Mega-Trends Affecting the Workers Compensation

Insurance IndustryChallenges Amid the

Economic Crisis

6th Annual National Workers Compensation ExecuSummitUncasville, CT

February 2, 2009

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

Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org www.iii.org

Presentation Outline• Economic Factors Affecting Exposure in WC

Economic Downturn and Inflation• Overall P/C Insurance Industry Performance Cycles

Profitability Underwriting Premium Growth Drivers Investment Performance

• Workers Comp Performance Review Underwriting performance Premium Drivers Frequency & Severity Trends Predictive Modeling and Workers Comp

• Mega-Trends/Emerging Issues Affecting Workers Comp The Aging Workforce The Obesity Epidemic Non-English Speaking Workers

• Other Trends & Concerns

Q&A

THE ECONOMIC STORM

What a Weakening Economy & Rising Unemployment Mean for

Workers Comp Insurers

3.7

%

0.8

% 1.6

% 2.5

% 3.6

%

3.1

%

2.9

%

0.1

%

4.8

%

4.8

%

0.9

%

2.8

%

-0.5

%

-3.3

%

-0.8

%

1.2

% 2.2

%

2.6

%

3.0

%

3.3

%

3.2

%

-3.8%

-0.2%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

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

Real GDP Growth*

*Yellow bars are Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 1/09; Insurance Information Institute.

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

slump, labor market contraction is growing

The Q4:2008 decline was the steepest since the

Q1:1982 drop of 6.4%

Length of US Recessions,1929-Present*

43

13

811 10

810 11

16

6

16

8 8

14

0

5

10

15

20

25

30

35

40

45

50

Aug.1929

May1937

Feb.1945

Nov.1948

July1953

Aug.1957

Apr.1960

Dec.1969

Nov.1973

Jan.1980

Jul.1981

Jul.1990

Mar.2001

Dec.2007

* As of February 2009Sources: National Bureau of Economic Research; Insurance Information Institute.

Current recession began in Dec. 2007 and is already the

longest since 1981. If it extends beyond April, it will become the longest recession since the Great Depression.

Months in Duration

p PreliminarySource: US Department of Labor, Bureau of Labor Statistics (BLS), National Bureau of Economic Research; NCCI Frequency and Severity Analysis

Workplace Injury Incidence RatesDeclined in Last 4 Economic Downturns

0

5

10

15

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007p

Inc

ide

nc

e R

ate

s p

er

10

0 F

TE

Wo

rke

rs(B

LS

)

0

1250

2500

3750

Cla

ims

pe

r 10

0,0

00

Wo

rke

rs(N

CC

I)

Recessions

Manufacturing Industry Injuries and Illnesses per 100 Full-Time Workers

Private Industry Injuries and Illnesses per 100 Full-Time WorkersNCCI Lost-Time Claims per 100,000 Workers

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Ja

n-0

0

Ja

n-0

1

Ja

n-0

2

Ja

n-0

3

Ja

n-0

4

Ja

n-0

5

Ja

n-0

6

Ja

n-0

7

Ja

n-0

8

January 2000 through December 2008

Unemployment will likely peak above 8% or 9% during this cycle, impacting payroll

sensitive p/c and non-life exposures

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

Dec. 2008 unemployment jumped to 7.2%, exceeding the 6.3% peak

during the previous cycle

Unemployment Rate:On the Rise

Average unemployment rate 2000-07 was 5.0%

Previous Peak: 6.3% in June 2003

Trough: 4.4% in March 2007

Dec

-08

U.S. Unemployment Rate,(2007:Q1 to 2010:Q4F)*

4.5%

4.5% 4.6% 4.

8% 4.9%

5.4%

6.1%

6.9%

7.4%

7.9%

8.3% 8.4%

8.4%

8.3%

8.2%

8.0%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

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

* Blue bars are actual; Yellow bars are forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1/09); Insurance Info. Inst.

Rising unemployment will erode payrolls

and workers comp’s exposure base.

Unemployment is expected to peak above 8% in the

second half of 2009.

Monthly Change Employment*(Thousands)

-76 -83 -88 -67 -47-100

-67-127

-403 -423

-584-524

-700

-600

-500

-400

-300

-200

-100

0

Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

Job losses in 2008 totaled 2.589 million, the highest since 1945 at WW II’s end; 11.1 million people are now defined as unemployed.

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

The Nov./Dec. 2008 losses were the largest since May 1980 loss of 431,000,

but less than the Dec. 1974 loss of 602,000

Years With Job Losses: 1939-2008*(Thousands)

-2,750-2,589

-2,128

-1,762

-1,512

-886 -857

-545 -540 -462 -450 -432 -378 -371 -297

-52

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

1945 2008 1982 2001 1949 1944 1991 1957 2002 1953 1970 1960 1974 1954 1958 1981

The US has seen net job losses in only 16 of the 70

years since 1939

Source: Insurance Information Institute research fromUS Bureau of Labor Statistics data: http://www.bls.gov/ces/home.htm.

