Highest in US History on An Inflation-Adjusted

Basis (Pvt Insured). 2011 Losses Were the 5th Highest

2012 CAT losses were down nearly 50% from 2011 until Sandy struck in late October

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2012 Dollars)

30

Underwriting Gain (Loss)1975–2012:Q3*

* Includes mortgage and financial guaranty insurers in all years.Sources: 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 10 11 12

Cumulative underwriting deficit from 1975 through

2011 is $479B

($ Billions) Underwriting losses

through 2012:Q3

totaled $6.7B

High cat losses in 2011 led to the highest

underwriting loss since 2002

33

Combined Ratios by Predominant Business Segment, 2012:9 Mos. vs. 2011:9 Mos.*

*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute

109.4108.0

105.4

112.0

100.0 99.498.6

102.7

96

98

100

102

104

106

108

110

112

114

All Lines Personal LinesPredominating

Commercial LinesPredominating

Diversified Insurers

2011:9M 2012:9M

(Percent)

The combined ratios for both personal and commercial lines

improved substantially through 2012:Q3, prior

to Hurricane Sandy

109.4110.2

118.8

109.5

112.5

110.2

107.6

104.1

109.7 110.2

102.5

105.4

91.1

93.6

104.2

98.9

102.1

106.7

109.0

102.9102.0

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

12

F

13

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2013F figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute

Commercial Lines Combined Ratio, 1990-2013F*

Commercial lines underwriting

performance in 2012 was the worst since 2002 due

to heavy impact from Sandy

34

35

2

(2)

(8)

(3)

(7)(10) (10)

(4)

(0)

11

24

15

119

(5)

(9)

(14)

(10) (11)(7)

(5)(2)

-$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

11

E

12

F

13

F

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, 1992–2013F

Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to

Further Diminish in 2012 and 2103Note: 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: Barclays Capital; A.M. Best.

$ Billions

Calendar Year

2

5

10

15

1820

21

18

15

12

6

911

109

42

0

5

10

15

20

25

30

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

2011 Tabular Discount Is $5.4 Billion

Considers all reserve discounts as deficienciesLoss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selectionsSource: NCCI analysis

WC Loss and LAE Reserve Deficiency: Private Carriers

WC Calendar Year Reserve Deficiency Increased in 2011

Percentage of CY Total Carried

Reserves

33%

10%

Workers Compensation Operating Environment

42

The Stronger Job Market, Rates Are Major Drivers of Growth; Underwriting

Improvements to Come

42

Workers Compensation Combined Ratio: 1994–2014F

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5

103.

5

104.

5 110.

6 116.

8

116.

9

117.

3

115.

0

111.

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 12E 13F 14F

Workers Comp Results Should Begin to Improve in 2013. Underwriting Results Deteriorated Markedly from 2007-2012 and Were the Worst They Had Been in a Decade.

Sources: A.M. Best (1994-2013F); Insurance Information Institute (2014F). 43

Workers Compensation Medical SeverityModerate Increase in 2011

44

Accident Year

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

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

2011p: Preliminary based on data valued as of 12/31/20111991-2010: Based on data through 12/31/2010, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes high deductible policies

Cumulative Change = 245%(1991-2011p)

4.5%

3.5%2.8%

3.2% 3.5%4.1%

4.6% 4.7%4.0%

4.4% 4.2% 4.0%4.4%

3.7%3.2% 3.4% 3.2%

5.1%

7.4%

10.1%10.6%

13.5%

5.4%

8.5%

6.3% 6.1%

4.2% 4.0%

1.3%

5.9%

8.8%

7.7%

7.3%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1995 1997 1999 2001 2003 2005 2007 2009 2011

Change in Medical CPI

Change Med Cost per Lost Time Claim

WC Medical Severity Generally Outpaces the Medical CPI Rate

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

Average annual increase in WC medical severity form 1995 through

2011 was more than double the medical CPI (7.9% vs. 3.9%).

