An Industry and Economy in Transition:

Overview and Outlook for US and Maryland P/C Insurance Markets

Maryland I-DayTowson, MD

April 24, 2012Download 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 bobh@iii.org www.iii.org

3

Economics 2012:

The World Is Changing2012 Is the First Year Since 2005 Where Economic Perceptions and Reality in the US Will Be Positive

Potentially Enormous Benefits for P/C Insurers

3

4

Economic Outlook for 2012

Economic Growth Will Accelerate Modestly in 2012/13, Albeit Unevenly No Double Dip Recession Economy remains more resilient than most pundits presume

Consumer Confidence Will Continue to Improve Consumer Spending/Investment Will Continue to Expand Consumer and Business Lending Continue to Expand Housing Market Remains Weak, but Some Improvement Expected by 2013 Inflation Remains Tame

Runaway inflation highly unlikely but energy spike possible; Fed has things under control Private Sector Hiring Remains Consistently Positive

Unemployment dips below 8% by year’s end Sovereign Debt, Euro Currency/Economy, Muni Bond “Crises” Overblown European Recession in Milder than Commonly Presumed Soft Landing in China Higher Oil Prices and Current Middle East Turmoil Pose Greater Risk to US Economy than

in 2011 Interest Rates Remain Low by Historical Standards; Edge Up by Year’s End Stock and Bond Markets More Stable, Less Volatile Political Environment Is More Hospitable to Business Interests

5

P/C Insurance Exposures Grow Robustly Personal and commercial exposure growth is certain in 2012; Strongest since 2004 But restoration of destroyed exposure will take until mid-decade

P/C Industry Growth in 2012 Will Be Strongest Since 2004 Growth likely to exceed A.M. Best projection of +3.8% for 2012 No traditional “hard market” emerges in 2012

Underwriting Fundamentals Deteriorate Modestly Some pressure from claim frequency, in some severity in key lines

Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures Wage growth is also positive and could modestly accelerate WC will prove to be tough to fix from an underwriting perspective

Increase in Demand for Commercial Insurance Will Accelerate in 2012 Includes workers comp, property, marine, many liability coverages Laggards: inland marine, aviation, commercial auto, surety Personal Lines: Auto leads, homeowners lags (though HO leads in NPW growth due to rates)

Investment Environment Is/Remains Much More Favorable Return of realized capital gains as a profit driver Interest rates remain low; Some upward pressured if economic strength surprises

Industry Capacity Hits a New Record by Year-End 2012 (Barring Mega-CAT)

Insurance Industry Predictions for 2012

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

6

Growth Will Expand Insurable Exposures and Help Absorb Excess Capital

6

7

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/12; Insurance Information Institute.

2.7

%0

.9%

3.2

%2

.3%

2.9

%-0

.7%

0.6

%-4

.0%

-6.8

% -4.9

%-0

.7%

1.6

%5

.0%

3.9

%3

.8%

2.5

%2

.3%

0.4

%1

.3%

1.8

% 3.0

%2

.2%

2.3

%2

.4%

2.6

%2

.4%

2.6

%2

.9%

3.0

%4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

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6   

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13

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Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit crunch, housing

slump, labor market contraction has been

severe but modest recovery is underway

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

2012 is expected to see a modest but choppy

acceleration in growth continuing into 2013

74

.4

73

.6

73

.6

72

.2

73

.6 76

67

.8

68

.9

68

.2

67

.7 71

.6 74

.5

74

.2 77

.5

67

.5 69

.8

74

.3

71

.5

63

.7

55

.7 59

.4 60

.9 64

.1

69

.9

75

.0

75

.3

74

.3

40

45

50

55

60

65

70

75

80

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

Consumer Sentiment Survey (1966 = 100)

January 2010 through March 2012

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 early 2012

Source: University of Michigan; Insurance Information Institute

Optimism among consumers is recovering, in part due to an

improving jobs outlook, after plunging amid the debt debate debacle and S&P downgrade

8

10

16.9

16.5

16.1

13.2

10.4

11.6 12

.7

14.5 14

.9

14.7 15

.1

15.4

15.5

15.4

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 15F 16F 17F 18-22F

(Millions of Units)

Auto/Light Truck Sales, 1999-2022F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 4/12); 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 2012-13 is

still far below 1999-2007 average of 17 million units, but a recovery is underway.

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

2012 and beyond

11

(Millions of Units)

New Private Housing Starts, 1990-2022F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

1 0.7

4 0.9

0

1.3

4

1.2

3

1.3

2

1.3

81

.42

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12F13F14F15F16F17F 18-22F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 4/12); Insurance Information Institute.

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

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

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

is holding back payroll exposure growth

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

58

.3

57

.1

60

.4

59

.6

57

.8

55

.3

55

.1

55

.2

55

.3 56

.9 58

.2

58

.5 60

.8

61

.4

59

.7

59

.7

54

.2 55

.8

51

.4 52

.5

52

.5

51

.8

52

.2 53

.1 54

.1

52

.4 53

.4

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

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through March 2012

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

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

Optimism among manufacturers was

increasing in late 2011 and into early 2012

12

13

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Feb. 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 February 2012 was 30%. This

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

The value of Manufacturing Shipments in Feb. 2012 was up 30% to $462B from its May 2009 trough.

Dec. figure is only 4.7% below its previous record high in July 2008.

$ Millions

13

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Jun 0

1

Sep 0

1

Dec 0

1

Mar

02

Jun 0

2

Sep 0

2

Dec 0

2

Mar

03

Jun 0

3

Sep 0

3

Dec 0

3

Mar

04

Jun 0

4

Sep 0

4

Dec 0

4

Mar

05

Jun 0

5

Sep 0

5

Dec 0

5

Mar

06

Jun 0

6

Sep 0

6

Dec 0

6

Mar

07

Jun 0

7

Sep 0

7

Dec 0

7

Mar

08

Jun 0

8

Sep 0

8

Dec 0

8

Mar

09

Jun 0

9

Sep 0

9

Dec 0

9

Mar

10

Jun 1

0

Sep 1

0

Dec 1

0

Mar

11

Jun 1

1

Sep 1

1

Dec 1

1

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 15

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 78.6% of industrial capacity in Mar. 2012, above the June 2009

low of 68.3% and close to its post-crisis peak

December 2007-June 2009 Recession

March 2001 through March 2012

15

50

.7 52

.7 54

.1

54

.6

54

.8

53

.5

53

.7

52

.8 53

.9

54

.6 56 5

7.1 5

9.4

59

.7

56

.3

54

.4

53

.3

53

.4

53

.8

52

.6

52

.6

52

.6

52

.6

53

.0

56

.8

57

.3

56

.0

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

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

January 2010 through March 2012

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 was

stable in late 2011 and increased in early 2012

16

17

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8247

,806

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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

Business Bankruptcy Filings,1980-2011

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.

