Overview and Outlook forthe P/C Insurance Industry

Casualty Actuaries of New EnglandApril 2, 2012 Sturbridge, MA

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038Office: 212.346.5540 Cell: (917) 494-5945 stevenw@iii.org www.iii.org

Not All Data in a PowerPoint SlideAre Accurate or Reliable

3

The Economic Situation

Its Effect on the Industry’sExposure Base, Growth,

Investments, and Profitability

4

Length of US Business Cycles,1929–Present*

10 1116

6

168 8

19

50

80

3745

39

24

106

36

58

12

92

120

73

33

43

138 11 10 8

0

10

20

30

40

50

60

70

80

90

100

110

120

Aug1929

May1937

Feb1945

Nov1948

Jul1953

Aug1957

Apr1960

Dec1969

Nov1973

Jan1980

Jul1981

Jul1990

Mar2001

Dec2007

Month Recession Started

Contraction Expansion Following

*Through March 2012. ** Post-WW II period through end of most recent completed expansion. Sources: National Bureau of Economic Research; Insurance Information Institute.

Average DurationRecession* = 10.9 MosExpansion** = 60.5 Mos

Length of Expansions Greatly Exceeds

Contractions

Duration (Months)

5

A Weak Recovery is Forecast:Real GDP Growth*, Yearly, 1970-2013F

Estimates/Forecasts from Blue Chip Economic Indicators, 3/2012 issue. *chained 2005 $Sources: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.

-4.5%

-3.0%

-1.5%

0.0%

1.5%

3.0%

4.5%

6.0%

7.5%Real GDP Growth (%) The “consensus” forecast is

for at least two more years of real yearly GDP growth below 3% -- weaker than after most

recent recessions

6

US Real GDP Growth, quarterly*

* Estimates/Forecasts from Blue Chip Economic IndicatorsSource: US Department of Commerce, Blue Economic Indicators 3/2012 issue (forecasts); Insurance Information Institute.

1.7%

3.8%

3.9%

3.8%

2.5%

2.3%

0.4% 1.

3% 2.0% 3.

0%

2.1%

2.2%

2.4%

2.6%

2.5%

2.7%

2.9%

3.0%

-1.8

%

1.3%

-3.7

%

-8.9

% -6.7

%

-0.7

%

-12%

-9%

-6%

-3%

0%

3%

6%

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

10:1

Q

10:2

Q

10:3

Q

10:4

Q

11:1

Q

11:2

Q

11:3

Q

11:4

Q

12:1

Q

12:2

Q

12:3

Q

12:4

Q

13:1

Q

13:2

Q

13:3

Q

13:4

Q

Demand for insurance continues to be affected by a sluggish economy

Real GDP Growth (%)

We need stronger growth than this to return the

economy to its full capacity anytime soon.

Worst quarterly drop since

1958:q1 (-11.1%)

7

March 2012 Forecasts of Quarterly US Real GDP for 2012-13

1.6%

2.0%2.2% 2.1%

2.5%2.7%

2.9% 3.0%3.3%

3.5% 3.6%4.0%

1.8%1.4%

1.7%1.5%

2.6%2.1%2.2%

2.4%

3.4%

3.0%2.9%2.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

12:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4

10 Most PessimisticMedian10 Most Optimistic

Sources: Blue Chip Economic Indicators (3/12); Insurance Information Institute

Real GDP Growth Rate

8

A Look Back: March 2011 Forecastsof Quarterly US Real GDP for 2011

2.6%2.5% 2.5%2.7% 3.4%

3.4%3.4% 3.4%

4.2%4.1%4.2%4.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

11:Q1 11:Q2 11:Q3 11:Q4

10 Most Pessimistic Median 10 Most Optimistic

Sources: Blue Chip Economic Indicators (2/12); Insurance Information Institute

Real GDP Growth Rate

A month into 2011, all forecasts for the year predicted steady growth,but at different rates.

