How to Live to Be 100 in the P/C Insurance Industry

And What it Takes to Survive the Next 100

Insurance Information Institute

May 6, 2014

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

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

2

Presentation Outline

What Does it Take to Live to 100

in the Insurance Business?

Challenges and Opportunities

for the Next 100 Years

Q&A

3

Lessons from Nature: What Would Darwin Would Say?

Longevity in the Business World Has Parallels in the Natural World

On the Life Cycle of Businesses: Lessons from Nature

Most Businesses, Like Living Species, Eventually Become Extinct99.5% of all living species to ever exist on Earth are now extinct; The

proportion is higher for business and extinctions occur over a much compressed timespan.

Changes in the natural environment (not external forces like humans) were responsible for almost all extinctions

This means that despite millions of years of evolution and adaptation, virtually every species eventually confronts a change in its environment to which it cannot adapt

It is the same in business

Business Cycle Gives Rise to “Creative Destruction”Mass extinctions in business are commonEconomy is constantly reinventing itselfNew industries and businesses spring from the ashes of the previous

generation, fill voids and occupy niches

5

43,6

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69,3

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64,0

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63,8

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,549

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37,8

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,695 28

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8247

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7533

,212

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 12 13

Business Bankruptcy Filings,1980-2013

Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013 data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline

2013 bankruptcies totaled 33,212, down 17.1% from 2012—the fourth

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%

5

6

Number of Recessions Endured by P/C Insurers, by Number of Years in Operation

32

27

20

13

8

0

5

10

15

20

25

30

35

1-50 51-75 76-100 101-125 126-150

Sources: Insurance Information Institute research from National Bureau of Economic Research data.

Number of Recessions Since 1860

Centenarian Insurers Have Weathered Many Economic Storms

Number of Years in Operation

Insurers are true survivors—not just of natural catastrophes but

also economic ones

6

7

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

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 4/14; Insurance Information Institute

4.3

%1

8.6

%2

0.3

%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

%1

3.7

%7

.7%

1.2

%-2

.9%

-0.5

%-3

.8%

-4.4

%-3

.3% -0.7

%0

.1% 2.1

%3

.1%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

09

10

11

12

13

Re

al N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Re

al G

DP

Gro

wth

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 (%) Inflation-adjusted premium growth

was negative for 6 years in a row

before and during the Great

Recession

8

Lessons from History: What Types of Business Live a Very Long Time (500+ Years) and Why?

Longevity in the Business World Requires Focus, Long-Term Objectives

Number of Firms More than 500 Years Old, by Industry*

35

28

19

75 4

2 2 2 2 10

5

10

15

20

25

30

35

40

Brewery

Hotel

Restaurant

Wine

Pharmacy

Confectionary

Glass

Paper

Sake

Transport

Others

Total Number

Source: http://en.wikipedia.org/wiki/List_of_oldest_companies

The brewery industry

appears to have the greatest

longevity with 35 firms 500+

years old.

BENEATH THE SURFACE Most of these companies are:

1. Family Owned/Mutuality2. Highly focused on one

specific business3. Have some geographic

focus (product or client)

Characteristics of Firms That Stand the Test of Time

1. Business Model: Highly Focused Firms tend to remain true to core business Avoid businesses you don’t understand Some diversification is usually good, but leads to an exponential

increase in complexity and unforeseen interactions across units

2. Ownership Structure: There Exists Some Concept of Mutuality Some of the world’s oldest firms are family owned (artisans, craftsman) Others have some form of cooperative arrangement (agricultural) Such organizations also exhibit altruistic behavior, a proven survival trait

3. Communal Interest: A Concern for the Greater Common Good Perpetual of the species (i.e., the industry) is evident in behaviors Concept of mutuality extends beyond organization to communal interest A strong willingness to work for the common good

Characteristics of Firms That Stand the Test of Time (cont’d)

4. Growth: Tend to Grow Slowly As with living species, the longest lived businesses in the world tend to

grow only slowly, if at all

5. Size: Tend to Be Small Relative to Competition Size seems to matter when it comes to species longevity: smaller = longer Also true among living species (e.g., bacteria, insects)

6. Profitability: Healthy Margins Are Important, But Not Paramount Object of continuous profit maximization is not consistent with longevity A “will to survive” is still necessary Perpetuation/continuity is critical objective

12

The Centenarians: Who Lives to Be 100+ in the P/C Insurance World?