% Change Surrounding Recessions

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

17

18

Private Sector Business Starts, 1993:Q2 – 2011: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

119

219

219

320

1 204

202

210 21

220

921

6 220 22

322

022

021

022

121

220

421

820

920

720

719

919

1 193

172 17

616

918

417

5 179

188

200

183 18

7

203

150

160

170

180

190

200

210

220

230

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

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

Are Recovering Slowly* Data through June 30, 2011 are the latest available as of March 7, 2012; Seasonally adjusted.Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up 4.5% to 370,000 in the first half of 2011 vs. first half 2011.

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

business starts since 1993

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 722,000 2011: 740,000**

18

19

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)

20

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

20

21

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

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 8.2% in

March 2012

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 14.5%

in Mar. 2012

January 2000 through March 2012, 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

21

Feb 12

186

7921

365

127

42 15-1

09-1

465

9723

-12

-85 -58

-161

-253 -230

-257

-347

-456

-547

-734 -6

67-8

06-7

07-7

44-6

49-3

34-4

52-2

97-2

15 -186

-262

75-8

316

62

229

51 6111

714

311

2 193

128 16

711

925

726

126

410

810

2 175

5221

613

9 178 23

4 277

233

121

144

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

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7D

ec-0

7Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Ju

n-09

Jul-0

9A

ug-0

9S

ep-0

9O

ct-0

9N

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9D

ec-0

9Ja

n-10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

Feb

-12

Mar

-12

Monthly Change in Private Employment

January 2008 through March 2012* (Thousands)

Private Employers Added 4.159 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs

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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

121,000 private sector jobs were created in

March

22

0.02

30.

011

-0.0

74-0

.132

-0.2

93-0

.546

-0.7

76-1

.033

-1.3

80-1

.836

-2.3

83-3

.117

-3.7

84-4

.590

-5.2

97-6

.041

-6.6

90-7

.024

-7.4

76-7

.773

-7.9

88-8

.174

-8.4

36-8

.361

-8.4

44-8

.428

-8.3

66-8

.222

-7.9

93-7

.942

-7.8

81-7

.764

-7.6

21-7

.509

-7.3

16-7

.188

-7.0

21-6

.902 -6.3

84-6

.120

-6.0

12-5

.910

-5.7

35-5

.683

-5.4

67-5

.328

-5.1

50-4

.916

-4.6

39-4

.406

-4.2

85

-6.6

45

-10

-8

-6

-4

-2

0

2

Dec

-07

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12F

eb-1

2

Mill

ion

sCumulative Change in Private Employment: Dec. 2007—Mar. 2012

December 2007 through March 2012* (Millions)

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

Cumulative job losses peaked at 8.444 million

in December 2009

Cumulative job losses as of Mar. 2012 totaled

4.285 million

23

All of the jobs “lost” since President

Obama took office in Jan. 2009 have been

recouped

Private Employers Added 4.159 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

24

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

12

.0

11

.1

11

.0

9.8

9.7

9.0

9.0

9.0

9.0

8.9

8.8

8.6

8.6

8.6

8.5

8.5

8.3

8.2

8.2

7.9

7.9

7.8

7.7

7.5

7.5

7.4

0

2

4

6

8

10

12

14

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

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for March 2012, seasonally adjusted.

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

In March, 30 states reported over-the-month unemployment rate decreases, 8 had increases, and 12 and the District

of Columbia had no change.

25

7.4

7.3

7.2

7.2

7.1

7.0

7.0

6.9

6.9

6.8

6.6

6.5

6.4

6.2

6.2

5.8

5.8

5.6

5.4

5.3

5.2

5.2

4.8

4.3

4.0

3.0

0

2

4

6

8

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

Un

em

plo

ym

en

t R

ate

(%

)Unemployment Rates By State, March 2012: Lowest 25 States*

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

In March, 30 states reported over-the-month unemployment rate decreases,

8 had increases, and 12 and the District of Columbia had no change.

Maryland’s unemployment rate is one of the lowest in

the country, helping support exposure growth

26

US Unemployment Rate

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

% 6.1

%

6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

9.7

%

9.6

%

9.6

%

8.9

%

9.1

%

9.1

%

8.7

%

8.3

%

8.2

%

8.1

%

8.0

%

7.9

%

7.8

%

7.7

%

7.5

%

9.6

%4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

: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 (4/12 edition); Insurance Information Institute.

2007:Q1 to 2013:Q4F*

Unemployment forecasts have been revised

downwards for 2012 and 2013. Optimistic scenarios

put the unemployment as low as 7.7% by Q4 of this year.

Jobless figures have been revised

downwards for 2012

28

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2011:Q4

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

$6,75005

: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

Peak was 2008:Q1 at $6.60 trillion

Latest (2011:Q4) was $6.71 trillion,

a new peak

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

5.3% from prior peak

Growth rates in 2011Q2 over Q1: 0.6%

Q3 over Q2: 0.4% Q4 over Q3: 1.0%

Pace of payroll growth is

accelerating

28

29

P/C Insurance Industry Financial Overview

Profit Recovery Was Set Back in 2011 by High Catastrophe

Loss & Other Factors

29

P/C Net Income After Taxes1991–2011 ($ 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

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

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

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011:Q3 ROAS1 = 3.5%

P-C Industry 2011 profits were down 46% to $19.2B vs. 2010, due

primarily to high catastrophe losses and as non-cat

underwriting results deteriorated

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 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 -2011 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 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

106.4

95.7

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 20110%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

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

10% in 2005 and 16% in 1979

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

*

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

*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 3.5% 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%

36

Profitability and Growth in Maryland P/C Insurance

Markets

Analysis by Line and Nearby State Comparisons

37

RNW All Lines: MD vs. U.S., 2001-2010

Sources: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

01 02 03 04 05 06 07 08 09 10

US All Lines MD All Lines

P/C Insurer profitability in MD is above that of the US

overall over the past decade

US: 7.1%

MD: 8.5%

(Percent)

38

RNW PP Auto: MD vs. U.S., 2001-2010

Sources: NAIC.

