After the Crisis: The Future of the

P/C Insurance IndustryCasualty Actuaries of Greater New York

New York, NYDecember 7, 2010

Download 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 bobh@iii.org www.iii.org

2

Presentation Outline

Reasons for Optimism, Causes for Concern

Industry Financial Overview for 2010 and Outlook for 2011 & Beyond Profitability Premium Growth Capital & Capacity Financial Strength Underwriting Performance: Commercial & Personal Lines Financial/Investment Review & Outlook Catastrophe Loss Trends

P/C Growth Overview & Analysis: Price and Exposure Trends Economic Crisis and Exposure(Insurance Demand): Personal & Commercial Lines Pricing: Personal & Commercial Lines

Regulatory and Legislative Overview Financial Services Reform

Impacts of 2011 on P-C Insurance Industry

Tort System Concerns

Leading Challenges Facing the P/C Insurance Industry: 2011-2015

Q&A

3

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry Economic Recovery in US is Self-Sustaining: No Double Dip Recession

Pessimism “Bubble” Persists; Negative Economic News Amplified; Positive News is Discounted Financial market volatility will remain a reality

Era of Mass P/C Insurance Exposure Destruction Has Ended But restoration of destroyed exposure will take 3+ years in US

No Secondary Spike in Unemployment or Swoon in Payrolls/WC Exposure But job and wage growth remains sluggish

Exposure Growth Beginning in 2nd Half 2010, Accelerate in 2011

Increase in Demand for Commercial Insurance is in its Earliest Stages and Will Accelerate in 2011 Includes workers comp, commercial auto, marine, many liability coverages, D&O

Laggards: Property, inland marine, aviation

Personal Lines: Auto leads, homeowners lags

P/C Insurance Industry Will See Growth in 2011 for the First Time Since 2006

Investment Environment Is/Remains Much More Favorable Volatility, however, will persist and yields remain low

Both are critical issues in long-tailed commercial lines like WC, Med Mal, D&O

Source: Insurance Information Institute.

4

P/C Insurance Industry Capacity as of 6/30/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis As of 12/31/09 capacity was within 2% of pre-crisis high

Record Capacity, Depressed Exposures Mean that Generally Soft Market Conditions Will Persist through 2010 and Potentially into 2011

There is No Catalyst for a Robust Hard Market at the Current Time High Global First Half 2010 CAT Losses Insufficient to Trigger Hard Market

Localized insurance and reinsurance impacts are occurring, especially earthquake coverage in Latin/South America, Offshore Energy Markets, European Wind Cover

Inflation Outlook for US and Major European Economies and Japan is Tame Will temper claims inflation Deflation is highly unlikely

Financial Strength & Ratings of Global (Re)Insurance Industries Remained Strong Throughout the Financial Crisis in Sharp Contrast With Banks

Insurers Avoided the Most Draconian Outcomes in Financial Services Reform Legislation

Tort Environment in US is Beginning to Deteriorate; No Tort Reform in US Major Transformation of US Economy Underway with Major Opportunities for Insurers

through 2020 in Health, Tech, Natural Resources, Ag., Energy

Source: Insurance Information Institute.

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

5

11 Industries for the Next 10 Years: Insurance Solutions Needed

Shipping (Rail, Marine)

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Agriculture

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

6

I.

P/C Insurance Industry Financial Overview & Outlook for 2011

Recession, Recovery & Volatility

7

Profitability

Historically Volatile

P/C Net Income After Taxes1991–2010: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 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$1

6,5

31$2

8,3

11

-$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:H1

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:H1 ROAS = 6.3%

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.5% ROAS for 2010:H1 and 4.6% for 2009. 2009:H1 net income was $19.2 billion and $10.2 billion in 2008:H1 excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

P-C Industry 2010:H1 profits rose $10.6B from $6.0B in 2009:H1, due mainly to $2.2B in realized

capital gains vs. -$11.1B in previous realized capital losses

9

ROE: P/C vs. All Industries1987–2009*

* Excludes Mortgage & Financial Guarantee in 2008 and 2009.Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

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

US P/C Insurers All US Industries

P/C Profitability IsCyclical and Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

A 100 Combined Ratio Isn’t What ItOnce Was: 90-95 Is Where It’s At Now

Combined Ratio / ROE

* 2009 and 2010:Q1 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.5 100.1101.0

7.5%7.3%

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: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 a 7% ROE in 2009,10% in 2005 and 16% in 1979

11

Return of Net Worth: 10-Year Average, 1999-2008*: All Lines

20.1

15.6

14.2

13.2

12.9

12.4

11.8

11.4

11.2

11.1

11.1

10.9

10.8

10.8

10.7

10.6

10.4

10.2

9.9

9.8

9.7

9.4

8.9

8.6

8.5

0

5

10

15

20

25

HI

DC

ME

AK

WY

UT RI

VT IA CT ID NC

MA

NM NH VA

CO

WA

SC

SD

KS

OR

MD NJ

NE

Pec

ent c

hang

e (%

)

*Latest available.

Source: 2009 NAIC Report on Profitability.