9

Off Target: March 2011 Forecasts for 2011 vs. Actual US Real GDP

0.4%

1.3%

1.8%

3.0%2.6%2.5% 2.5%2.7% 3.4%

3.4%3.4% 3.4%

4.2%4.1%4.2%4.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

11:Q1 11:Q2 11:Q3 11:Q4

10 Most Pessimistic Median 10 Most Optimistic Actual

Sources: Blue Chip Economic Indicators (2/12); Insurance Information Institute

Real GDP Growth Rate

This 3.0% growth

number is preliminary and will be

revised

Even the most pessimistic forecasts were too bullish for the first three quarters of 2011. They were close to the fourth quarter number, though.

First Half of 2012: Fastest Growth [3+%] Expected in MI, AL, NV, ND, SC

10

MA: +2.89%VT: +2.57%CT: +2.04% NH: +1.87%ME: +0.05% RI: -3.57%

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

12

Growth Will Expand Insurable Exposures and Help Absorb Excess Capital

12

Consumer Sentiment Survey,Jan 1978-Mar 2012 (1966 = 100)

13

14

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Jan. 2012

*seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments are nearly back to peak (which happened in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to December 2011 was 30.2%. This growth leads to gains in many commercial exposures: WC, Commercial

Auto, Property and Various Liability Coverages

The value of Manufacturing Shipments in Dec. 2011 was up 30.2%

to $464B from its May 2009 trough. Dec. figure is only 4.5% below its previous record high in July 2008.

$ Millions

14

15

Manufacturing Growth for Selected Sectors, Jan. 2012 vs. Jan. 2011

13.4%

7.1% 7.5%10.9%

5.2%8.8%8.4%

10.1%

31.2%

10.1%

5.8%

0%

5%

10%

15%

20%

25%

30%

35%

All

Ma

nu

fact

uri

ng

Du

rab

le M

fg.

Pri

ma

ryM

eta

ls

Ma

chin

ery

Ele

ctri

cal

Eq

uip

.

Tra

nsp

ort

atio

nE

qu

ip.

No

n-D

ura

ble

Mfg

.

Fo

od

Pro

du

cts

Pe

tro

leu

m &

Co

al

Ch

em

ica

l

Pla

stic

s &

Ru

bb

er

Manufacturing Is Expanding Across a Wide Range of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC, Commercial

Property, Commercial Auto and Many Liability Coverages

Growth (%)

Manufacturing of durable goods has

been especially strong

*seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Durables: +10.1% Non-Durables: +7.1%

16

Labor Market Trends

Job Growth Finally Taking Hold,Bolstering the Commercial &

Personal Lines Exposure Bases,but Problems Remain

22

95

71

72

46

12

16

1-4

-73

20 6

1 75

47

41

-13

6-1

12

-21

5-2

16

-23

1-2

59

-29

4-4

25

-48

0-7

97

-65

8-8

39 -7

25

-78

7-8

02

-31

2-4

26 -2

96 -2

19

-18

4-2

32

-42

-12

0 -40

-27

19

38

4 92

92 12

81

15 1

96

13

41

40

11

92

57

26

12

64

10

81

02 1

75

52

21

61

39 17

8 23

4 28

52

33

14

1

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Ma

r-0

7

Ma

y-0

7

Jul-

07

Se

p-0

7

No

v-0

7

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Se

p-0

8

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Se

p-0

9

No

v-0

9

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-

10

Se

p-1

0

No

v-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-

11

Se

p-1

1

No

v-1

1

Jan

-12

Monthly Change in Private Employment*January 2007 through February 2012

(Thousands)

At the rate of job growth in December 2011 through February 2012,the unemployment rate will be down to 7.5% by the end of 2012.

*seasonally adjustedSources: U.S. Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute.

