An Industry and Economy in Transition: Overview and Outlook for US and Ohio P/C Insurance Markets...

An Industry and Economy in Transition:

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

Ohio Insurance InstituteBoard of Directors Meeting

Columbus, OHMarch 7, 2012

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 [email protected] www.iii.org

2

Presentation Outline

U.S. Economic Overview and Outlook Economy as a Growth Engine for P/C Insurers Labor Market Review

Summary of P/C Financial Performance Focus on Ohio Markets

Catastrophe Loss Developments & Trends Global, US and Ohio

Will the Market Turn? Four Necessary Criteria: Underwriting Loss Trends Capital/Capacity Reinsurance Markets Pricing Discipline

Analysis by Key Line Other Contributing Factors to the Underwriting Cycle

Investment Environment Tort/Casualty Environment Inflation

Q&A

3

Economics 2012:

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

Potentially Enormous Benefits for P/C Insurers

3

4

Economic Outlook for 2012

Economic Growth Will Accelerate Modestly in 2012/13, 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 in Milder than Commonly Presumed Soft Landing in China Higher Oil Prices and Current Middle East Turmoil Pose Greater Risk to US Economy than in

2011 Interest Rates Remain Low by Historical Standards; Edge Up by Year’s End Stock and Bond Markets More Stable, Less Volatile Political Environment Is More Hospitable to Business Interests Obama Wins Re-Election Based on Improving Economy

5

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

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

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

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

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

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

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

Insurance Industry Predictions for 2012

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

6

Growth Will Expand Insurable Exposures and Help Absorb Excess Capital

6

7

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 2/12; Insurance Information Institute.

2.7

%0

.9%

3.2

%2

.3%

2.9

%-0

.7%

0.6

%-4

.0%

-6.8

% -4.9

%-0

.7%

1.6

%5

.0%

3.9

%3

.8%

2.5

%2

.3%

0.4

%1

.3%

1.8

% 3.0

%2

.1%

2.2

%2

.4%

2.6

%2

.5%

2.7

%2

.9%

3.0

%4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2

00

0

2

00

1

2

00

2

2

00

3

2

00

4

2

00

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00

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

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

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

slump, labor market contraction has been

severe but modest recovery is underway

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

2012 is expected to see a steady

acceleration in growth continuing into 2013

74

.4

73

.6

73

.6

72

.2

73

.6 76

67

.8

68

.9

68

.2

67

.7 71

.6 74

.5

74

.2 77

.5

67

.5 69

.8

74

.3

71

.5

63

.7

55

.7 59

.4 60

.9 64

.1

69

.9

75

.0

75

.3

40

45

50

55

60

65

70

75

80

Jan

-10

Fe

b-1

0

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Jun

-10

Jul-

10

Au

g-1

0

Se

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Oct

-10

No

v-1

0

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c-1

0

Jan

-11

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b-1

1

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1

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1

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Oct

-11

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v-1

1

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1

Jan

-12

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b-1

2

Consumer Sentiment Survey (1966 = 100)

January 2010 through February 2012

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

consumers, but improved substantially in late 2011 and early 2012

Source: University of Michigan; Insurance Information Institute

Optimism among consumers is recovering, in part due to an

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

8

9

16.9

16.5

16.1

13.2

10.4

11.6 12

.7

14.0 14

.6

14.7 15

.1

15.4

15.5

15.4

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12F 13F 14F 15F 16F 17F 18-22F

(Millions of Units)

Auto/Light Truck Sales, 1999-2022F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 2/12); Insurance Information Institute.

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

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2012-13 is

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

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

2012 and beyond

10

(Millions of Units)

New Private Housing Starts, 1990-2022F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

1 0.7

2 0.8

8

1.3

4

1.2

3

1.3

2

1.3

81

.42

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

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

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11 and 2/12); Insurance Information Institute.

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

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

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

is holding back payroll exposure growth

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

58

.3

57

.1

60

.4

59

.6

57

.8

55

.3

55

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55

.2

55

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58

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59

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40

45

50

55

60

65

Jan

-10

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1

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p-1

1

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

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b-1

2

ISM Manufacturing Index(Values > 50 Indicate Expansion)


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

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

Optimism among manufacturers was

increasing in late 2011 and into early 2012

11

http://www.ism.ws/ismreport/mfgrob.cfm

12

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Dec. 2011

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

Monthly shipments are nearly back to peak (in July 2008, 8 months into the recession). Trough in May 2009. Growth from trough to December 2011 was 29.0%. 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

29.0% to $459B from its May 2009 trough. Dec. figure is only 5.3% below its previous record high.

$ Millions

12

http://www.census.gov/manufacturing/m3/

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. 13

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 78.5% of industrial capacity in Jan. 2012, above the June 2009

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

December 2007-June 2009 Recession

March 2001 through January 2012

13

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

50

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54

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54

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53

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56

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57

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40

45

50

55

60

65

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1

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p-1

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Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Fe

b-1

2

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


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

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

Optimism among non-manufacturers was

stable in late 2011 and increased in early 2012

14

http://www.ism.ws/ismreport/nonmfgrob.cfm

15

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

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64,8

53 71,5

4970

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62,3

0452

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51,9

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54,0

2744

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37,8

8435

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35,0

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43,5

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56,2

8247

,806

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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

Business Bankruptcy Filings,1980-2011

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute

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

2011 bankruptcies totaled 47,806, down 15.1% from 56,282 in 2010—the second consecutive year of decline. Business bankruptcies more

than tripled during the financial crisis.