$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

6.2

$1

6.7

$1

7.5

$2

2.3

$2

2.5

$2

2.3$

18

.3

$1

7.6

$1

9.3

$2

0.8

$2

1.9

-2.8%+0.6%+8.8%

+2%

+5.5%

+3.6%+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%

+6.5%

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 2010 2011p

IndemnityClaim Cost ($ 000s)

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2010:+3.4%

2010p: Preliminary based on data valued as of 12/31/20111991–2010: Based on data through 12/31/2010, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes high deductible policies

Accident Year

Workers Comp Indemnity Claim Costs: Modest Increase in 2011

Average indemnity costs per claim resumed its upward climb in 2011

Average Indemnity Cost per Lost-Time Claim

4.2%

5.2%5.6%

4.7%

6.3%

2.3%

1.1%

2.7%

4.3%4.7% 4.6%

2.7%

5.9%

7.7%

9.0%

10.1%

4.6%

3.6%

5.6%

6.6%

8.8%

3.0%2.3%

1.1%3.5%

3.6%

2.0%

0.6%

-2.8%

1.0%1.7%

10.1%

9.2%

3.1%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1995 1997 1999 2001 2003 2005 2007 2009 2001p

Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim

WC Indemnity Severity vs. Wage Inflation, 1995 -2011p

2011p: Preliminary based on data valued as of 12/31/2011; 1991-2010: Based on data through 12/31/2010, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI

WC indemnity severity turned

positive again in 2011

Annual Change 1991–1993: -1.9%Annual Change 1994–2001:+7.3%Annual Change 2002–2010:+3.4%

Indemnity severities usually

outpace wage gains

Workers Compensation Premium: First Increase in YearsNet Written Premium

$ Billions

Calendar Yearp Preliminary

Source: 1990–2010 Private Carriers, Best's Aggregates & Averages; 2011p, NCCI1996–2011p 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

49

Workers Comp Combined Ratio vs. Net Written Premium Growth, 1990—2013F

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 12E13F

Co

mb

ine

d R

ati

o

-15%

-10%

-5%

0%

5%

10%

15%

20%

An

nu

al C

ha

ng

e in

WC

NW

P

WC Combined Ratio WC Change in NPW

Sources: Combined Rations: A.M. Best (1990-2013F); NWP Growth A.M. Best (1990-2012E); Insurance Information Institute (2013F).

WC Premium volume

contracted by double digits

in 2008-09

WC Premium growth is

estimated to be in the 10% range

in 2012-13

Fig. 3

$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*

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

50

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2012E

*Shaded areas indicate recessions.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 Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005

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

+10% in 2012E

Payroll reached a record 6.88 trillion

in 2012

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

-0.7

0.4

7.8

-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*

Percent

Calendar Year

Cumulative1990–1993

+36.3%

Cumulative 2000–2003

+17.1%


-25.6%


-27.8%

*States approved through 7/31/12.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

Approve rates/loss costs are seeing their

first significant increase since 2003

Current NCCI Voluntary MarketFiled Rate/Loss Cost Changes(Excludes Law-Only Filings)

53

Ratio

•IN and NC filed in cooperation with state rating bureauSource: NCCI

Impact of Discounting on Workers Compensation PremiumNCCI States—Private Carriers

54

Policy Yearp Preliminary

Dividend ratios are based on calendar year statisticsNCCI benchmark level does not include an underwriting contingency provisionBased on data through 12/31/2011 for the states where NCCI provides ratemaking servicesSource: NCCI.

Percent

55

Change in Commercial Rate Renewals, by Line: 2012:Q4

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

Major Commercial Lines Renewed Uniformly Upward in Q4:2012 for the Sixth Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat

Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

4.4% 4.4%4.9%

5.7%

9.0%

1.3%

3.2% 3.3% 3.4% 3.5% 3.4%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

Su

rety

Bu

sin

ess

Inte

rru

ptio

n

Ge

ne

ral

Lia

bili

ty

Co

mm

erc

ial

Au

to

Um

bre

lla

Co

mm

erc

ial

Au

to EP

L

Co

nst

ruct

ion

D&

O

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

Workers Comp rate increases are large than any other line, followed

by Property lines


Workers Comp Rate Changes,2008:Q4 – 2012: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% 7.4%8.3% 8.1%

9.0%

-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 12:Q1 12:Q2 12:Q3 12:Q4

WC rate changes have been positive for 7

consecutive quarters, longer than any other

commercial line

(Percent Change)


57

Workers Comp. Quarterly Rate Changes, by Line: 2000:Q1 to 2012:Q4

1999:Q4 = 100

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


Most accounts are now renewing

upwards

58

Experience Rating Change:Spit Point Modification

Experience Rating Was Developed in the Early 20th Century as Method for Adjusting Premium Costs to Reflect Actual Claims Experience

Current Experience Rating Plan (ERP) Includes a “Split Point” which Allows the Plan to Be More Responsive to the Distinction Between Costs Derived from Frequency and Severity