Characteristics of An Exclusive Club of Insurers

13

100+ Year Old Insurers as a Share of All P/C Insurers

87.7%

12.3%

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

About 12% of P/C insurance companies (fewer than 1-in-8) today (2013) are 100+ years old. This is a surprisingly high percentage.

Insurers at Least 100 Years Old, 12.3%(287)

Insurers Less than 100 Years Old,

87.7%(1,979)

Odds of a Human Living to 100Born 1900: ~0.25% (1-in-400)

Born Today: ~2% (1-in-50)

14

Decade of Formation for P/C Insurers at Least 100 Years Old in 2014

39 10

22 2016

60

37

65

38

77

1 0 0 04 2

0

10

20

30

40

50

60

70

80

90

100

110

1750-59

1760-69

1770-79

1780-89

1790-99

1800-09

1810-19

1820-29

1830-39

1840-49

1850-59

1860-69

1870-79

1880-89

1890-99

1900-09

1910-19

Decade Of Formation

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

Of the Centenarian p/c insurers in existence today, 64% were formed since 1870. There was a post-Civil

war spike in formations in the 1870s and another in the 1890s. Another spike occurred in the 1910s after the financial crises of the 1900-1909 era and as workers

compensation systems were adopted.

As of Jan. 1, 2014 there were 296 P/C that were at least 100 years old.

77 insurers formed in the decade 1910-

1919 are still in existence; 32 were

formed between 1910 and 1914

15

100-Year-Old Insurers: Independent vs. Part of Group/Holding Company*

51.2% 48.8%

*As of 2010.Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

The number of 100-year-old insurers that are independent vs. part of a more diversified group structure is split almost evenly.

Independent, 48.8%(140)

Part of Holding Company, 51.2%

(147)

16

100-year-old Insurers: Mutual vs. Stock vs. Reciprocal

62.4%

35.9%

1.4%0.3%

*As of 2010.Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data LLC.

The vast majority (62.4%) of 100-year-old insurers are mutual insurers, while stock insurers account for 35.9% of the total.

Mutual, 62.4%,(179)

Stock, 35.9%,(103)

Reciprocal, 1.4%,(4)

Other, 0.3%,(1)

17

Premium to Surplus Ratios, “Centenarians” vs. Overall P-C Industry, 1998, 2008 and 2013

$0.85

$0.95

$0.73$0.72 $0.69

$0.51

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

1998 2008 2013

"Centenarians" Overall P-C Industry

“Centenarians” are companies at least 100 years old with positive NWP in 2013. Sources: National Association of Insurance Commissioners’ Annual Statements, via Highline; I.I.I. calculations

NWP/Surplus

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

capacity to handle the risk it has accepted.

Insurers that are 100+ years old hold nearly $2 in

surplus for every $1 dollar in premium they write

18

Why Do Insurers Fail?

Leading Reasons Why Most Insurers Never Make it to 100

P/C Insurer Impairments, 1969–2012

Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute.

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

19

Impairments among P/C insurers remain infrequent

Since most failures are due to inadequate pricing, underreserving and

excessive growth (factors under management

control), the leading cause of death in the p/c insurance industry amounts to suicide

20

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2012

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

11

2

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

2012 impairment rate was 0.69%, down from 1.11% in 2011; the rate is lower 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

Five Deadliest Sins for P/C Insurance Companies OPERATIONAL ISSUES

1. Underpricing/Underreserving (~43% of failures) Leading cause of p/c insurer death according to A.M. Best

2. Excessive Growth (~13%) Too much growth too fast (organically or via M&A) can be fatal

3. Excessive Catastrophe Exposure (~7%) Too much underpriced exposure, too little reinsurance,

insufficient diversification

4. Investment Problems (~7%) Investments are too risky, too illiquid or insufficiently understood

5. Affiliate Problems (~8%) Non-core operations can cause problems for parent (e.g., AIG)

Source: I.I.I. research.

22

Reasons for US P/C Insurer Impairments, 1969–2012

Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute.

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

23

Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2012

Source: A.M. Best Special Report “Pace of P/C Impairments Slowed in 2012; Auto Writers, RRGs Continued to Struggle,” June 2013; Insurance Information Institute..