0%

2%

4%

6%

8%

10%

12%

14%

16%

01 02 03 04 05 06 07 08 09 10

US PP Auto MD PP Auto

Average 2001-2010

US: 7.6%

MD: 8.0%

39

RNW Comm. Auto: MD vs. U.S.,2001-2010

Sources: NAIC.

0%

5%

10%

15%

20%

25%

01 02 03 04 05 06 07 08 09 10

US Comm Auto MD Comm Auto

(Percent)

Average 2001-2010

US: 9.2%

MD: 12.2%

40

RNW Comm. Multi-Peril: MD vs. U.S.,2001-2010

Sources: NAIC.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

01 02 03 04 05 06 07 08 09 10

US Comm M-P MD Comm M-P

(Percent)

Average 2001-2010

US: 9.2%

MD: 11.7%

41

RNW Homeowners: MD vs. U.S.,2001-2010

Sources: NAIC.

-30%

-20%

-10%

0%

10%

20%

30%

40%

01 02 03 04 05 06 07 08 09 10

US HO MD HO

(Percent)

Average 2001-2010

US: 5.0%

MD: 9.4%

42

RNW Workers Comp: MD vs. U.S.,2001-2010

Sources: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

01 02 03 04 05 06 07 08 09 10

US WComp MD WComp

(Percent)

Average 2001-2010

US: 6.1%

MD: 4.1%

All Lines: 10-Year Average RNW MD & Nearby States

7.1%

8.0%

8.5%

11.7%

11.8%

6.6%

7.5%

0% 5% 10% 15%

Virginia

D.C.

Maryland

New Jersey

West Virginia

U.S.

Pennsylvania

Source: NAIC, Insurance Information Institute

2001-2010

Maryland All Lines profitability is above the US average and below the regional

average

PP Auto: 10-Year Average RNW MD & Nearby States

7.1%

7.6%

8.0%

10.5%

13.5%

7.1%

7.4%

0% 5% 10% 15%

D.C.

Virginia

Maryland

U.S.

West Virginia

New Jersey

Pennsylvania

Source: NAIC, Insurance Information Institute

2001-2010

Maryland PP Auto profitability is above the US average and below the regional average

45

Top Ten Most Expensive And Least Expensive States For Automobile Insurance, 2009 (1)

RankMost

expensive statesAverage

expenditure RankLeast

expensive statesAverage

expenditure1 District of Columbia $1,128 1 North Dakota $510

2 New Jersey 1,101 2 South Dakota 521

3 Louisiana 1,099 3 Iowa 532

4 New York 1,057 4 Idaho 555

5 Delaware 1,021 5 Nebraska 559

6 Florida 1,006 6 Kansas 578

7 Rhode Island 969 7 Wisconsin 591

8 Connecticut 952 8 Maine 598

9 Nevada 944 9 North Carolina 610

10 Maryland 929 10 Ohio 616

(1) Based on average automobile insurance expenditures.

Source: © 2012 National Association of Insurance Commissioners.

Maryland ranked 10th in 2009, with an average expenditure for auto insurance of $929.

46

1.66

%

1.59

%

1.57

%

1.37

%

1.36

%

1.35

%

1.35

%

1.34

%

1.29

%

1.28

%

1.27

%

1.23

%

1.22

%

1.19

%

1.11

%

1.11

%

1.11

%

1.11

%

1.08

%

1.06

%

1.05

%

1.04

%

1.04

%

1.03

%

1.02

%

0.00%

0.50%

1.00%

1.50%

2.00%

LA DC FL WV NV NM MS TX MI NY AZ AR DE SC KY RI GA NJ OK AK US UT AL PA TN

*Average auto insurance expenditure as a percentage of the 2009 median income for a family of fourSources:  Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

Ratio of Avg. Expenditure for Pvt. Passenger Auto Insurance to Median Family Income, 2009

Top 25 States(Percent)

47

1.0

2%

1.0

1%

0.9

8%

0.9

7%

0.9

7%

0.9

4%

0.9

2%

0.9

2%

0.9

2%

0.9

1%

0.9

1%

0.9

1%

0.9

0%

0.8

9%

0.8

6%

0.8

6%

0.8

5%

0.8

4%

0.8

3%

0.8

3%

0.8

1%

0.8

0%

0.7

8%

0.7

8%

0.7

8%

0.7

2%

0.6

5%

0.00%

0.50%

1.00%

1.50%

2.00%

WA

OR

MT

MO CA

CT HI

ID NC

MD IL IN CO

ME

OH

MA

KS

VT

WY

MN

NH

NE VA

SD WI

IA

ND

*Average auto insurance expenditure as a percentage of the 2009 median income for a family of fourSources:  Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

(Percent) Bottom 25 States

Ratio of Avg. Expenditure for Pvt. Passenger Auto Insurance to Median Family Income, 2009

Auto insurance in Maryland is very affordable, consuming just 0.91% of median family

income—well below the 1.05% US average

Comm. Auto: 10-Year Average RNW MD & Nearby States

6.9%

9.2%

12.2%

12.5%

22.6%

6.7%

8.7%

0% 5% 10% 15% 20% 25%

D.C.

Virginia

Maryland

U.S.

Pennsylvania

New Jersey

West Virginia

Source: NAIC, Insurance Information Institute

2001-2010

Maryland Commercial Auto

profitability is above the US and regional average

Comm. M-P: 10-Year Average RNW MD & Nearby States

8.3%

11.2%

11.7%

17.1%

20.7%

5.3%

9.4%

0% 5% 10% 15% 20% 25%

D.C.

Virginia

Maryland

New Jersey

Pennsylvania

U.S.

West Virginia

Source: NAIC, Insurance Information Institute

2001-2010

Maryland Commercial Multi-Peril profitability is

above the US average and below

the regional average

Homeowners: 10-Year Average RNW MD & Nearby States

5.0%

12.2%

12.5%

12.7%

19.5%

4.8%

9.4%

0% 5% 10% 15% 20% 25%

D.C.

Pennsylvania

New Jersey

Virginia

Maryland

U.S.