Current Split Point is $5,000 (Hasn’t Been Adjusted in 20+ Years)

Primary Loss = Amt. up to $5,000 reflects frequency (given full weight under ERP)

Excess Loss = Amt. above $5,000 reflects severity (partially weighted)

Claim severity inflation has tripled since last update, so split point less effective (ERP less responsive to individual claim experience) as ex-mods drifted toward all-average

New Spilt Point Phased Up to $15,000 Over 3-Year Period

Year 1 (1/1/13 or later): Split point increases to $10,000

Year 2: Increases to $13,500

Year 3: Increase to $15,000

Revenue Neutral in Aggregate

Insureds running high severity claims will see most significant impact

Source: NCCI; Insurance Information Institute.

Experience Rating Plan Primary/Excess Split Point Value Filing

61

Approved

Recommended

Filed

AK

OR

UT

MT

SD

KS

NE

OKNM

MO

AR

LA

MS

KY

TN

AL

FL

WI

IN

PA

NY

ME

WV

NC

SC

GA

VA

IL

MI

IA

MN

TX

CO

AZ

ID

NV

CA

NHMA

RICT

NJ

VT

HI

DE

DCMD

63

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 1/13; Insurance Information Institute.

2.7

%0

.5%

3.6

%3

.0%

1.7

%-1

.8%

1.3

%-3

.7%

-5.3

%-0

.3%

1.4

%5

.0%

2.3

%2

.2%

2.6

%2

.4%

0.1

%2

.5%

1.3

%4

.1%

2.0

%1

.3% 3

.1%

1.6

%2

.1%

2.5

%2

.7%

2.7

%2

.8%

2.9

%3

.0%

-0.1

%

-8.9%

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

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

14

:1Q

14

:2Q

14

:3Q

14

: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

was severe

The Q4:2008 decline was the steepest since the Q1:1982

drop of 6.8%

2013 is expected to see initially slow

growth, then gradually accelerate throughout the year and into 2014

State-by-State Leading Indicatorsthrough 2013:Q1

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 64

5 Fastest Growing StatesSouth Carolina 6.97%Michigan 4.32%West Virginia 3.59%Idaho 3.14%Georgia 3.04%

5 Slowest Growing StatesWyoming -1.09%

Delaware -0.24%North Dakota -0.19%Vermont 0.09%Minnesota 0.18%

Near-term growth forecasts vary widely by state

74

.47

3.6

73

.67

2.2

73

.6 76

67

.86

8.9

68

.26

7.7 7

1.6 74

.57

4.2 77

.56

7.5 69

.8 74

.37

1.5

63

.75

5.7 5

9.5

60

.9 64

.16

9.9

75

.07

5.3

76

.27

6.4 79

.37

3.2

72

.3 74

.38

2.6

82

.77

4.5

73

.8 76

.8

40

45

50

55

60

65

70

75

80

85

90

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

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13

Fe

b-1

3

Consumer Sentiment Survey (1966 = 100)

January 2010 through February 2013

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

consumers, but improved substantially in late 2011 and in 2012

Source: University of Michigan; Insurance Information Institute

Optimism among consumers rose in February despite tax hike, federal budget concerns

65

66

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

-5.6%

-17.3%

-5.3%

7.8%

15.0%

22.3%

1.2%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

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

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: +15.0% Public: -5.6%

Public sector construction activity remains depressed

67

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

6.6%

-3.1%

16.6%

-10.2%

10.4%

-4.5%

13.7%

-0.2%

-7.8%

15.0%

23.6%

7.6%

21.2%25.2%

-15%-10%

-5%0%5%

10%15%20%25%30%

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

erci

al

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

Man

ufa

ctu

rin

g

Private Construction Activity is Up in Most Segments, Including the Key Residential Construction Sector

Growth (%) Led by the Residential Construction, Lodging, Office, Transportation and Power industries, Private sector

construction activity is up across many segments after plunging during the “Great Recession”


68

(Millions of Units)

New Private Housing Starts, 1990-2014F

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

1 0.7

8

0.9

9

1.2

01.3

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 11 12F 13F 14F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (2/13); Insurance Information Institute.

