Is the World Becoming a Riskier Place? Economic Overview and P/C Insurance Industry Outlook for 2012...

Is the World Becoming aRiskier Place?

Economic Overview and P/C Insurance Industry Outlook for 2012 & Beyond

Casualty Actuaries of Greater New YorkNew York, NY

December 7, 2011Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

2

Presentation Outline

Review of Recent Events What in the World is Going On?

Summary of P/C Financial Performance Catastrophe Loss Developments & Trends

US, Global Will the Market Turn? Four Necessary Criteria:

Underwriting Loss Trends Capital/Capacity Reinsurance Markets Pricing Discipline

Other Contributing Factors to the Underwriting Cycle Investment Environment Tort/Casualty Environment Inflation

Other Contributing Factors to the Underwriting Cycle Investment Environment

3

What in the World Is Going On?

Is the World Becoming a Riskier Place?

What Are the Implications for Insurance and Risk Management?

4

Uncertainty, Risk and Fear Abound

ECONOMIC & POLITICAL CONCERNS Global Economic Slowdown Echoes of the Financial Crisis European Sovereign Debt, Bank & Currency Crises Collapse of Major Financial Institutions US Debt and Budget Crisis, S&P Downgrade & Austerity Housing Crisis Persistently High Unemployment Inflation/Deflation Runaway Energy & Commodity Prices Political Upheaval in the Middle East Regulation ChinaNow the #2 Economy in the World 2012 ElectionsCATASTROPHIC LOSS Japan, New Zealand, Turkey, Haiti, Chile Earthquakes Nuclear Fears US: Tornadoes, Flooding, Wildfires, Hurricanes, Winter Storms Manmade Disasters (e.g., Deepwater Horizon) Cyber Attacks Resurgent Terrorism Risk (e.g., Bin Laden, Gadhafi Killings)

Are “Black Swans”

everywhere or does it just seem that way?

5

What is Going On in the US and Global Financial Markets?

1. Need for a Binding, Comprehensive Solution to Europe’s Debt Problems 15 of 17 Eurozone countries put on negative credit watch by S&P on Dec. 5 Current requires construction of a “fiscal union” to save Euro monetary union Requires rewriting EU treaties to mandate strict Debt/GDP ratios (3%) with sanctions to be imposed

on violators Short-term Europe needs to build a financial “Firewall” (larger bailout fund) around Italy, Spain,

Ireland, Portugal to avoid another “Big, Fat Greek Debt Disaster” Solution: Unified strategy similar to TARP; Monetary easing; Binding fiscal pact OUTCOME: Europeans will eventually stumble into a resolution

2. Realization that US Economic Growth Will Remain Lackluster Q1 GDP just 0.4%; Q2 only 1.3%; Q3 still a subpar 2.0%; Acceleration unlikely Job growth has been anemic for months and unemployment remains high at 8.6% Markets remain extremely volatile and jittery; Housing/Debt hangover OUTCOME: Tepid growth in the 2% - 2.5% range in 2012; Unemployment 8.5% - 9%

3. View that Washington is Dysfunctional and “Rudderless” Lack of coherent, consistent medium and long term plan to deal with basic structural issues in the

US economy (debt, taxes, employment, regulation, etc.) No confidence that 2012 political cycle will resolve these problems

4. Economic Slowdown in Emerging Markets China, other economies less able to stimulate global economy than in 2008

6

Déjà Vu? Lehman II? Is This 2008 All Over Again?

Why Today is Not 2008 All Over Again The Situation Today is Very, Very Different from 2008 Credit Markets Are Not Seizing; Some Contraction in Europe Bank Balance Sheets Are in Much Stronger Shape

Capital up, charge offs falling

We Will Not Experience the Mega-Collapses/Near Collapses Like in 2008 No repeat of Lehman, AIG, Washington Mutual, Wachovia…

MF Global is not a “Systemically Important Financial Institution”

Some Additional Regulatory Controls Are Now Place

What Would Be Helpful Now? Solution to European Bank/Sovereign Debt Problem (Thought We Had One!) Long-Term Fiscal and Monetary Policy Direction Fed on Aug. 9 stated rates would remain low “at least through mid-2013”

This is not only a signal that borrowing costs will remain low over an extended period of time and that inflation will remain muted; Also tells investors that they’ll need to take on risk in order to earn returns in the market.