West Virginia

Source: NAIC, Insurance Information Institute

2001-2010

Maryland Homeowners

profitability is above the US average and below the regional

average

51

Top Ten Most Expensive And Least Expensive States For Homeowners Insurance, 2009 (1)

RankMost

expensive statesAverage

expenditure RankLeast

expensive statesAverage

expenditure1 Texas (3) $1,511 1 Idaho  $485

2 Florida (4) 1,460 2 Wisconsin  542

3 Louisiana  1,430 3 Oregon  544

4 Mississippi  1,185 3 Utah  544

5 Oklahoma  1,123 4 Washington  552

6 D.C. 1,069 5 Delaware  610

6 Rhode Island  1,069 6 Ohio  613

7 Massachusetts  1,035 7 Arizona  642

8 New York  1,021 8 Iowa  645

9 Connecticut  1,016 8 South Dakota  645

(1) States with the same premium receive the same rank.(2) Based on the HO-3 homeowner package policy for owner-occupied dwellings, 1 to 4 family units. Provides “all risks” coverage (except those

specifically excluded in the policy) on buildings and broad named-peril coverage on personal property, and is the most common package written.(3) The Texas Department of Insurance developed home insurance policy forms that are similar but not identical to the standard forms.(4) Florida data excludes policies written by Citizen's Property Insurance Corporation, the state's insurer of last resort, and therefore are not directly

comparable to other states.

Note: Average premium=Premiums/exposure per house years. A house year is equal to 365 days of insured coverage for a single dwelling. The NAIC does not rank State Average Expenditures and does not endorse any conclusions drawn from this data.

Source: © 2011 National Association of Insurance Commissioners (NAIC). Reprinted with permission. Further reprint or distribution strictly prohibited without written permission of NAIC.

Maryland ranked as the 25th most expensive state for homeowners insurance in 2009, with an average expenditure of $779.

52

2.35

%

2.28

%

2.16

%

2.16

%

1.78

%

1.72

%

1.57

%

1.56

%

1.45

%

1.42

%

1.28

%

1.28

%

1.27

%

1.24

%

1.23

%

1.21

%

1.19

%

1.17

%

1.16

%

1.13

%

1.13

%

1.12

%

1.10

%

1.09

%

1.09

%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

TX FL MS LA OK AR AL SC KS NM MO TN DC NY RI NE CA US GA KY WV MT MN NC ND

*Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of fourSources:  Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

Top 25 States(Percent)

Ratio of Avg. Premium for Homeowners Insurance to Median Family Income, 2009

53

1.0

8%

1.0

5%

1.0

5%

1.0

5%

1.0

3%

1.0

3%

1.0

1%

1.0

0%

0.9

9%

0.9

7%

0.9

7%

0.9

7%

0.9

6%

0.9

3%

0.8

8%

0.8

7%

0.8

6%

0.8

6%

0.8

6%

0.8

6%

0.8

5%

0.8

0%

0.7

9%

0.7

7%

0.7

6%

0.7

1%

0.6

8%

0.00%

0.50%

1.00%

1.50%

2.00%

CO AK IN MI

HI

MA

NV

CT IL AZ

WY

ME

SD VT

PA IA DE

OH VA

NH NJ ID UT

MD

OR WI

WA

*Average homeowners insurance expenditure as a percentage of the 2009 median income for a family of fourSources:  Prepared by the Insurance Information Institute, based on data from the U.S. Census and the National Association of Insurance Commissioners.

(Percent) Bottom 25 States

Ratio of Avg. Premium for Homeowners Insurance to Median Family Income, 2009

Homeowners insurance in Maryland is very affordable,

consuming just 0.77% of median family income—well below the 1.17% US average

Workers Comp: 10-Year Average RNW MD & Nearby States

4.0%

5.6%

6.1%

7.2%

11.3%

3.1%

4.1%

0% 2% 4% 6% 8% 10% 12%

D.C.

Virginia

U.S.

Pennsylvania

Maryland

West Virginia

New Jersey

(1) Data not available.Source: NAIC, Insurance Information Institute.

2001-2010

Maryland Workers Comp profitability is

below the US average and regional average

55

All Lines DWP Growth: MD vs. U.S., 2002-2011

Source: SNL Financial.

14.3

%

9.8%

7.6%

2.2% 3.

4%

0.5%

-2.2

%

-3.2

%

0.0%

3.8%

15.1

%

13.7

%

10.4

%

3.8%

3.9%

-1.0

%

-3.2

%

-1.4

%

1.9%

2.1%

-15%

-10%

-5%

0%

5%

10%

15%

20%

02 03 04 05 06 07 08 09 10 11

US DWP: All Lines MD DWP: All Lines

(Percent)

Average 2002-2011

US: 3.6%

MD: 4.5%

56

Comm. Lines DWP Growth: MD vs. U.S., 2002-2011

Source: SNL Financial.

19

.0%

11

.4%

4.5

%

3.3

%

5.4

%

0.2

%

-0.8

%

-7.5

% -2.5

%

5.4

%

16

.9%

17

.5%

5.3

%

3.5

% 7.2

%

-1.5

%

7.6

%

-14

.9%

1.5

%

2.5

%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

02 03 04 05 06 07 08 09 10 11

US DWP: Comm. Lines MD DWP: Comm. Lines

(Percent)

Average 2002-2011

US: 3.8%

MD: 4.6%

57

Personal Lines DWP Growth: MD vs. U.S., 2002-2011

Source: SNL Financial.

11

.1%

9.2

%

5.4

%

2.3

%

2.3

%

1.2

%

-0.1

%

1.1

% 2.5

%

2.3

%

11

.0%

12

.3%

8.1

%

7.9

%

1.1

%

-0.2

%

-0.4

%

2.0

%

2.3

%

1.6

%

-10%

-5%

0%

5%

10%

15%

20%

02 03 04 05 06 07 08 09 10 11

US DWP: Personal Lines MD DWP: Personal Lines

(Percent)

Average 2002-2011

US: 3.7%

MD: 4.6%

Global Catastrophe Loss Developments and Trends

60

2011 Rewrote Catastrophe Loss and Insurance History

But Will Losses Turn the Market?

60

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Hydrological events(flood, mass movement)

Selection of significant loss events (see table)

Natural catastrophes

Earthquake, tsunami Japan, 11 March

EarthquakeNew Zealand, 22 Feb.

Cyclone Yasi Australia, 2–7 Feb.

Landslides, flash floodsBrazil, 12/16 Jan.

Floods, flash floods Australia, Dec. 2010–Jan. 2011

Severe storms, tornadoesUSA, 22–28 April

Severe storms, tornadoesUSA, 20–27 May

WildfiresUSA, April/Sept.

EarthquakeNew Zealand, 13 June

FloodsUSA, April–May

Climatological events(extreme temperature, drought, wildfire)

Number of Events: 820Number of Events: 820

DroughtUSA, Oct. 2010– ongoing

Hurricane IreneUSA, Caribbean22 Aug.–2 Sept.