Top 25 States

Hawaii had the highest RNW in the US form 1999-2008

12

8.5

8.4

7.9

7.9

7.7

7.4

6.9

6.7

6.7

6.6

6.5

6.4

6.3

6.3

6.3

6.3

6.2

5.6

5.3

4.4

4.1

3.6

3.5

3.2

-13.8

-10

.2

-15

-10

-5

0

5

10

OH

CA IN WI

AZ

MO

MT IL

WV

GA

MN MI

AR

FL

PA

TN

KY

OK

NV

NY

DE

TX AL

ND

MS LA

Pe

ce

nt

ch

an

ge

(%

)

Sources: 2009 NAIC Report on Profitability.

Bottom 25 States

Return of Net Worth: 10-Year Average, 1999-2008: All Lines

Mississippi and Louisiana were the least profitable states

from 1999-2008 due to Hurricanes Katrina and Rita

Financial Strength & Ratings

13

Industry Has Weathered the Storms Well

P/C Insurer Impairments, 1969–20098

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

7 65

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

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

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

5 of the 11 are Florida companies (1 of these

5 is a title insurer)

15

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009

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

9*

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

2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007/08

16

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

38.1%

14.3%8.1%

7.6%

7.9%

7.0%

9.1%

4.2%

3.7%

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.

Investment Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems

Misc.

Sig. Change in Business

Capital/PolicyholderSurplus (US)

17

Shrinkage, but Not Enoughto Trigger Hard Market

19

Policyholder Surplus, 2006:Q4–2010: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

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

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

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2009:Q1 Trough

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.8B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%)10:Q2: -$10.2B (-1.9%)

Surplus set a new record in 2010:Q1*

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

22

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute

3.3%

9.6%

6.9%

10.9%

6.2%

13.8%

16.2%

0%

3%

6%

9%

12%

15%

18%

6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Overthe Past 20+ Years

(Percent)

23

* 2010 NWP and Surplus figures are % changes as of H1:10 vs H1:09. Sources: A.M. Best, ISO, Insurance Information Institute

Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

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*

NWP % change Surplus % change

(Percent)

Sharp Decline in Capacity is a Necessary butNot Sufficient Condition for a True Hard Market

Surplus growth is now positive but premiums

continue to fall, a departure from the historical pattern

Merger & Acquisition

24

Barriers to Consolidation Will Diminish in 2010

25

U.S. P/C Insurance-RelatedM&A Activity, 1988–2009

$2$5

$19

$1 $0

$20

$0

$9

$35

$14$16

$4

$56

$31

$8$12

$2$3 $3 $5$6

$40

$0

$10

$20

$30

$40

$50

$60

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Tra

ns

ac

tio

n V

alu

e (

$ B

illio

n)

0

20

40

60

80

100

120

140

Nu

mb

er o

f Tra

ns

ac

tion

s

Transaction Values

Number of Transactions

Note: U.S. Company was the acquirer and/or target.

Source: Conning Research & Consulting.

2010: No Mega Deals So Far, Despite Record Capital, Slow Growth and Improved

Financial Market Conditions

$ Value of Deals Down 78% in 2009, Volume Up 7%

Investment Performance

26

Investments Are a PrincipleSource of Declining Profitability

Property/Casualty Insurance Industry Investment Gain: 1994–2010: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

$39.0

$25.8

$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:H1In 2008, Investment Gains Fell by 50% Due to Lower Yields and

Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income

Investment Gains Are Recovering So Far in 20101 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) 2009:H1 gain was $12.5B

Investment gains in 2010 are on track to be their best since 2007

28

Treasury Yield Curves: Pre-Crisis (July 2007) vs. October 2010

0.14% 0.13% 0.18% 0.23% 0.38%

1.85%

2.54%

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

1.18%

0.57%

3.87%3.52%

0%

1%

2%

3%

4%

5%

6%

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

October 2010 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve is near its most depressed level in at least 45 years. Investment

income is falling as a result.

The Fed’s Announced Intention to Pursue Additional Quantitative Easing Could Further Depress Rates in the 7 to 10-Year Maturity Range

Sources: Board of Governors of the United States Federal Reserve Bank; Insurance Information Institute.

QE2 Target

29

-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

War

rant

y

Surplu

s Line

s

Med

Mal

WC

Reinsu

ranc

e**

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*

30

Underwriting Trends – Financial Crisis Does Not

Directly Impact Underwriting Performance: Cycle, Catastrophes

Were 2008’s Drivers

31

P/C Insurance Industry Combined Ratio, 2001–2010:H1*

* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:H1=101.7 Sources: A.M. Best, ISO.

95.7

99.3 100.1101.0

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:H1

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

Lower CAT

Losses, More

Reserve Releases

Underwriting Gain (Loss)1975–2010:H1*

* Includes mortgage and financial guarantee insurers.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 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

The industry recorded a $5.1B underwriting

loss in 2010:H1 compared to $2.1B in

2009:H1

Cumulative underwriting deficit from 1975 through

2009 is $445B

($ Billions)

33

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

11

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2011E

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

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

Prior year reserve releases totaled $8.8 billion in the

first half of 2010, up from $7.1 billion in

the first half of 2009

34

Fed Efforts to Stimulate Inflation Will Ultimately Pressure Claim

Cost Severities

Inflation Trends:

Benign Inflation Tempers Claim Severity

35

Annual Inflation Rates(CPI-U, %), 1990–2016F

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 1.52.0 2.2 2.2 2.2 2.2

2.92.4

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 10F 11F 12F 13F 14F 15F 16F

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

There is So Much Slack in the US Economy Inflation Should Not Be a Concern Through 2010-12 Despite Fed’s Quantitative Easing Efforts.