Congress and the Administration need to remove regulatory and tax uncertainty ASAP and drive a pro-growth agenda

8

P/C Insurance Industry Financial Overview

Profit Recovery Will Be Set Back by High CATs, Low

Interest Rates, Diminishing Reserve Releases

P/C Net Income After Taxes1991–2011:H1 ($ 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

4,6

70

$4

,75

8

$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 = 0.3% 2009 ROAS1 = 5.9% 2010 ROAS = 6.5% 2011:H1 ROAS = 1.7%

P-C Industry 2011:H1 profits were down 71.6% to $4.8B vs. 2010:H1,

due 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 2.3% ROAS for 2011:H1, 7.5% 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

* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurers. 2011H1 combined ratio including M&FG insurers is 110.5 , ROAS = 2.3%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.3100.8

109.4

101.0

2.3%

7.5%7.4%

9.6%

15.9%

14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009* 2010* 2011:H1*0%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

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

A combined ratio of about 100 generated ~7.5% 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 annualized ROAS for H1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. For 2011:H1 ROAS = 1.7% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2007:12.3%

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

10 Years

10 Years10 Years

2011:2.3%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

Global Catastrophe Loss Developments and Trends

13

2011 Will Rewrite Catastrophe Loss and Insurance History

But Will Losses Turn the Market?

14

Global Catastrophe Loss Summary: First Half 2011

2011 Is Already (as of June 30) the Highest Loss Year on Record Globally

Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss

$260 Billion in Economic Losses Globally

New record for the first six months, exceeding the previous record of $220B in 2005

Economy is more resilient than most pundits presume

$55 Billion in Insured Losses Globally

More than double the first half 2010 amount

Over 4 times the 10-year average

$27 Billion in Economic Losses in the US

Represents a 129% increase over the $11.8 billion amount through the first half of 2010

$17.3 Billion in Insured Losses in the US Arising from 100 CAT Events

Represents a 162% increase over the $6.6 billion amount through the first half of 2010

15Source: MR NatCatSERVICE

Natural Loss Events,January – September 2011

World Map

19

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

(Insured Losses, 2010 Dollars, $ Billions)

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

$11.3$14.0 $14.9$16.3$20.5$20.8 $23.1$24.9

$35.0

$72.3

$10.0$9.3$9.0$8.0$8.0$7.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

WinterStormDaria(1991)

ChileQuake(2010)

Hugo (1989)

TyphoonMirielle(1991)

Charley(2004)

NewZealandQuake(2011)

Rita (2005)

Wilma(2005)

Ivan (2004)

SpringTornadoes/

Storms(2011)

Ike (2008)

Northridge(1994)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and

thunderstorm season would likely become the 7th

costliest event in global insurance history

3 of the top 15 most expensive

catastrophes in world history have occurred in the past 18 months

100

200

300

400

500

600

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

Worldwide Natural Disasters,1980 – 2011*

Number of Events

*2011 figure is through June 30.Source: MR NatCatSERVICE 20

Meteorological events(Storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami, volcanic eruption)

There were 355 events through the first 6

months of 2011

22

U.S. Insured Catastrophe Loss Update

2011 CAT Losses Already Greatly Exceed All of 2010 and Will Become One of the Most Expensive Years on Record

23

$8

.3

$7

.4

$2

.6 $1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9 $

27

.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$1

3.6 $2

5.0

$1

00

.0

$7

.5

$2

.7

$4

.7

$2

2.9

$5

.5 $1

6.9

$0

$20

$40

$60

$80

$100

$120

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

US Insured Catastrophe Losses

*Estimate through Oct. 31, 2011.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Insurance Information Institute.

2011 Will Become the 5th or 6th Most Expensive Year in History for Insured Catastrophe Losses in the US

$100 Billion CAT Year is Coming Eventually

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

24

Top 13 (14?) Most Costly Disastersin U.S. History

(Insured Losses, 2010 Dollars, $ Billions)**

*Losses will actually be broken down into several “events” as determined by PCS.**Hurricane Irene losses stated in 2011 dollars.Sources: PCS; Insurance Information Institute inflation adjustments.