Homeowners Insurers Are Starting to See Meaningful Exposure Growth for the First Time Since 2005. Commercial Insurers with Construction Risk

Exposure, Surety Also Benefit

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 are stimulating new

home construction for the first time in years

69

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

4.1%

-6.4%-12.2%

-1.6%

15.6%

-4.6%

-13.8%

-2.9%-8.8%

-6.3%-5.6%

-17.3%

-5.3%

-21.4%

-29.9%-40%

-30%

-20%

-10%

0%

10%

20%

To

tal

Pu

bli

cC

on

stru

ctio

n

Res

iden

tial

To

tal

No

nre

sid

enti

al

Off

ice

Co

mm

erci

al

Hea

lth

Car

e

Ed

uca

tio

nal

Pu

bli

c S

afet

y

Am

use

men

t &

Rec

.

Tra

nsp

ort

atio

n

Po

wer

Hig

hw

ay &

Str

eet

Sew

age

&W

aste

Dis

po

sal

Wat

er S

up

ply

Co

nse

rvat

ion

&D

evel

op

.

Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2013.

Growth (%)


Public sector construction activity is down substantially in many

segments, but is actually now up in some key segments

Transportation and Power projects lead public sector

construction

70

Construction Employment,Jan. 2010—January 2013*

*Seasonally adjustedSources: 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

7 5,51

95,

499

5,50

15,

497

5,46

85,

435

5,47

85,

485

5,49

7 5,52

45,

530

5,54

75,

546 5,

583

5,57

65,

577 5,

612

5,62

95,

644

5,64

05,

636

5,61

55,

622

5,62

75,

630

5,63

35,

649 5,67

3 5,70

3 5,73

1

5,400

5,450

5,500

5,550

5,600

5,650

5,700

5,750

5,800

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

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Construction employment growth accelerated in the second half of 2012. Stronger growth in this key

sector is possible in 2013.

(Thousands)

71

Construction Employment, Jan. 2003–Jan. 2013

Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

5,000

5,500

6,000

6,500

7,000

7,500

8,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

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

The Construction Sector Could Be a Growth Leader in 2013 and 2014 as the Housing Market and Private Investment Recover. Commercial Insurers Will Benefit.

Construction employment

troughed at 5.435 million in Jan.

2011, after a loss of 2.291 million jobs, a 29.7%

plunge from the April 2006 peak

71

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of Jan. 2013 totaled 5.731 million, an

increase of 296,000 jobs or 5.4% from the

Jan. 2011 trough

58

.35

7.1

60

.45

9.6

57

.85

5.3

55

.15

5.2

55

.3 56

.9 58

.25

8.5 6

0.8

61

.45

9.7

59

.75

4.2 55

.85

1.4 52

.55

2.5

51

.85

2.2 53

.1 54

.15

1.9 53

.35

4.1

52

.55

0.2

50

.55

0.7

51

.65

1.7

49

.95

0.2

53

.1

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

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Se

p-1

2

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through January 2013

The manufacturing sector expanded for 33 of the 37 months from Jan. 2010 through Jan. 2013. The question is whether this will continue.

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

Manufacturing activity expanded in 3 of the past 4 months, but only

slightly. The recent trend is basically flat.

72

73

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4 15

.0 15.6

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F

(Millions of Units)

Auto/Light Truck Sales, 1999-2014F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (1/13); Insurance Information Institute.

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

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2013-14 is

still far below 1999-2007 average of 17 million units, but a robust

recovery is well underway.

Job growth and improved credit market conditions will boost auto sales in

2013 and beyond

74

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Dec. 2012

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

Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to Dec. 2012 was 36%. Manufacturing is an

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

ENERGY INTENSIVE

The value of Manufacturing Shipments in Nov. 2012 were up 36% to $484.9B from its May 2009 trough.

June figure is only 0.1% below its previous record high in July 2008.

$ Millions

74

75

Manufacturing Growth for Selected Sectors, 2012 vs. 2011*

9.1%

2.5%

11.2%

2.0% 2.6%

4.9%

-1.5%

3.9% 4.3%4.3%

7.0% 7.0%

12.4%

3.8%

-4%-2%0%2%4%6%8%

10%12%14%

All

Ma

nu

fact

uri

ng

Du

rab

le M

fg.

Wo

od

Pro

du

cts

Pri

ma

ryM

eta

ls

Fa

bri

cate

dM

eta

ls

Ma

chin

ery

Ele

ctri

cal

Eq

uip

.

Tra

nsp

ort

atio

nE

qu

ip.

No

n-D

ura

ble

Mfg

.