WildfiresCanada, 14–22 May

DroughtSomaliaOct. 2010–Sept. 2011

FloodsPakistanAug.–Sept.

FloodsThailandAug.–Nov.

Earthquake Turkey23 Oct.

Flash floods, floodsItaly, France, Spain4–9 Nov.

Floods, landslidesGuatemala, El Salvador11–19 Oct.

Tropical Storm WashiPhilippines, 16–18 Dec.

Winter Storm JoachimFrance, Switzerland, Germany, 15–17 Dec.

62Source: MR NatCatSERVICE

Natural Loss Events, 2011

World Map

68

Top 16 Most Costly World Insurance Losses, 1970-2011**

(Insured Losses, 2011 Dollars, $ Billions)

*Average of range estimates of $35B - $40B as of 1/4/12; Privately insured losses only.**Figures do not include federally insured flood losses.Sources: Swiss Re sigma 1/2011; Munich Re; Insurance Information Institute research.

$11.9$13.0 $13.0$13.1

$19.1$21.3

$24.0$25.0

$37.5

$47.6

$7.7 $8.1 $8.3 $8.5 $9.3 $9.7

$0$5

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

Hugo (1989)

WinterStormDaria(1991)

ChileQuake(2010)

Ivan (2004)

TyphoonMirielle(1991)

Charley(2004)

Wilma(2005)

ThailandFloods(2011)

NewZealandQuake(2011)

Ike (2008)

Northridge(1994)

SpringTornadoes/

Storms(2011)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

5 of the top 14 most expensive

catastrophes in world history have occurred within the past 2 years

Taken as a single event, the Spring 2011 tornado and

thunderstorm season would likely become the 5th

costliest event in global insurance history

71

U.S. Insured Catastrophe Loss Update

2011 Was One of the Most Expensive Years on Record

71

72

Top 14 Most Costly Disastersin U.S. History

(Insured Losses, 2011 Dollars, $ Billions)

*Losses will actually be broken down into several “events” as determined by PCS. Includes losses for the period April 1 – June 30.Sources: PCS; Insurance Information Institute inflation adjustments.

$9.0$11.9 $13.1

$19.1$21.3

$24.0 $25.0

$47.6

$8.5$7.7$6.5$5.5$4.4$4.3

$0$5

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

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

SpringTornadoes& Storms*

(2011)

9/11Attack(2001)

Andrew(1992)

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and storm season are

is the 4th costliest event in US insurance history

Hurricane Irene became the 11th most expense

hurricane in US history

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2011Number of Events (Annual Totals 1980 – 2011)

Source: MR NatCatSERVICE 73

37

8

51

2

50

100

150

200

250

300

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

There were 117 natural disaster events in 2011

75

$1

2.3

$1

0.7

$3

.7 $1

4.0

$1

1.3

$6

.0

$3

3.9

$7

.4 $1

5.9 $

32

.9

$7

1.7

$1

0.3

$7

.3

$2

8.5

$1

1.2

$1

4.1

$3

2.3

$1

00

.0

$1

3.7

$4

.7

$7

.8

$3

6.9

$8

.6

$2

5.8

$0

$20

$40

$60

$80

$100

$120

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

US Insured Catastrophe Losses

*PCS figure as of April 6, 2012.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

US CAT Losses in 2011 Were the 5th Highest in US History on An Inflation Adjusted Basis

$100 Billion CAT Year is Coming Eventually

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2011 Dollars)

75

$500

$530

$830

$975

$980

$1,000

$1,200

$1,400

$1,510

$2,000

$5,000

$6,900

$7,300

$840

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000

Flooding, April*

Wildfire, Sep. 4-19

Thunderstorms, Apr. 19-20

Thunderstorms, Aug. 18-19

Winter Storm, Jan. 31-Feb. 3

Thunderstorms, Jul. 10-14

Texas Drought, 2011*

Thunderstorms, Jun. 16-22

Thunderstorms, Apr. 14-16

Thunderstorms, Apr. 8-11

Thunderstorms, Apr. 3-5

Hurricane Irene, Aug. 26-28**

Thunderstorms, May 20-27

Thunderstorms, Apr. 22-26

**Includes $700 million in flood losses insured through the National Flood Insurance Program.Source: PCS except as noted by “*” which are sourced to Munich Re; Insurance Information Institute.

2011’s Most Expensive Catastrophes, Insured Losses

Includes $1.65B in AL, mostly in the Tuscaloosa

and Birmingham

areas

Includes approximately $2B in losses

for May 22 Joplin tornado

77

78

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011*

*Insurance Information Institute estimates for 2010 and 2011 based on A.M. Best data.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

4.4

9.0

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.70*

Combined Ratio Points

U.S. Thunderstorm Loss Trends, 1980 – 2011

79Source: Property Claims Service, MR NatCatSERVICE

Average thunderstorm

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

Hurricanes get all the headlines, but thunderstorms are consistent

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

years on record.

Thunderstorm losses in 2011 totaled a record

$25.8 billion

85

Federal Disaster Declarations Patterns:

1953-2012

85

Records Were Set for Federal Disaster Declarations in 2010 and

2011—Most Declarations Were Unrelated to Tropical Activity

Number of Federal Disaster Declarations, 1953-2012*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

91

2

43

0

20

40

60

80

100

120

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

*Through April 22, 2012.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011

The number of federal disaster declarations set a

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

declarations.

There have been 2,057 federal disaster

declarations since 1953. The average

number of declarations per year is 34 from

1953-2010, though that few haven’t been

recorded since 1995.

12 federal disasters were declared

through Apr. 22, 2012

86

87

Federal Disasters Declarations by State, 1953 – 2012: Highest 25 States*

86

78

70

65

63

58

56

56

53

53

51

51

50

48

48

48

47

47

47

45

45

45

42

40

39

0

10

20

30

40

50

60

70

80

90

100

TX CA OK NY FL LA AL KY AR MO IL TN MS IA MN WV KS NE PA OH VA WA ND NC IN

Dis

as

ter

De

cla

rati

on

s

*Through Apr. 18, 2012.

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

Over the past nearly 60 years,

Texas has had the highest number of Federal Disaster

Declarations

AL has had 56 federal disaster

declarations since 1953, nearly one per year, and has had 1

so far in 2012

88

Federal Disasters Declarations by State, 1953 – 2012: Lowest 25 States*

39

39

37

36

35

33

33

28

28

27

26

26

25

24

24

23

22

20

17

17

16

15

14

11

10

9 9

0

10

20

30

40

50

ME SD AK GA WI VT NJ NH OR MA PR HI MI AZ NM ID MD MT NV CT CO SC DE DC UT RI WY

Dis

as

ter

De

cla

rati

on

s

*Through Apr. 22, 2012. Includes Puerto Rico and the District of Columbia.