$8.6$11.5 $12.8

$16.3 $17.5$22.6 $23.1

$45.8

$8.2$6.7$6.3$5.3$4.3$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)

SpringTornadoes& Storms*

(2011)

Northridge(1994)

Andrew(1992)

9/11 Attack(2001)

Katrina(2005)

Taken as a single event, the Spring 2011 tornado season

would likely become 5th costliest event in US insurance history

25

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2011:H1*

*Insurance Information Institute estimates for 2010 and 2011:H1Notes: 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 3.

35.

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

E

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

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 4.15*

Combined Ratio Points

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 – 2011*Number of Events (Annual Totals 1980 – 2010 and First Half 2011)

*Through June 30.Source: MR NatCatSERVICE 26

50

100

150

200

250

300

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

There were 98 natural disaster events in the first

half of 2011

37

8

51

2

U.S. Thunderstorm Loss Trends, 1980 – 2011*

27

Average thunderstorm losses are up more

than 8 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 the first half of 2011 totaled $16.4 billion, a new

annual record through just 6 months

*Through June 30, 2011.Source: Property Claims Service, MR NatCatSERVICE

Source: Property Claims Service, MR NatCatSERVICE

U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals) vs. First Half 2011

28

Insured winter storm losses in 2011 totaled $1.4 billion and are up 50% since 1980.

Source: National Forest Service, MR NatCatSERVICE

U.S. Acreage Burned by Wildfires, 1980 – 2010 (Annual Totals) vs. First Half 2011

29

2011 could be a severe year for wildfire damage. Acres

burned through June 30 already exceed all of 2010.

30

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–2011:H11

0.2%

2.4%

3.4%4.9%

6.6%

8.0%

31.8%

42.7%

1.Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 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, $160.5

Fires (4), $9.0

Tornadoes (2), $119.5

Winter Storms, $30.0

Terrorism, $24.9

Geological Events, $18.5

Wind/Hail/Flood (3), $12.7

Other (5), $0.6

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Number of Federal Disaster Declarations, 1953-2011*

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

7

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

*

*Through December 4, 2011.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 a New Record in 2011

The number of federal disaster declarations set a new record in 2011, with 93 declarations through Nov.

13. It is no wonder that FEMA is broke!

There have been 2,047 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.

http://www.fema.gov/news/disaster_totals_annual.fema

32

Federal Disasters Declarations by State, 1953 – Nov. 13, 2011: Highest 25 States

86

78

70

65 63

58

55 55 53 53 51 50 50 48 48 47 47 47 46 45 45 44 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 MS TN IA MN KS NE PA WV OH VA WV ND NC IN

Dis

aste

r Dec

lara

tions

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

CA has had 78 federal disaster

declarations since 1953, approximately

1.1 per year, and has had 2 so far in 2011


33

Federal Disasters Declarations by State, 1953 – Nov. 13, 2011: Lowest 25 States*

39 39

36 35 35

32 32

27 27 26 26 25 25 24 23 23 22

20

17 16 16 15 14

11

9 9 9

0

10

20

30

40

50

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

Dis

aste

r Dec

lara

tions

*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, Wyoming, Utah and Rhode Island had the fewest number of

Federal Disaster Declarations


34

SPRING 2011 TORNADO & SEVERE STORM OUTBREAK

2011 Losses Are Putting Pressure on US P/C Insurance Markets

35

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

56 1,2

82

1,819

1,8

05

546

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 11P

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

*2011 is preliminary data through October 13.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.

Number of Tornadoes and Related Deaths, 1990 – 2011*

Tornadoes have already claimed more than 500 lives

There were 1,805 tornadoes recorded in the US by Oct. 13

Insurers Expect to Pay at Least $2 Billion Each for the April 2011 Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin

Insurers Making a Difference in Impacted Communities

Source: Insurance Information Institute 37

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

Location of Tornadoes in the US, January 1—December 5, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 38