Fo

od

Pro

du

cts

Pe

tro

leu

m &

Co

al

Ch

em

ica

l

Pla

stic

s &

Ru

bb

er

Te

xtile

Pro

du

cts

Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial

Property, Commercial Auto and Many Liability Coverages

Growth (%)

Manufacturing of durable goods was especially

strong in 2012

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

Durables: +7.0% Non-Durables: +2.2%

77

Manufacturing Employment,Jan. 2010—January 2013*

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

4111

,870

11,9

1011

,920

11,9

2611

,935

11,9

5711

,943

11,9

2511

,931

11,9

3811

,946

11,9

50

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Manufacturing employment is up by nearly 500,000 or 4.3% since Jan. 2010

—a surprising source of strength in the economy. Employment in the

sector is close to a multi-year high.

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

(Thousands)

50

.7 52

.7 54

.15

4.6

54

.85

3.5

53

.75

2.8 53

.95

4.6 56 5

7.1 5

9.4

59

.75

6.3

54

.45

3.3

53

.45

3.8

52

.65

2.6

52

.65

2.6

53

.05

6.8

56

.15

5.0

53

.75

4.1

52

.75

2.9 54

.3 55

.25

4.8

54

.85

5.7

55

.2

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

Fe

b-1

2

Ma

r-1

2

Ap

r-1

2

Ma

y-1

2

Jun

-12

Jul-

12

Au

g-1

2

Se

p-1

2

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13

ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through January 2013

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

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

Optimism among non-manufacturers is stable

and remains expansionary in 2013

78

79

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

5371

,549

70,6

4362

,304

52,3

7451

,959

53,5

4954

,027

44,3

6737

,884

35,4

7240

,099

38,5

4035

,037

34,3

1739

,201

19,6

95 28,3

2243

,546

60,8

3756

,282

47,8

0630

,620

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 1112

:H1

Business Bankruptcy Filings,1980-2012: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

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

than tripled during the financial crisis. Through Q3:2012, filings were down 15.8% vs. Q3:2011

% Change Surrounding Recessions

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

79

80

Private Sector Business Starts, 1993:Q2 – 2012:Q2*

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

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

207

199

191 19

317

2 176

169

184

175 17

918

820

018

3 187 19

119

719

319

1

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 12

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

Are Recovering Slowly* Data through Jun. 30, 2012 are the latest available as of Feb. 6, 2013; Seasonally adjusted. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up 2.2% to 748,000 in 2011 vs. 2010. In 2012, starts are likely to be up by about

2.7% over 2011 levels.

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 742,000 2011: 748,000*

80

82

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking)

83

P/C Insurance Growth Analysis by State and Line

Premium Growth Rates Vary Tremendously by State

Economy Plays a Big Role

83

86

Direct Premiums Written: Comm. LinesPercent Change by State, 2006-2011*

10

0.9

60

.8

38

.9

28

.9

27

.9

25

.6

14

.9

8.3

4.0

2.9

2.7

0.9

0.2

0.0

-0.5

-1.5

-2.5

-3.0

-6.3

-6.4

-6.6

-6.6

-6.7

-7.6

-7.8

-7.9

-20

0

20

40

60

80

100

120

ND

SD

MT IA NE

KS

OK

WY

MN

TX

AK WI

VT IN AR

LA

TN

DC IL

OH

MA

NM

MS

WA

NY

NC

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Only 12 states showed any commercial lines growth

2006 and 2011

87

Direct Premiums Written: Comm. LinesPercent Change by State, 2006-2011*

-7.9

-8.0

-8.1

-9.0

-10

.0

-10

.1

-10

.8

-11

.4

-11

.6

-12

.2

-12

.7

-12

.9

-13

.2

-13

.2

-13

.6

-14

.7

-15

.0

-16

.0

-16

.7

-19

.4

-19

.8

-19

.9

-23

.7

-24

.4

-26

.4

-33

.0

-40

-35

-30

-25

-20

-15

-10

-5

0

KY

PA

MO

US

ME

CT

SC AL

VA

GA ID

MD NJ RI

CO

UT

OR MI

DE

CA

NH HI

FL AZ

WV

NV

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


88

Direct Premiums Written: Workers’ CompPercent Change by State, 2006-2011*

32

1.6

16

0.5

13

.2

12

.7

10

.9

1.2

0.6

-1.5

-6.3

-6.9

-7.0

-10

.4

-10

.5

-11

.6

-13

.3

-13

.4

-14

.6

-14

.8

-15

.3

-16

.1

-16

.4

-17

.0

-17

.2

-18

.6

-19

.4

-19

.8

-50

0

50

100

150

200

250

300

350

ND

MT

SD IA

OK WI

NY

KS

WY IL CT

OH PA

NE

NJ

MN MI

ME IN MA

NC LA

NM VA RI

AL

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.