Workers Comp and Pvt. Passenger Auto Account for More Than 40 Percent of the Impaired Insurers Since 2000

Workers Comp

Other

Pvt. Passenger Auto

HomeownersCommercial Multiperil

Commercial Auto Liability

Other Liability

Med Mal

Surety

Title

24

Mergers & Acquisitions

Waves of Consolidation Periodically Reduce the Number of Insurers

25

U.S. INSURANCE MERGERS AND ACQUISITIONS, All Sectors, 1989-2013 (1)

$7.1$6.9$8.6$5.0

$8.5$12.5

$27.0

$40.8

$56.2

$41.7

$55.7

$41.5

$9.7

$59.9

$14.9

$50.8

$43.0

$50.4

$31.4

$14.4

$46.5

$54.7

$43.2

$19.3

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

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

Tra

ns

ac

tio

n v

alu

es

0

100

200

300

400

500

600

Nu

mb

er o

f tran

sa

ctio

ns

($ Billions)

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

Source: Conning proprietary database.

M&A activity recovered to pre-crisis levels but deal values dropped sharply

in 2013

$165.4

26

U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 2002-2013 (1)

$486

$20,353

$425

$9,264

$35,221

$13,615

$16,294

$3,507

$6,419

$12,458

$4,651 $4,397

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012

Tra

ns

ac

tio

n v

alu

es

0

10

20

30

40

50

60

70

80

90

Nu

mb

er o

f tran

sa

ctio

ns

($ Millions)

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

Source: Conning proprietary database.

M&A activity in the P/C sector remains below

pre-crisis levels.

27

U.S. INSURANCE MERGERS AND ACQUISITIONS,LIFE/ANNUITY SECTOR, 2002-2013 (1)

$2,796

$18,533

$3,817

$21,865

$5,055$5,849

$382 $840

$23,848

$3,063

$6,083

$3,299

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Tra

ns

ac

tio

n v

alu

es

0

5

10

15

20

25

30

35

40

Nu

mb

er o

f tran

sa

ctio

ns

($ Millions)

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

Source: Conning proprietary database.

Life/Annuity sector M&A activity is highly volatile

28

Leadership Attributes Found in Insurers that Reach 100+ Years

Secrets of the Ancients

Leadership Attributes Inherent in Long-Lived Insurance Companies1. Management Acts as a Steward of the Enterprise

Objective is to pass a healthy firm safely and securely to the next generation of management and policyholders

2. Management Financial Incentives In line with the goal of providing the protection purchased There is typically no 3rd party (shareholders) to compensate

Objective if public company is to maximize profits

CEO (total) comp is a smaller multiple relative to average employee

3. Nimble: Environment for Small Insurers Can & Does Change Not likely first to change, but adaptation occurs within reasonable timeframe

4. Customer Focus & Relationship Driven Customer is the #1 priority Committed to agency form of distribution, with 21st century enhancements

5. Regulation In favor of comprehensive but local regulation (contrast with banks)

What Do I Admire in an Insurer and Its Management?1. A Firm Whose Management’s Incentives are Strictly

Aligned With the Insurer’s Principal Stakeholders Customers, agents, employees, community These include financial and operational objectives

2. Management Is Knowledgeable Management of small, long-lived insurer is no less knowledgeable

about industry trends, opportunities and threats than larger competitors

3. Intuitive and Comprehensive Understanding of Enterprise Risk Management Much is made of ERM today, but long-lived insurers practiced it

well before it had a name

What Do I Admire in an Insurer and Its Management?4. CEO is Willing to Seek Advice and Counsel

No imperial CEOs; Self-aggrandizement is rare CEO is a listener and consensus builder

5. Commitment to Core Constituencies Customer is the #1 priority Committed to agency form of distribution, with 21st century enhancements

6. Lack of a “Wandering Eye” Disciplined enough to stick with the business you know, but also

adapting to changing business conditions and seizing opportunities as necessary

32

Challenges for the Next 100 Years

Staying Alive: The Decades Ahead

33

P/C (Re)Insurance Industry Financial Overview

2013: Best Year in the Post-Crisis Era

Performance Improved with Lower CATs, Strong Markets

33

P/C Net Income After Taxes1991–2013 ($ Millions)

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 6.1% 2013 ROAS1 = 10.3%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.8% ROAS in 2013, 6.3% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

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

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56

$3

5,0

74

$6

3,7

84

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

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

2013 ROAS was 10.3%

Net income in 2013 was up substantially

(+81.9%) from 2012

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013*

*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2011: 4.7%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013: 9.8 %