Nov. ‘08.–Apr. 09 monthly losses were

the largest in the Post-WW II period

Private employers added jobs in every

one of the last 24 months

Payroll growth since Jan 2010: $340.3

billion, equivalent to roughly $2.25 billion in

WC premiums

21

1-1

21

10

-49

-56

-43 -1

2-1

53

00

-51

0-8

48

46

43

2-2

59

-15

0-1

79 -14

22

4-1

3-2

0 -9-3

7 -15

-13

-54 -1

8-7

93

3-1

4-2

7-2

1-1

1-1

-6

(300)

(200)

(100)

0

100

200

300

400

500

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Se

p-0

9

No

v-0

9

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-

10

Se

p-1

0

No

v-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-

11

Se

p-1

1

No

v-1

1

Jan

-12

Monthly Change in Government Employment*

(Thousands)

In 2011 employment by government at all levels dropped every month except August. Total jobs lost in last twelve months: 278,000.

*seasonally adjustedSources: U.S. Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information Institute.

January 2009 through February 2012

Census

17

-17

0

(25)

0

25

50

75

100

125

Sept report Oct report Nov report Jan revision

Private Employment Government Employment Total Nonfarm Employment

Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised

(Thousands)

The September 2011 report for employment in August was dis-spiriting.BLS reported the U.S. economy added no net jobs.

Was the recovery stalling? Would we sink into another recession?

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

17

42

-17

15

0

57

(25)

0

25

50

75

100

125

Sept report Oct report Nov report Jan revision

Private Employment Government Employment Total Nonfarm Employment

Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised

(Thousands)

In the October report the August figures were revised.This report showed gains in both private and government employment,

for a net addition of 57,000 jobs. Where were these revisions (and their implications) reported?

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

17

42

72

-17

15

32

0

57

105

(25)

0

25

50

75

100

125

Sept report Oct report Nov report Jan revision

Private Employment Government Employment Total Nonfarm Employment

Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised

(Thousands)

In the November report the August employment numbers were revised again, now showing that the economy in August to adding 105,000 net

new jobs. Latest report: +85,000 jobs.Where were these revisions (and their implications) reported?

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

17

42

72

52

-17

15

32 33

0

57

105

85

(25)

0

25

50

75

100

125

Sept report Oct report Nov report Jan revision

Private Employment Government Employment Total Nonfarm Employment

Report of August 2011 Changes in Private, Government, and Total Civilian Employment, Initial and Revised

(Thousands)

In the January 2012 report for August, BLS revised the U.S. numbers for all of 2011 to reflect new population estimates, on which the

employment samples from each month are projected.Latest August data: +85,000 jobs.

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

23

Percentage Change in Nonfarm Employment,US & New England states, Jan 2012 vs. Jan 2011

-0.3

0.7

0.4

1.2

0.9

0.7

1.5

-0.5

0

0.5

1

1.5

US NH VT CT ME MA RI

*Preliminary data for January 2012, seasonally adjusted.

Sources: US Bureau of Labor Statistics, Regional and State Employment and Unemployment—January 2012, published March 13, 2012; Insurance Information Institute.

Percent Change

24

(Millions of Units)

Private Housing Starts, 1990-2013F

1.481.47

1.621.641.571.60

1.711.85

1.962.07

1.80

1.36

0.90

0.550.590.610.73

0.89

1.351.46

1.291.20

1.01

1.19

0.0

0.3

0.6

0.9

1.2

1.5

1.8

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

F

13

F

Sources: U.S. Census Bureau and Department of Housing and Urban Development (history) at http://www.census.gov/const/newresconst.pdf ; Blue Chip Economic Indicators (3/2012), forecasts; Insurance Information Institute.

Weak home construction forecast implies little exposure growth likely for Homeowners insurers for the next few years,

but homeowners might fortify homes to mitigate storm and other damage.

Forecast range for

2012: 610,000 to

900,000

Forecast range for

2013: 680,000 to 1,450,000

Single vs. Multi-Family Housing Starts,Annually, 2001-2012*

100

150

200

250

300

350

400

450

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

400

600

800

1000

1200

1400

1600

1800

units in multi-family buildings single family units

*January 2012 data, annualized, seasonally-adjusted, preliminarySource: US Census Bureau at http://www.census.gov/construction/nrc/pdf/newresconst.pdf

Thousands of Units, Multi-Family

The slump is mainly in single-family housing,but starts of multi-family units also plunged in 2009-10.