Top 25 States

89

Direct Premiums Written: Worker’s CompPercent Change by State, 2006-2011*

-19

.8

-19

.9

-21

.0

-22

.2

-22

.9

-23

.0

-23

.1

-23

.1

-23

.4

-23

.6

-25

.5

-25

.6

-26

.1

-28

.4

-29

.0

-29

.2

-29

.6

-29

.8

-36

.1

-40

.3

-43

.8

-44

.2

-45

.2

-46

.1

-49

.0

-52

.5-55

-50

-45

-40

-35

-30

-25

-20

-15

TN

MS

US

OR ID SC

AR

TX

GA

DC

MD

KY

VT

AK

MO

NH AZ

CA

CO

UT

WA

DE HI

NV

WV

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.


93

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

93

94

Unemployment and Underemployment Rates: Stubbornly High in 2012, 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

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 7.9% in

Jan. 2013—lowest in 4 years.

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 14.4%

in Jan. 2013

January 2000 through Jan. 2013, 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 is now clearly improving

94

22

75

41

68

50

12

36

61

-79

24 6

8 74

51

2-1

14

-10

5-2

22

-21

9-2

03

-26

7-2

69

-42

9-4

84

-78

6 -70

1-8

21

-69

2-8

12

-82

1-2

88

-44

2-2

82 -2

22 -1

62

-23

3-3

4-1

67

-17

-26

17

01

02

94 10

31

29

11

3 18

81

54

11

48

02

43

22

3 30

31

83

17

72

06

12

92

56

17

41

97 24

9 32

32

65

20

81

20 15

27

81

77

13

11

18

21

7 25

62

02

16

6

11

1(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Fe

b-0

7M

ar-

07

Ap

r-0

7M

ay-

07

Jun

-07

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Fe

b-1

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

Monthly Change in Private Employment

January 2008 through Jan. 2013 (Thousands)

Private Employers Added 6.07million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 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

166,000 private sector jobs were

created in January

95

Jobs Created2012: 2.247 Mill2011: 2.420 Mill2010: 1.235 Mill

-0.0

17

-0.0

43

0.06

8

0.23

8

0.34

0

0.43

4

0.53

7

0.66

6

0.77

9

0.96

7

1.12

1

1.23

5

1.31

5

1.55

8

1.78

1

2.08

4

2.26

7

2.44

4

2.65

0

2.77

9

3.03

5

3.20

9

3.40

6

3.65

5

3.97

8

4.24

3

4.45

1

4.57

1

4.72

3

4.80

1

4.97

8

5.10

9

5.22

7

5.44

4

5.70

0

5.90

2

6.06

8

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Mill

ion

sCumulative Change in Private Sector Employment: Jan. 2010—Jan. 2013

January 2010 through January 2013* (Millions)

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

Cumulative job gains through Jan. 2013 totaled 6.08 million

97

Job gains and pay increases have added more than $600 billion to payrolls

since Jan. 2010

Private Employers Added 6.07million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

100

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

10

.2

10

.2

9.8

9.6

9.2

8.9

8.7

8.6

8.6

8.6

8.5

8.4

8.4

8.2

8.2

8.1

8.0

7.9

7.9

7.8

7.6

7.6

7.6

7.5

7.3

7.1

0

2

4

6

8

10

12

14

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

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for December 2012, seasonally adjusted.

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

In December, 22 states reported over-the-month unemployment rate

decreases, 16 states and the District of Columbia had increases, and 12 states

had no change.

KY’s unemployment rate is slightly above

the US average

101

7.1

6.9

6.7

6.7

6.7

6.6

6.6

6.6

6.6

6.4

6.1

5.7

5.7

5.5

5.5

5.5

5.4

5.2

5.2

5.1

5.1

4.9

4.9

4.4

3.7

3.2

0

2

4

6

8

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

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, December 2012: Lowest 25 States*

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

In December, 22 states reported over-the-month unemployment rate

decreases, 16 states and the District of Columbia had increases, and 12 states

had no change.