36

ROE: Property/Casualty Insurance vs. Fortune 500, 1987–2013E*

* Excludes Mortgage & Financial Guarantee in 2008 – 2013. 2013 Fortune 500 figure is I.I.I. estimate. Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

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

P/C Profitability Is Both by Cyclicality and Ordinary Volatility

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

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

Combined Ratio / ROE

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

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

96.7

102.4

106.5

95.7

14.3%

15.9%

12.7%

10.9%

7.4% 7.9%

4.7%6.2%9.6%

8.8%

4.3%

9.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 20130%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

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

10% in 2005 and 16% in 1979

Lower CATs helped ROEs

in 2013

RNW for Major P/C Lines,2003-2012 Average

18.9%

12.1%

9.8%9.0%

7.6% 7.1% 7.1%6.0%

1.1%

26.5%

13.3%

7.9%

0%

5%

10%

15%

20%

25%

30%

Fire InlandMarine

AllOther

MedMal

CommAuto

CMP AllLines

PPAuto

WC OtherLiab

HO Allied

Source: NAIC; Insurance Information Institute

10-year returns for some lines are excellent, though homeowners is a major

laggard, largely due to major catastrophes. WC returns slipped.

39

RNW All Lines by State, 2003-2012 Average:Highest 25 States

21

.0

17

.7

15

.1

14

.8

13

.4

13

.3

13

.1

12

.6

12

.0

11

.7

11

.4

11

.4

11

.4

11

.1

11

.0

11

.0

11

.0

10

.9

10

.9

10

.7

10

.7

10

.5

10

.3

10

.3

9.9

9.4

02468

1012141618202224

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

Source: NAIC.

The most profitable states over the past decade are

widely distributed geographically, though none

are in the Gulf region

40

9.2

9.1

8.9

8.9

8.6

8.5

8.3

8.1

7.9

7.7

7.7

7.6

7.4

6.5

6.5

6.1

6.1

5.5

5.2

4.9

4.9

4.2

3.2

2.0

-6.5

-9.4

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

10

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

RNW All Lines by State, 2003-2012 Average: Lowest 25 States

Source: NAIC.

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

by catastrophes

P/C UNDERWRITING

41

Underwriting Losses in 2013 Much Improved After High

Catastrophe Losses in 2011/12

41

42

P/C Insurance Industry Combined Ratio, 2001–2013*

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

95.7

99.3100.8

106.3

102.4

96.7

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 2012 2013

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

43

Number of Years with Underwriting Profits by Decade, 1920s–2010s

0 0

32

54

8

10

76

0

2

4

6

8

10

12

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s* 2010s**

* 2009 combined ratio excl. mort. and finl. guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an u/w profit.**Data for the 2010s is for the period 2010 through 2013.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

43

Underwriting Gain (Loss)1975–2013*

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

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

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

Cumulative underwriting deficit from 1975 through

2012 is $510B

($ Billions) Underwriting profit in 2013

totaled $15.5B

High cat losses in 2011 led to the highest

underwriting loss since 2002

PRICING, PREMIUM GROWTH & CYCLES

47

Surviving the to the Century Mark Means Surviving the

Underwriting Cycle

48

-5%

0%

5%

10%

15%

20%

25%

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

Net Premium Growth: Annual Change, 1971—2014F

(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.

2014F: 4.0%

2013: 4.6%

2012: +4.3%

49

Average Commercial Rate Change,All Lines, (1Q:2004–4Q:2013)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9%

-11

.0%

-6.4

%-5

.1%

-4.9

%-5

.8%

-5.6

%-5

.3%

-6.4

%-5

.2%

-5.4

% -2.9

%

2.7

% 4.4

%4

.3%

3.9

%5

.0%

5.2

%4

.3%

3.4

%2

.1%

-0.1

% 0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

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

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

KRW Effect

Pricing as of Q4:2013 was positive for the 10th consecutive

quarter. Gains are likely to continue into 2014.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

50

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2013:Q3

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

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

Percentage Change (%)

Peak = 2001:Q4 +28.5%

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

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

nearly 8 years; Q3:2013 renewals were up 3.4%. Some insurers posted

stronger numbers.