Multi-family-unit starts rose in 2011, and

single-family starts are starting up in 2012.

Thousands of Units, Single Family

Multi-family plunge didn’t begin until 2009

Single family plunge began

in 2006

26

Private Housing Starts in the Northeast US, Monthly*, 1990-2012

*seasonally-adjusted annual rate; data through January 2012Sources: U.S. Census Bureau and Department of Housing and Urban Development at http://www.census.gov/const/newresconst.pdf ; Insurance Information Institute.

Billions

0

25

50

75

100

125

150

175

200

225

250

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

27

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.3 14

.8

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F

(Millions of Units)

The Car-Buying Slump Will Create Pressure to Replace Aging Vehicles

Sources: history--U.S. Department of Commerce; forecasts (including 2011 preliminary--Blue Chip Economic Indicators (3/2012); Insurance Information Institute; USA Today 8/10/2011 edition (AAA Survey).

Many more older cars are on the road today than In “normal” times. Previously in a 3-year span, new cars would replace about 35 million old cars, but in 2008-10 only about 27 million old cars were replaced.

2011 AAA Survey: 1 in 4 drivers have neglected repairs and maintenance because of the

economyForecast range for

2012: 13.4 to

15.1

Forecast range for

2013: 13.9 to

16.0

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Jun 0

1

Sep 0

1

Dec 0

1

Mar

02

Jun 0

2

Sep 0

2

Dec 0

2

Mar

03

Jun 0

3

Sep 0

3

Dec 0

3

Mar

04

Jun 0

4

Sep 0

4

Dec 0

4

Mar

05

Jun 0

5

Sep 0

5

Dec 0

5

Mar

06

Jun 0

6

Sep 0

6

Dec 0

6

Mar

07

Jun 0

7

Sep 0

7

Dec 0

7

Mar

08

Jun 0

8

Sep 0

8

Dec 0

8

Mar

09

Jun 0

9

Sep 0

9

Dec 0

9

Mar

10

Jun 1

0

Sep 1

0

Dec 1

0

Mar

11

Jun 1

1

Sep 1

1

Dec 1

1

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 28

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 78.7% of industrial capacity in Feb. 2012, above the June 2009

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

December 2007-June 2009 Recession

March 2001 through February 2012

28

31

Inflation Trends/Forecastsand Effects on Claims

32

Historic and Forecast 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 2.2 2.4 2.4 2.4 2.52.9

2.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 3/12 (forecasts).

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

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

Annual Inflation Rates (%)

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

commodity bubble reduced inflationary pressures in 2009/10

Higher energy, commodity and food

prices pushed up inflation in 2011, but

not longer turn inflationary

expectations.

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

Sources: Bureau of Labor Statistics; Insurance Information Institute.

3.2%

1.7%

6.8%

5.1%

4.2%

3.0% 3.2%

5.0%

7.1%

0%

2%

4%

6%

8%

Overall CPI "Core" CPI InpatientHospitalServices

OutpatientHospitalServices

PrescriptionDrugs

Medical CareCommodities

LegalServices

Motor VehicleParts &

Equipment

ResidentialMaint. &Repair

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

33

Excludes Food and Energy

Price Level Change: 2011 vs. 2010

33

P/C Commercial Property Insurance Claim Cost Drivers Grow Faster than the Overall CPI Suggests

Sources: Bureau of Labor Statistics; Insurance Information Institute.

3.2%

7.1%

9.0%

5.4%

3.6%

1.7%

0%

3%

6%

9%

Overall CPI "Core" CPI Inputs toConstruction

Industries

Non-residentialmaintenance &

repair

Asphalt Paving &Roofing Materials

Plumbing Fixtures &Fittings

Copper prices spiked and retreated in 2011. In July its price was 33% higher than a year earlier; by November it cost 8% less than in November 2010.