1,885 tornadoes killed 546 people through Dec. 5,

including at least 340 on April 26 mostly in the

Tuscaloosa area, and 130 in Joplin

on May 22

http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html

Location of Large Hail Reports in the US, January 1—December 5, 2011


There were 9,413 “Large Hail”

reports through Dec. 5, causing

extensive damage to homes,

businesses and vehicles


Location of Wind Damage Reports in the US, January 1—December 5, 2011


There were 18,580 “Wind Damage” reports through Dec. 5, causing

extensive damage to homes and,

businesses


Severe Weather Reports,January 1—December 5, 2011

41Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

There have been 29,885

severe weather reports through

Dec. 5; including 1,881

tornadoes; 9,413 “Large Hail” reports

and 18,580 high wind events


Large Hail, 9,413 , 32%

Wind Damage,

18,580 , 62%

Tornadoes, 1,885 , 6%

Tornadoes accounted for just 6% of all Severe Weather

Reports through October 13 but more

than 500 deaths

Number of Severe Weather Reports in US, by Type: January 1—December 5, 2011

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


The BIG Question:When Will the Market Turn?

43

Are Catastrophes and Other Factors Pressuring Insurance Markets?

44

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 Q2:2011, overall p/c underwriting losses remain modest•Combined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at onset of last hard market)•Prior-year reserve releases continue reduce u/w losses, boost ROEs

Material Decline in Surplus/ Capacity

Entered 2011 At Record

High; Since Fallen

•Surplus hit a record $565B as of 3/31/11•Fell by 1% in Q2 2011•Little excess capacity remains in reinsurance markets•Weak 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 turning from negative to flat or up in some lines (property, WC)•Competition remains intense as many seek to maintain market share

Sources: Barclays Capital; Insurance Information Institute.

1. UNDERWRITING

46

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

47

P/C Insurance Industry Combined Ratio, 2001–2011:H1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=110.5 Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-M&FG was 102.2).

95.7

99.3100.8

109.4

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)1975–2011*

* Includes mortgage and financial guaranty insurers in all years. 2011 figure is actual H1 underwriting losses of $24.098 billion.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 1011*

The industry recorded a $10.4B underwriting loss in 2010 compared

to $3.0B in 2009

Cumulative underwriting deficit from 1975 through

2010 is $455B

($ Billions) Underwriting losses in 2011 will be much larger:

$24.1B based on H1

data

49

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

0 0

3

0

54

8

10

76

0

2

4

6

8

10

12

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

* 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.**Data for the 2010s includes 2010 and 2011.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

50

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 Remained 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

Financial Strength & Underwriting

51

Cyclical Pattern is P-C Impairment History is Directly Tied to

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–20108

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15 16 18

11

5

0

10

20

30

40

50

60

70

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

Source: A.M. Best Special Report “1969-2010 Impairment Review,” June 21, 2010; Insurance Information Institute.

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

8 of the 18 in 2009 were small Florida carriers. Total also

includes a few title insurers.

54

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

57

Performance by Segment:Commercial Lines

Homeowners Insurance Combined Ratio: 1990–2011P

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 11

6.0

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 11P

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 (1990-2010); Insurance Information Institute (2011P).

Private Passenger Auto Combined Ratio: 1993–2011P

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

1.0

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 11P

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

Sources: A.M. Best (1990-2010); Insurance Information Institute (2011P).

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

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 11P

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

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

Commercial Lines Combined Ratio, 1990-2011P

Commercial lines in 2011 will likely experience record their

worst underwriting performance since 2002

Workers Compensation Combined Ratio: 1994–2011P

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

8.012

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

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They

Have Been in a DecadeSources: A.M. Best (1994-2010); Insurance Information Institute (2011P).

2. SURPLUS/CAPITAL/CAPACITY

62

Have Large Global Losses Reduced Capacity in the Industry, Setting

the Stage for a Market Turn?

64

Policyholder Surplus, 2006:Q4–2011:Q2

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$556.9

$559.1

$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:Q2

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2007:Q3 Peak

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)10:Q1: +$18.9B (+3.6%)

10:Q2: +$8.7B (+1.7%)10:Q3: +$23.0B (+4.4%)10:Q4: +$35.1B (+6.7%)11:Q1: +$42.9B (+8.2%)11:Q2: +37.3B (+7.1%)

Surplus as of 6/30/11 fell by 1% below its all time record high of $564.7B set

as of 3/31/11. Further declines are likely

*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 $0.78 of

NPW—the strongest claims-paying status in its history.