Deficits and Monetary Policy 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 have reduced inflationary pressures

P/C Insurers Experience Inflation More Intensely than 2009 CPI Suggests

Source: CPI is Blue Chip Economic Indicator 2009 estimate, 12/09; Legal services, medical care and motor vehicle body work are avg. monthly year-over-year change from BLS; BI and no-fault figures from ISO Fast Track data for 4 quarters ending 09:Q3. Tort costs is 2009 Towers-Perrin estimate. WC figure is I.I.I. estimate based on historical NCCI data.

-0.4%

2.7% 3.0% 3.1%3.8%

4.3%

5.5%6.2%

-2%

0%

2%

4%

6%

8%

OverallCPI

LegalServices

US TortCosts

MedicalCare

MotorVehicleBodyWork

BodilyInjury

Severity

WC MedSeverity

No-FaultClaim

Severity

(Percent)

Healthcare and Legal/Tort Costs Are a Major P/C Insurance Cost Driver. These Are Expected to Increase Above the Overall Inflation Rate (CPI) Indefinitely

36

37

Performance by Segment:Commercial/Personal Lines

38

Calendar Year Combined Ratios by Segment: 2008-2012F

102.4

98.9

101.5

103.5

101.0

103.7102.0

104.2103.8104.5

90

92

94

96

98

100

102

104

106

Personal Lines Commercial Lines

2008 2009 2010P 2011F 2012F

Overall deterioration in 2010 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting

performance related to the prolonged commercial soft market

Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate

Sources: A.M. Best (historical); Insurance Information Institute forecasts for 2010 – 2012.

39

Net Written Premium Growth by Segment: 2008-2012F

-0.1%

-9.4%

2.9%

-2.5%

3.4%

1.0%

3.9%2.5%

-4.0%

-0.7%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Personal Lines Commercial Lines

2008 2009 2010P 2011F 2012F

Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession

weigh on commercial lines.

Personal lines will show growth in 2010 while commercial lines is expected to continue to shrink

Sources: A.M. Best (historical); Insurance Information Institute forecasts (2010 - 2012).

Workers Compensation Combined Ratio: 1994–2012F

10

2.0

97

.0 10

0.0

10

1.0

11

0.9

11

0.0

10

7.0

10

2.7

98

.4

10

3.5

10

4.3 1

09

.8 11

6.0

11

7.0

11

7.0121.7

10

7.0

11

5.3

11

8.2

80

85

90

95

100

105

110

115

120

125

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

Workers Comp Underwriting Results Are Deteriorating Markedly

Sources: A.M. Best (history); Conning (forecasts); Insurance Information Institute.

Workers Compensation Premium Continues Its Sharp DeclineNet Written Premium

$ Billions

Calendar Yearp Preliminary

Source: 1990–2008 Private Carriers, Best's Aggregates & Averages; 2009p, NCCI1996–2009p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

44

Catastrophic Loss –Catastrophe Losses Trends Are

Trending Adversely

45

$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

$7

.9

$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*20??

US Insured Catastrophe Losses

*Through June 30, 2010.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.

2010 CAT Losses Are Running Below 2009, So Far Figures Do Not Include an Estimate of Deepwater Horizon Loss

$100 Billion CAT Year is Coming Eventually

First Half 2010 CAT

Losses Were Down 19% or $1.4B from

first half 2009

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

46

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2009

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

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

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

Combined Ratio Points

50

100

150

200

250

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

First Half 201095 Events

Number of events in first half of 2010 is close to the annual totals from five of past ten years.

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 – 2010Number of Events (Annual Totals 1980 – 2009 vs. First Half 2010)

Source: MR NatCatSERVICE 47© 2010 Munich Re

50

Top 12 Most Costly Disastersin US History

(Insured Losses, 2009, $ Billions)

Sources: PCS; Insurance Information Institute inflation adjustments.

$11.3 $12.5

$18.2$22.8 $23.8

$45.3

$8.5$8.1$7.3$6.2$5.2$4.2

$0$5

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

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;

8 of the Top 12 Disasters Affected FL

Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US

and World History

II. Exposure Trends and Growth:

Overview & Analysis

52

Soft Market and Reduced Demand Due to Recession Have Challenged Growth for Years

Winds of Change for 2011 and Beyond?

53

-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

10F

Soft Market Appears to Persist in 2010 but May Be Easing: Relief in 2011?