% Change Surrounding Recessions

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

15

http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633

http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633

16

Private Sector Business Starts, 1993:Q2 – 2011:Q2*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

119

219

219

320

1 204

202

210 21

220

921

6 220 22

322

022

021

022

121

220

421

820

920

720

719

919

1 193

172 17

616

918

417

5 179

188

200

183 18

7

203

150

160

170

180

190

200

210

220

230

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

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

Are Recovering Slowly* Data through June 30, 2011 are the latest available as of February 26, 2012; Seasonally adjusted; **Annualized based on 2011:H1 actual data.Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

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

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

business starts since 1993

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

16

http://www.bls.gov/news.release/cewbd.t08.htm

17

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, but

many insurers do not write in

these economic segments

Shipping (Rail, Marine, Trucking)

18

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

18

19

Unemployment and Underemployment Rates: Stubbornly High in 2011, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 8.3% in

January 2012

Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.

Peak rate in the last 30 years:

10.8% in November -

December 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 15.1%

in Jan. 2012

January 2000 through January 2012, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

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

19

186

7921

365

127

42 15-1

09-1

465

9723

-12

-85 -58

-161

-253 -230

-257

-347

-456

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67-8

06-7

07-7

44-6

49-3

34-4

52-2

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15 -186

-262

75-8

316

62

229

51 6111

714

311

2 193

128 16

711

925

726

126

410

810

2 175

5221

613

9 178 22

0 257

144

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan-

07F

eb-0

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Feb

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Mar

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Apr

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May

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Jun-

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l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

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Jan-

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Feb

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Mar

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Apr

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May

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Jun-

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l-10

Aug

-10

Sep

-10

Oct

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Nov

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Dec

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Jan-

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n-12

Monthly Change in Private Employment

January 2008 through January 2012* (Thousands)

Private Employers Added 3.771 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs

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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

257,000 private sector jobs were created in

January

20

http://www.bls.gov/ces/home.htm

21

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

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,75005

:Q1

05:Q

2

05:Q

3

05:Q

4

06:Q

1

06:Q

2

06:Q

3

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

Peak was 2008:Q1 at $6.60 trillion

Latest (2011:Q4) was $6.71 trillion,

a new peak

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

5.3% from prior peak

Growth rates in 2011Q2 over Q1: 0.6%

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

Pace of payroll growth is

accelerating

21

http://research.stlouisfed.org/fred2/series/WASCUR

http://research.stlouisfed.org/fred2/series/WASCUR

22

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

12.6

11.1

10.8

10.4

10.4

9.9

9.9

9.8

9.7

9.5

9.3

9.1

9.0

9.0

8.9

8.7

8.7

8.5

8.5

8.4

8.2

8.1

8.1

8.0

8.0

7.9

0

2

4

6

8

10

12

14

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

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for December 2011, seasonally adjusted.

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

In December, 37 states and the District of Columbia reported over-the-month unemployment rate decreases, 3 had

increases, and 10 had no change.

23

7.9

7.8

7.7

7.6

7.4

7.3

7.1

7.0

6.8

6.8

6.8

6.7

6.6

6.6

6.3

6.2

6.1

6.0

5.8

5.7

5.6

5.1

5.1

4.2

4.1

3.3

0

2

4

6

8

10

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

Une

mpl

oym

ent R

ate

(%)

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

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

In December, 37 states and the District of Columbia reported over-the-month

unemployment rate decreases, 3 had increases, and 10 had no change.

24

US Unemployment Rate

4.5

%

4.5

%

4.6

%

4.8

%

4.9

% 5.4

% 6.1

%

6.9

%

8.1

%

9.3

%

9.6

% 10

.0%

9.7

%

9.6

%

9.6

%

8.9

%

9.1

%

9.1

%

8.7

%

8.4

%

8.3

%

8.2

%

8.1

%

8.0

%

7.9

%

7.8

%

7.7

%

9.6

%4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

Rising unemployment eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10% in

late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (2/12 edition); Insurance Information Institute (forecasts)

2007:Q1 to 2013:Q4F*

Unemployment forecasts have been revised

downwards for 2012 and 2013. Optimistic scenarios

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

Jobless figures have been revised

downwards for 2012

0.02

30.

011

-0.0

74-0

.132

-0.2

93-0

.546

-0.7

76-1

.033

-1.3

80-1

.836

-2.3

83-3

.117

-3.7

84-4

.590

-5.2

97-6

.041

-6.6

90-7

.024

-7.4

76-7

.773

-7.9

88-8

.174

-8.4

36-8

.361

-8.4

44-8

.428

-8.3

66-8

.222

-7.9

93-7

.942

-7.8

81-7

.764

-7.6

21-7

.509

-7.3

16-7

.188

-7.0

21-6

.902 -6.3

84-6

.120

-6.0

12-5

.910

-5.7

35-5

.683

-5.4

67-5

.328

-5.1

50-4

.930

-4.6

73

-6.6

45

-10

-8

-6

-4

-2

0

2

Dec

-07

Jan-

08F

eb-0

8M

ar-0

8A

pr-0

8M

ay-

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09F

eb-0

9M

ar-0

9A

pr-0

9M

ay-

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1M

ar-1

1A

pr-1

1M

ay-

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Mill

ion

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

December 2007 through January 2012* (Millions)

Private Employers Added 3.771 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs

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

Cumulative job losses peaked at 8.444 million

in December 2009

Cumulative job losses as of Jan. 2012 totaled

4.673 million

25

http://www.bls.gov/ces/home.htm

33

P/C Insurance Industry Financial Overview

Profit Recovery Was Set Back in 2011 by High Catastrophe

Loss & Other Factors

33

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 34

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

35

-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%

36

40

Profitability and Growth in Ohio P/C Insurance Markets

Analysis by Line and Nearby State Comparisons

41

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

Sources: NAIC.

