Property/CasualtyInsurance Industry

Overview & Outlook

PIWA Annual ConventionPearl River, New York September 24, 2009

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office phone: (212) 346-5540 Cell: (917) 494-5945 steven@iii.org www.iii.org

Presentation Outline

1. A Glance at the U.S. Economy

2. P/C Industry Financial Performance

3. Catastrophe Loss Management

4. Investments

5. Capital & Capacity

6. Q & A

A Glance atthe U.S. Economy

2009-10 Outlook:Time for a Rebound?

95

98

101

104

107

110

113

Mar 01

Jun 0

1

Sep 0

1

Dec 0

1

Mar 02

Jun 0

2

Sep 0

2

Dec 0

2

Mar 03

Jun 0

3

Sep 0

3

Dec 0

3

Mar 04

Jun 0

4

Sep 0

4

Dec 0

4

Mar 05

Jun 0

5

Sep 0

5

Dec 0

5

Mar 06

Jun 0

6

Sep 0

6

Dec 0

6

Mar 07

Jun 0

7

Sep 0

7

Dec 0

7

Mar 08

Jun 0

8

Sep 0

8

Dec 0

8

Mar 09

Jun 0

9

Total Industrial Production, monthly Mar 2001-July 2009 (Index 2002=100)*

Source: http://www.federalreserve.gov/releases/g17/ipdisk/ip_sa.txt. *seasonally adjusted4

Recession began December 2007

Nearing a bottom?

Index

Hurricane Katrina

March 2001-November 2001

recession

Near-Term Forecasts for QuarterlyIndustrial Production: A Wide Range

7.8%8.3%

7.2%6.7%

7.3% 6.9%

-3.1%

-0.2%

0.6%1.2%

1.8% 1.8%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

Avg of 10 MostOptimisticForecastsAvg of 10 MostPessimisticForecasts

Source: Blue Chip Economic Indicators (8/09)

Single vs. Multi-Family Housing Starts

329

346

349

343

332

336

309

126

1273

1359 14

99

1611

1716

1465

1046

622

429

282

0

300

600

900

1,200

1,500

1,800

2,100

2001 2002 2003 2004 2005 2006 2007 2008 2009*

units in multi-family buildings single family units

Not seasonally adjusted *average of first seven months of 2009, annualizedSource: US Census Bureau at http://www.census.gov/const/newresconst.pdf

Thousands of Units

The 2007-09 slump was mainly in single-family housing, but starts of multi-family units finally began dropping in late 2008 and continued in 2009.

2008 single family starts down 40%

vs. 2007

In the Near Term, Millions Fewer Private Housing Starts

2.07

1.80

1.36

0.90

0.57

0.79

1.48

1.351.

46

1.29

1.20

1.01

1.19

1.47

1.62 1.64

1.57 1.60 1.

71

1.85

1.96

0.40.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.1

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

Measured by number of new units started, exposure growth for HO insurers is low.

Housing start data also affects commercial insurers with construction risk exposure.

I.I.I. estimate: each 100,000 decline in housing starts “costs” home insurers $90

million in gross premium. Estimated premium loss in 2008 vs. 2005: about $1

billion.

Sources: US Department of Commerce; Blue Chip Economic Indicators (8/09); Insurance Information Inst.

Millions of Units

Housing bubble

Recession

Recession

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

Traditional Unemployment Rate U-3Unemployment + Underemployment Rate U-6

January 2000 through July 2009, seasonally adjusted

U-6 went from 9.2% in April 2008 to

16.5% in June 2009

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

9.5% June 2009 unemployment rate (U-3) was the highest monthly rate since 1983. Peak rate in the last 30 years: 10.8% in

Nov-Dec 1982.

Unemployment and UnderemploymentRates: Rocketing Up in 2008-9

Percent

U.S. Unemployment Rate ForecastsQuarterly, 2009:Q3 to 2010:Q4

10.0%

10.4%10.6% 10.6%

10.5%10.4%

9.8%

10.1% 10.1%10.0%

9.9%

9.7%9.6%

9.9%9.8%

9.6%

9.2%

8.9%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4

10 most pessimistic consensus/midpoint 10 most optimistic

Sources: Blue Chip Economic Indicators (8/09); Insurance Info. Inst.

Unemployment is expected to peak in

late 2009 or first quarter of 2010.

Rising unemployment will erode payrolls and workers comp’s exposure base.

3.1%

2.1%

5.4%

1.4%

0.1%

3.0%

1.2%

3.2% 3.