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

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

NWP was flat with 0.0% growth in 10:H1 vs. -4.4% in 09:H1

54

Direct Premiums Written: All LinesPercent change by State, 2004-2009

42

.9

23

.8

22

.0

18

.8

17

.2

15

.4

14

.8

14

.2

14

.1

14

.0

13

.5

13

.0

13

.0

12

.9

12

.8

12

.3

12

.2

11

.5

10

.7

7.9

5.8

5.5

5.1

5.0

4.6

0

5

10

15

20

25

30

35

40

45

ND LA

SD

WY

MT

UT

OK

DE IA

NM

MS

WV

SC

DC

TX

NE

KS

NC ID AL

FL

WA

GA

AR HI

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…

55

4.5

4.2

2.6

2.5

2.4

2.0

0.9

0.7

0.6

0.5

0.0

-0.1

-2.8

-3.1

-3.5

-3.7

-5.2

-8.2

-9.2

-14

.8

-15

.2

-0.5

-1.2

-1.6

-1.8

-2.4

-20

-15

-10

-5

0

5

AK

VA

TN

KY

MD

MO AZ

OR WI

NV

NY IN PA

MN

VT

CO

CT RI

NJ IL

ME

OH

NH

MA MI

CA

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Bottom 25 States

Direct Premiums Written: All LinesPercent change by State, 2004-2009

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

the past 5 years

56

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q3

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

Percentage Change (%)

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since KRW Effect

Market has Been Soft for 6+ years and Remains Soft as Capital is Restored and

Underwriting Losses Remain Modest

57

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2010:Q3

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

1999:Q4 = 100

Pricing today is where is was in

Q3:2000 (pre-9/11)

Downward pricing pressure is most pronounced for

larger risks

58

Change in Commercial Rate Renewals, by Line: 2010:Q3

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

Most Major Commercial Lines Renewed Down in Q3:2010 at a Pace Similar to that of a Year Earlier

Percentage Change (%)

-3.7%

-2.8% -2.7%

0.3%

-5.2% -5.6% -5.3%-4.7%

-4.4% -4.2%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%All C

omm

ercia

l

GL

Comm

l Pro

p

Comm

l Aut

o

Umbr

ella

Const

ructi

on

D&OBus

. Int

erru

ptio

n

EPLSur

ety

60

Monthly Change* in Auto Insurance Prices, 1991–2010*

*Percentage change from same month in prior year; through September 2010; 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

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

61

Average Expenditures on Auto Insurance

$651$668

$691$705

$726

$786

$830$842

$831$816

$795$816

$844

$878

$690$685$703

$600

$650

$700

$750

$800

$850

$900

$950

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

Countrywide Auto Insurance Expenditures Increased2.6% in 2008 and 3.5% Pace in 2009 (est.) and 4% in 2010 (est.)

* Insurance Information Institute Estimates/ForecastsSource: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

64

Average Premium forHome Insurance Policies**

* Insurance Information Institute Estimates/Forecasts **Excludes state-run insurers.Source: NAIC, Insurance Information Institute estimates 2008-2010 based on CPI data.

$508$536

$593

$668

$822 $835$854

$879

$804

$764

$729

$500

$550

$600

$650

$700

$750

$800

$850

$900

$950

00 01 02 03 04 05 06 07 08* 09* 10*

67

Average Commercial Rate Change,All Lines, (1Q:2004–3Q:2010)

-3.2

%

-5.9

%

-7.0

%

-9.4

%

-9.7

% -8.2

%

-4.6

%

-2.7

%

-3.0

%

-5.3

%

-9.6

%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9% -1

1.0

%

-6.4

% -5.1

%

-4.9

%

-5.8

%

-5.6

%

-5.3

%

-6.4

% -5.2

%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

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

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

KRW Effect

Magnitude of Price Declines Shrank

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

Performance, Higher Cat Losses and

Costlier Reinsurance

(Percent)

Market Remains Soft as Capital Restored and

Underwriting Losses Remain Modest

69

(Millions of Units)

New Private Housing Starts, 1990-2016F

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

0

0.5

6

0.6

0 0.7

6

1.0

2 1.2

0 1.3

3 1.4

3

1.5

0

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 10F11F12F13F14F15F16F

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

Little Exposure Growth Likely for Homeowners Insurers Until 2012. 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

I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers

$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is

estimated at about $1.3 billion

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

71

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

5371

,549

70,6

4362

,304

52,3

7451

,959

53,5

4954

,027

44,3

6737

,884

35,4

7240

,099

38,5

4035

,037

34,3

1739

,201

19,6

95 28,3

2243

,546

60,8

3729

,059

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910

:H1

Business Bankruptcy Filings,1980-2010:H1

Source: American Bankruptcy Institute; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines. There Are Some Preliminary Indications that Business

Bankruptcies Are Beginning to Decline.

There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:H1

bankruptcies totaled 29,059, down 4% from H1:2009, but still very high by historical standards.

% Change Surrounding Recessions

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

72

Private Sector Business Starts,1993:Q2 – 2009:Q4*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

199

191 19

317

117

716

918

0

203

150

160

170

180

190

200

210

220

230

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

Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure

*Latest available as of September 12, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

(Thousands)

180,000 businesses started in 2009:Q4, the best quarter in 2009. 2009 was the slowest year for new

business starts since 1993.