34

Excludes Food and Energy

Price Level Change: 2011 vs. 2010

34

P/C Premium and Underwriting Trends

35

Mainly Driven by the Industry’s Underwriting Cycle,

Not the Economy

36

-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

Soft Market Persisted into Early 2011 but Growth Returned: More in 2012?

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

*2011 and 2012 figures are A.M. Best EstimatesShaded 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 3.5% (est.) in

2011

2012 forecast:

3.8% growth

37

P/C Insurance Industry Combined Ratio, 2001–2011:Q3*

* Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=109.9 Sources: A.M. Best, ISO.

95.7

99.3100.8

108.2

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

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

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Cyclical Deterioration

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

38

2

(2)

(8)

(3)

(7)(10) (10)

(4)

(0)

11

24

15

119

(5)

(9)

(14)

(10) (11)(7)

(5)(2)

-$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

11

E

12

F

13

F

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, 1992–2013F

Reserve Releases Remained Strong in 2010 But Tapered Off in 2011. Releases Are Expected to

Further Diminish in 2012 and 2103Note: 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: Barclays 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

P/C Insurance IndustryFinancial Performance

39

A Resilient Industry in Challenging Times

P/C Net Income After Taxes1991–2011:Q3 ($ 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

$7

,97

9

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

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

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 5.6% 2011:Q3 ROAS1 = 1.9%

P-C Industry 2011:Q3 profits were down 71% to $8.0B vs. 2010:Q3,

due primarily to high catastrophe losses and as non-cat

underwriting results deteriorated

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 3.0% ROAS for 2011:Q3, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute 40

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

Combined Ratio / ROE

* 2008 -2010 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2011-12 combined ratios are A.M. Best estimate excl. M&FG insurers. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.099.3

100.8102.0

107.5

95.7

6.1%

3.9%

7.5%7.4%4.4%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011E 2012F0%

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

41

-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

*1

2

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2012F*

*Profitability = P/C insurer ROEs. 2011-12 figures are A.M. Best estimates. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. For 2011:Q3 ROAS = 1.9% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2012F: 6.1%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2011E: 3.9%

42

Financial Strength & Capacity

43

The P-C IndustryHas Weathered the Storm Well

P/C Insurer Impairments, 1969–20118

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 1

9 21

28

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

11

Source: A.M. Best Special Report “1969-2011 Impairment Review,” January 23, 2012; Insurance Information Institute.

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

3 small Missouri insurers did encounter problems in 2011 after the May tornado in Joplin. They

were absorbed by a larger insurer and all claims were paid.

44

45

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

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

1

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

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

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

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

46

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

47

Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010

2.0%4.4%

4.8%

6.5%

6.9%

7.7%

8.1%

10.9%

22.2%

26.6%

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

Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade

Workers Comp

Financial Guaranty

Pvt. Passenger Auto

Homeowners

Commercial Multiperil

Commercial Auto Liability

Other Liability

Med Mal

SuretyTitle

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

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

US Policyholder Surplus:1975–2009:Q3*

* As of 9/30/09Source: A.M. Best, ISO, Insurance Information Institute.

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

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

non-insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.87:$1 as of9/30/09, Up from Near Record Low of $0.85:$1 at Year-End 2007

Surplus as of 9/30/09 was $490.8B, up from $437.1B as of 3/31/09. Recent peak was $521.8 as of 9/30/07. Surplus as of 9/30/09 is now only 5.9% below 2007 peak; Crisis trough was as of

3/31/0916.2% below 2007 peak.

49

Policyholder Surplus, 2006:Q4–2011:Q3

Source: 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

$538.6

$564.7

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

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

2007:Q3 = previous surplus peak

Quarterly Surplus Changes Since 2011:Q1 Peak11:Q2: -$5.6B (-1.0%)

11:Q3: -$26.1B (-4.6%)

Surplus as of 9/30/11 was down 4.6% below its all

time record high of $564.7B set as of 3/31/11. Further

declines are possible

Note: Beginning in 2010:Q1 figures include $22.5B of paid-in capital from a holding company parent to a subsidiary insurer. It was a single investment in a non-insurance business.