6%

2.1%

1.5%

-5.4

%

-6.4

%

-1.0

%

2.2%

2.3% 2.5% 2.8%

2.8%

2.9%

-0.7

%

-2.7

%-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

05:3

Q

05:4

Q

06:1

Q

06:2

Q

06:3

Q

06:4

Q

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:Q

4

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

Real Quarterly GDP Changes (annualized),

2005:Q3-2010:Q4F

Sources: US Department of Commerce, Bureau of Economic Analysis (actual) at http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm Blue Chip Economic Indicators 8/09 issue (forecasts).

Spike due almost entirely to the weak dollar (growing exports and slowing imports)

Red bars are actual; Yellowbars are forecasts/estimates

The Q1:2009 decline was the steepest since the

Q1:1982 drop of 6.4%

P/C IndustryFinancial Performance

2009 Outlook is Dim

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

:Q1

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

40 Years ofHard and Soft Markets

1975-78 1984-87 2000-03Shaded areas denote “hard

market” periods In 2007 net written premiums fell, the first decline since

1943

Year-to-Year Change in Net Written Premium, 2000-2009*

Sources: A.M. Best (historical through 2008; ISO for 2009. *first quarter 2009 only

5.0%

8.4%

15.3%

10.0%

3.9%

0.5%

4.2%

-1.0% -1.4%-3.5%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*

P/C insurers are experiencing their slowest growth rates since 1943

Soft markets and slow economy => continued negative or slow growth

P/C Net Income After Taxes1991-2009:Q1*

$14.

2

$5.8

$19.

3

$10.

9 $20.

6

$24.

4

$36.

8

$30.

8

$21.

9

$3.0

$30.

0

$62.

5

$2.4

-$1.

3

-$7.0

$63.

7

$44.

2

$20.

6

$38.

5

-$10

$0

$10

$20

$30

$40

$50

$60

$70

$80

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

*2009:Q1 Sources: A.M. Best, ISO, Insurance Information Inst.

2008 industry profits dropped 96.2% vs. 2007

Billions

-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 0608

F09

F

1975: 2.4%

1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2%

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

10 Years10 Years

9 Years

Note: 2008 result excluding Mortgage & Financial Guarantee insurers is 4.2%.Sources: ISO; A.M. Best (2009F); Insurance Information Institute.

2008: 0.5%

P/C Insurance Industry ROEs,1975 – 2009F*

2009F: 7.4%

15

115.

8

107.

4

100.

1

98.3 10

0.7

92.4

102.

0105.

1

95.5

85

90

95

100

105

110

115

120

2001 2002 2003 2004 2005 2006 2007 2008 2009:Q1E

P/C Insurance Industry Combined Ratio, 2001-

2009:Q1E

Sources: A.M. Best, ISO; III preliminary estimates.

The industry’s combined ratio appears to be on a “cyclical upturn” dating to 2006. In 2008, even excluding net CAT losses (which

added 3.4 points to the combined ratio vs. 2007) and M&FG losses (another 4.1 points vs. 2007), the 2008 ratio would have been 97.6.

Combined Ratio

09:Q1 combined ratio was 98.4 excl. M&FG vs. 96.8

in 08:Q1

-$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:Q

1*

Underwriting Gain/(Loss)1975-2009:Q1

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

Billions In the past 34 years, only twice has the p-c insurance industry earned an underwriting profit of over $1.7

billion. In contrast, in that span it’s had underwriting losses of $20 billion or more in 14 years.

90

95

100

105

110

115

120

125

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E08E09F

Commercial Lines Personal Lines

Sources: A.M. Best; Insurance Information Institute *after dividends to policyholders.

Results benefited from favorable loss cost

trends, improved tort environment, low CAT

losses, WC reforms, and reserve releases

Personal, Commercial Lines Combined Ratios* Varied Widely Since 1993

Catastrophe Losses

2008 Insured Catastrophe Loss Distribution by Category

Commercial, $6.80 , 27%

Personal*, $16.13 , 64%

Vehicle**, $2.27 , 9%

2008 CAT Facts

•The $25.2 billion in insured losses was the 4th highest ever, behind only, 2005, 2004 and 2001

•There were 37 designated catastrophes in 2008, the highest since 1998 (also 37)

•Commercial losses accounted for 27% of insured losses but just 9% of claims

*Includes homeowers, condominium and rental policies.**Includes commercial and private passenger vehiclesSource: PCS; Insurance Information Institute research.

$ Billions

20

Catastrophic Losses*: Was 2005an Outlier or a Harbinger?

$7.5$2.7$4.7

$22.9

$5.5

$16.9

$8.3$7.4$2.6

$10.1$8.3$4.6

$26.5

$5.9

$12.9

$27.5

$6.7

$26.0

$61.9

$9.2

$0

$10

$20

$30

$40

$50

$60

$70

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

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita.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.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions

21

Is $25 billion the new level of expected

yearly CAT losses?Before 2001, CAT

losses averaged about $8-10 billion per year.