66%

68%

70%

72%

74%

76%

78%

80%

82%

Ma

r 0

1

Ju

n 0

1

Se

p 0

1

De

c 0

1

Ma

r 0

2

Ju

n 0

2

Se

p 0

2

De

c 0

2

Ma

r 0

3

Ju

n 0

3

Se

p 0

3

De

c 0

3

Ma

r 0

4

Ju

n 0

4

Se

p 0

4

De

c 0

4

Ma

r 0

5

Ju

n 0

5

Se

p 0

5

De

c 0

5

Ma

r 0

6

Ju

n 0

6

Se

p 0

6

De

c 0

6

Ma

r 0

7

Ju

n 0

7

Se

p 0

7

De

c 0

7

Ma

r 0

8

Ju

n 0

8

Se

p 0

8

De

c 0

8

Ma

r 0

9

Ju

n 0

9

Se

p 0

9

De

c 0

9

Ma

r 1

0

Ju

n 1

0

Se

p 1

0

Recovery in Capacity Utilization is a Positive Sign for Insurance Exposure

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 74

Percent of Capacity Utilized (Manufacturing, Mining, Utilities)

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the demand for insurance

Manufacturing capacity stood at

74.7% in Sept. 2010, above the June 2009 low of 68.2% but well below the pre-crisis

peak of 80%+

Recession began December 2007

75

Distribution Trends

Distribution by Channel Type Continues to Evolve

76

All P/C Lines Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

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

Direct Independent Agents

Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C lines, but have gained or held

generally steady in recent years. Direct channels include exclusive agency companies, direct

marketers and direct sales (e.g., internet)

77

Personal Lines Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

80%

72 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

Direct Independent Agents

The greatest challenge to independent agents remains personal lines, especially

private passenger auto

78

Commercial P/C Distribution Channels, Direct vs. Independent Agents

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

72 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

Direct Independent Agents

Independent agents have seen only modest erosion in commercial lines

market share in recent decades

Crisis-Driven Exposure Drivers

79

Economic Obstaclesto Growth in P/C Insurance Will

Slowly Be Cleared Away

80

16.9

16.5

16.1

13.1

10.3

11.4

12.6

14.0 14

.7 15.1

15.0 15

.5

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 10F 11F 12F 13F 14F 15F 16F

(Millions of Units)

Auto/Light Truck Sales, 1999-2016F

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

Car/Light Truck Sales Will Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales in 2010

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2010-11 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

81

(Millions of Units)

New Private Housing Starts, 1990-2016F

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

0

0.5

6

0.6

0 0.7

6

1.0

2 1.2

0 1.3

3 1.4

3

1.5

0

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 10F11F12F13F14F15F16F

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

Little Exposure Growth Likely for Homeowners Insurers Until 2012. 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

I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers

$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is

estimated at about $1.3 billion

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

82

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

5371

,549

70,6

4362

,304

52,3

7451

,959

53,5

4954

,027

44,3

6737

,884

35,4

7240

,099

38,5

4035

,037

34,3

1739

,201

19,6

95 28,3

2243

,546

60,8

3729

,059

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910

:H1

Business Bankruptcy Filings,1980-2010:H1

Source: American Bankruptcy Institute; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines. There Are Some Preliminary Indications that Business

Bankruptcies Are Beginning to Decline.

There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:H1

bankruptcies totaled 29,059, down 4% from H1:2009, but still very high by historical standards.

% Change Surrounding Recessions

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

83

Private Sector Business Starts,1993:Q2 – 2009:Q4*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

199

191 19

317

117

716

918

0

203

150

160

170

180

190

200

210

220

230

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

Business Starts Are Down Nearly 20% in the Current Downturn, Holding Back Most Types of Commercial Insurance Exposure

*Latest available as of September 12, 2010, seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

(Thousands)

180,000 businesses started in 2009:Q4, the best quarter in 2009. 2009 was the slowest year for new

business starts since 1993.

84

The Economic Storm

What the Financial Crisis and Recession Mean for the Industry’s

Exposure Base, Growth and Profitability

85

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/10; 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

%

3.7

%

1.7

%

2.5

%

2.3

%

2.5

%

2.7

%

3.0

%

3.2

%

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

Demand Commercial 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%

Economic growth up sharply in late 2009 with rebuilding

of inventories and stimulus. More moderate growth

expected in 2010/11 but no “double dip”

86

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

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 10/10; Insurance Information Institute

4.3

%1

8.6

%2

0.3

%5

.8%

0.3

%-1

.6%

-1.0

%-1

.8%

-1.0

%3

.1%

1.1

%0

.8%

0.4

%0

.6%

-0.4

%-0

.3%

1.6

% 5.6

%1

3.7

%7

.7%

1.2

%-2

.9%

-0.5

%-3

.8%

-4.4

%-3

.3%

-1.6

%

5.2

%-0

.9%

-7.4

%-6

.5% -1

.5%

1.8

%

-10%

-5%

0%

5%

10%

15%

20%

25%

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

Re

al N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Re

al G

DP

Gro

wth

Real NWP Growth Real GDP

P/C Insurance Industry’s Growth is Influenced Modestlyby Growth in the Overall Economy

Real GDP Growth vs. Real P/C (%)