The industry now has $1 of surplus for every $0.83 of NPW, close to the strongest claims-

paying status in its history

Investment Performance

50

Weak Investment ResultsAre a Main Cause of Low Profits

P/C Insurance Industry Investment Gain: 1994–2011:Q31

$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

$42.0

$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 11:3Q

Investment gains recovered significantly in 2010 due to realized capital gains. The financial crisis caused investment gains to fall by 50% in 2008

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

($ Billions)

Investment gains at 2011:3Q were about

$2.1 billion better than the same period in 2010

51

52

P/C Insurer Net Realized Capital Gains/Losses, 1990-2011E

*2011 is an estimate based on annualized actual 2011 9-month figure of $5.5B.Sources: A.M. Best, ISO, Insurance Information Institute.

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

98

-$5.

70

$7.3

0

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

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

Insurers Posted Net Realized Capital Gains in 2011 for the First Time Since 2007. Realized Capital Losses Were the Primary Cause

of 2008/2009’s Large Drop in Profits and ROE

($ Billions)$11.2B positive swing

52

53

2011: Nowhere to Run, Nowhere to Hide

Most of the Country East of the Rockies Suffered Severe Weather in 2011, Impacting

Most Insurers

53

Number of Federal Disaster Declarations, 1953-2012*

13 1

7 18

16

16

7 71

21

22

22

02

52

51

11

11

92

91

71

74

84

64

63

83

02

2 25

42

23

15

24

21

34

27 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

98

43

0

10

20

30

40

50

60

70

80

90

100

53

55

57

59

61

63

65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

09

11

*Through March 9, 2012. Sources: Federal Emergency Management Administration at http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

There have been 2,057* federal disaster declarations since 1953.Note that 2005 was a relatively low year for number of disaster

declarations in the 1996-2010 period,but that year included Hurricanes Katrina, Rita, and Wilma.

The number of federal disaster declarations set

a new record in 2011.

From 1953-71, the average number of declarations

per year was 16.5.

The average number from

1996-2010 was 58.4.

The average number from

1972-1995 was 31.7.

55

15 Costliest 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.

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

$35.0

$72.3

$11.3$10.0$9.3$9.0$8.0$8.0

$0

$10

$20

$30

$40

$50

$60

$70

$80

ChileQuake(2010)

Hugo (1989)

TyphoonMirielle(1991)

Charley(2004)

NewZealandQuake(2011)

Rita (2005)

Wilma(2005)

Ivan (2004)

SpringTornadoes

(2011)

Ike (2008)

Northridge(1994)

WTCTerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

Taken as a single event, the Spring 2011 tornado season

would be the 7th costliest event in global insurance

history

3 of the 11 most expensive

catastrophes in world history occurred in the past 9 months

56

$8.3

$7.4

$2.6

$10.

1

$8.3

$4.6

$26.

5

$5.9 $1

2.9

$27.

5

$61.

9

$9.2

$6.7

$27.

1

$10.

6

$13.

6 $24.

0

$7.5

$2.7

$4.7

$22.

9

$5.5

$16.

9

$0

$10

$20

$30

$40

$50

$60

$70

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

US Insured Catastrophe Losses

*First three quarters of 2011 (est).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; Munich Re; Insurance Information Institute.

First half 2011 US CAT losses exceeded losses from all of 2010. Even modest fourth quarter losses will put 2011 among the worst ever for CATs

CAT Losses Surged on Near- Record Tornado

Activity

($ Billions)2000s: A Decade of Disaster

2001-2010: $202B (up 122%)

1991-2000: $91B

58

Federal Disaster Declarationsin New England States, 1953 – 2012*

86

3933

28 27

179

0

10

20

30

40

50

60

70

80

90

100

TX ME VT NH MA CT RI

Dis

aste

r Dec

lara

tions

*Through Feb. 26, 2012.