66

$1

2,1

30

.5

$3

9,5

07

.0

$1

8,1

42

.5

$1

0,6

46

.5

$9

84

.0

$4

18

.7

$2

2,0

29

.6

$5

86

.3

$1

0,3

89

.9

$4

,75

7.7

$1

7,3

46

.9

$1

6,1

14

.4

$5

,55

2.5

$6

,97

4.1

$8

,86

9.7

74

87

66

48 47

24

53

69

51

5656

5552

42

40

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

(Va

lue

of

De

als

$ M

ill)

0

10

20

30

40

50

60

70

80

90

100

Nu

mb

er o

f De

als

Value of Deals $ Mill)

Number of Deals

*2011 data are through December 1.Source: SNL Securities; Insurance Information Institute.

M&A Activity in the US P/C Insurance Industry, 1997-2011*

P/C M&A activity in 2011 is up 60% since 2008, its highest level (in $ terms) since 2008

M&A Activity in the P/C Insurance Industry Remains Well Below its 1990s Peak

72

3. REINSURANCE MARKET CONDITIONS

Record Global Catastrophes Activity is

Pressuring Pricing

Global Reinsurance Capital, 2007-2011:H1

Reinsurer Capital%

Change

Source: Aon Reinsurance Market Outlook, September 2011 from Individual Company and AonBenfield Analytics; Insurance Information Institute.

$411

$342

$402

$445$470

17%

-17%

-5%

18%

$300

$320

$340

$360

$380

$400

$420

$440

$460

$480

$500

2007 2008 2009 2010 2011:H1-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Reinsurer Capital Change

High Global Catastrophe Losses Have Had a Modest Adverse Impact on Global Reinsurance Market Capacity

Global reinsurance market capacity is down in mid-2011 due to large

catastrophe losses

Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011.

Global Property Catastrophe Rate on Line Index, 1990-2011 YTD (6/1/11)

A modest increase in global property catastrophe reinsurance pricing was

evident in June 1 renewals in the wake of record global catastrophe

losses. Larger increase could occur for the Jan.1, 2012 renewals

Source: Guy Carpenter, GC Capital Ideas.com, November 23, 2011.

Historical Capital Levels of Guy Carpenter Reinsurance Composite, 1998—2Q11

Most excess reinsurance capacity was

removed from the market in 2011,

leaving uncertainty as to the direction of

2012 reinsurance renewals

4. RENEWED PRICING DISCIPLINE

78

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

79

-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*

Soft Market Persisted in 2010 but Growth Returned: More in 2011?

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

*2011 figure is for H1 vs. 2010:H1. 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:H1 growth

was +2.6%

80

Monthly Change* in Auto Insurance Prices, 1991–2011*

*Percentage change from same month in prior year; through October 2011; 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

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

82

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

-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

%

1.7

%

-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); Marsh (Q411E); Insurance Information Institute

KRW Effect

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

since 2003. Slightly stronger gains in Q4.

(Percent)

Q2 2011 marked the 30th consecutive quarter of price

declines

83

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q3

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

Percentage Change (%)

Peak = 2001:Q4 +28.5%

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since

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

nearly 7 years (Q4:2003)

KRW Effect: No Lasting Impact

Trough = 2007:Q3 -13.6%

85

Change in Commercial Rate Renewals, by Line: 2011:Q3

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

Major Commercial Lines Renewed Uniformly Upward in Q3:2011 for the First Time Since 2003, With Workers Up More than Any Other Line

Percentage Change (%)

1.5%1.9%

3.0%

4.1%

0.2% 0.3%0.6%

0.8% 0.8%

1.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Ge

ne

ral

Lia

bili

ty

Su

rety

Co

mm

l Au

to

Co

nst

ruct

ion

D&

O

Um

bre

lla

EP

L

Bu

s.In

terr

up

tion

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

89

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…

90

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

91

Other Cycle-Influencing Factors

Could Other Factors Act as a Catalyst to Turn the

Market?

INVESTMENTS: THE NEW REALITY

92

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting or Cyclicality?