87

Regional Differences Will Significantly Impact P/C Markets

Recovery in Some Areas Will Begin Years Ahead of Others

and Speed of Recovery Will Differ by Orders of Magnitude

88

State Economic Growth Varied Tremendously in 2008

US Bureau of Economic Analysis

Highest Quintile

Fourth Quintile

Third Quintile

Second Quintile

Lowest Quintile

Far West0.6

Rocky Mountain2.2

Southwest1.7

Plains2.0 Great Lakes

-0.4

New England1.0

Mideast1.3

Southeast0.0

US = 0.7

WA2.0

OR1.6

CA0.4

NV-0.6

ID0.0

MT1.8

WY4.4

UT1.4 CO

2.9

AZ-0.6 NM

2.0

TX2.0

OK2.7

KS2.2

NE1.3

SD3.5

ND7.3 MN

2.0

IA2.1

MO1.3

WI0.7

IL0.3

MI-1.5

IN-0.6

OH-0.7

NY1.6

PA1.1

NJ0.6

MD1.3

DE-1.6

DC3.0VA

1.3

WV2.5

KY-0.1

NC0.1

SC0.6

TN0.5

AR0.7

LA0.3

MS1.7

AL0.7

GA-0.6

FL-1.6

AK-2.0

HI0.7

ME1.4

NH1.8

VT1.7 MA

1.9

RI-0.9CT

-0.4

Mountain, Plains States Growing the Fastest

Percent Change in Real GDP by State, 2007–2008

89

Fastest Growing States in 2008:Plains, Mountain States Lead

2.1% 2.0%

7.3%

4.4%

3.5%2.9% 2.7% 2.5%

0%

1%

2%

3%

4%

5%

6%

7%

8%

ND WY SD CO OK WV IA TX, MN,NM, WA

Source: US Bureau of Economic Analysis; Insurance Information Institute.

Real State GDP Growth (%)

Natural Resource and Agricultural States Have Done Better Than Most Others Recently, Helping Insurance Exposure in Those Areas

90

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

91

Unemployment and Underemployment Rates: Rocketed Up in 2008-09; Stabilized in 2010

2

4

6

8

10

12

14

16

18

Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Nov.10

Unemployment rate was 9.8% in

November

Unemployment peaked at 10.1%

in Oct. 2009, highest monthly rate since 1983.

Peak rate in the last 30 years: 10.8% in Nov -

Dec 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in Oct 2009; Stood at 17.0% in Sep.

2010

January 2000 through November 2010, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

92

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

%

9.7

%

9.6

%

9.6

%

9.4

%

9.3

%

9.1

%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

Rising unemployment eroded payrolls

and workers comp’s exposure base.

Unemployment likely peaked at 10% in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/10); Insurance Information Institute

2007:Q1 to 2011:Q4F*

Unemployment forecasts remain stubbornly high

through 2011

93

Unemployment Rates by State, October 2010:Highest 25 States*

9.5

9.49.8

9.6

9.7

9.7

9.2

9.1

9.1

8.89.

3

8.99.19.410

.511.4

9.9

9.9

9.9

10.010

.7

12.8

12.4

11.9

14.2

0

2

4

6

8

10

12

14

16

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

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for October 2010, seasonally adjusted.

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

In October, state and regional unemployment rates were little changed.

Some 29 states and DC reported unemployment rate decreases from a

year earlier, 16 states had increases and 5 had no change.

94

6.7

6.7

6.4

5.7

6.86.97.

47.

4

4.54.75.

4

7.17.3

3.8

6.7

8.1

8.1

7.67.8

7.8

7.98.18.

4

8.3

8.38.4

0

2

4

6

8

10

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

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, October 2010: Lowest 25 States*

*Provisional figures for October 2010, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In October, state and regional unemployment rates were little changed.

Some 29 states and DC reported unemployment rate decreases from a

year earlier, 16 states had increases and 5 had no change.

-72

-14

4-1

22

-16

0-1

37

-16

1-1

28

-17

5-3

21

-38

0-5

97

-68

1-7

79

-72

6-7

53

-52

8 -38

7-5

15 -3

46 -2

12

-22

5-2

24

64

-10

91

4 39

20

8 31

3 43

2-1

75 -6

6-1

-24

17

13

9

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-0

8A

ug

-08

Se

p-0

8O

ct-0

8N

ov-

08

De

c-0

8Ja

n-0

9F

eb

-09

Ma

r-0

9A

pr-

09

Ma

y-0

9Ju

n-0

9Ju

l-09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-1

0A

ug

-10

Se

p-1

0O

ct-1

0O

ct-1

0

Monthly Change Employment

January 2008 through November 2010* (Thousands)

Job Losses Since the Recession Began in Dec. 2007 Peaked at 8.4 Mill in Dec. 09; Stands at 7.5 Million Through October 2010;

15.1 Million People are Now Defined as Unemployed

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

The job gain and loss figures for much of 2010 were severely distorted by the hiring and

termination of temporary Census workers. So far in 2010, 874,000 nonfarm jobs have been created.