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

Over the past nearly 60 years, Texas has had the

highest number of Federal Disaster Declarations

U.S. Tornado Count, 2005-2011

60Source: http://www.spc.noaa.gov/wcm/

There were 1,893 tornadoes in the US in 2011 far above

average, but well below 2008’srecord

Deadly and costly April/ May spike

Location of Tornadoes in the US, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 61

1,894 tornadoes killed 552 people in 2011, including

at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in

Joplin on May 22

Location of Large Hail Reports in the US, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 62

There were 9,417 “Large Hail”

reports in 2011, causing extensive damage to homes,

businesses and vehicles

Location of Wind Damage Reports in the US, 2011

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# 63

There were 18,685 “Wind Damage” reports through Dec. 27, causing

extensive damage to homes and,

businesses

Severe Weather Reports, 2011

64Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

There were 29,996 severe

weather reports in 2011;

including 1,894 tornadoes;

9,417 “Large Hail” reports

and 18,685 high wind events

65

Economics 2012:

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

Potentially Enormous Benefits for P/C Insurers

65

66

Economic Outlook for 2012 Economic Growth Will Accelerate Modestly in 2012/13, Beating Expectations

No Double Dip Recession Economy remains more resilient than most pundits presume

Consumer Confidence Will Continue to Improve Consumer Spending/Investment Will Continue to Expand Consumer and Business Lending Continue to Expand Housing Market Remains Weak, but Some Improvement Expected in 2012 Inflation Remains Tame

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

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

than in 2011 Interest Rates Remain Low by Historical Standards; Edge Up by Year’s End Political Environment Is More Hospitable to Business Interests

67

1.P/C Insurance Exposures Grow Robustly Personal and commercial exposure growth is certain

in 2012; Strongest since 2004 But restoration of destroyed exposure will take until

mid-decade

2.P/C Industry Growth in 2012 Will Be Strongest Since 2004 Growth likely to exceed A.M. Best projection of +3.8%

for 2012 No traditional “hard market” emerges in 2012

3.Underwriting Fundamentals Deteriorate Modestly Some pressure from claim frequency, in some

severity in key lines

7 Insurance P/C Industry Predictionsfor 2012

68

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

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

NPW growth due to rates)

6. Investment Environment Is/Remains Much More Favorable Return of realized capital gains as a profit driver

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

7 Insurance P/C Industry Predictionsfor 2012

69

10 Greatest Potential Threatsto the Global Economy as of March 2012

1. Conflict in the Middle East, Disrupting Oil Markets A conflict between Iran and Israel viewed by some as imminent $200/bbl oil is possible; Severe supply disruptions Resultserious damage to the global economy, killing fragile

recovery

2. Rising Oil Prices Even in the absence of conflict, oil prices slowing growth Sustained $10/bbl increase -0.2% on global GDP in Year 1; -0.5%

Year 2

3. Sovereign Debt Concerns in Europe (was #1 threat in 2011) Contagion spreads beyond GreeceItaly, Spain, Portugal, etc. Greek/EU political/economic solution fails resulting in disorderly

default

4. “Hard Landing” of Chinese Economy A sharp decline in China’s GDP would damage global economies

70

10 Greatest Potential Threatsto the Global Economy as of March 2012

5. Mega-Catastrophe Trends Continue at Record Pace Catastrophes trimmed 0.5% off global GDP in 2011 Massive disruptions to fragile global supply chains

6. Sudden Weakening of US Economy

7. Intensification of Geopolitical Instability (esp. in Middle East)

8. Disintegration of Eurozone (Political Failure)

9. Commodity Price Inflation (apart from oil)

10.Large-Scale Cyber Attack/Terrorism Attack (including cyberterror)

www.iii.org

Thank you for your timeand your attention!

Insurance Information Institute Online: