property-casualty insurance: the road ahead in the post ...recession world namic management seminar...

Property-Casualty Insurance: The Road Ahead in the Post-

Recession WorldNAMIC Management Seminar

Bretton Woods, NHJune 23, 2010

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

2

Presentation Outline

Reasons for Optimism, Causes for ConcernInsurance Industry Financial Overview & Outlook

ProfitabilityPremium GrowthUnderwriting Performance: Commercial & Personal LinesFinancial Market Impacts

Capital & CapacityFinancial Strength & Ratings

Key Differences Between Insurer and Bank Performance During Crisis

The Global Economic Storm: Financial Crisis & RecessionExposure, Growth & Profitability

Crisis-Driven Exposure Issues: Personal & Commercial LinesWhen and Where Will Growth Return?

Threats and Issues Facing P/C Insurers Through 2015Catastrophe Loss TrendsQ&A

2010 NAMIC Management Conference - Hartwig of 60

3

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

Economic Recovery in US is Self-Sustaining: No Double Dip RecessionEuropean Debt Crisis Will Pass; Concerns are Overblown

Volatility will remain a reality, however

Era of Mass Commercial Insurance Exposure Destruction Has EndedBut restoration of destroyed exposure will take 3+ years in US

No Secondary Spike in Unemployment or Swoon in Payrolls/WC ExposureBut wage growth remains sluggish

Exposure Growth Will Begin in Earnest in 2nd Half 2010, Accelerate in 2011Increase in Demand for Commercial Insurance is in its Earliest Stages and Will Accelerate in 2011

Includes workers comp, commercial auto, marine, many liability coverages, D&OLaggards: Property, inland marine, aviationPersonal Lines: Auto leads, homeowners lags

P/C Insurance Industry Will See Growth in 2011 for the First Time Since 2006Investment Environment Is/Remains Much More Favorable

Volatility, however, will persist and yields remain lowBoth are critical issues in long-tailed commercial lines like WC, Med Mal, D&O

Source: Insurance Information Institute.

4

P/C Insurance Industry Capacity as of 3/31/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis

As of 12/31/09 capacity was within 2% of pre-crisis high

Record Capacity, Depressed Exposures Mean that Generally Soft Market Conditions Will Persist through 2010 and Potentially into 2011There is No Catalyst for a Robust Hard Market at the Current TimeHigh First Half 2010 CAT Losses Insufficient to Trigger Hard Market

Localized insurance and reinsurance impacts are occurring, especially earthquake coverage in Latin/South America, Offshore Energy Markets, European Wind Cover

Inflation Outlook for US and Major European Economies and Japan is TameWill temper claims inflation

Financial Strength & Ratings of Global (Re)Insurance Industries Remained Strong Throughout the Financial Crisis in Sharp Contrast With BanksInsurers Have Avoided (So Far) the Most Draconian Outcomes in Financial Services Reform LegislationTort Environment in US is Beginning to Deteriorate; No Tort Reform in USMajor Transformation of US Economy Underway with Major Opportunities for Insurers through 2020 in Health, Tech, Natural Resources, Energy


Reasons for Optimism, Causes for Concern in the P/C Insurance Industry


P/C (Re) Insurance Financial Performance

5

A Resilient Industry in Challenging Times

6

Profitability

Historically Volatile


P/C Net Income After Taxes1991–2010:Q1 ($ Millions)

$14,

178

$5,8

40

$19,

316

$10,

870 $20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$62,

496

$3,0

43 $8,8

56

$28,

311

-$6,970

$65,

777

$44,

155

$20,

559

$38,

501

-$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:Q1

2005 ROE*= 9.6%2006 ROE = 12.7%2007 ROE = 10.9%2008 ROE = 0.3%2009 ROAS1 = 5.8%2010:Q1 ROAS = 6.7%

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields an 8.3% ROAS for 2010:Q1, 7.3% for 2009 and 4.4% for 2008. 2009 net income was $34.5 billion and $20.8 billion in 2008 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

P-C Industry 2010:Q1 profits rose vs. -$1.3B in 2009:Q1, due mainly to $1B in realized capital

gains vs. -$8B in previous realized capital losses

8

ROE: P/C vs. All Industries1987–2009*

* Excludes Mortgage & Financial Guarantee in 2008 and 2009.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

US P/C Insurers All US Industries

P/C Profitability IsCyclical and Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)


9

ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2010*

* Return on average surplus in 2008/09 excluding mortgage and financial guaranty insurers.Source: The Geneva Association, Insurance Information Institute

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

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

-13.

2 pt

s +1.7

pts

+2.3

pts

-9.0

pts

-6.4

pts

-3.2

pts

The P/C Insurance Industry WellShort of Its Cost of Capital in 2008 but

Narrowed the Gap in 2009 and Early 2010

US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from

1991 to 2002, but on Target or Better 2003-07, Fell Short in 2008/09

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

Attract and Retain Capital to the Business

(Percent)

-2.1

pts

10

Median ROE for Insurers vs. Financial Firms & Other Key Industries 2009(Profits as a % of Stockholders’ Equity)

Source: Fortune, May 3, 2010; Insurance Information Institute.

9%9%9%

7%7%

5%4%

0%3.5%

10.5%12%

14%14%

19%21%21%

$0 $0 $0 $0 $0 $0

Food Consumer ProductsPharmaceuticals

Computers, Office Equip.Health Insurance & Mgd. Care

Specialty RetailersEnergy

All IndustriesDiversified FinancialsTelecommunications

UtilitiesP/C Insurance (Stock)L/H Insurance (Stock)

EntertainmentCommercial Banks

P/C Insurance (Mutual)*L/H Insurance (Mutual)

Stock P/C insurers earned a 7% ROE in 2009, below the

10.5% earned by the Fortune 500 as a whole and well below health insurers’14%. P/C Mutuals’ average

ROE was 3.5%.

Commercial bank ROE was 4% in 2009


A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 Is Where It’s At NowCombined Ratio / ROE

* 2009 and 2010:Q1 figures are return on average statutory surplus. 2008, 2009 and 2010:Q1figures exclude mortgage and financialguarantee insurers

Source: Insurance Information Institute from A.M. Best and ISO data.

97.5100.6 100.1 100.7

92.6

99.5 99.0101.0

8.3%7.3%

9.6%

15.9%14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009* 2010:Q1*0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

A combined ratio of about 100 generated a 7% ROE in 2009,10% in 2005 and 16% in 1979

P/C Premium GrowthPrimarily Driven by the

Industry’s Underwriting Cycle, Not the Economy

12


13

-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 10F

Soft Market Appears to Persistin 2010. Relief in 2011?(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.

NWP down 1.3% in 10:Q1 vs. 09:Q1

14

Average Expenditures on Auto Insurance

$651$668

$691$705

$726

$786

$830 $842 $831$816

$795$816

$844

$878

$690$685$703

$600

$650

$700

$750

$800

$850

$900

$950

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

Countrywide Auto Insurance Expenditures Increased2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)

* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.


15

Average Premium forHome Insurance Policies**

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

$508$536

$593

$668

$822 $835$854

$879

$804$764

$729

$500

$550

$600

$650

$700

$750

$800

$850

$900

$950

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

16

Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2010)

-3.2

%

-5.9

%-7

.0%

-9.4

%-9

.7% -8

.2%

-4.6

%-2

.7%

-3.0

%-5

.3%

-9.6

%

-11.

3%-1

1.8%

-13.

3% -12.

0%-1

3.5%

-12.

9% -11.

0%

-6.4

% -5.1

%-4

.9%

-5.8

%-5

.6%

-5.3

%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

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

KRW Effect

Magnitude of Price Declines Shrank

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

Performance, Higher Cat Losses and

Costlier Reinsurance

(Percent)

Market Remains Soft as Capital Restored and Underwriting Losses Fall


17

Change in Commercial Rate Renewals, by Line: 2010:Q1

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

Most Major Commercial Lines Renewed Down in Q1:2010 by Roughly the Same Margin as a Year Earlier

Percentage Change (%)

-3.9%

-2.9% -2.5%-2.1%

0.4%

-5.3% -5.4%-5.0%

-4.6% -4.4%-3.9%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%All C

ommerc

ial

Comml P

rop

GL Umbrella

Comml A

uto

Constr

uctio

n

WC

Bus. In

terrup

tion

EPLD&O

Surety

18

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q1


Percentage Change (%)

Market has Been Soft for 6 years

and Remains Soft as Capital is Restored and Underwriting Losses Fall

Peak = 2004:Q4 +28.5%

KRW Effect

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since


19

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q1


1999:Q4 = 100

Pricing today is where is was in

Q4:2000 (pre-9/11)

Capital/PolicyholderSurplus (US)

20

Shrinkage, but Not Enoughto Trigger Hard Market


$0

$50$100

$150

$200

$250$300

$350

$400

$450$500

$550

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

US Policyholder Surplus:1975–2010*

* As of 3/31/10Source: A.M. Best, ISO, Insurance Information Institute.

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

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

non-insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.82:$1 as of12/31/09, A Record Low (at Least in Recent History)

Surplus as of 3/31/10 was a record $540.7B, up from $437.1B at the crisis trough at 3/31/09. Prior

peak was $521.8 as of 9/30/07. Surplus as of 3/31/10 is now 3.6% above 2007 peak; Crisis trough

was as of 3/31/09 16.2% below 2007 peak.

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

22

Policyholder Surplus, 2006:Q4–2010:Q1E

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

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

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:Q410:Q1E

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2007:Q3 Peak

08:Q2: -$16.6B (-3.2%) 08:Q3: -$43.3B (-8.3%) 08:Q4: -$66.2B (-12.9%)09:Q1: -$84.7B (-16.2%)

09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-2.0%)10:Q1: +$18.9B (+3.6%)

Surplus set a new record in 2010: Q1*

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


23

Paid-in Capital, 2005–2010:Q1

Source: ISO.

($ Billions)

$14.4

$3.8 $3.2

$12.3

$0.2$6.5

$22.5

$0

$5

$10

$15

$20

$25

2005 2006 2007 2008 2009 2010:Q1

Paid-in capital for insurance operations in

2009:Q1 was $1B. In 2010:Q1 it was $0.2B

In 2010:Q1 One Insurer’s Paid-in Capital Rose by $22.5Bas Part of an Investment in a Non-insurance Business

$22.7

24

Global Reinsurance Capacity Source of Decline in 2008

Global Reinsurance Capacity Shrankin 2008, Mostly Due to Investments

$360

$300

$350

$270

$290

$310

$330

$350

$370

2007 2008 2009E

55% 14%

31%

Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute estimate for 2009.

Global Reinsurance CapacityFell by an Estimated 17% in 2008

Change inUnrealizedCapital Losses

RealizedCapitalLosses

Hurricanes


25

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute

3.3%

9.6%

6.9%

10.9%

6.2%

13.8%

16.2%

0%

3%

6%

9%

12%

15%

18%

6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Overthe Past 20+ Years

(Percent)

26

* 2010 NWP and Surplus figures are % changes as of Q1:10 vs Q1:09. Adjusting for unique transaction of insurer the increase is 18.4%. Sources: A.M. Best, ISO, Insurance Information Institute

Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

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*

NWP % change Surplus % change

(Percent)

Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market

Surplus growth is now positive but premiums

continue to fall, a departure from the historical pattern


Merger & Acquisition

27

Barriers to Consolidation Will Diminish in 2010

28

U.S. P/C Insurance-RelatedM&A Activity, 1988–2009

$2$5

$19

$1 $0

$20

$0

$9

$35

$14$16

$4

$56

$31

$8$12

$2$3 $3 $5$6

$40

$0

$10

$20

$30

$40

$50

$60

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

Tran

sact

ion

Valu

e ($

Bill

ion)

0

20

40

60

80

100

120

140

Num

ber of Transactions

Transaction Values

Number of Transactions

Note: U.S. Company was the acquirer and/or target.Source: Conning Research & Consulting.

2010: No Mega Deals So Far, Despite Record Capital, Slow Growth and Improved

Financial Market Conditions$ Value of Deals Down 78%

in 2009, Volume Up 7%


Investment Performance

29

Investments Are a PrincipleSource of Declining Profitability

Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q11

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7$39.0

$12.6

$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:Q1

In 2008, Investment Gains Fell by 50% Due to Lower Yields andNearly $20B of Realized Capital Losses

2009 Saw Smaller Realized Capital Losses But Declining Investment Income1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

($ Billions) 2009:Q1 gain was

$3.7B


31

P/C Insurer Net Realized Capital Gains, 1990-2010:Q1

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

$2.8

8$4

.81 $9

.89

$9.8

2

$10.

81 $18.

02

$13.

02$1

6.21

$6.6

3-$

1.21

$6.6

1$9

.13

$9.7

0

$3.5

2 $8.9

2

-$7.

98

$0.9

8

-$19

.81

$9.2

4

$6.0

0$1

.66

-$25-$20-$15-$10

-$5$0$5

$10$15$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910:Q1

Realized Capital Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE

($ Billions)

32

Treasury Yield Curves: Pre-Crisis (July 2007) vs. May 2010*

0.15% 0.16% 0.22% 0.34%0.76%

2.75%

3.31%

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

2.10%

1.26%

4.22%4.05%

0%

1%

2%

3%

4%

5%

6%

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

May 2010 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve is near its most depressed level in at

least 45 years. Investment income is falling as a result

Stock Dividend Cuts Have Further Pressured Investment Income

*Week ending May 24, 2010.Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.


33

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

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

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

-3.1%-3.3%-3.3%-3.7%-4.3%

-5.2%-5.7%

-7.3%

-1.8%-1.8%-2.0%

-3.6%

-1.9%-2.1%

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

Person

al Lin

es

Pvt Pas

s Auto

Pers P

rop

Commerc

ial

Comml A

uto

Credit

Comm P

rop

Comm C

as

Fidelity

/Sure

ty

Warr

anty

Surplus

Line

s

Med M

al

WC

Reinsu

rance

**

34

Distribution of P/C Insurance Industry’s Investment Portfolio

Sources: NAIC; Insurance Information Institute research.

Invested assets totaled $1.214 trillion as of 12/31/08

Insurers are generally conservatively invested, with more than 2/3 of assets invested in bonds as of 12/31/08

Only about 15% of assets were invested in common stock as of 12/31/08

Even the most conservative of portfolios was hit hard in 2008

Portfolio Facts

8.0%14.8%

0.9%1.8%

6.1%

68.4%

Bonds

Common Stock

Real Estate

As of December 31, 2008

Cash and Short-term

Investments

Preferred Stock

Other


Financial Strength & Ratings

35

Industry Has Weathered the Storms Well

P/C Insurer Impairments, 1969–2009

815

127

11 934

913 12

199

16 14 1336

4931

3450 48

5560 58

4129

1612

3118 19

49 5047

3518

14 15

7 65

0

10

20

30

40

50

60

70

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Source: A.M. Best; Insurance Information Institute.

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

5 of the 11 are Florida companies (1 of these

5 is a title insurer)


37

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009

90

95

100

105

110

115

120

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09*

Com

bine

d R

atio

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Impairm

ent Rate

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007/08

38

Reasons for US P/C Insurer Impairments, 1969–2008

38.1%

14.3%8.1%

7.6%

7.9%

7.0%

9.1%4.2%

3.7%

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.

Investment Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/In-adequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems

Misc.

Sig. Change in Business


39

Underwriting Trends –Financial Crisis Does Not

Directly Impact Underwriting Performance: Cycle, Catastrophes

Were 2008’s Drivers

40

P/C Insurance Industry Combined Ratio, 2001–2009*

* Excludes Mortgage & Financial Guaranty insurers in 2008/2009. Including M&FG, 2008=105.0, 2009=101.0 Sources: A.M. Best, ISO.

95.7

99.3101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned Premiums

Relatively Low CAT Losses, Reserve Releases

Cyclical Deterioration

2005 Ratio Benefited from Heavy Use of Reinsurance

Which Lowered Net Losses


Underwriting Gain (Loss)1975–2009*

* Includes mortgage and financial guarantee insurers.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 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

The industry “improved” as of 2009:Q3 to an underwriting loss of $3.1 billion, compared to a

loss for all of 2008 of $21.2 billion.

Cumulative underwriting

deficit from 1975 through 2009 is

$445B

($ Billions)

42

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$30

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

10E

11E

Prio

r Yr.

Res

erve

Rel

ease

($B

)

-6

-4

-2

0

2

4

6

8 Impact on C

ombined R

atio (Points)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio

P/C Reserve Development, 1992–2011E

Reserve Releases Will Expected to Taper Off in 2010 and Drop Significantly in 2011

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


43

Calendar Year vs. Accident Year P/C Combined Ratio: 1992–2010E1

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

105.

6

107.

8

110.

1 115.

9

107.

3

100.

1

98.3 10

0.9

92.4 95

.5

105.

1

101.

9 105.

9

114.

7

107.

8 111.

8

107.

4

108.

3

105.

3 109.

2

109.

2

110.

0

112.

3

100.

8

96.6

96.0 10

0.6

93.9 97

.4

105.

5

105.

7 109.

4115.

7

106.

9

108.

4

106.

4

105.

8

101.

6

80

85

90

95

100

105

110

115

120

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

Calendar Year Accident Year

Accident Year Results Show a More Significant Deterioration in Underwriting Performance. Calendar Year Results Are Helped by Reserve Releases

44

Number of Years with Underwriting Profits by Decade, 1920s–2000s

0 0

3

54

8

10

76

0

2

4

6

8

10

12

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

* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Number of Years with Underwriting Profits

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

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


45

Performance by Segment:Commercial/Personal Lines &

Reinsurance

46

Calendar Year Combined Ratios by Segment: 2008-2010P

Sources: A.M. Best (historical and estimates/projected for 2009 and 2010); Insurance Information Institute.

101.0 101.2

92.2

100.3

103.7

100.599.8

107.2

103.6

9092949698

100102104106108110

Personal Lines Commercial Lines US Reinsurance

2008 2009E 2010P

Overall deterioration in 2010 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting

performance related to the prolonged commercial soft market

Personal lines combined ratio is expected to improve in 2010 while commercial lines

and reinsurance deteriorate


47

After-Tax Return on Surplus (ROE) by Segment: 2008-2010P


5.3%

7.3%

5.2%

6.6% 7.1%

5.3%

3.9%

-1.3%

1.7%

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

Personal Lines Commercial Lines Reinsurance

2008 2009E 2010P

Profitability will rise or stabilize across most p/c lines, barring a financial crisis relapse or major catastrophic losses

Personal lines ROEs should improve in 2010 and remain flat in commercial lines and

reinsurance

48

Net Written Premium Growth by Segment: 2008-2010P


-1.1%

-7.9%

-1.5%

1.8%

-5.6%

-2.0%

3.5%

-4.0%

-0.7%

-10%-8%-6%-4%-2%0%2%4%6%

Personal Lines Commercial Lines Reinsurance

2008 2009E 2010P

Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession weigh on commercial lines. Low catastrophe losses and ample

capacity are holding down reinsurance prices while higher insurer retentions impact premiums

Personal lines will return to growth in 2010 while commercial lines and reinsurance are

expected to continue to shrink


Homeowners Insurance Combined Ratio: 1990–2010P

113.

0

117.

7

158.

4

113.

6

101.

0 109.

4

108.

2

111.

4 121.

7

109.

3

98.3

94.2 10

0.1

89.4 95

.7

117.

0

105.

5

105.

0118.

4

112.

7 121.

7

80

90

100

110

120

130

140

150

160

170

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

Homeowners Line Is Expected to Be Marginally Profitable Overall in 2010, but in Many States Could Be Quite Profitable. Volatility Due to

Catastrophe Losses Will Persist

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

Private Passenger Auto Combined Ratio: 1993–2010P

101.

7

101.

3

101.

3

101.

0

109.

5

107.

9

104.

2

98.4

94.3

95.1

95.5 98

.3 100.

3

99.3

98.599.5 10

1.1

103.

5

80

85

90

95

100

105

110

115

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

Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry



Commercial Multi-Peril Combined Ratio: 1995–2010P

119.

0

119.

8

108.

5

125.

0

116.

2

116.

1

104.

9

101.

9

105.

4

95.1 97

.6100.

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.

0

97.0 99

.5

113.

1

115.

0 121.

08085

9095

100105

110115120

125130

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

Commercial Multi-Peril is Expected to Continue to Perform Reasonably Well

*2009E and 2010P figures are for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.

Commercial Auto Combined Ratio: 1993–2010P

112.

1

112.

0

113.

0

115.

9

102.

7

95.2

92.9

92.1

92.4 94

.2 96.8

97.0 98

.5

118.

1

115.

7

116.

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 09E 10P

Commercial Auto is Expected to Remain Reasonably Profitable in 2010



Workers Compensation Combined Ratio: 1994–2010P

102.

0

97.0 10

0.0

101.

0

110.

9

110.

0

107.

0

102.

7

98.4 10

3.5

104.

3 109.

0

112.

0

121.7

107.

0

115.

3

118.

2

80

85

90

95

100

105

110

115

120

125

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

Workers Comp Underwriting Results Are Deteriorating Markedly


54

The Economic Storm

What the Financial Crisis and Recession Mean for the Industry’s

Exposure Base, Growth and Profitability


55

Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 6/10; Insurance Information Institute.

2.9%

0.1%

4.8%

4.8%

-0.2

%-0

.7%

1.5%

-2.7

%-5

.4%

-6.4

%-0

.7%

2.2%

5.6%

3.0% 3.5%

3.0%

3.1%

3.0%

3.1%

3.2%

3.2%3.7%

0.8% 1.

6% 2.5% 3.

6%3.

1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

11:1

Q

11:2

Q

11:3

Q

11:4

Q

Personal and Commercial Lines Exposure Base Have Been Hit Hardand Will Be Slow to Come Back

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump, labor market contraction

has been severe but modest recovery is underway

The Q1:2009 decline was the steepest since the Q1:1982 drop of 6.4%

Economic growth up sharply in Q4:09 with rebuilding of inventories and stimulus.

More moderate growth expected in 2010/11

56

Real GDP Growth vs. Real P/CPremium Growth: Modest Association

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 6/10; Insurance Information Institute

4.3%

18.6

%20

.3%

5.8%

0.3%

-1.6

%-1

.0%

-1.8

%-1

.0%

3.1%

1.1%

0.8%

0.4%

0.6%

-0.4

%-0

.3%

1.6%

5.6%

13.7

%7.

7%1.

2%-2

.9% -0.5

%-3

.8%

-4.4

%-3

.3%

-3.4

%

5.2%

-0.9

%-7

.4%

-6.5

% -1.5

%1.

8%

-10%

-5%

0%

5%

10%

15%

20%

25%

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 0910

E

Rea

l NW

P G

row

th

-4%

-2%

0%

2%

4%

6%

8%

Real G

DP G

rowth

Real NWP Growth Real GDP

P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy

Real GDP Growth vs. Real P/C (%)


57

Merchandise Exports Are Growingat Pre-Crisis Levels Again

-75%

-50%

-25%

0%

25%

50%

75%

Jan

05

Jul 0

5

Jan

06

Jul 0

6

Jan

07

Jul 0

7

Jan

08

Jul 0

8

Jan

09

Jul 0

9

Advanced economiesEmerging economies

Note: data are through November 2009Source: International Monetary Fund World Economic Outlook January 2010 update at http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv

Annualized % change of 3-month moving average over previous 3-month moving average

Global trade crashed during the financial crisis. Seizure of

credit markets contributed significantly to the crash.

58

Regional Differences Will Significantly Impact P/C Markets

Recovery in Some Areas Will Begin Years Ahead of Others

and Speed of Recovery Will Differ by Orders of Magnitude


59

State Economic Growth Varied Tremendously in 2008

US Bureau of Economic Analysis

Highest Quintile

Fourth Quintile

Third Quintile

Second Quintile

Lowest Quintile

Far West0.6

Rocky Mountain2.2

Southwest1.7

Plains2.0 Great Lakes

-0.4

New England1.0

Mideast1.3

Southeast0.0

US = 0.7

WA2.0

OR1.6

CA0.4

NV-0.6

ID0.0

MT1.8

WY4.4

UT1.4 CO

2.9

AZ-0.6 NM

2.0

TX2.0

OK2.7

KS2.2

NE1.3

SD3.5

ND7.3 MN

2.0

IA2.1

MO1.3

WI0.7

IL0.3

MI-1.5

IN-0.6

OH-0.7

NY1.6

PA1.1

NJ0.6

MD1.3

DE-1.6

DC3.0VA

1.3

WV2.5KY

-0.1NC0.1

SC0.6

TN0.5AR

0.7

LA0.3

MS1.7

AL0.7

GA-0.6

FL-1.6

AK-2.0

HI0.7

ME1.4

NH1.8

VT1.7 MA

1.9RI

-0.9CT-0.4

Mountain, Plains States Growing the Fastest

Percent Change in Real GDP by State, 2007–2008

60

Fastest Growing States in 2008:Plains, Mountain States Lead

2.1% 2.0%

7.3%

4.4%

3.5%2.9% 2.7% 2.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

ND WY SD CO OK WV IA TX, MN,NM, WA

Source: US Bureau of Economic Analysis; Insurance Information Institute.

Real State GDP Growth (%)

Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas


61

Slowest Growing States in 2008: Diversity of States Suffering

Source: US Bureau of Economic Analysis; Insurance Information Institute.

States in the North, South, East and West All Represented Among Hardest Hit, But for Differing Reasons

Real State GDP Growth (%)

-0.9%

-1.5% -1.6% -1.6% -1.7%

-2.0%

-0.1%

-0.4%-0.6% -0.6% -0.6% -0.6%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%KY CT AZ GA IN NV RI MI DE FL OH AK

62

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving


63

Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilizing in 2010?

2

4

6

8

10

12

14

16

18

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

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

May10

Unemployment rate was 9.7% in

MayUnemployment peaked at 10.1%

in Oct. 2009, highest monthly rate since 1983.Peak rate in the last 30 years: 10.8% in Nov -

Dec 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in Oct 2009; Stood at 16.6% in May

2010

January 2000 through May 2010, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

64

Unemployment Rates Vary Widelyby State and Region*

11.7

%11

.4%

11.0

%10

.8%

10.4

%10

.4%

10.2

%10

.2%

8.9%

7.7%

7.1%

6.9%

9.7%

9.1%

8.8%

8.3%

7.2%

12.3

%9.

2%8.

9%8.

0%6.

4%6.

2%

8.3%

6.6%

0%

3%

6%

9%

12%

15%

FL MS

SC AL KY TN NC

GA

WV AR

VA LA NJ

PA DE NY MD RI

MA CT ME

NH VT AL HI

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for May 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Southeast Mid-Atlantic New England


65

Unemployment Rates Vary Widelyby State and Region* (cont’d)

14.0

%

13.6

%

6.5%

4.9%

4.6%

3.6%

9.1%

10.6

%12.4

%

10.0

%8.

2%

6.8%

10.7

%

7.0%

9.3%

10.8

%

8.0%

7.0%7.2%7.3%

9.0%

8.4%

8.3%

6.7%

9.6%

0%

3%

6%

9%

12%

15%A

Z

NM TX OK ID CO UT MT

WY

NV

CA

OR

WA MI IL O

H IN WI

MO

MN IA KS NE SD

ND

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for May 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

Southwest Mountain

Far West

Great Plains

Great Lakes

66

US Unemployment Rate

4.5%

4.5% 4.6% 4.8% 4.9% 5.

4%

6.1%

6.9%

8.1%

9.3% 9.

6% 10.0

%

9.7% 9.8%

9.6%

9.3%

9.1%

8.9%

8.7%

9.5%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

Rising unemployment eroded payrolls

and workers comp’s exposure base.

Unemployment likely peaked at 10% in late

2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (6/10); Insurance Information Institute

2007:Q1 to 2011:Q4F*

Unemployment forecasts are being

revised downward for the first time in years


67

Monthly Change Employment*

-72

-144 -122

-160 -137

-161 -128

-175

-321

-380

-597

-681

-779 -726

-753

-528 -3

87-5

15-3

46 -212

-225

-224

64-1

0914 39

208 29

0 431

-1,000

-800

-600

-400

-200

0

200

400

600Ja

n 08

Feb

08M

ar 0

8A

pr 0

8M

ay 0

8Ju

n 08

Jul 0

8A

ug 0

8S

ep 0

8O

ct 0

8N

ov 0

8D

ec 0

8Ja

n 09

Feb

09M

ar 0

9A

pr 0

9M

ay 0

9Ju

n 09

Jul 0

9A

ug 0

9S

ep 0

9O

ct 0

9N

ov 0

9D

ec 0

9Ja

n 10

Feb

10M

ar 1

0A

pr 1

0M

ay 1

0

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

*Estimate based on Reuters poll of economists.Source: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute

Job Losses Since the Recession Began in Dec. 2007 Peaked at 8.4 Mill in Dec. 09; Stands at 7.4 Million Through May 2010;

15.0 Million People are Now Defined as Unemployed

January 2008 through April 2010* (Thousands)

May’s gain of 431,000 jobs was distorted by the hiring of

411,000 temporary Census workers. Private sector

employment was up 41,000

68

US Nonfarm Private Employment

138.

013

8.1

138.

013

7.9

137.

813

7.8

137.

713

7.6

137.

613

7.4

137.

013

6.7

136.

213

5.1

133.

513

2.8

132.

113

1.5

131.

213

0.6

130.

313

0.1

129.

912

9.6

129.

712

9.6

129.

612

9.6

129.

813

0.1

130.

6

129130131132133134135136137138139

Nov

07

Dec

07

Jan

08Fe

b 08

Mar

08

Apr

08

May

08

June

Jul 0

8A

ug 0

8S

ep 0

8O

ct 0

8N

ov 0

8D

ec 0

8Ja

n 09

Feb

09M

ar 0

9A

pr 0

9M

ay 0

9Ju

n 09

Jul 0

9A

ug 0

9S

ep 0

9O

ct 0

9N

ov 0

9D

ec 0

9Ja

n 10

Feb

10M

ar 1

0A

pr 1

0M

ay 1

0Monthly, Nov 2007 – May 2010 (Millions)

The US Economy Lost About 8.4 Million Jobs in the Two

Years from Dec. 07 – Dec. 09.As employment expands,

workers comp insurers will be among the first beneficiaries

Employment Peak; Recession Starts

Seasonally adjusted. Source: US Bureau of Labor Statistics


69

Wage & Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)

Wage & Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums

* Average Wage and Salary data as of 10/1/2009. Shaded areas indicate recessionsSource: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books

Weakening Payrolls Have Eroded $2B+ in Workers Comp Premiums

7/90-3/91 3/01-11/01 12/07-?

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$0

$5$10

$15$20

$25$30

$35$40

$45

Wage & SalaryDisbursements

WC NPW

Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)

*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).

-4.4%

-2.0%-1.1%

1.1%

3.7%4.6%

8.5%

3.5%2.1%

-0.5%

-3.6%-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1948-1949

1953-1954

1957-1958

1960-1961

1969-1970

1973-1975

1980 1981-1982

1990-1991

2001 2007-2009

Recessions in the 1970s and 1980s saw smaller exposure impacts

because of continued wage inflation, a factor not present

during the 2007-2009 recession

The Dec. 2007 to mid-2009 recession

caused the largest impact on WC

exposure in 60 years

(Percent Change)

(All Post WWII Recessions)

Recession Dates (Beginning/Ending Years)


Crisis-Driven Exposure Drivers

71

Economic Obstaclesto Growth in P/C Insurance

72

16.9

16.5

16.1

13.1

10.3

11.7

13.3

16.9

16.617

.117.5

17.8

17.4

910111213141516171819

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

(Millions of Units)

Auto/Light Truck Sales, 1999-2011F

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

Car/Light Truck Sales Will Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales;

Gas Prices Could Once Again Become a Factor, Too

New auto/light truck sales fell to the lowest level since the late 1960s.

Forecast for 2010-11 is still far below 1999-2007

average of 17 million units

Sharply lower auto sales will have a smaller effect on auto insurance

exposure level than problems in the housing market will on home insurers

“Cash for Clunkers” generated about $300M in net new personal auto premiums


73

(Millions of Units)

New Private Housing Starts, 1990-2011F

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1.85 1.

96 2.07

1.80

1.36

0.90

0.56 0.

69

0.94

1.351.

46

1.29

1.20

1.01

1.19

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F

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

Little Exposure Growth Likely for Homeowners InsurersDue to Weak Home Construction Forecast for 2010-2011.

Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged 34% from 2005-2007; drop

through 2009 was 72% (est.); A net annual decline of 1.49 million units,

lowest since records began

in 1959

I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers

$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is

estimated at about $1.3 billion

Average Square Footage of Completed New Homes in U.S., 1973-2010:Q1

1,66

01,

695

1,64

51,

700

1,72

01,

755

1,76

01,

740

1,72

01,

710

1,72

51,

780

1,78

51,

825 1,90

5 1,99

52,

035

2,08

02,

075

2,09

52,

095

2,10

02,

095

2,12

02,

150

2,19

02,

223

2,26

62,

324

2,32

02,

330

2,34

9 2,43

42,

469

2,52

12,

519

2,43

82,

389

1,500

1,700

1,900

2,100

2,300

2,500

2,700

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

Source: U.S. Census Bureau: http://www.census.gov/const/www/quarterly_starts_completions.pdf; Insurance Information Institute.

Square Ft

The trend to building larger homes reversed in 2009, affecting exposure growth beyond

the decline in number of units built

Average size of completed new homes often falls in recessions

(yellow bars), but historically bounces back in expansions

74


75

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

3714

,607

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,00080 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:Q

1

Business Bankruptcy Filings,1980-2010:Q1

Source: American Bankruptcy Institute; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines

There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:Q1 bankruptcies totaled 14,607, up 18% from Q1:2009

% Change Surrounding Recessions

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

76

Private Sector Business Starts,1993:Q2 – 2009:Q3*

175

186

174 18

018

6 192

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

3 209

201

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

199

191 19

317

1 177

169

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

Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure

*Latest available as of June 7, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

(Thousands)

169,000 businesses started in 2009:Q3, actually declining during

form the prior quarter. The figure is the lowest level since 1993.


77

Business Fixed Investment

Source: Wells Fargo Securities Economics Group, Monthly Outlook, April 7, 2010

-18.

4% -13.

9%

-15.

0%

-11.

0% -5.0

%

-3.5

%

1.0% 3.

0% 4.5%

5.0%

-0.5

%

-5.0

%

-9.4

%

-25.

9%

-36.

4%

-4.9

%

1.5%

19.0

%

5.7% 6.5% 7.6% 9.2% 10

.3%

9.7%

9.6%

9.3%

6.8%

14.5

%

-0.1

%

-7.2

%

-43.

6%

-17.

3%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%08

:Q1

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

Structures Equipment & Software

2008:Q1 to 2011:Q4F

Investment in Structures is forecast to be down in 2010 and low in 2011. This will

hold exposure in many commercial lines down

Investment in Equipment &

Software is forecast to be positive in

both 2010 and 2011.

78

Total Industrial Production

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (6/10); Insurance Information Institute

-9.0%

-13.0%

-19.0%

-10.4%

6.4% 6.8% 7.5%5.4% 5.0% 4.8% 4.5% 4.3% 4.2% 4.0%

1.5%3.2% 3.6%

0.3% 0.2%

-4.6%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

End of Recession in mid-2009, Stimulus Program Are Benefiting Industrial Production and Therefore Insurance Exposure Both

Directly and Indirectly, Albeit Very Modestly

2007:Q1 to 2011:Q4F (%)

Industrial Production is Aided by a Rebuild of Inventories, Gradual

Economic Recovery and Stimulus Program (Q2:09

through 2010)

Industrial Production Began to Contract Sharply in Late 2008 and Plunged

in 2009:Q1


79

Year-Over-Year Change in Quarterly USState Tax Revenues, Inflation Adjusted

Source: US Census Bureau; Nelson A. Rockefeller Institute of Government: http://www.rockinst.org/.

2.4% 4.

7% 5.6%

9.9%

9.5%

4.4%

1.8%

0.4%

-1.3

%-1

.7%

-3.0

%-7

.6%

-10.

7%0.

0% 1.6%

-0.6

%0.

1% 4.0% 4.7% 5.7% 8.

2%3.

4% 6.0% 7.0%

12.4

%6.

6%4.

2%3.

7% 6.3%

2.6%

1.3% 3.

2% 5.5%

3.1% 3.6%

2.6% 5.

4%2.

8%-3

.9%

-10.

9%-4

.1%

-16.

4%-11.

6%

2.4%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%1Q

992Q

993Q

994Q

991Q

002Q

003Q

004Q

001Q

012Q

013Q

014Q

011Q

022Q

023Q

024Q

021Q

032Q

033Q

034Q

031Q

042Q

043Q

044Q

041Q

052Q

053Q

054Q

051Q

062Q

063Q

064Q

061Q

072Q

073Q

074Q

071Q

082Q

083Q

084Q

081Q

092Q

093Q

094Q

09

States Revenues Were Down 4.4% in Q4 2009, the 5th Consecutive Quarter of Revenue Decline. This Will Impact Public Infrastructure

Spending Significantly and Related Insurance Exposures and Demand.

Nationwide, state-tax collections for fiscal year 2009 declined by a record $63 billion, or 8.2 percent from the

previous year. That loss is roughly twice the amount states gained in fiscal relief

from the federal stimulus package

80

State and Local Debt Outstanding, 1975-2009

Source: Federal Reserve Board of Governors, Flow of Funds Accounts from Credit Suisse.

Many States/Localities Are in Dire Fiscal Straights, but the Default Rate on Moody’s-Rated Muni Debt is Just 0.09% over the Past 10 Years. Just 1 State Has Defaulted in the Past 100 Years (AR). Default Rate on Munis During the

Great Depression was 1.8%, 97% of Which Was Ultimately Recovered

Debt issued by state and local governments has soared by 100%

between 1999 and 2009


81

State and Local Expenditures vs. Tax Receipts, 1960-2010:Q1

Source: Bureau of Economic Analysis and Credit Suisse estimates.

The gap between state and local governments revenues and

expenditures is at a 50-year high and is widening

Many States/Localities Are in Dire Fiscal Straights, but the Default Rate on Moody’s-Rated Muni Debt is Just 0.09% over the Past 10 Years. Just 1 State Has Defaulted in the Past 100 Years (AR). Default Rate on Munis During the

Great Depression was 1.8%, 97% of Which Was Ultimately Recovered

82

Mounting Pressure on Claim Cost Severities?

Inflation Trends:Concerns Over Stimulus Spending

and Monetary Policy


83

Annual Inflation Rates(CPI-U, %), 1990–2011F

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.33.0

3.8

2.8

3.8

-0.4

1.8 1.7

2.92.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10F11F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, June 10, 2010 (forecasts).

There is So Much Slack in the US Economy Inflation Should Not Be a Concern Through 2010/11, but Deficits and Monetary Policy Remain Longer

Run Concerns

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

commodity bubble have reduced inflationary pressures

P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests

Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.

-0.4%

2.7% 3.0% 3.1%3.8%

4.3%5.5%

6.2%

-2%

0%

2%

4%

6%

8%

OverallCPI

LegalServices

US TortCosts

MedicalCare

MotorVehicleBodyWork

BodilyInjury

Severity

WC MedSeverity

No-FaultClaim

Severity

(Percent)

Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely

84


WC Insurers Experience Inflation More Intensely than 2009 CPI Suggests

Source: Bureau of Labor Statistics; Insurance Information Institute.

2.7%

1.8%

6.9%

3.0% 3.0%3.4% 3.1% 3.4%

0%

2%

4%

6%

8%

Overall CPI "Core" CPI HospitalServices

Physicians'Services

DentalServices

PrescriptionDrugs

Medical CareCommodities

Medical CPI

(Percent increase Dec 08 to Dec 09)

Healthcare Costs Are a Major WC Insurance Cost Driver. They AreLikely to Increase Faster than the CPI for the Next Few Years, at Least

85

Excludes Food and Energy

Inpatient Services Rose 6.7%;

Outpatient Services Rose 7.4%

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% 3.4%

5.1%

7.4%

10.1%

8.3%

10.6%

7.3%

13.5%

8.8%

7.3%

5.6%

7.4%

5.4% 5.4%

6.7%

5.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

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

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Risingat Twice 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

2009 was nearly twice the medical CPI (7.6% vs. 3.9%). New healthcare reform

legislation is unlikely to have any impact on the gap.


87

Top Concerns/Risks for Insurersif Inflation Is Reignited


What are the potential impacts for insurers?What can/should insurers do to protect themselves from the risks of inflation?

ConcernsThe Federal Reserve Has Flooded Financial System with Cash (Turned on the Printing Presses), the Federal Gov’t Has Approved a $787B Stimulus and the Deficit is Expected to Mushroom to $1.8 Trillion. All Are Potentially Inflationary.

Rising Claim SeveritiesCost of claims settlement rises across the board (property and liability)

Rate InadequacyRates inadequate due to low trend assumptions arising from use of historical data

Reserve InadequacyReserves may develop adversely and become inadequate (deficient)

Burn Through on RetentionsRetentions, deductibles burned through more quickly

Reinsurance Penetration/ExhaustionHigher costs risks burn through their retentions more quickly, tapping into reinsurance more quickly and potentially exhausting their reinsurance more quickly

Key Risks From Sustained/Accelerating Inflation

Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2009E*

0%

2%

4%

6%

8%

10%

12%

14%

1961-70 1971-80 1981-90 1991-2000 2001-09E

Tort Costs Medical Costs CPI

* CPI-U and medical costs as of Sept 2009; Tort figure is for full-year 2009 from Tillinghast.

Tort system is an inflation amplifier

Avg. Ann. Change: 1961-2009E*Tort costs: +8.4%Med costs: +5.9%

Overall inflation: +4.2%

Source: U.S. Bureau of Labor Statistics; Tillinghast-Towers Perrin, 2008 Update on U.S. Tort Costs; I.I.I.

Tort costs move with inflation but at twice the rate of inflation

Are there healthcare reform spillover effects?


89

Claim Trends in Auto Insurance

Rising Costs Held in Check by Falling Frequency:

Can That Pattern Be Sustained?

90

Bodily Injury: Severity Trends Generally Above Decline in Frequency

-5.4%

-3.8%-5.0%

-3.1% -3.2%

2.9%

4.7%5.9% 6.1%

2.1%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009

Severity Frequency

Source: ISO/PCI Fast Track data; Insurance Information Institute

Annual Change, 2005 through 2009

Cost Pressures Will Increase if Current BI Frequency and Severity Trends Continue


91

Property Damage Liability: Frequency and Severity Trends Nearly Offset in 2009

-1.6%

-3.5%

0.8%

-3.4%

0.6%

2.9%3.6%

2.1%1.4%

-0.3%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2005 2006 2007 2008 2009*

Severity Frequency



Favorable Severity/Frequency Trends Keeping PD Costs in Check, But Are TheseTrends Sustainable?

92

No-Fault (PIP) Liability: Frequency and Severity Trends Are Adverse*

-4.8%-5.7%

-2.7%

-6.9%

5.9%4.7%

2.4%

6.3% 6.4% 6.4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009*

Severity Frequency

*No-fault states included are: FL, HI, KS, KY, MA, MI, MN, NY, ND and UT.Source: ISO/PCI Fast Track data; Insurance Information Institute


Multiple States Are Experiencing Severe Fraud and Abuse Problems in their No-Fault Systems, Especially FL, MI, NY and NJ


93

Collision Coverage: Frequency and Severity Trends Have Been Favorable

-1.8%

-3.5%

2.3%

-2.4%-1.6%

3.9%3.1%

0.7% 0.4%

-2.3%

-4%

-3%

-2%

-1%

0%1%

2%

3%

4%

5%

2005 2006 2007 2008 2009*

Severity Frequency



The Recession, High Fuel Prices Have Helped Push Down Frequency and Temper Severity, But this Trend Will Likely Be

Reversed Based on Evidence from Past Recoveries

94

Comprehensive Coverage: Frequency and Severity Trends Favorable in 2009

-3.1%

-9.8%-6.6%

1.6%

-1.6%

15.5%

-1.4% -1.4%

13.0%

-2.0%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2005 2006 2007 2008 2009*

Severity Frequency



Weather Creates Volatility for Comprehensive Coverage; Recession Has Helped Push Down Frequency and Temper

Severity, But This Factors Will Weaken as Economy Recovers


Critical Differences Between P/C Insurers and Banks

95

Superior Risk Management Model and Low Leverage Make a Big Difference

96

How P/C Insurance Industry Stability Has Benefitted Consumers

Bottom Line:

Insurance markets – unlike banking – are operating normally

The basic function of insurance – the orderly transfer of risk from client to insurer – continues uninterrupted

This means that insurers continue to:Pay claims (whereas 246 banks have gone under as of 5/28/10)

– The promise is being fulfilledRenew existing policies (banks are reducing and eliminating lines of credit)Write new policies (banks are turning away people and businesses who want or need to borrow)Develop new products (banks are scaling back the products they offer)Compete intensively (banks are consolidating, reducing consumer choice)

Source: Insurance Information Institute


97

Reasons Why P/C Insurers Have Fewer Problems Than Banks

Emphasis on UnderwritingMatching of risk to price (via experience and modeling)Limiting of potential loss exposureSome banks sought to maximize volume and fees and disregarded risk

Strong Relationship Between Underwriting and Risk BearingInsurers always maintain a stake in the business they underwrite, keeping “skin in the game” at all timesBanks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences – straightforward moral hazard problem from Econ 101

Low LeverageInsurers do not rely on borrowed money to underwrite insurance or pay claims There is no credit or liquidity crisis in the insurance industry

Conservative Investment PhilosophyHigh quality portfolio that is relatively less volatile and more liquid

Comprehensive Regulation of Insurance OperationsThe business of insurance remained comprehensively regulated whereas a separate banking system had evolved largely outside the auspices and understanding of regulators (e.g., hedge funds, private equity, complex securitized instruments, credit derivatives – CDS’s)

Greater TransparencyInsurance companies are an open book to regulators and the public

A Superior Risk Management Model


Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WVVA

NC

LATX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI C

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SD WI

INOH

MT

CA

NV

UT

WY

CO

AK

= A= B= C= D= F= NG

Source: Heartland Institute, May 2010

A- A-

A-

B-

B-

B-

B-

B-

B-B-

B-B-

B-

B-

B-

B-

B- C-

C-

C-

C -

C-

D-D-

A

A

A

A

B+

B+

B+

B

B

B

B

B

B

C+

C+

C

D+

D+D+D

NGNG

D F

F

2010 Property and Casualty InsuranceReport Card

Not Graded: District of ColumbiaMississippiLouisiana


Shifting Legal Liability & Tort Environment

99

Is the Tort PendulumSwinging Against Insurers?

100

Important Issues & Threats Facing Insurers: 2010–2015


Bottom Line: Tort “crisis” is on the horizon and will be recognized as such by 2012–2014

No tort reform (or protection of recent reforms) is forthcoming from the current Congress or Administration

Erosion of recent reforms is a certainty (already happening)

Innumerable legislative initiatives will create opportunities to undermine existing reforms and develop new theories and channels of liability

Torts twice the overall rate of inflation

Influence personal and commercial lines, esp. auto liability

Historically extremely costly to p/c insurance industry

Leads to reserve deficiency, rate pressure

Emerging Tort Threat


Reverse U.S. Supreme Court decisions on pleadings

Eliminate pre-dispute arbitration

Erode federal preemption

Expand securities litigation

Pass Foreign Manufactures Legal Accountability Act

Grant enforcement authorities to state AGs

Confirm pro-trial lawyer judges –“Federalize Madison County”

Roll back existing legal reforms

Source: Institute for Legal Reform.

Trial Bar Priorities

Top Categories Percentage

Environmental 14%

Insurance coverage 13%

Mortgage fraud 12%

Nursing home/seniors issues 11%

Bad-faith against insurance companies 10%

41 different practice areas were included as categories

Source: Institute for Legal Reform poll, December 2009.

Trial Lawyer Poll: Which Areas Offer the Greatest Potential Benefit?


103

Over the Last Three Decades, Total Tort Costs* as a % of GDP Appear Somewhat Cyclical

$0

$50

$100

$150

$200

$250

$300

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

Tort

Syst

em C

osts

1.50%

1.75%

2.00%

2.25%

2.50%

Tort Costs as %

of GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010

2009–2010 Growth in Tort Costs as % of GDP is Due in

Part to Shrinking GDP

104

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

New MexicoAppellate

Courts

Watch List

CaliforniaAlabamaMadison County, ILJefferson County, MSTexas Gulf CoastRio Grande Valley, TX

Dishonorable Mention

AR Supreme CourtMN Supreme CourtND Supreme CourtPA GovernorMA Supreme Judicial CourtSacramento County

New JerseyAtlantic County (Atlantic City)

New York City


Average Jury Awards 1999 - 2008

$725 $747 $756$800 $799

$1,018 $1,022

$950

$1,077$1,046

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Jury Verdict Research; Insurance Information Institute.

Avg. Jury Awards 1999 vs. 2003 and 2008

$644

$201 $5

89

$2,3

38 $2,8

87

$4,8

38

$799

$208

$901

$4,1

64

$3,4

99

$1,0

46

$327 $8

49

$3,7

17

$3,7

22

$4,8

85$5,4

46

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Overall Vehicularliability

Premisesliability

Wrongfuldeath*

Medicalmalpractice

Productsliability

1999 2003 2008

*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.


Sum of Top 10 Jury Awards 2004-2009

$5,159

$2,954

$815 $616

$1,344 $1,511

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2004 2005 2006 2007 2008 2009

Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009 and 2010.

108

Catastrophic Loss –Catastrophe Losses Trends

Are Trending Adversely


109

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5

$5.9 $1

2.9 $2

7.5

$61.

9

$9.2

$6.7

$27.

1

$10.

6

$2.6

$100

.0

$7.5

$2.7

$4.7

$22.

9

$5.5 $1

6.9

$0

$20

$40

$60

$80

$100

$120

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

US Insured Catastrophe Losses

*Through March 31, 2010.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Insurance Information Institute.

2009 CAT Losses Were Less than Half of 2008. 2005 Was by Far the Worst Year Ever for Insured Catastrophe

Losses in the Decade of the 2000s Were More than Double the 1990s, But the Worst Has Yet to Come

$100 Billion CAT Year is Coming Eventually

2009 CAT Losses

Were Down 61% from 2008 and are down 21% in Q1

2010

($ Billions)

2000s: A Decade of Disaster2000s: $193B (up 117%)

1990s: $89B

Geophysical events(earthquake, tsunami, volcanic activity)Meteorological events (storm)

Hydrological events(flood, mass movement)Climatological events(extreme temperature, drought, wildfire)

Selection of significant natural catastrophes (see table)

© 2010 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – As at 29 March 2010

Global natural catastrophes

4

53

12

7

8

6

Natural Catastrophes: Jan – Mar 2010Worldmap

Chilean earthquake (mag. 8.8) on 27 Feb. produced at least $4

billion in insured losses, $20 billion in economic losses.

Most costly insurance event in 2010

Severe winter weather in the Eastern US produced insured

losses of produced at least $1B in insured losses and $2B

in economic losses

Winter Storm Xynthia produced

at least $2B in insured losses and $4B in economic

losses

The 12 Jan. Haiti quake killed 225,500 people, caused $8B+ in economic damage, but little in the way of

insured losses


Gulf Coast Near Deepwater Horizon Site

Sources: Energy Information Administration

On April 20, 2010, an explosion and fire occurred on

the offshore drilling rig

Deepwater Horizon, which had been

drilling an exploratory well in approx. 5,000 ft of water in the Gulf of

Mexico, 52 miles SE of Venice,

Louisiana.The platform

subsequently sank, with 11

crewmembers presumed dead,

and the uncompleted well

leaking oil.

112

Announced Deepwater Horizon Insured Losses

*Lloyd’s estimates net loss to the market of $300 million to $600 million. Includes estimate across all Lloyd’s syndicates. Those syndicates that have reported losses individually are also shown in this chart and included in the Lloyd’s total.**Munich Re expects low triple digit million euro loss***Hanover Re expects a Eur40 million loss ****Hiscox expects net claims of below GBP10 million ($14.8 million)Source: Insurance Information Institute (I.I.I.); Company disclosures, SNL Financial Citi research note 05/04/10; Barclays Capital research note 05/10/10

$200

.0

$100

.0

$70.

0

$53.

0

$45.

0

$40.

0

$30.

0

$25.

0

$25.

0

$20.

0

$20.

0

$15.

0

$15.

0

$15.

0

$13.

0

$8.0

$7.5

$5.0

$600.0

$20.

0

$0

$100

$200

$300

$400

$500

$600

$700

Lloyd

's*

Swiss R

e

Munich

Re**

Partne

rRe

Hanov

er Re**

*

Validu

sRe

Catlin

XL Cap

ital

Chauc

er

Lanc

ashir

eAIG

Everes

t Re

Montpe

lier R

e

Transa

tlanti

c Re

Amlin

Hiscox

****

Arch C

apita

lAXIS

Travele

rs

W.R. B

erkley

Insured losses are well-syndicated and spread across a broad range of

global insurers and reinsurers.

(Millions)


*Forecast as of June 2, 2010.Source: Colorado State University, Department of Atmospheric Sciences; Insurance Information Institute.

Probabilty of Landfall of at Least One Major Hurricane (CAT 3-4-5) in 2010*

The Probability of a Major Hurricane Making Landfall Somewhere Along the US Coast is Greatly Elevated in 2010, Including a 50%

Chance Along the Oil Spill-Impacted Gulf Coast

Region Average Over Last Century

2010 Forecast*

Entire U.S. Coastline 52% 76%

U.S. East Coast Incl. FL Peninsula

31% 51%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 50%

Caribbean 42% 65%

Outlook for 2010 North Atlantic Hurricane Season*

The 2010 Hurricane Season is Expected to Be Nearly Twice as Active as the Long-Run Average (195% of Normal)

Forecast Parameter Average (1950-2000)

2010 Forecast*

Named Storms 9.6 18

Named Storm Days 49.1 90

Hurricanes 5.9 10

Hurricane Days 24.5 40

Major Hurricanes 2.3 5

Major Hurricane Days 5.0 13

Accumulated Cyclone Energy 96.1 185

Net Tropical Cyclone Activity 100% 195%

*Forecast as of June 2, 2010.Source: Colorado State University, Department of Atmospheric Sciences; Insurance Information Institute.


Sources: MR NatCatSERVICE

U.S. Significant Natural Catastrophes, 1950 – 2009Number of Events ($1+ Bill economic loss and/or 50+ fatalities)

There were 7 Significant Natural Catastrophes in

the United States in 2009

116

Distribution of US Insured CAT Losses: TX, FL, LA vs. US, 1980-2008*($ Billions)

* All figures (except 2006-2008 loss) have been adjusted to 2005 dollars.Source: PCS division of ISO.

Florida Accounted for 19% of All US Insured CAT Losses from 1980-2008: $57.1B out of $297.9B

$176 , 60% $57.10 ,

19%

$31.20 , 10%

$33.60 , 11%

Florida

Texas

Louisiana

Rest of US


117

Top 12 Most Costly Disastersin US History(Insured Losses, 2009, $ Billions)

Sources: PCS; Insurance Information Institute inflation adjustments.

$11.3 $12.5$18.2

$22.8 $23.8

$45.3

$8.5$8.1$7.3$6.2$5.2$4.2

$0$5

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

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;

8 of the Top 12 Disasters Affected FL

Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US

and World History

118

Total Value of Insured Coastal Exposure

(2007, $ Billions)

Source: AIR Worldwide

$224.4$191.9

$158.8$146.9$132.8

$92.5$85.6$60.6$55.7$51.8$54.1

$14.9

$479.9$635.5

$772.8$895.1

$2,378.9$2,458.6

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

$522B Increase Since 2004,

Up 27%

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, an Increase of $522B or 27% from $1.937 Trillion in 2004

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004


119

US Residual Market Exposure to Loss

$372.3$430.5 $419.5

$656.7

$771.9$696.4

$292.0$244.2$221.3

$281.8

$150.0

$54.7

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: PIPSO; Insurance Information Institute

Hurricane Andrew

4 Florida Hurricanes

Katrina, Rita, and Wilma

In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from

$54.7B in 1990 to $696.4B in 2008

($ Billions)

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Insurance Information Institute Online:


property-casualty insurance: the road ahead in the post ...recession world namic management seminar...

Documents