151,000 jobs were created in October and losses in

Sept. and Aug. were revised sharply downward

96

US Nonfarm Private Employment1

38

.01

38

.11

38

.01

37

.91

37

.81

37

.81

37

.71

37

.61

37

.61

37

.41

37

.01

36

.71

36

.21

35

.11

33

.51

32

.81

32

.11

31

.51

31

.21

30

.61

30

.31

30

.11

29

.91

29

.61

29

.71

29

.61

29

.61

29

.61

29

.81

30

.21

30

.61

30

.41

30

.41

30

.41

30

.31

30

.5

129130131132133134135136137138139

No

v 0

7D

ec

07

Jan

08

Fe

b 0

8M

ar

08

Ap

r 0

8M

ay

08

Jun

eJu

l 08

Au

g 0

8S

ep

08

Oct

08

No

v 0

8D

ec

08

Jan

09

Fe

b 0

9M

ar

09

Ap

r 0

9M

ay

09

Jun

09

Jul 0

9A

ug

09

Se

p 0

9O

ct 0

9N

ov

09

De

c 0

9Ja

n 1

0F

eb

10

Ma

r 1

0A

pr

10

Ma

y 1

0Ju

n 1

0Ju

l 10

Au

g 1

0S

ep

10

Oct

10

Monthly, Nov 2007 – October 2010 (Millions)

The US Economy Lost About 8.4 Million Jobs in the Two

Years from Dec. 07 – Dec. 09.

As employment expands, workers comp will be among the first lines to see exposure

gains

Employment Peak; Recession Starts

Seasonally adjusted. Source: US Bureau of Labor Statistics

14 39

20

8

31

3

43

2

-17

5

-66

-1

-24

17

2

39

16 6

2

15

8 24

1

51 61 1

17

14

3

11

2 16

0

50

(300)

(200)

(100)

0

100

200

300

400

500

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-1

0

Au

g-1

0

Se

p-1

0

Oct

-10

No

v-1

0

Total Employment Private Employment

Monthly Change in Employment: Total vs. Private Employment

January 2010 through November 2010* (Thousands)

The Private Sector Posted Job Gains Every Month in 2010—Totaling 1.232 Million through November. The Government

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

The job gain and loss figures for much of 2010 were severely distorted by the hiring and

termination of temporary Census workers. So far in 2010, 874,000 nonfarm jobs have been created.

159,000 private jobs were created in October while 8,000

government jobs were lost

Job Creation: Jan. – Oct. 2010

Total: 874,000 Private: 1,232,000

99

Insurance Industry Employment Trends

Soft Market, Difficult Economy, Outsourcing, Productivity

Enhancements and Consolidation Have Contributed

to Industry’s Job Losses

100

Overview of Insurance Sector Employment Changes*

*data are through September 2010 and are preliminary (i.e., subject to later revision); not seasonally adjusted

Insurance Subsector Aug 2010 Employment

Sept 2010 Employment

Change

P-C Direct 465,400 462,200 -3,200

Reinsurers 26,100 26,400 +300

Claims Adjusters 43,500 43,400 -100

Agents/Brokers 629,700 626,500 -3,200

Life Direct 343,300 342,800 -500

Health/Medical Direct 429,600 427,200 -2,400

Title & other Direct 66,600 66,200 -400

3d-Party Administration 125,600 124,900 -700

All other insurance-related activities

50,100 49,800 -300

Net Total 2,179,900 2,169,400 -10,500

102

U.S. Employment in the DirectP/C Insurance Industry: 1990–2010*

*As of September 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Thousands

460

480

500

520

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

As of September 2010, P/C insurance industry employment was down by 28,900 or 5.9% to 462,200 since the recession began in Dec. 2007 (compared to

overall US employment decline of 7.2%)

105

U.S. Employment in the Reinsurance Industry: 1990–2010*

Thousands

24

28

32

36

40

44

48

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of September 2010; Not seasonally adjusted; Does not including agents & brokersNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

As of September 2010, US employment in the reinsurance

industry was down by 500 or 1.9% to 26,400 since the recession

began in Dec. 2007 (compared to overall US employment decline of

7.2%)

106

U.S. Employment in Insurance Agencies & Brokerages: 1990–2010*

Thousands

500

550

600

650

700

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*As of September 2010; Not seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

As of September 2010, employment at insurance agencies and

brokerages was down by 53,100 or 7.8% to 626,500 since the recession

began in Dec. 2007 (compared to overall US employment decline of

7.2%)

107

U.S. Employment in Insurance Claims Adjusting: 1990–2010*

Thousands

40

45

50

55

60

Jan-

90

Sep

-90

May

-91

Jan-

92

Sep

-92

May

-93

Jan-

94

Sep

-94

May

-95

Jan-

96

Sep

-96

May

-97

Jan-

98

Sep

-98

May

-99

Jan-

00

Sep

-00

May

-01

Jan-

02

Sep

-02

May

-03

Jan-

04

Sep

-04

May

-05

Jan-

06

Sep

-06

May

-07

Jan-

08

Sep

-08

May

-09

Jan-

10

Sep

-10

*As of September 2010; Not seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

As of September 2010, claims adjusting employment was down by 8,600 or 16.3%

to 43,400 since the recession began in Dec. 2007 (compared to overall US

employment decline of 7.2%)

Katrina, Rita, Wilma

III.Regulation, Legislation and the 2010 Midterm Election Results:

Impacts on P/C Insurer Profitability & Performance

109

Significant Impacts Are Guaranteed

110

The 2010 Midterm Elections:What do the results mean for insurers?