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

01 02 03 04 05 06 07 08 09 10

US All Lines OH All Lines

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

overall over the past decade

US: 7.1%

OH: 9.7%

(Percent)

42

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

Sources: NAIC.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

01 02 03 04 05 06 07 08 09 10

US PP Auto OH PP Auto

Average 2001-2010

US: 7.6%

OH: 11.6%

43

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

Sources: NAIC.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

01 02 03 04 05 06 07 08 09 10

US Comm Auto OH Comm Auto

(Percent)

Average 2001-2010

US: 9.2%

OH: 14.1%

44

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

Sources: NAIC.

-10%

-5%

0%

5%

10%

15%

20%

01 02 03 04 05 06 07 08 09 10

US Comm M-P OH Comm M-P

(Percent)

Average 2001-2010

US: 9.2%

OH: 11.2%

45

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

Sources: NAIC.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

01 02 03 04 05 06 07 08 09 10

US HO OH HO

(Percent)Average 2001-2010

US: 5.0%

OH: -3.8%

Homeowners insurance has become consistently and

significantly unprofitable in recent years. 2011

continued that trend.

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

5.7%

7.1%

7.5%

8.8%

9.7%

5.6%

6.6%

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

Ohio

Indiana

West Virginia

U.S.

Pennsylvania

Kentucky

Michigan

Source: NAIC, Insurance Information Institute

2001-2010

Ohio All Lines profitability is above the US and regional

average

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

5.4%

7.4%

7.6%

9.6%

11.6%

-1.2%

7.1%

-5% 0% 5% 10% 15%

Ohio

Indiana

U.S.

West Virginia

Pennsylvania

Kentucky

Michigan


2001-2010

Ohio PP Auto profitability is

above the US and regional average

48

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

RankMost

expensive statesAverage

expenditure RankLeast


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

2 New Jersey 1,101 2 South Dakota 521

3 Louisiana 1,099 3 Iowa 532

4 New York 1,057 4 Idaho 555

5 Delaware 1,021 5 Nebraska 559

6 Florida 1,006 6 Kansas 578

7 Rhode Island 969 7 Wisconsin 591

8 Connecticut 952 8 Maine 598

9 Nevada 944 9 North Carolina 610

10 Maryland 929 10 Ohio 616

(1) Based on average automobile insurance expenditures.

Source: © 2012 National Association of Insurance Commissioners.

Ohio ranked 10th least expensive in 2009, with an average expenditure for auto insurance of $616.

49

1.66

%

1.59

%

1.57

%

1.37

%

1.36

%

1.35

%

1.35

%

1.34

%

1.29

%

1.28

%

1.27

%

1.23

%

1.22

%

1.19

%

1.11

%

1.11

%

1.11

%

1.11

%

1.08

%

1.06

%

1.05

%

1.04

%

1.04

%

1.03

%

1.02

%

0.00%

0.50%

1.00%

1.50%

2.00%

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

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

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

Top 25 States(Percent)

50

1.0

2%

1.0

1%

0.9

8%

0.9

7%

0.9

7%

0.9

4%

0.9

2%

0.9

2%

0.9

2%

0.9

1%

0.9

1%

0.9

1%

0.9

0%

0.8

9%

0.8

6%

0.8

6%

0.8

5%

0.8

4%

0.8

3%

0.8

3%

0.8

1%

0.8

0%

0.7

8%

0.7

8%

0.7

8%

0.7

2%

0.6

5%

0.00%

0.50%

1.00%

1.50%

2.00%

WA

OR

MT

MO CA

CT HI

ID NC

MD IL IN CO

ME

OH

MA

KS

VT

WY

MN

NH

NE VA

SD WI

IA

ND

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

(Percent) Bottom 25 States

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

Auto insurance in Ohio is very affordable, consuming just 0.86% of median family

income—well below the 1.05% US average

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

6.8%

8.9%

9.2%

11.5%

14.1%

6.7%

8.7%

0% 5% 10% 15%

Ohio

Indiana

U.S.

Michigan

Pennsylvania

Kentucky

West Virginia


2001-2010

Ohio Commercial Auto profitability is above the US and regional average

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

6.0%

8.7%

9.4%

11.2%

13.7%

5.3%

8.3%

0% 5% 10% 15%

Michigan

Ohio

Pennsylvania

Kentucky

U.S.

Indiana

West Virginia


2001-2010

Ohio Commercial Multi-Peril

profitability is above the US average and the regional average

Homeowners: 10-Year Average RNW OH & Nearby States

-3.8%

4.8%

5.0%

6.4%

12.7%

-7.1%

-2.6%

-10% -5% 0% 5% 10% 15%

Pennsylvania

Michigan

U.S.