Trough = 2007:Q3 -13.6%

KRW : No Lasting Impact

52

Monthly Change* in Auto Insurance Prices, 1991–2014*

*Percentage change from same month in prior year; through March 2014; 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 '13 '14

Cyclical peaks in PP Auto tend to occur roughly every 10 years (early

1990s, early 2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

Pricing peak occurred in late

2010 at 5.3%, falling to 2.8% by Mar. 2012

The Mar. 2014 reading of 3.6% is down from 4.8%

a year earlier

53

Homeowners InsuranceNet Written Premium, 2000–2015F

$45.8$49.5

$52.2$54.8 $55.2

$61.1$63.5

$66.8$70.4

$74.0

$77.9

$57.5$56.2

$32.4

$40.0

$35.2

$30

$35

$40

$45

$50

$55

$60

$65

$70

$75

$80

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

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

$ Billions Homeowners insurance NWP continues to rise (up 128% 2000-2013) despite very little unit

growth during the real estate crash. Reasons include rate increases, especially in coastal

zones, ITV endorsements (e.g., “inflation guards”), and inelastic demand

INVESTMENTS: THE NEW REALITY

54

Investment Performance is a Key Driver of Profitability

A Century of Survival: Investment Environment Varies Wildly Over the

Span of 100 Years54

Property/Casualty Insurance Industry Investment Income: 2000–20131

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4

$39.6

$49.5

$52.3

$30

$40

$50

$60

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

Investment Income Fell in 2012 and 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing

1 Investment gains consist primarily of interest and stock dividends...Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings are running below their 2007

pre-crisis peak

58

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

Warra

nty

Surplu

s Line

s

Med

Mal

WC

Reinsu

rance

**

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

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

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

58

59

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*

*Monthly, constant maturity, nominal rates, through March 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

Recession2-Yr Yield10-Yr Yield

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

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

U.S. Treasury yields plunged to historic lows in

2013. Only longer-term yields have rebounded.

59

SURPLUS/CAPITAL/CAPACITY

61

2013 Recorded Yet Another Record High in the Primary and Reinsurance Sectors

61

62

Policyholder Surplus, 2006:Q4–2013: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

$567.8$583.5$586.9

$607.7$614.0$624.4

$653.3

$570.7$566.5

$505.0$515.6$517.9

$400

$450

$500

$550

$600

$650

$700

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

2007:Q3Pre-Crisis Peak

Surplus as of 12/31/13 stood at a record high $653.3B

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

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

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2014in very strong financial condition.

Global Reinsurance Capital (Traditional and Alternative), 2007 - 2013

Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.

Total reinsurance capital reached a record $540B in 2013, up 58.8% from 2008. Of that, $50B (9.3%) is alternative capacity, up 163% from

$19B since 2008

Reinsurance Pricing: Rate-on-Line Index by Region, 1990 – 2014*

*As of Jan. 1.Source: Guy Carpenter

Lower CATs and a flood of new

capital has pushed reinsurance pricing

down in most regions, including

the US

Shifting Legal Liability & Tort Environment

67

Could the Tort Pendulum Once AgainSwing Against Insurers?

68

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

Business Leaders Ranking of Liability Systems in 2012

Best States

1. Delaware

2. Nebraska

3. Wyoming

4. Minnesota

5. Kansas

6. Idaho

7. Virginia

8. North Dakota

9. Utah

10. Iowa

Worst States

41. Florida

42. Oklahoma

43. Alabama

44. New Mexico

45. Montana

46. Illinois

47. California

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2012 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2012

Wyoming Minnesota Kansas Idaho

Drop-offs

Indiana Colorado Massachusetts South Dakota

Newly Notorious

Oklahoma

Rising Above

Arkansas

69

70

The Nation’s Judicial Hellholes: 2012/2013

Source: American Tort Reform Association; Insurance Information Institute

West VirginiaIllinoisMadison County

New YorkAlbany and

NYC

Watch List

Philadelphia, Pennsylvania

South Florida Cook County, Illinois New Jersey Nevada Louisiana

Dishonorable Mention

MO Supreme Court WA Supreme Court

California

MarylandBaltimore

71

U.S. Insured Catastrophe Loss Update

2013 Was a Welcome Respite from the High Catastrophe Losses in Recent Years

2014 Winter Storm Losses Manageable

71

72

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.6

$3

5.0

$1

2.9

$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

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

U.S. Insured Catastrophe Losses

*Through 12/31/13.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.

2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Well

Below 2011 and 2012 YTD Totals.