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

Over the past nearly 60 years, Utah and Rhode Island had the fewest

number of Federal Disaster Declarations

MD has had 22 federal disaster declarations since 1953, roughly one every 3 years, though there were 2

declarations in both 2010 and 2011

89

SPRING 2012 TORNADO & SEVERE STORM OUTBREAK

2012 Is Off to a Worrisome Start, But a Repeat of 2011 Is Unlikely

89

90

1,1

33

1,1

32 1

,29

7

1,1

73

1,0

82 1,2

34

1,1

73

1,1

48

1,4

24

1,3

45

1,0

71 1,2

16

94

1

1,3

76

1,2

64

1,1

03

1,0

98

1,6

92

1,1

46 1,2

82

55

9

1,819

1,6

91

550

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

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

Nu

mb

er

of

To

rna

do

es

0

100

200

300

400

500

600

Nu

mb

er o

f De

ath

s

Number of Tornadoes

Number of Deaths

*Through April 19, 2012.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.html

Number of Tornadoes and Related Deaths, 1990 – 2012*

Tornadoes claimed 550 lives in 2011, the most since 1925

559 tornadoes have been recorded so far

this year*

2012 Tornado Losses Is Off to a Ominous Beginning. First Half 2011 Insured Losses from Tornadoes and Thunderstorms Topped $21B.

U.S. Tornado Count, 2005-2012*

91

*Through April 17, 2012.Source: http://www.spc.noaa.gov/wcm/

There were 1,897 tornadoes in the US in 2011 far above

average, but well below 2008’s record

2012 count is running

ahead of 2011

Severe Weather Reports, 2011

95Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

There were 29,996 severe

weather reports in 2011;

including 1,894 tornadoes;

9,417 “Large Hail” reports

and 18,685 high wind events

97

Maryland’s 2011 and 2012 YTD Severe Storm Loss

Summary

Tornadoes, Hail and Severe Thunderstorms Took their Toll

Severe Weather Reports in Maryland,January 1—December 31, 2011

98Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

MARYLAND

Total Reports = 254

Tornadoes = 18 (Red)

Hail Reports = 62 (Green)

Wind Reports = 174 (Blue)

There were 254 severe weather

reports in MD in 2011

Severe Weather Reports in Maryland,January 1—April 19, 2012

99Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

MARYLAND

Total Reports = 5

Tornadoes = 0 (Red)

Hail Reports = 1 (Green)

Wind Reports = 4 (Blue)

There have been 5 severe weather

reports in MD so far in 2012

The BIG Question:When Will the Market Turn?

100

Are Catastrophes and Other Factors Pressuring Insurance Markets?

100

101

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

Criteria Status Comments

Sustained Period of

Large Underwriting

LossesEarly Stage,

Inevitable

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

Material Decline in Surplus/ Capacity

Entered 2011 At Record High; Only

Small Decline

•Surplus hit a record $565B as of 3/31/11•Fell just 1.6% through 12/31/11 from 12/31/10•Will likely see new record in 2012•Little excess capacity remains in reinsurance markets•Modest growth in demand for insurance is insufficient to absorb much excess capacity

Tight Reinsurance

MarketSomewhat in

Place

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

Renewed Underwriting

& Pricing Discipline

Some Firming esp. in

Property, WC

•Commercial lines pricing trends have turned from negative to flat and now positive, esp. Property & WC; •Competition remains intense as many seek to maintain market share

Sources: Barclays Capital; Insurance Information Institute.

1. UNDERWRITING

102

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

102

103

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

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=106.4 Sources: A.M. Best, ISO.

95.7

99.3100.8

108.2

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

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

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Cyclical Deterioration

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Underwriting Gain (Loss)1975–2011E*

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

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

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

Cumulative underwriting deficit from 1975 through

2011 is $479B

($ Billions) Underwriting losses in

2011 totaled $36.5B, the

largest since 2001

105

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

11

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2011E

Reserve Releases Are Continuing Strong in 2010 But Should Begin to Taper Off in 2011

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

Prior year reserve releases totaled $8.8 billion in the

first half of 2010, up from $7.1 billion in

the first half of 2009

110

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2011

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

1

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2011 impairment rate was 0.91%, up from 0.67% in 2010; the rate is slightly higher than the 0.82% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated

Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

111

Reasons for US P/C Insurer Impairments, 1969–2010

3.6%4.0%

8.6%

7.3%

7.8%

7.1%

7.8%13.6%

40.3%

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

Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.

Investment and Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems (Overstatement of Assets)

Misc.

Sig. Change in Business

114

Performance by Segment:Personal Lines

114

115

Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2013F

14.5%

2.7%2.6%2.2%1.4%

-0.9%0.9%

9.2%

6.9% 7.0%6.4%

5.6%

2.2%

5.7%

4.5%4.0%3.1%

0.2%-4.9%

15.3%

5.0%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

13%

15%

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

Private Passenger AutoHomeownersAll Lines

Sources: A.M. Best (historical); Insurance Information Institute (2011F-2013F).

Average 2000-2010Auto = 2.8

Home = 6.4%All Lines = 3.6%

While homeowners insurance has grown faster than auto over the past decade, auto is

generally more profitable

Homeowners Insurance Combined Ratio: 1990–2012F

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.2

94

.4 10

0.3

88

.9 95

.6

11

6.8

10

5.7

10

6.7

12

3.7

10

5.0

11

8.4

11

2.7 12

1.7

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 09 10 11E12F

Homeowners Line Could Deteriorate in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected Due to

Local Catastrophe Loss Activity

Sources: A.M. Best (1990-2012E); Insurance Information Institute. 116

Private Passenger Auto Combined Ratio: 1993–2012P

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.2

10

1.3

10

1.0

10

0.8

10

0.3

99

.5 10

1.1

10

3.5

80

85

90

95

100

105

110

115

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E 12F

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

Sources: A.M. Best (1990-2012F); Insurance Information Institute. 117

118

Claim Trends in Auto Insurance

Frequency and Severity Trends Are Mixed But On Net Have

Deteriorated

118

119

MD Private Passenger Auto: Frequency & Severity Trends by Coverage Type

Source: ISO/PCI; Insurance Information Institute

-1.1%

1.3%

-6.3%

5.2%

-5.6%

-0.7%

-2.1%

1.7%

-3.3%

-6.4%-8%

-6%

-4%

-2%

0%

2%

4%

6%

Bodily Injury Property DamageLiability

PIP Collision Comprehensive

Severity Frequency

Frequency and severity trends in Maryland are

generally favorable(Percent)