West Virginia

Indiana

Ohio

Kentucky


2001-2010

Ohio Homeowners profitability is below the US average and the regional average

54

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

RankMost


expenditure RankLeast


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

2 Florida (4) 1,460 2 Wisconsin 542

3 Louisiana 1,430 3 Oregon 544

4 Mississippi 1,185 3 Utah 544

5 Oklahoma 1,123 4 Washington 552

6 D.C. 1,069 5 Delaware 610

6 Rhode Island 1,069 6 Ohio 6137 Massachusetts 1,035 7 Arizona 642

8 New York 1,021 8 Iowa 645

9 Connecticut 1,016 8 South Dakota 645

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

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

comparable to other states.

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

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

Ohio ranked as the 6th least expensive state for homeowners insurance in 2009, with an average expenditure of $613.

55

2.35

%

2.28

%

2.16

%

2.16

%

1.78

%

1.72

%

1.57

%

1.56

%

1.45

%

1.42

%

1.28

%

1.28

%

1.27

%

1.24

%

1.23

%

1.21

%

1.19

%

1.17

%

1.16

%

1.13

%

1.13

%

1.12

%

1.10

%

1.09

%

1.09

%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

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

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

Top 25 States(Percent)

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

56

1.0

8%

1.0

5%

1.0

5%

1.0

5%

1.0

3%

1.0

3%

1.0

1%

1.0

0%

0.9

9%

0.9

7%

0.9

7%

0.9

7%

0.9

6%

0.9

3%

0.8

8%

0.8

7%

0.8

6%

0.8

6%

0.8

6%

0.8

6%

0.8

5%

0.8

0%

0.7

9%

0.7

7%

0.7

6%

0.7

1%

0.6

8%

0.00%

0.50%

1.00%

1.50%

2.00%

CO AK IN MI

HI

MA

NV

CT IL AZ

WY

ME

SD VT

PA IA DE

OH VA

NH NJ ID UT

MD

OR WI

WA

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

(Percent) Bottom 25 States

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

Homeowners insurance in Ohio is very affordable,

consuming just 0.86% of median family income—well below the 1.17% US average

57

All Lines DWP Growth: OH vs. U.S., 2001-2010

Source: SNL Financial.

12.1

% 14.5

%

9.9%

7.5%

2.2% 3.

3%

0.4%

-2.4

%

-3.0

%

0.3%

11.8

%

11.4

%

9.1%

2.8%

-1.3

%

-0.7

%

-1.8

%

0.1%

-1.5

%

-0.3

%

-15%

-10%

-5%

0%

5%

10%

15%

20%

01 02 03 04 05 06 07 08 09 10

US DWP: All Lines OH DWP: All Lines

(Percent)

Average 2001-2010

US: 4.5%

OH: 3.0%

58

Comm. Lines DWP Growth: OH vs. U.S., 2001-2010


15

.6%

19

.8%

11

.4%

4.7

%

3.0

%

5.3

%

0.3

%

-1.6

%

-7.1

% -2.2

%

16

.7%

18

.6%

12

.0%

2.4

%

-2.8

%

-0.2

%

-2.2

%

-0.2

%

-5.1

%

-3.5

%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

01 02 03 04 05 06 07 08 09 10

US DWP: Comm. Lines OH DWP: Comm. Lines

(Percent)

Average 2001-2010

US: 4.9%

OH: 3.6%

59

Personal Lines DWP Growth: OH vs. U.S., 2001-2010


8.3

% 10

.8%

9.4

%

5.3

%

2.4

%

2.3

%

1.2

%

0.1

%

1.1

% 2.6

%

8.1

%

7.5

%

7.9

%

3.7

%

0.1

%

-1.0

%

-1.5

%

-0.1

%

1.7

%

2.3

%

-10%

-5%

0%

5%

10%

15%

20%

01 02 03 04 05 06 07 08 09 10

US DWP: Personal Lines OH DWP: Personal Lines

(Percent)

Average 2001-2010

US: 4.3%

OH: 2.9%

60

Private Passenger Auto DWP Growth: OH vs. U.S., 2001-2010


8.3% 9.

8%

8.1%

3.5%

0.6%

0.5%

0.0%

0.0% 1.

5%

8.0%

6.2%

6.1%

1.5%

-1.3

%

-2.0

%

-2.6

%

-1.5

%

-0.2

%

1.0%

-0.3

%

-10%

-5%

0%

5%

10%

15%

20%

01 02 03 04 05 06 07 08 09 10

US DWP: PP Auto OH DWP: PP Auto

(Percent)

Average 2001-2010

US: 3.2%

OH: 1.5%

61

Homeowner’s MP DWP Growth: OH vs. U.S., 2001-2010


8.3

%

14

.4%

13

.5%

11

.0%

7.9

%

7.2

%

4.2

%

0.8

%

3.8

% 5.0

%

8.3

%

12

.3% 1

4.7

%

11

.2%

3.9

%

2.0

%

1.5

%

3.6

%

6.3

%

5.4

%

0%

5%

10%

15%

20%

01 02 03 04 05 06 07 08 09 10

US DWP: HO Lines OH DWP: HO Lines

(Percent)

Average 2001-2010

US: 7.6%

OH: 6.9%

Global Catastrophe Loss Developments and Trends

62

2011 Rewrote Catastrophe Loss and Insurance History

But Will Losses Turn the Market?