Catastrophe Financing

Supporters of Homeowners Defense Act (e.g., Rep. Neil, D-FL) defeated (HR 2555); Act proposed a larger role for the federal govt. in financing natural catastrophe losses

Rep. Gene Taylor (D-MS) defeated: He supported the Multi-Peril Insurance Act (HR 1264) which would have added wind to the NFIP

Unclear if flood program once again winds up in limbo

Health Care Reform (Obamacare)

Promises to “repeal and replace” aren’t credible (Senate and White House still Democratically controlled); Object is to starve implementation via low/no funding

Obamacare and Boehnercare will do little to control the trajectory of costs

Impacts on benefits business

Republicans need plan to deal with entitlement (Medicare) to cut budget

Dodd-Frank

Likely few major and provisions impact insurers the most (e.g., creation of FIO) unlikely to be affected

Source: Insurance Information Institute research.

111

The 2010 Midterm Elections:What do the results mean for insurers?

Tort Reform

Tort was not a major issue in the 2010 campaign, but the new House can be expected to receptive to the idea of federal tort reform, unlike prior Congresses since 2006

Fewer new pieces of legislation likely to spawn tort actions (e.g., climate change)

State legislatures and governorships more receptive to tort reforms

Taxes/Fiscal Policy

Odds of an across-the-board continuation of Bush tax cuts more likely; Benefits small business and high net worth individuals and their insurers.

Immediate expensing of new investment in 2011?? Good for p/c exposures.

Regulatory/Business Policy

More pro-business stance

Should help stimulate commercial exposures (WC payrolls, property & liability)

Ohio monopolistic state fundMove to competitive structure?

T

Source: Insurance Information Institute research.

Financial Services Reform

112

Insurers Are Impacted, But Not Significantly

113

Financial Services Reform:What does it mean for insurers?

Systemic Risk and Resolution Authority

Creates the Financial Stability Oversight Council and the Office of Financial Research

Imposes heightened federal regulation on large bank holding companies and “systemically risky” nonbank financial companies, including insurers

Federal Insurance Office (FIO)

Establishes the FIO (while maintaining state regulation of insurance) within the Department of Treasury, headed by a Director appointed by the Secretary of Treasury

FIO will have authority to monitor the insurance industry, identify regulatory gaps that could contribute to systemic crisis

CONCERN: FIO morphs into quasi/shadow or actual regulator

Surplus Lines/Reinsurance

Title V of the Dodd-Frank bill includes, as a separate subtitle, the Nonadmitted and Reinsurance Reform Act (NRRA), which eliminates regulatory inefficiencies associated with surplus lines insurance and reinsurance

The Dodd Frank Wall Street Reform and Consumer Protection Act

Source: Insurance Information Institute (I.I.I.) updates and research; The Financial Services Roundtable; Adapted from summary by Dewey & LeBoeuf LLP

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 C

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 2010

A- A-

A-

B-

B-

B-

B-

B-

B-B-

B-B-

B-

B-

B-

B-

B- C-

C-

C-

C -

C-

D-D-

A

A

A

A

B+

B+

B+

B

B

B

B

B

B

C+

C+

C

D+

D+D+

D

NG

NG

D F

F

2010 Property and Casualty InsuranceReport Card

Not Graded: District of ColumbiaMississippiLouisiana

Shifting Legal Liability & Tort Environment

116

Is the Tort PendulumSwinging Against Insurers?

117

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 08E 10E

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)

* Excludes the tobacco settlement, medical malpracticeSources: Tillinghast-Towers Perrin, 2008 Update on US Tort Cost Trends, Appendix 1A; I.I.I. calculations/estimates for 2009 and 2010

2009–2010 Growth in Tort Costs as % of GDP is Due in

Part to Shrinking GDP

Business Leaders Ranking of Liability Systems in 2009*

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 2009 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2009

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.

119

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

New MexicoAppellate

Courts

Watch List

California Alabama Madison County, IL Jefferson County, MS Texas Gulf Coast Rio Grande Valley,

TX

Dishonorable Mention

AR Supreme Court MN Supreme Court ND Supreme Court PA Governor MA Supreme

Judicial Court Sacramento County

New JerseyAtlantic County (Atlantic City)

New York City

IV. Leading Challenges Facing the

P/C Insurance Industry 2011-2015

120

Surviving is HardThriving is Harder

121

Important Issues & Threats Facing Insurers: 2011–2015

Source: Insurance Information Institute

1. Establishing Adequate Reserves and Prices

Failure to do so is the leading cause of death of p/c insurers

2. Rationalize Pricing with the New Investment Reality

Insurers must generate risk-appropriate rates of return and achieve their cost of capital in order to maintain the ability to attract/retain capital

3. Structure Business to Seize Growth Opportunities in the Post-Crisis World

Need to have products, expertise for the growing industries of the 2010s

4. Fend Off Regulatory and Legislative Attacks

Federal fireworks may be over for now, but scores of anti-insurer bills/regulatory proposals will be considered each year across the US

5. Adapt to Evolving Distribution Model: Channel Fusion

Value added of the IA channel is affirmed and enhanced

Operational Challenges

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Thank you for your timeand your attention!

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