5.1 5.

3 5.4 5.

5 5.6 5.

7 5.8 5.

9 6.0 6.

2 6.3 6.

5 6.6 6.

8 7.0 7.

1

7.3 7.

4 7.5

7.5 7.5

7.6 7.6 7.

7 7.9 8.

0 8.1 8.

2 8.3 8.

5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

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

09F

10F

11F

12F

13F

14F

15F

16F

17F

18F

19F

Source: http://edr.state.fl.us/conferences/population/demographic.htm

Data are from Feb. 18, 2009 Florida Demographic Estimating conference

A Million More Florida Resident Households in the Next Decade?

Millions of Households

The State of Florida now (Feb 09) forecasts nearly 1 million more

households by 2019 (up almost 13%). There will be more businesses, too.

Hurricane Andrew

Hurricane Wilma

August Forecast for the 2009 Hurricane Season: 10 Named Storms

Average,1950-2000

2005 2009F

Net Tropical Cyclone Activity 100% 275% 85%Named Storms 9.6 28 10Hurricanes 5.9 14 4

Intense Hurricanes 2.3 7 2

Source: Philip Klotzbach and Dr. William Gray, Colorado State University, August 4, 2009.

23

Major (Category 3, 4, 5) Hurricanes Striking the US by Decade

3 10 10

76

5

4

6

88

5

8

6

9

1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s

*Figure for 2000s is extrapolated based on data for 2000-2008 (7 major storms: Charley, Ivan, Jeanne (2004), Katrina, Rita, Wilma (2005), Ike (2008)).Sources: Tillinghast from National Hurricane Center: http://www.nhc.noaa.gov/pastint.shtm.; I.I.I.

Mid 1920s – mid-1960s:AMO Warm Phase

Mid-1990s – 2030s?AMO Warm Phase

Colorado State team forecasts 3

more intense hurricanes in

2009

Inflation-Adjusted U.S. Insured Catastrophe Losses By Cause of Loss,

1988-2007¹

Fire, $8.1 , 2.6%

Tornadoes, $82.4 , 26.5%

All Tropical Cyclones, $141.6 ,

45.6%

Other, $1.7 , 0.5%Wind/Hail/Flood,

$9.9 , 3.2%

Earthquakes, $19.5 , 6.3%

Winter Storms, $24.4 , 7.9%

Terrorism, $22.9 , 7.4%

Source: Insurance Services Office (ISO)..

1 Catastrophes are all events causing direct insured losses to property of $25 million or more in 2007 dollars. Catastrophe threshold changed from $5 million to $25 million beginning in 1997. Adjusted for inflation by the III.2 Excludes snow. 3 Includes hurricanes and tropical storms. 4 Includes other geologic events such as volcanic eruptions and other earth movement. 5 Does not include flood damage covered by the federally administered National Flood Insurance Program. 6 Includes wildland fires.

Number of Tornadoes in Each Calendar Quarter, 2005–2009:Q2

209

504

235

160

244

543

193

112

360

944

305

81

157

617

118

394

571

105

0

100

200

300

400

500

600

700

800

900

1,000

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

2005 20062007 20082009

Sources: US Dept. of Commerce, Storm Prediction Center, National Weather Service,at http://www.spc.noaa.gov/climo/torn/monthlytornstats.pdf 2009:Q2 is I.I.I. estimate

The first two quarters of 2009 were more

typical of prior years than 2008.

Investments

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

09F

P-C Inv Income/Inv Assets 10-Year Treasury Note

P/C Investment Income as a % of Invested Assets Follows 10-Year U.S. T-Note

Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.

Investment yield historically tracks 10-

year Treasury note quite closely

P/C Industry Investment Income*, 1994-2008

$33.

7 $36.

8

$38.

0 $41.

5

$37.

1

$36.

7

$38.

7

$39.

6

$49.

5 $52.

3 $54.

6

$51.

2

$51.

4

$40.

8

$38.

6

$39.

9

$25

$30

$35

$40

$45

$50

$551994

95

96

97

98

99

2000

01

02

03

04

2005** 06

07

08

09**

*

Bill

ion

s

*Primarily interest and stock dividends. ** Investment income (excluding one-time dividend) jumped in 2005 as insurers that had accumulated cash captured rising bond interest rates. Also, 2005 figure includes special one-time dividend of $3.2B. ***2009 figure is Q1 actual, annualizedSources: ISO; Insurance Information Institute.

Investment income might moderate further if rates for new bond

investments stay low and/or if insurers shift to shorter-maturity bonds and

more US government notes.

Investment income CAGR 1994-2007 was just 3.8%.