2012 was the third most expensive year ever for insured CAT

losses

Record tornado losses caused

2011 CAT losses to surge

($ Billions, $ 2012)

72

73

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2013*

*2010s represent 2010-2013.Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3

0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

3.4

8.7 8.9

3.43.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

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: 6.1E*

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

a record high in 2012

75

Top 10 States for InsuredCatastrophe Losses, 2013

$1,995

$1,509

$1,190

$909 $907$805 $773 $762

$677$593

0200400600800

1,0001,2001,4001,6001,8002,000

Okl

ahoma

Texas

Illin

ois

Min

nesota

Colora

do

Mis

siss

ippi

Nebra

ska

Geo

rgia

India

na

Louisia

na

Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.

$ Millions

Oklahoma let the country in insured CAT losses in 2013

76

$9,756

$6,369

$2,318$1,511 $1,440

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

New York New Jersey Texas Kentucky Colorado

*Includes catastrophe losses of at least $25 million.Sources: PCS unit of ISO; Insurance Information Institute.

Top 5 States by Insured Catastrophe Losses in 2012*

NY and NJ let the US in CAT losses in 2012 due Sandy

(2012, $ Billions)

77

$6,558$10,994

$44,563

$57,277

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Homeowners* Vehicle Commercial NFIP Flood**

Commercial (i.e., business claims) are more expensive

because the value of property is often higher as well as the impact of insured business

interruption losses

*Includes rental and condo policies (excludes NFIP flood). **As of Oct. 31, 2013.Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of March 2013; Insurance Information Institute.

Hurricane Sandy: Average Claim Payment by Type of Claim

The average insured flood loss was nearly 9 times larger than the average non-flood insured loss

(mostly wind)

Post-Sandy, the I.I.I. worked very hard to make help media, consumers and regulators understand the distinction between a flood claim and a

standard homeowners claim. NFIP is $24B in debt.

Insurers Making a Difference in Impacted Communities

Source: Insurance Information Institute 78

Destroyed home in Tuscaloosa. Insurers will pay some 165,000 claims totaling $2 billion in the Tuscaloosa/

Birmingham areas alone.

Presentation of a check to Tuscaloosa Mayor Walt

Maddox to the Tuscaloosa Storm Recovery Fund

Presentation of a check to Moore, OK,

Public School Relief Fund

80

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1993–20121

0.1%

1.7%

3.8%4.7%

6.3%

7.1%

36.0%

40.4%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2012 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $158.2

Fires (4), $6.5

Tornadoes (2), $140.9

Winter Storms, $27.8

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.9

Other (5), $0.2

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1993-2012

totaled $391.7B, an average of $19.6B per year or $1.6B

per month

81

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

$7.8 $8.7 $9.2 $11.1$13.4$18.8

$23.9 $24.6$25.6

$48.7

$7.5$7.1$6.7$5.6$5.6$4.4

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Hurricane Sandy became the 5th

costliest event in US insurance history

Hurricane Irene became the 12th most expense hurricane

in US history in 2011

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have

Occurred Over the Past Decade

*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

83Sources: Munich Re NatCatSERVICE; Insurance Information Institute.

Winter Storm and Winter Damage Events in the US and Canada, 1980-2013 (2013 US$)

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

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

Insured losses from

severe winter events

totaled $2 billion in

2013.

Insured winter storm and damage losses in Jan. 2014 already totaled $1.5 billion. Continued severe weather since then makes it likely that

2014 will become one of the top 5 costliest winters since 1980.

Insured Losses (Millions, $ 2013)

5-year running average

U.S. Thunderstorm Insured Loss Trends, 1980 – 2013

84Source: Property Claims Service, and MR NatCatSERVICE

Thunderstorm losses in 2013 totaled $10.3 billion, the 6th

highest on record

Average thunderstorm

losses are up 7 fold since the early

1980s. The 5-year running average

loss is up sharply

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss. 2008-2013 are the most expensive

years on record.

Terrorism Update

85

A Challenge Through Which the Industry Has Persevered

Download III’s Terrorism Insurance Report at: http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2014.html

85

Life$1.2 (3%)

Aviation Liability

$4.3 (11%)

Other Liability

$4.9 (12%)

Biz Interruption $13.5 (33%)

Property -WTC 1 & 2*$4.4 (11%) Property -

Other$7.4 (19%)

Aviation Hull$0.6 (2%)

Event Cancellation

$1.2 (3%)

Workers Comp

$2.2 (6%)

Total Insured Losses Estimate: $42.9B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.

**$32.5 billion in 2001 dollars.

Source: Insurance Information Institute.

Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2013)

($ Billions)

87

Terrorism Risk Insurance Program

Testified before House Financial Services Nov. 2013 Testified before Senate Banking Cmte. in Sept. 2013 Provided testimony at NYC hearing in June 2013 Provided Capitol Hill Joint House/Senate Staff Briefing in

April 2014 I.I.I. Published Several Updates to its Study on Terrorism

Risk and Insurance Working with Trades, Congressional Staff, GAO & Others

Senate Banking Committee, 9/25/13House Financial Services Subcommittee, 11/13/13

CAT OF THE FUTURE?CYBER RISK

90

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large

and Small in Every IndustryNEW III White Paper:

http://www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf

90

Data Breaches 2005-2013, by Number of Breaches and Records Exposed# Data Breaches/Millions of Records Exposed

* 2013 figures as of Jan. 1, 2014 from the ITRC updated to an additional 30 million records breached (Target) as disclosed in Jan. 2014.Source: Identity Theft Resource Center.

157

321

446

656

498

419447

619662

87.9

17.322.9

35.7

19.1

66.9

222.5

16.2

127.7

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013*0

20

40

60

80

100

120

140

160

180

200

220

# Data Breaches # Records Exposed (Millions)

The Total Number of Data Breaches (+38%) and Number of Records Exposed (+408%) in 2013 Soared

Millions

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

92

Growth Will Expand Insurer Exposure Base Across Most Lines

92

93

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 4/14; Insurance Information Institute.

2.7%

0.5%

3.6%

3.0%

1.7%

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1.4%

5.0%

2.3%

2.2% 2.6%

2.4%

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2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

1.1% 2.

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8% 2.5% 3.

6%3.

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Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction

was severe

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

The remainder of 2014 into 2015 are expected

to see a modest acceleration in growth

94

Unemployment and Underemployment Rates: Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 6.3% in April 2014. 4% to 6% is

“normal.”

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 12.3%

in Apr. 2014.8% to 10% is

“normal.”

January 2000 through April 2014, Seasonally Adjusted (%)

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving.

94

95

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4

15.5 16

.0 16.4

16.2

16.2

16.2

16.216

.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 12 13 14F15F 16F17F18F 19F

(Millions of Units)

Auto/Light Truck Sales, 1999-2019F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/14 and 3/13); Insurance Information Institute.

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

With Workers Comp Exposures

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2014-15 is

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

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

2014 and beyond

Truck purchases by contractors are especially strong

96

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.4

8

1.4

7 1.6

21

.64

1.5

71

.60 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

6

0.9

10

.55

0.5

9

0.6

1 0.7

8 0.9

2 1.0

81

.31 1.4

41

.50

1.5

11

.50

1.3

51.4

61

.29

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F15F16F17F18F19F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (4/14 and 3/13); Insurance Information Institute.

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

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

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

annual decline of 1.49 million units, lowest since records began

in 1959

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

for several more years

97

Value of New Private Construction: Residential & Nonresidential, 2003-2013*

Billions of Dollars

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

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

Non ResidentialResidential

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

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2013: Value of new pvt. construction hits $667.5B, up

33% from the 2010 trough but still

27% below 2006 peak

97

$261.8

$238.8

$311.5

$356.0

*2013 figure is a seasonally adjusted annual rate as of December.Sources: US Department of Commerce; Insurance Information Institute.

98

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Mar. 2014

*seasonally adjusted; Data published May 2, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments in Mar. 2014 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial

exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.

$ Millions

98

The value of Manufacturing Shipments in Mar. 2014 was $494.9B—a new record high.

99

Oil & Gas Extraction Employment,Jan. 2010—March 2014*

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

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

616

9.3

170.

117

1.0

172.

517

3.6

176.

317

8.2

178.

518

0.9

181.

918

3.1

184.

818

5.2

185.

718

6.8

187.

618

8.0

188.

018

8.2

190.

019

1.7

191.

919

3.4

192.

419

2.6

193.

119

3.3

195.

019

6.5

199.

720

0.6

203.

020

4.1

205.

320

7.7

208.

1

150

160

170

180

190

200

210

220

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Apr

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May

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Aug

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Sep

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Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

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Jan-

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eb-1

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Feb

-14

Mar

-14

Oil and gas extraction employment is up 33.1% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in

the US.

(Thousands) Highest since Aug.

1986

100

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, Pipelines)

www.iii.org

Thank you for your timeand your attention!

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