102

US Unemployment Rate Forecast

4.5

%4

.5%

4.6

%4

.8%

4.9

% 5.4

% 6.1

%6

.9%

8.1

%9

.3%

9.6

% 10

.0%

9.7

%9

.6%

9.6

%

8.9

%9

.1%

9.1

%8

.7%

8.3

%8

.2%

8.1

%7

.8%

7.8

%7

.7%

7.6

%7

.5%

7.4

%7

.3%

7.1

%7

.0%

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

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

: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 (2/13 edition); Insurance Information Institute.

2007:Q1 to 2014:Q4F*

Unemployment forecasts have been revised slightly

downwards. Optimistic scenarios put the

unemployment as low as 7.0% by Q4 of next year.

Jobless figures have been revised

slightly downwards for 2013/14

103

US Unemployment Rate Forecasts

7.7% 7.6% 7.6% 7.5%

7.4% 7.3%7.1% 7.0%7.0% 6.9%6.7%

6.5%

7.8%7.9% 7.9%7.9%

7.5%

7.8%7.7%

7.6%

7.2%7.4%

7.6%7.7%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

13:Q1 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4

10 Most PessimisticConsensus/Midpoint10 Most Optimistic

Unemployment will remain high even under the most optimistic of scenarios, but

forecasts are being revised downwards

Sources: Blue Chip Economic Indicators (Feb. 2013); Insurance Information Institute

Quarterly, 2013:Q1 to 2014:Q4

Fig. 2

104

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2012:Q3

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

$7,00005

:Q1

05:Q

2

05:Q

3

05:Q

4

06:Q

1

06:Q

2

06:Q

3

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

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2012:Q2) was $6.88 trillion, a new peak--$663B

above 2009 trough

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

5.3% from prior peak

Growth rates in 2012Q1:12 over Q4:11: 1.8%Q2 over Q1: 1.4%

Q3 over Q2: 0.3%

Pace of payroll growth is slowing

in 2012

104

106

Mass Layoff Announcements,Jan. 2002—December 2012*

*Seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics at http://www.bls.gov/mls/; National Bureau of Economic Research (recession dates); Insurance Information Institute.

500

1,000

1,500

2,000

2,500

3,000

3,500

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

Mass layoff announcements peaked at more than 3,000 per

month in Feb. 2009

There were 1,509 mass layoffs announced in

Dec. 2012, a sharp drop from Nov.’s Hurricane Sandy induced spike

INVESTMENTS: THE NEW REALITY

109

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence

Underwriting & Pricing 109

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

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$53.4$56.2

$50.8

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

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

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

Crisis Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2012F figure is III estimate based on annualized actual 9M:2012 result of

$38.089B.Sources: ISO; Insurance Information Institute.

($ Billions)

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

113

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2013*

*Monthly, through Jan. 2013. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

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

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

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

rose 48bp from its all time record lows to 1.91% in Jan. 2013

113

116

-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*

116

2. SURPLUS/CAPITAL/CAPACITY

117

How Will Large Catastrophe Losses Impact Capacity?

117

119

Policyholder Surplus, 2006:Q4–2012: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

$559.2 $559.1

$538.6

$550.3

$567.8

$583.5

$570.7$566.5

$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 11:Q4 12:Q1 12:Q2 12:Q3

2007:Q3Pre-Crisis Peak

Surplus as of 9/30/12 was up $12.8B or 2.2% from the

previous record high of $570.7B set as of 3/31/12.

*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 $0.80

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 Both Entered and Emerged from the 2012 Hurricane

Season Very Strong Financially. There is No Insurance Industry “Fiscal Cliff”

Impacts of Aging and Obesity in the Workforce

120

121

Fatal Work Injury Rates Improved SlightlySince 2006 but Still Climb Sharply With Age

2.8

2.7 3.

3 3.7 4.

2

5.0

11.2

2.6 3.

0 3.1 3.4 4.

1 4.6

10.2

2.4 2.6 2.7 3.

2 3.7

4.5

12.2

2.5

2.4

2.4 3.

0 3.6 4.

3

12.1

2.8

2.2 2.

7 2.9 3.

6

4.7

11.9

0

2

4

6

8

10

12

14

18-19 20-24 25-34 35-44 45-54 55-64 65+

2006

2007

2008

2009

2010

Source: US Bureau of Labor Statistics, at http://www.bls.gov/iif/oshcfoi1.htm/#2010

The fatality rate for workers 65 and older was 5 times that of workers age 25-34. The workplace of the future will have to

be completely redesigned to accommodate the surge in older workers.