62

63

Global Catastrophe Loss Summary: 2011

2011 Was the Highest Loss Year on Record for Economic Losses Globally

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

$380 Billion in Economic Losses Globally (New Record)

New record, exceeding the previous record of $270B in 2005

$105 Billion in Insured Losses Globally

2011 losses were 2.5 times 2010 insured losses of $42B

Second only to 2005 on an inflation adjusted basis (new record on a unadjusted basis)

Over 5 times the 30-year average of $19B

$72.8 Billion in Economic Losses in the US

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

$35.9 Billion in Insured Losses in the US Arising from 171 CAT Events

Fifth highest year on record

Represents 51% increase over the $23.8 billion total in 2010

Source: Munich Re; Insurance Information Institute.

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Hydrological events(flood, mass movement)

Selection of significant loss events (see table)

Natural catastrophes

Earthquake, tsunami Japan, 11 March

EarthquakeNew Zealand, 22 Feb.

Cyclone Yasi Australia, 2–7 Feb.

Landslides, flash floodsBrazil, 12/16 Jan.

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

Severe storms, tornadoesUSA, 22–28 April

Severe storms, tornadoesUSA, 20–27 May

WildfiresUSA, April/Sept.

EarthquakeNew Zealand, 13 June

FloodsUSA, April–May

Climatological events(extreme temperature, drought, wildfire)

Number of Events: 820Number of Events: 820

DroughtUSA, Oct. 2010– ongoing

Hurricane IreneUSA, Caribbean22 Aug.–2 Sept.

WildfiresCanada, 14–22 May

DroughtSomaliaOct. 2010–Sept. 2011

FloodsPakistanAug.–Sept.

FloodsThailandAug.–Nov.

Earthquake Turkey23 Oct.

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

Floods, landslidesGuatemala, El Salvador11–19 Oct.

Tropical Storm WashiPhilippines, 16–18 Dec.

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

64Source: MR NatCatSERVICE

Natural Loss Events, 2011

World Map

70

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

(Insured Losses, 2011 Dollars, $ Billions)

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

$10.0$11.9 $13.0$13.1

$19.1$21.3

$24.0$25.0

$37.5

$47.6

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

$0$5

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

Hugo (1989)

WinterStormDaria(1991)

ChileQuake(2010)

Ivan (2004)

TyphoonMirielle(1991)

Charley(2004)

ThailandFloods(2011)

Wilma(2005)

NewZealandQuake(2011)

Ike (2008)

Northridge(1994)

SpringTornadoes/

Storms(2011)

WTC TerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

Taken as a single event, the Spring 2011 tornado and

thunderstorm season would likely become the 5th

costliest event in global insurance history

5 of the top 14 most expensive

catastrophes in world history have occurred within the past 2 years

73

U.S. Insured Catastrophe Loss Update

2011 Was One of the Most Expensive Years on Record

73

74

Top 14 Most Costly Disastersin U.S. History

(Insured Losses, 2011 Dollars, $ Billions)

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

$9.0$11.9 $13.1

$19.1$21.3

$24.0 $25.0

$47.6

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

$0$5

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

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

SpringTornadoes& Storms*

(2011)

9/11Attack(2001)

Andrew(1992)

Katrina(2005)

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

is the 4th costliest event in US insurance history

Hurricane Irene became the 11th most expense

hurricane in US history

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

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

Source: MR NatCatSERVICE 75

37

8

51

2

50

100

150

200

250

300

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

There were 117 natural disaster events in 2011

77

$1

2.3

$1

0.7

$3

.7 $1

4.0

$1

1.3

$6

.0

$3

3.9

$7

.4 $1

5.9 $

32

.9

$7

1.7

$1

0.3

$7

.3

$2

8.5

$1

1.2

$1

4.1

$3

2.6

$1

00

.0

$1

3.7

$4

.7

$7

.8

$3

6.9

$8

.6

$2

5.8

$0

$20

$40

$60

$80

$100

$120

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

US Insured Catastrophe Losses

*PCS estimate through Sept. 30, 2011.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

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

$100 Billion CAT Year is Coming Eventually

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2011 Dollars)

77

$500

$530

$830

$975

$980

$1,000

$1,200

$1,400

$1,510

$2,000

$5,000

$6,900

$7,300

$840

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

Flooding, April*

Wildfire, Sep. 4-19

Thunderstorms, Apr. 19-20

Thunderstorms, Aug. 18-19

Winter Storm, Jan. 31-Feb. 3

Thunderstorms, Jul. 10-14

Texas Drought, 2011*

Thunderstorms, Jun. 16-22




Hurricane Irene, Aug. 26-28**

Thunderstorms, May 20-27


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

2011’s Most Expensive Catastrophes, Insured Losses

Includes $1.65B in AL, mostly in the Tuscaloosa

and Birmingham

areas

Includes approximately $2B in losses

for May 22 Joplin tornado

79

80

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

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

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

4.4

9.0

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

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

Avg. CAT Loss Component of the Combined Ratio

by Decade

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

Combined Ratio Points

U.S. Thunderstorm Loss Trends, 1980 – 2011

81Source: Property Claims Service, MR NatCatSERVICE

Average thunderstorm

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

Hurricanes get all the headlines, but thunderstorms are consistent

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

years on record.