130

Performance by Segment:Commercial Lines

130

109.4110.2

118.8

109.5

112.5

110.2

107.6

104.1

109.7 110.2

102.5

105.4

91.2

94.8

101.299.5

101.0

107.5

102.0102.0

111.1112.3

122.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

P

12

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best; Insurance Information Institute

Commercial Lines Combined Ratio, 1990-2012F*

Commercial lines underwriting

performance in 2011 was the worst since 2002

132

Workers Compensation Combined Ratio: 1994–2012F

10

2.0

97

.0 10

0.0

10

1.0

11

0.9

11

0.0

10

7.0

10

2.7

98

.4

10

3.6

10

4.4 1

10

.6 11

6.8

11

8.5

12

0.5

12

1.7

10

7.0

11

5.3

11

8.2

80

85

90

95

100

105

110

115

120

125

130

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

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They

Have Been in a DecadeSources: A.M. Best ; Insurance Information Institute. 138

147

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

34

.4

23

.1

14

.2

10

.2

9.0

4.6

1.4

-3.7

-7.3

-9.3

-10

.0

-10

.3

-10

.9

-10

.9

-13

.0

-14

.7

-15

.3

-15

.9

-16

.9

-17

.8

-19

.8

-21

.4

-21

.7

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

10152025303540

OK

MT ID LA

SD IA KS

NY WI

PA

MS IL

NM NJ

NE

MD

NC AL

CT VA

SC

AR

MN

Pe

ce

nt

ch

an

ge

(%

)

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

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Only 7 (small) states showed growth in workers

comp premium volume between 2005 and 2010

Workers Comp DPW in MD dropped 14.7% from between 2005 and 2010

148

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

-22

.6

-23

.7

-24

.2

-25

.0

-25

.2

-25

.2

-25

.3

-26

.8

-26

.9

-28

.1

-28

.3

-28

.7

-29

.0

-30

.1

-32

.5

-32

.6

-33

.8

-34

.7

-36

.1

-42

.7

-45

.4

-50

.7

-51

.2

-57

.7

-70

-60

-50

-40

-30

-20

-10

0

AZ

ME

GA

KY IN NH

OR

DC

MA

TN VT

US

TX

AK

MO MI

UT RI

CO

DE

NV HI

CA

FL

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

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

the past 5 years

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

Sources: SNL Financial LC.; Insurance Information Institute.

Workers Comp DPW plunged 28.7% from

between 2005 and 2010

2. SURPLUS/CAPITAL/CAPACITY

149

Have Large Global Losses Reduced Capacity in the Industry, Setting

the Stage for a Market Turn?

149

151

Policyholder Surplus, 2006:Q4–2011:Q4

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

$564.7

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2011:Q1 Peak

11:Q2: -$5.6B (-1.0%)11:Q3: -$26.1B (-4.6%)11:Q4: -$14.3B (-2.5%)

Surplus as of 12/31/11 was down 2.5% below its all

time record high of $564.7B set as of 3/31/11. A new record high in 2012 is

possible.

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

The Industry now has $1 of surplus for every $0.80 of NPW, close to the strongest claims-

paying status in its history.

158

3. REINSURANCE MARKET CONDITIONS

Record Global Catastrophes Activity is

Pressuring Pricing

158

159

Global Property Catastrophe Rate on Line Index, 1990—2012 (as of Jan. 1)

15%

-3%

-13%

-8%

-20% -18% -1

1%

3%

14%

-11%

-6%

-9%

-16%

10%

-12%

-3%

8%

14%

76%

68%

25%

20%

0%

115

141

230

200184

147

123

152

255

233

195

235

184

199

133111

105

237

100

154

173

145

190

-40%

-20%

0%

20%

40%

60%

80%

100%

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

Ye

ar

Ov

er

Ye

ar

% C

ha

ng

e in

RO

L

0

50

100

150

200

250

300

Cu

mu

lativ

e R

ate

on

Lin

e (1

99

0=

10

0)

Year Over Year % Change

Cumulative Rate on Line Index

Sources: Guy Carpenter; Insurance Information Institute.

Property-Cat reinsurance pricing is up about 8% as of 1/1/12—modest relative

to the level CAT losses

Source: Guy Carpenter, GC Capital Ideas.com, February 28, 2012.

Historical Capital Levels of Guy Carpenter Reinsurance Composite, 1998—3Q11

160

Most excess reinsurance capacity was

removed from the market in 2011, but

there does not appear to be a

shortage, leading to modest increases in

2012 reinsurance renewals except in areas hit hard by

CATs.

4. RENEWED PRICING DISCIPLINE

162

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

162

163

-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*

Premium Growth Is Up Modestly: More in 2012?

(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 was up 0.9% in 2010

2011 growth

was +3.3%

164

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

Sources: ISO, Insurance Information Institute.

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

10.2

%15

.1%

16.8

%16

.7%

12.5

%10

.1%

9.7%

7.8%

7.2%

5.6%

2.9%

5.5%

-4.6

%-4

.1%

-5.8

%-1

.6%

10.3

%10

.2% 13

.4%

6.6%

-1.6

%2.

1%0.

0%-1

.9%

0.5%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

1.3% 2.

3%1.

7% 3.5%

1.6%

4.1%

3.8%

-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

In 2011, growth in personal lines predominating cos. (+2.9%) and commercial lines predominating cos.

(+4.3%), diversified (+2.4%)

165

Growth in Net Written Premium by Segment, 2011 vs. 2010

Source: ISO/PCI; Insurance Information Institute

1.3%

3.8%

-2.3%

2.3%

3.3%2.9%

4.3%

2.4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

All Lines Personal LinesPredominating

Commercial LinesPredominating

Diversified Insurers

2010 2011

Personal lines insurer growth decelerated as auto pricing moderated even has homeowners insurance rates rose

(Percent)

Commercial lines growth improved

dramatically as a 7-year long soft market

came to an end and an improving economy bolstered demand

166

Monthly Change* in Auto Insurance Prices, 1991–2012*

*Percentage change from same month in prior year; through March 2012; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-2%

0%

2%

4%

6%

8%

10%

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

Cyclical peaks in PP Auto tend to occur

approximately every 10 years (early 1990s, early

2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

Pricing peak occurred in 2010 at

5.1%, falling to 2.8% by Mar. 2012

The Feb. 2012 reading of 2.7% was the lowest since July 2008

167

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

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

% -8.2

%-4

.6% -2

.7%

-3.0

%-5

.3%

-9.6

%-1

1.3

%-1

1.8

%-1

3.3

%-1

2.0

%-1

3.5

%-1

2.9

% -11

.0%

-6.4

% -5.1

%-4

.9%

-5.8

%-5

.6%

-5.3

%-6

.4% -5.2

%-5

.4%

-2.9

%

2.8

%

-0.1

% 0.9

%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

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

KRW Effect

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

since 2003. Slightly stronger gains in Q4.