Property/Casualty Insurance Industry Investment Gain: 1994–2011:H11

$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

$52.9

$24.8

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11:H1

Investment Gains Recovered Significantly in 2010 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)

2011 investment gains are likely to come in

below 2010 due to lower interest rates and poor stock market returns

94

Treasury Yield Curves: Pre-Crisis (July 2007) vs. Nov. 2011*

0.01% 0.01% 0.04% 0.11% 0.26%

1.45%

2.02%

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

0.91%

0.40%

3.04%2.73%

0%

1%

2%

3%

4%

5%

6%

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

November 2011 Yield Curve*Pre-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 2013.

The End of the Fed’s Quantitative Easing Is Unlikely to Push Interest Rates Up Substantially Given Ongoing Economic Weakness

*Week ending Nov. 25.Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

96

-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*

Shifting Legal Liability & Tort Environment

97

Is the Tort PendulumSwinging Against Insurers?

98

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

$0

$50

$100

$150

$200

$250

$300

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10E 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, 2010 Update on US Tort Cost Trends, Appendix 1A

Tort Costs Have Remained High but Relatively Stable Since the mid-2000s. As a Share of GDP they Should Fall as

the Economy Expands

Business Leaders Ranking of Liability Systems in 2010

Best States

1. Delaware

2. North Dakota

3. Nebraska

4. Indiana

5. Iowa

6. Virginia

7. Utah

8. Colorado

9. Massachusetts

10. South Dakota

Worst States

41. New Mexico

42. Florida

43. Montana

44. Arkansas

45. Illinois

46. California

47. Alabama

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2010

North Dakota Massachusetts South Dakota

Drop-offs

Maine Vermont Kansas

Newly Notorious

New Mexico Montana Arkansas

Rising Above

Texas South Carolina Hawaii

Midwest/West has mix of good and bad states.

100

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

NevadaClark County

Watch List

Madison County, IL Atlantic County, NJ St. Landry Parish,

LA District of Columbia NYC and Albany,

NY St. Clair County, ILDishonorable

Mention

MI Supreme Court City of St. Louis CO Supreme Court

CaliforniaLos Angeles

and Humboldt Counties

Philadelphia

Inflation

103

Is it a Threat to Claim Cost Severities

104

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

2.2 2.3 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 11F12F13F14F15F16F17F

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

The slack in the U.S. economy suggests that inflation should not heat upbefore 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), 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 are pushing up inflation in 2011, but not longer turn

inflationary expectations.

Medical Cost Inflation Has Outpaced Overall Inflation Over 50 Years

719.8

1589.8

0

300

600

900

1200

1500

1800

61 66 71 76 81 86 91 96 01 06 11*

Inde

x V

alue

(196

1=10

0)

All ItemsMedical Care

*Based on change from Feb. 2011 to Feb. 2010 (latest available) Source: Department of Labor (Bureau of Labor Statistics)

A claim that cost $1,000 in 1961 would cost nearly $16,000 based on

medical cost inflation trends over the past 50 years.

Regulatory Environment & Financial Services Reform

106

Insurers Not as Impacted as Banks, But Dodd-Frank

Implementation Has Been a Concern for Insurers

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WV

VA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI B

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

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

Source: Heartland Institute, May 2011

B B+

B+

D

B

C-

B-

B+

B+C-

B+C-

B

C+

C-

C-

B- D-

B

F

D

C-

C-C+

B+

B+

B+

A+

A+

C-

B

A

A

B

C+

C+

B-

B-

C+

C

F

D+F

D+

B

C+

F F

D-

2010 Property and Casualty InsuranceRegulatory Report Card

Not Graded: District of Columbia

Pennsylvania’s regulatory environment got a grade of

“C” in 2010

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

115

Growth Would Also Help Absorb Excess Capital

116

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 11/11; 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

%

2.0

%

2.3

%

1.9

%

2.2

%

2.4

%2

.6%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

2

00

6

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

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%

2011 got off to a sluggish start, but growth is expected to proceed at a more modest, though still relatively weak

pace through 2012

2011 Financial Overview State Economic Growth Varied in 2010

117

Texas had one of the stronger economies in 2010 and has

generally outperformed during the economic

downturn

Hard hit Midwest and Northeast states finally

entering recovery in 2010

118

(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

0.5

9 0.6

9 0.9

1

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 11F12F13F14F15F16F17F18-22F

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

Little Exposure Growth Likely for Homeowners Insurers Until 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

119

16.9

16.5

16.1

13.2

10.4

11.6 12

.7 13.5 14

.1 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 11F 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 11/11); 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 2011-12 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