Thunderstorm losses in 2011 totaled a record

$25.8 billion

Source: Property Claims Service, MR NatCatSERVICE

U.S. Winter Storm Loss Trends, 1980 – 2011

82

Insured winter storm losses in 2011 totaled $2.0 billion. Average winter storm losses have nearly doubled

since the early 1980s

Slide 82

Source: National Forest Service, MR NatCatSERVICE

U.S. Acreage Burned by Wildfires, 1980 – 2011

83

8.3 millions acres were burned by wildfires in 2011, one of the worst years on record, causing

$855 in insured losses

Slide 83

85

U.S. Insured Catastrophe Losses by Cause of Loss, 2011 ($ Millions)

2.8%

1.5%5.6%

72.1%

15.4%

.Source: ISO’s Property Claim Services Unit, Munich Re; Insurance Information Institute.

Hurricanes & Tropical Storms, $5,510

Wildfires, $855

Thunderstorms (Incl. Tornadoes , $25,813

Winter Storms, $2,017

Geological Events, $50, (0.1%)Flood , $535, (1.5%) Other, $1,000

2011’s insured loss distribution was

unusual with tornado and thunderstorm accounting for the

vast majority of loss

Thunderstorm/ Tornado losses were 2.5 times above the 30-year average

87

2011: Nowhere to Run, Nowhere to Hide

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

Most Insurers

87

Number of Federal Disaster Declarations, 1953-2012*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

96

43

0

20

40

60

80

100

120

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

*Through March 5, 2012.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011

The number of federal disaster declarations set a

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

declarations.

There have been 2,051 federal disaster

declarations since 1953. The average

number of declarations per year is 34 from

1953-2010, though that few haven’t been

recorded since 1995.

6 federal disasters were declared

through Mar. 5, 2012

88

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

89

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

86

78

70

65

63

58

56

55

53

53

51

50

50

48

48

47

47

47

46

45

45

45

42

40

39

0

10

20

30

40

50

60

70

80

90

100

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

Dis

as

ter

De

cla

rati

on

s

*Through Mar. 5, 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

45 federal disasters were declared in OH

over the past 60 years—about one

every 1.3 years


90

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

39

39

37

36

35

33

33

28

28

27

26

25

25

24

24

23

22

20

17

17

16

15

14

11

10

9 9

0

10

20

30

40

50

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

Dis

as

ter

De

cla

rati

on

s

*Through Mar. 5, 2012. Includes Puerto Rico and the District of Columbia.

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

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

number of Federal Disaster Declarations


92

1,1

33

1,1

32 1

,29

7

1,1

73

1,0

82 1,2

34

1,1

73

1,1

48

1,4

24

1,3

45

1,0

71 1,2

16

94

1

1,3

76

1,2

64

1,1

03

1,0

98

1,6

92

1,1

46 1,2

82

27

4

1,819

1,7

09

550

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011P12*

Nu

mb

er

of

To

rna

do

es

0

100

200

300

400

500

600

Nu

mb

er o

f De

ath

s

Number of Tornadoes

Number of Deaths

*Through March 6, 2012.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service at http://www.spc.noaa.gov/climo/online/monthly/newm.html

Number of Tornadoes and Related Deaths, 1990 – 2012*

Tornadoes claimed 550 lives in 2011, the most since 1925

There were 1,709 tornadoes recorded

in the US in 2011

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

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

Insurers Making a Difference in Impacted Communities

Source: Insurance Information Institute 94

Destroyed home in Tuscaloosa. Insurers will pay some 165,000

claims totaling $2 billion in the Tuscaloosa/

Birmingham areas alone.

Presentation of a check to Tuscaloosa Mayor Walt Maddox to the Tuscaloosa Storm

Recovery Fund

Location of Tornadoes in the US, 2011

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

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

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

Location of Large Hail Reports in the US, 2011


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


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

extensive damage to homes and,

businesses


Severe Weather Reports, 2011

98Source: 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


100

Ohio’s Catastrophe Loss History: 2011

Ohio May Not Be a Coastal State, but It is No Stranger to Catastrophe

100

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


OHIO

Total Reports = 1,050

Tornadoes = 34 (Red)

Hail Reports = 322 (Green)

Wind Reports = 694 (Blue)

There were 1,050 severe weather

reports in OH in 2011


Severe Weather Reports in OH,January 1—March 6, 2012


OHIO

Total Reports =32

Tornadoes = 8 (Red)

Hail Reports = 5 (Green)

Wind Reports = 19 (Blue)

There have been 32 severe weather

reports in OH so far in 2012




The BIG Question:When Will the Market Turn?

103

Are Catastrophes and Other Factors Pressuring Insurance Markets?

103

104

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

Criteria Status Comments

Sustained Period of

Large Underwriting

LossesEarly Stage,

Inevitable

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

Material Decline in Surplus/ Capacity

Entered 2011 At Record

High; Since Fallen

•Surplus hit a record $565B as of 3/31/11•Fell by 4.6% through 9/30/11 (latest available)•Little excess capacity remains in reinsurance markets•Weak growth in demand for insurance is insufficient to absorb much excess capacity

Tight Reinsurance

MarketSomewhat in

Place

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

Renewed Underwriting

& Pricing Discipline

Some Firming esp. in

Property, WC

•Commercial lines pricing trends have turned from negative to flat or up in some lines (property, WC); Casualty is flat.•Competition remains intense as many seek to maintain market share

Sources: Barclays Capital; Insurance Information Institute.