(Percent)

Q2 2011 marked the 30th consecutive quarter of price

declines

168

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

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

Percentage Change (%)

KRW Effect: No Lasting Impact

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

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

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

169

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

1999:Q4 = 100

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

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

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

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

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

3.5% for medium accounts

171

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

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

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

& Workers Comp Leading the Way

Percentage Change (%)

2.7% 3.0%

5.7%

7.5%

0.8%

2.0% 2.0% 2.1% 2.2% 2.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Su

rety

EP

L

Co

mm

l Au

to

D&

O

Ge

ne

ral

Lia

bili

ty

Um

bre

lla

Co

nst

ruct

ion

Bu

s.In

terr

up

tion

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

Property lines are showing larger increases than

casualty lines, with the exception of workers

compensation

109.4110.2

118.8

109.5

112.5

110.2

107.6

104.1

109.7 110.2

102.5

105.4

91.2

93.7

104.1

98.9

101.2

107.5

102.0

111.1112.3

122.3

$7

.30

$6

.49

$1

3.9

1

$1

3.1

5

$1

1.9

4

$1

1.5

5

$1

0.6

8

$1

0.3

5

$1

0.0

2

10

.25

$1

1.9

5

$8

.30

$1

3.5

0

$8

.42

$4

.83

$5

.20

$5

.71

$5

.25

$5

.70

$7

.70

$6

.40

$6

.10

90

95

100

105

110

115

120

125

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

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

$0

$2

$4

$6

$8

$10

$12

$14

Co

st

of

Ris

k/$

10

00

Re

ve

nu

e

CommercialCombined RatioCost of Risk

*Insurance Information Institute estimates for 2011.Source: 2011 RIMS Benchmark Survey; A.M. Best; Insurance Information Institute

Cost of Risk vs. Commercial Lines Combined Ratio

The cost of risk cannot continue to fall as actual

results deteriorate

172

174

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

44

.8

25

.4

19

.8

17

.3

16

.6

14

.2

13

.9

12

.4

12

.3

11

.9

9.1

8.1

8.1

7.1

6.8

5.4

5.2

4.7

3.8

3.7

3.1

3.0

1.5

1.2

1.1

0

5

10

15

20

25

30

35

40

45

ND

SD LA

WY

OK

WV

KS IA TX

MT

NE

DE

MS

NM SC

DC

UT

AR

NC ID WA

AL

WI

AK

TN

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

West Virginia premium growth was among the fastest in the

US in recent years…

175

0.7

0.6

0.1

-0.1

-0.3

-0.5

-0.8

-1.4

-1.6

-1.7

-2.5

-2.8

-2.9

-3.4

-3.6

-4.1

-4.5

-4.7

-4.8

-5.7

-5.8

-8

-8.2

-8.3

-13

.5

-14

.2

-15

.5

-20

-15

-10

-5

0

5M

D

MO

KY IN NY

GA

MN

VA

US

PA

OR FL IL CT

VT

OH RI

CO

NJ HI

ME

NH

MA

AZ

NV MI

CA

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC; Insurance Information Institute.

Bottom 25 States

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

the past 5 years

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

US Direct Premiums Written declined by 1.6% between 2005

and 2010

MD premiums were flat between 2005-2010

INVESTMENTS: THE NEW REALITY

181

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting or Cyclicality?

181

Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q41

$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$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

Investment Gains in 2011 Were Surprisingly Robust. Investment Gains Recovered Significantly in 2011 Due to Realized Investment Gains; The

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

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

($ Billions)

Investment gains in 2011 were $2.8B above 2010 levels—a surprise given falling rates

and flat stock markets

187

Treasury Yield Curves: Pre-Crisis (July 2007) vs. Mar. 2012

0.06% 0.08% 0.14% 0.19% 0.34%

1.56%

2.17%

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

1.02%

0.51%

3.28%2.94%

0%

1%

2%

3%

4%

5%

6%

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

March 2012 Yield CurvePre-Crisis (July 2007)

Treasury yield curve remains near its most depressed level

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

The Fed Is Actively Signaling that it Is Determined to Keep Rates Low Through Late 2014

Source: Federal Reserve Board of Governors; Insurance Information Institute.

Shifting Legal Liability & Tort Environment

189

Is the Tort PendulumSwinging Against Insurers?

189

190

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

$0

$50

$100

$150

$200

$250

$300

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

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

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

Tort costs in dollar terms have remained high but relatively stable

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

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

194

The Nation’s Judicial Hellholes: 2011

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinois

Madison , St. Clair and McLean

counties

New YorkAlbany and

NYC

Watch List

Eastern District of Texas

Cook County, IL Southern NJ Franklin County, AL Smith County, MS Louisiana

Dishonorable Mention

MI Supreme Court AK Supreme Court MO Supreme Court

California

Philadelphia

NevadaClark County

Inflation

195

Is it a Threat to Claim Cost Severities

195

196

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

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.6

3.2

2.4 2.2 2.4 2.4 2.4 2.52.9

2.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 and 4/12 (forecasts).

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

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

Annual Inflation Rates (%)

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

commodity bubble reduced inflationary pressures in 2009/10

Higher energy, commodity and food

prices pushed up inflation in 2011, but

not longer turn inflationary

expectations.

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

Sources: Bureau of Labor Statistics; Insurance Information Institute.

3.2%

1.7%

6.8%

5.1%

4.2%

3.0% 3.2%

5.0%

7.1%

0%

2%

4%

6%

8%

Overall CPI "Core" CPI InpatientHospitalServices

OutpatientHospitalServices

PrescriptionDrugs

Medical CareCommodities

LegalServices

Motor VehicleParts &

Equipment

ResidentialMaint. &Repair

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

197

Excludes Food and Energy

Price Level Change: 2011 vs. 2010

197

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200