2011 and beyond

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

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. 120

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 77.8% of industrial capacity in

Sept. 2011, above the June 2009 low of 68.3% and a

post-crisis high

December 2007-June 2009 Recession

http://www.federalreserve.gov/releases/g17/Current/default.htm

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

61

.2

60

.4

53

.5 55

.3

50

.9

50

.6 51

.6

50

.8 52

.7

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

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through November 2011

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

Source: Institute for Supply Management; Insurance Information Institute

Optimism among manufacturers may be increasing in late 2011

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

57

.3

52

.8 54

.6

53

.3

52

.7

53

.3

53

52

.9

56

.2

40

45

50

55

60

65

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

De

c-1

0

Jan

-11

Fe

b-1

1

Ma

r-1

1

Ap

r-1

1

Ma

y-1

1

Jun

-11

Jul-

11

Au

g-1

1

Se

p-1

1

Oct

-11

No

v-1

1

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

January 2010 through November 2011

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

Source: Institute for Supply Management; Insurance Information Institute

Optimism among non-manufacturers may be increasing in late 2011

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

.7

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

Consumer Sentiment Survey (1966 = 100)

January 2010 through August 2011

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

impact consumers, but may be improving marginally

Source: University of Michigan; Insurance Information Institute

Optimism among consumers is recovering after plunging amid the

debt debate debacle and S&P downgrade

127

11 Industries for the Next 10 Years: Insurance Solutions Needed

Shipping (Rail, Marine, Trucking)

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Agriculture

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

Many industries are

poised for growth, but

many insurers do not write in

these economic segments

128

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

129

Unemployment and Underemployment Rates: Stubbornly High in 2011

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 8.6% in

October

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 16.2%

in Oct. 2011

January 2000 through November 2011, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemploymentwill constrain overall economic growth

Sep 11

186

7921

365

127

42 15-1

09-1

465 97

23-1

2-8

5 -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 -215 -186

-262

75-8

316

62

229

51 6111

714

311

2 193

128 16

794

261

219

241

99 7517

372

220

117

140

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

7N

ov-0

7D

ec-

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-0

8Ju

n-08

Jul-0

8A

ug-0

8S

ep-0

8O

ct-0

8N

ov-0

8D

ec-

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

ov-0

9D

ec-

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-

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

1

Monthly Change in Private Employment

January 2008 through November 2011* (Thousands)

Private Employers Added 3.134 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

140,000 private sector jobs were created in

October

133

Unemployment Rates by State, October 2011:Highest 25 States*

13.4

11.7

11.0

10.6

10.6

10.5

10.4

10.4

10.3

10.2

10.1

9.6

9.6

9.5

9.3

9.1

9.0

9.0

9.0

9.0

9.0

8.8

8.7

8.5

8.4

8.2

0

2

4

6

8

10

12

14

NV CA DC MI MS SC NC RI FL GA IL KY TN OR AL NJ US AZ IN OH WA ID CT MO TX AR

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for October 2011, seasonally adjusted.

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

In October, 36 states and the District of Columbia reported over-the-month

unemployment rate decreases, 5 had increases, and 9 had no change.

134

8.2

8.1

8.1

7.9

7.9

7.7

7.6

7.4

7.3

7.3

7.2

7.0

7.0

6.7

6.6

6.5

6.4

6.4

6.1

6.0

5.7

5.6

5.3

4.5

4.2

3.5

0

2

4

6

8

10

WV CO PA DE NY WI MT AK ME MA MD LA UT KS NM HI MN VA OK IA WY VT NH SD NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, October 2011: Lowest 25 States*

*Provisional figures for October 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In October, 36 states and the District of Columbia reported over-the-month

unemployment rate decreases, 5 had increases, and 9 had no change.

135

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

%

9.1

%

9.1

%

9.0

%

8.9

%

8.9

%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

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 (11/11); Insurance Information Institute

2007:Q1 to 2012:Q4F*

Unemployment forecasts remain stubbornly high

through 2011, but still imply millions of new

jobs will created.

Jobless figures have been revised

upwards for 2011/12

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Is the World Becoming a Riskier Place? Economic Overview and P/C Insurance Industry Outlook for 2012...

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