Fatal Work Injury Rate per 100,000 full-time-equivalent workers No improvement in

fatal work injury rate for this age group

122

Older Workers Lose More Daysfrom Work Due to Injury or Illness

56

910

12

15

56

9

1112

13

56

8

10

13

15

56

9

12

14 14

0

2

4

6

8

10

12

14

16

20-24 25-34 35-44 45-54 55-64 65+

2008200920102011

Source: US Bureau of Labor Statistics, Nonfatal Occupational Injuries and Illnesses Requiring Days Away From Work, 2011 (Table 10), released November 8, 2012.

Median Days Away From Work

Youngest baby boomer is age 49 (in 2013)

Median lost time of workers age 65+ is 2-3X that of workers age 25-34. These numbers are pretty stable—they haven’t changed much since 2008.

Oldest baby boomer is age 67 (in 2013)

123

Older Workers Are MuchMore Likely to Break a Bone

3.1 3.7 4.0 4.35.9 6.4

15.313.4

9.9

7.47.86.7

0

2

4

6

8

10

12

14

16

18

20-24 25-34 35-44 45-54 55-64 65+

Fractures Multiple Traumatic Injuries

*per 10,000 full-time-equivalent workersSource: US Bureau of Labor Statistics, US Department of Labor at http://www.bls.gov/news.release/pdf/osh2.pdf Table 14

Incidence Rate* (2011)

124

Older Workers Are More Likely to Slip When Walking, but Less Likely to Overexert Themselves

10

.9 12

.7 17

.0 22

.3

30

.6 35

.1

34

.7 37

.7

44

.3 49

.6

39

.6

23

.8

10

.212

.1

12

.8

11

.4

10

.5

9.9

0

10

20

30

40

50

60

20-24 25-34 35-44 45-54 55-64 65+

Vehicles Floors, Walkways, etc. Overexertion

Source: US Bureau of Labor Statistics, US Department of Labor at http://www.bls.gov/news.release/pdf/osh2.pdf Table 14

Incidence Rate (2011)

Source/Nature of Injury:

Incidence rate for injury caused by vehicles is

about the same for all age groups

The Obesity Epidemic

125

In 1994, in no state was the percent of adults who were obese as high as 20%.

By 2010, all 50 states had adult obesity rates of 20% or more. In 12 states, 30% of the

adults were obese.

Obesity Trends Among U.S. AdultsBRFSS, 2010

(*BMI ≥30, or ~ 30 lbs. overweight for 5’ 4” person)

Source: http://www.cdc.gov/obesity/data/trends.html#State

129

The Most Obese Workers File Twice as ManyWC Claims as Healthy-Weight Workers

75

.21

40

.97

60

.17

14.19

18

3.6

3

11

7.6

1

5.535.80

7.05

10.80

8.81

11.65

0

20

40

60

80

100

120

140

160

180

200

BMI <18.5(Underweight)

18.5-24.9(HealthyWeight)

25-29.9(Overweight)

30-34.9 (ObeseClass I)

35-39.9 (ObeseClass II)

40+ (ObeseClass III)

Los

t W

ork

day

s p

er 1

00 F

TE

s

4

6

8

10

12

Cla

ims

per

100

FT

Es

Lost Workdays Claims

Source: Ostbye, T., et al, “Obesity and Workers Compensation,” Archives of Internal Medicine, April 23, 2007.

The most obese have twice as many claims and 13 times

more lost workdays than healthy weight workers

130

WC Medical Claims and Indemnity Costsare 5-10x Higher for the Most Obese Workers

$7,1

09

$13,

338

$19,

661

$3,9

24

$5,3

96 $13,

569

$34,

293

$7,5

03

$51,

091

$23,

373

$23,

633

$59,

178

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

BMI <18.5(Underweight)

18.5-24.9(Healthy Weight)

25-29.9(Overweight)

30-34.9 (ObeseClass I)

35-39.9 (ObeseClass II)

40+ (ObeseClass III)

Medical Claims Costs Indemnity Claims Costs

Source: Ostbye, T., et al, “Obesity and Workers Compensation,” Archives of Internal Medicine, April 23, 2007.

Indemnity costs are 11 times higher for the most obese workers than for

healthy-weight workers.

www.iii.org

Thank you for your timeand your attention!

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

Insurance Information Institute Online:

132

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