1. UNDERWRITING

106

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

106

107

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

Underwriting Gain (Loss)1975–2011*

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

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

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

Cumulative underwriting deficit from 1975 through

2010 is $455B

($ Billions)Underwriting losses in

2011 at $34.9

through Q3 will be

largest since 2001

108

110

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

Financial Strength & Underwriting

112

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

Underwriting, Reserving & Pricing

112

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 insurers in Missouri did encounter

problems in 2011 following the May

tornado in Joplin. They were absorbed by a

larger insurer and all claims were paid.

113

115

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

117

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

32

27

20

13

8

0

5

10

15

20

25

30

35

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

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

Number of Recessions Since 1860

Many US Insurers Are Close to a Century Old or Older

Number of Years in Operation

Insurers are true survivors—not just of natural catastrophes but also economic ones

117

118

Performance by Segment:Personal Lines

118

Homeowners Insurance Combined Ratio: 1990–2012F

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.2

94

.4 10

0.3

88

.9 95

.6

11

6.8

10

5.7

10

6.7

12

3.7

10

5.0

11

8.4

11

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E12F

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

Local Catastrophe Loss Activity

Sources: A.M. Best (1990-2012E); Insurance Information Institute. 120

Private Passenger Auto Combined Ratio: 1993–2012P

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.2

10

1.3

10

1.0

10

0.8

10

0.3

99

.5 10

1.1

10

3.5

80

85

90

95

100

105

110

115

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

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

Sources: A.M. Best (1990-2012F); Insurance Information Institute. 121

129

Performance by Segment:Commercial Lines

129

109.4110.2

118.8

109.5

112.5

110.2

107.6

104.1

109.7 110.2

102.5

105.4

91.2

94.8

101.299.5

101.0

107.5

102.0102.0

111.1112.3

122.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

P

12

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

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

Commercial Lines Combined Ratio, 1990-2012F*

Commercial lines underwriting

performance in 2011 was the worst since 2002

131

2. SURPLUS/CAPITAL/CAPACITY

148

Have Large Global Losses Reduced Capacity in the Industry, Setting

the Stage for a Market Turn?

148

150

Policyholder Surplus, 2006:Q4–2011:Q3

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$556.9 $559.1

$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:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2011:Q1 Peak

11: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.

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

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

paying status in its history.

A.M. Best is predicting year-end 2011 surplus was down just 1.7%

and that surplus will increase sharply by 8.4% in 2012

150

152

$1

2,1

30

.5

$3

9,5

07

.0

$1

8,1

42

.5

$1

0,6

46

.5

$9

84

.0

$4

18

.7

$2

2,0

29

.6

$5

86

.3

$1

0,3

89

.9

$4

,75

7.7

$1

7,3

46

.9

$1

6,1

14

.4

$5

,55

2.5

$6

,97

4.1

$8

,86

9.7

74

87

66

48 47

24

53

69

51

5656

5552

42

40

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

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

(Va

lue

of

De

als

$ M

ill)

0

10

20

30

40

50

60

70

80

90

100

Nu

mb

er o

f De

als

Value of Deals $ Mill)

Number of Deals

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

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

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

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

156

3. REINSURANCE MARKET CONDITIONS

Record Global Catastrophes Activity is

Pressuring Pricing

156

157

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

15%

-3%

-13%

-8%

-20% -18% -1

1%

3%

14%

-11%

-6%

-9%

-16%

10%

-12%

-3%

8%

14%

76%

68%

25%

20%

0%

115

141

230

200184

147

123

152

255

233

195

235

184

199

133111

105

237

100

154

173

145

190

-40%

-20%

0%

20%

40%

60%

80%

100%

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

Ye

ar

Ov

er

Ye

ar

% C

ha

ng

e in

RO

L

0

50

100

150

200

250

300

Cu

mu

lativ

e R

ate

on

Lin

e (1

99

0=

10

0)

Year Over Year % Change

Cumulative Rate on Line Index

Sources: Guy Carpenter; Insurance Information Institute.

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

to the level CAT losses

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

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

158

Most excess reinsurance capacity was

removed from the market in 2011, but

there does not appear to be a

shortage, leading to modest increases in

2012 reinsurance renewals except in areas hit hard by

CATs.

4. RENEWED PRICING DISCIPLINE

160

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

160

161

-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

20112012

expected growth is

3.8%

162

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

Sources: ISO, Insurance Information Institute.

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

10.2

%15

.1%

16.8

%16

.7%

12.5

%10

.1%

9.7%

7.8%

7.2%

5.6%

2.9%

5.5%

-4.6

%-4

.1%

-5.8

%-1

.6%

10.3

%10

.2% 13

.4%

6.6%

-1.6

%2.

1%0.

0%-1

.9%

0.5%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

1.3% 2.

3%1.

3%3.

5%1.

6%4.

1%

-10%

-5%

0%

5%

10%

15%

20%

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

2011

:Q2

2011

:Q3

Through 2011:Q3, growth in personal lines

predominating cos. (+3.1%) and commercial lines predominating cos.