P/C Industry Net Realized Capital Gains and Losses, 1990-2009:Q1

$2.88$4.81

$9.89

$1.66

$6.00

$9.24$10.81

$13.02

$16.21

$6.63

-$1.21

$6.61$8.97

-$19.80

-$0.41

$18.02

$3.52

$9.70$9.13$9.82

-$24

-$20

-$16

-$12

-$8

-$4

$0

$4

$8

$12

$16

$20

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

09:Q

1

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

Nearly $9 billion in realized capital gains in 2007, but

$-19.7 billion in 2008.

$ Billions

Capital & Capacity

Policyholder Surplus by Quarter,2006:Q4 – 2009:Q1

Billions$4

87.1

$496

.6 $512

.8

$521

.8

$478

.5

$455

.6

$437

.1

$505

.0

$515

.6

$517

.9

$400

$425

$450

$475

$500

$525

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1

Source: ISO

Decline Since 2007:Q3 Peak

2009Q1: -$84.7B (-16.2%)

0.8

1.0

1.2

1.4

1.6

1.8

2.0

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809:Q1

U.S. P/C Industry Premiums-to-Surplus Ratio: 1985-2009:Q1

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

19980.85:1–the lowest

(strongest) P:S ratio in recent history.

Premiums are a rough measure of risk accepted; surplus is funds beyond reserves to pay unexpected

losses. The larger surplus is in relation to premiums—the lower the ratio of premiums to surplus—the greater

the industry’s capacity to handle the risk it has accepted.

1.03:1 as of

3/31/09

Ratio at year-end

Largest Capital Events asa Percent of Surplus, 1989-present

3.3%

9.6%

6.9%

10.9%

16.2%

13.8%

6.2%

0%

3%

6%

9%

12%

15%

18%

6/3

0/1

989

Hu

rric

an

eH

ug

o

6/3

0/1

992

Hu

rric

an

eA

nd

rew

12/3

1/9

3N

ort

hri

dg

eE

art

hq

uake

6/3

0/0

1S

ep

t. 1

1A

ttacks

6/3

0/0

4F

lori

da

Hu

rric

an

es

6/3

0/0

5H

urr

ican

eK

atr

ina

Fin

an

cia

lC

risis

as o

f3/3

1/0

9**

Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event. Sources: PCS; Insurance Information Institute.

The financial crisis now ranks as the largest “capital event”

over the past 20+ years

Premium-to-Surplus Ratios Before Major Capital Events*

$1.65

$1.42 $1.40

$1.03 $1.03$0.88

$1.05$1.15

$0.5

$0.7

$0.9

$1.1

$1.3

$1.5

$1.7

$1.9

6/3

0/1

989

Hu

rric

an

eH

ug

o

6/3

0/1

992

Hu

rric

an

eA

nd

rew

12/3

1/9

3N

ort

hri

dg

eE

art

hq

uake

6/3

0/0

1S

ep

t. 1

1A

ttacks

6/3

0/0

4F

lori

da

Hu

rric

an

es

6/3

0/0

5H

urr

ican

eK

atr

ina

6/3

0/0

7F

inan

cia

lC

risis

As o

f3/3

1/0

9**

*Ratio is for end of quarter immediately prior to event. Date shown is end of quarter prior to event. **Latest availableSource: PCS; Insurance Information Institute.

P/C insurance industry was better capitalized going into the

financial crisis than before any “capital event” in recent history

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

NWP % change Surplus % change

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

Historically, Hard Markets Follow When Surplus “Growth” is Negative

In 2008, A.M. Best Affirmed or Upgraded 88% of P/C Insurers*

Upgraded, 59 , 4.2%

Other, 59 , 4.2%

Affirm, 1,183 , 83.4%

Downgraded, 55 , 3.9%

Under Review, 63 , 4.4%

*Through December 19.Source: A.M. Best.

37

In 2008, despite financial market turmoil, high cat losses and a soft

market, A.M. Best lowered ratings on just 3.9% of P-C insurers. It placed

another 4.4% under review

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

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

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.

Reinsurance Failure3.7%

Rapid Growth14.3%

Misc.9.1%

Affiliate Impairment

7.9%

Sig. Change in Business

4.2%

Deficient Loss

Reserves/In-adequate Pricing38.1%

Investment Problems

7.0%

Alleged Fraud8.1%

Catastrophe Losses7.6%

Summary

• The slumping economy has affected P/C exposure growth but this might begin reversing soon

• Combined ratios seem headed up, continuing a recent trend

• Likely continued low investment returns are probably insufficient to overcome a continued soft marketClear need to remain underwriting focused

• A growing CAT threat continues

• The industry has had a major capital shock but is still in fairly strong shape

Insurance Information Institute On-Line

If you would like a copy of this presentation, please give me your business card with e-mail address