(+3.9%), diversified (+2.3%)

162

163

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

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

% -8.2

%-4

.6% -2

.7%

-3.0

%-5

.3%

-9.6

%-1

1.3

%-1

1.8

%-1

3.3

%-1

2.0

%-1

3.5

%-1

2.9

% -11

.0%

-6.4

% -5.1

%-4

.9%

-5.8

%-5

.6%

-5.3

%-6

.4% -5.2

%-5

.4%

-2.9

%

2.8

%

-0.1

% 0.9

%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

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

KRW Effect

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

since 2003. Slightly stronger gains in Q4.

(Percent)

Q2 2011 marked the 30th consecutive quarter of price

declines

164

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

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

Percentage Change (%)

KRW Effect: No Lasting Impact

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

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

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

167

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

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

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

& Workers Comp Leading the Way

Percentage Change (%)

2.7% 3.0%

5.7%

7.5%

0.8%

2.0% 2.0% 2.1% 2.2% 2.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Su

rety

EP

L

Co

mm

l Au

to

D&

O

Ge

ne

ral

Lia

bili

ty

Um

bre

lla

Co

nst

ruct

ion

Bu

s.In

terr

up

tion

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

Property lines are showing larger increases than

casualty lines, with the exception of workers

compensation

170

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

44

.8

25

.4

19

.8

17

.3

16

.6

14

.2

13

.9

12

.4

12

.3

11

.9

9.1

8.1

8.1

7.1

6.8

5.4

5.2

4.7

3.8

3.7

3.1

3.0

1.5

1.2

1.1

0

5

10

15

20

25

30

35

40

45

ND

SD LA

WY

OK

WV

KS IA TX

MT

NE

DE

MS

NM SC

DC

UT

AR

NC ID WA

AL

WI

AK

TN

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

West Virginia premium growth was among the fastest in the

US in recent years…

171

0.7

0.6

0.1

-0.1

-0.3

-0.5

-0.8

-1.4

-1.6

-1.7

-2.5

-2.8

-2.9

-3.4

-3.6

-4.1

-4.5

-4.7

-4.8

-5.7

-5.8

-8

-8.2

-8.3

-13

.5

-14

.2

-15

.5

-20

-15

-10

-5

0

5M

D

MO

KY IN NY

GA

MN

VA

US

PA

OR FL IL CT

VT

OH RI

CO

NJ HI

ME

NH

MA

AZ

NV MI

CA

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC; Insurance Information Institute.

Bottom 25 States

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

the past 5 years

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

US Direct Premiums Written declined by 1.6% between 2005

and 2010

OH premiums shrank more than the US overall

in recent years

INVESTMENTS: THE NEW REALITY

177

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting or Cyclicality?

177

Property/Casualty Insurance Industry Investment Gain: 1994–2011E1

$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$56.0$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 11E*

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

Crisis Caused Investment Gains to Fall by 50% in 2008

1 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B; 2011 figure is annualized based 2011:Q3 actual of $42.0B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains through Q3:2011 were $2.1B above the

same period in 2010—a surprise given falling rates

and flat stock markets

178

179

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

179

182

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

0.02% 0.03% 0.07% 0.12% 0.24%

1.38%

1.97%

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

0.84%

0.36%

3.03%2.70%

0%

1%

2%

3%

4%

5%

6%

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

January 2012 Yield CurvePre-Crisis (July 2007)

Treasury yield curve remains near its most depressed level

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

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

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

183

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

Warra

nty

Surplu

s Line

s

Med

Mal

WC

Reinsu

rance

**

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

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

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

183

Shifting Legal Liability & Tort Environment

184

Is the Tort PendulumSwinging Against Insurers?

184

185

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

$0

$50

$100

$150

$200

$250

$300

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

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

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

Tort costs in dollar terms have remained high but relatively stable

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

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

Business Leaders Ranking of Liability Systems in 2010

Best States

1. Delaware

2. North Dakota

3. Nebraska

4. Indiana

5. Iowa

6. Virginia

7. Utah

8. Colorado

9. Massachusetts

10. South Dakota

Worst States

41. New Mexico

42. Florida

43. Montana

44. Arkansas

45. Illinois

46. California

47. Alabama

48. Mississippi

49. Louisiana

50. West Virginia

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

New in 2010

North Dakota Massachusetts South Dakota

Drop-offs

Maine Vermont Kansas

Newly Notorious

New Mexico Montana Arkansas

Rising Above

Texas South Carolina Hawaii

Midwest/West has mix of good and bad states.

188

189

The Nation’s Judicial Hellholes: 2011

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinois

Madison , St. Clair and McLean

counties

New YorkAlbany and

NYC

Watch List

Eastern District of Texas

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

Dishonorable Mention

MI Supreme Court AK Supreme Court MO Supreme Court

California

Philadelphia

NevadaClark County

Inflation

190

Is it a Threat to Claim Cost Severities

190

191

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

2.1 2.12.4 2.4 2.4 2.5

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 10 11 12F13F14F15F16F17F

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 and 1/12 (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

192

Excludes Food and Energy

Price Level Change: 2011 vs. 2010

192

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigDownload at www.iii.org/presentations

Insurance Information Institute Online:

195

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