2008’s job losses were exceeded only by 1945, at the conclusion of WW II

New Private Housing Starts,1990-2010F (Millions of Units)

2.07

1.80

1.36

0.93

0.72

0.95

1.48

1.35

1.46

1.29

1.20

1.01

1.19

1.47

1.62 1.64

1.57 1.60

1.71

1.85

1.96

0.70.80.91.01.11.21.31.41.51.61.71.81.92.02.1

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

Exposure growth forecast for HO insurers is dim for 2009 with some

improvement in 2010.

Impacts also for comml. insurers with construction risk exposure

New home starts plunged

34% from 2005-2007;

Drop through 2009 trough is 65% (est.)—a

net annual decline of 1.35 million

units

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 $1.2 billion.

Source: US Department of Commerce; Blue Chip Economic Indicators (1/09); Insurance Information Inst.

16.916.916.6

17.117.5

17.817.4

16.516.1

13.2

11.2

13.1

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07F 08E 09F 10F

Weakening economy, credit crunch are hurting auto sales; Gas prices less of a factor now.

New auto/light trick sales are expected to experience a net

drop of 5.7 million units annually by 2009 compared

with 2005, a decline of 20.7%

Impacts of falling auto sales will have a less pronounced effect on auto insurance exposure growth

than problems in the housing market will on home insurers

Auto/Light Truck Sales,1999-2010F (Millions of Units)

Source: US Department of Commerce; Blue Chip Economic Indicators (1/09); Insurance Information Inst.

Total Industrial Production,(2007:Q1 to 2010:Q4F)

1.5%

3.2% 3.6%

0.3% 0.4%

-3.4%

-8.9%-8.6%

-6.1%

-2.6%

2.9%3.3%3.8%3.7%

0.5%

2.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (1/09); Insurance Info. Inst.

Industrial production began

to contract sharply during H2 2008 and

is expected to shrink through the

first half of 2009

Obama stimulus program is expected benefit impact industrial production and therefore

insurance exposure both directly and indirectly

Figures for H2:09 and 2010 revised

sharply upwards to reflect expected

impact of Obama stimulus program

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45Wage & SalaryDisbursementsWC NPW

*9-month data for 2008Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR; I.I.I. Fact Books

Wage & Salary Disbursements (Payroll Base) vs. Workers Comp

Net Written Premiums

7/90-3/91

Shaded areas indicate recessions

3/01-11/01

Wage & Salary Disbursement (Private Employment) vs. WC NWP$ Billions $ Billions

12/07-?

Weakening wage and salary growth is

expected to cause a deceleration in workers comp

exposure growth

$214.5

$124.0

$77.7 $68.4$49.4

$26.8 $19.2

$0

$100

$200

$300

Public sectorjobs and vital

services

Help workershurt by theeconomy

Transportation,Infrastructure

Education Energy Lowerhealthcare

costs

Science,technology

U.S. $825B Economic Stimulus Package, By Category

Sources: House Appropriations Committee; Wall Street Journal, January 16, 2009

$ BillionsCommercial insurance lines that will benefit

from the Obama stimulus plan include

workers comp, commercial property,

commercial auto, surety, inland marine

and others

I.I.I. Estimate

Every 1 million jobs created or preserved will increase (or

preserve) as much as $1 billion in workers comp premium. Obama stimulus target is 3-4

million jobs.

5.2%

-0.9

%-7

.4%

-6.5

%-1

.5%

1.8%

4.3%

18.6

%20

.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%

13.7

%7.

7%1.

2%-2

.9% -0

.5%

-3.4

%-4

.9%

-10%

-5%

0%

5%

10%

15%

20%

25%7

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

8F

Rea

l N

WP

Gro

wth

-4%

-2%

0%

2%

4%

6%

8%

Rea

l G

DP

Gro

wth

Real NWP Growth Real GDP

Real GDP Growth vs. Real P/C Premium Growth: Modest Association

P/C insurance industry’s growth is influenced modestly by growth

in the overall economy

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 8/08; Insurance Information Inst.

Total Private Employment* Grew by25½ Million Workers from 1991 to 2008

89.7

89.9 91

.7 94.9 97

.7 100.

1 103.

0 106.

0 108.

6

108.

8

108.

2

115.

4

115.

2

110.

9 114.

0

111.

8

111.

0

109.

8

80

90

100

110

120

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

*seasonally adjusted at mid-yearSource: U.S. Bureau of Labor Statistics, at http://data.bls.gov/cgi-bin/surveymost

Millions

The US economy added 25.5 million jobs between 1991 and

2008, but job growth has recently stagnated, impacted payrolls and the workers comp exposure base

Average Weekly Real Earnings in Private Employment Were Flat from 1999 to 2008$2

59.2

$257

.9

$258

.3

$260

.1

$258

.0

$260

.7 $264

.3

$271

.5 $276

.1 $279

.4

$279

.3

$281

.2

$276

.1

$275

.1

$277

.3

$276

.9

$275

.0

$276

.0

$250

$260

$270

$280

$290

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

Sources: U.S. Bureau of Labor Statistics; I.I.I.

(at mid-year) Constant 1982 dollars

Virtually all of the real wage growth occurred between 1995 and 1999 and has now stagnated

New Private Housing Starts,1990-2014F (Millions of Units)

2.07

1.80

1.36

0.97

0.97

1.38 1.

45

1.54 1.56

1.51

1.48

1.35

1.46

1.29

1.20

1.01

1.19

1.47

1.62 1.64

1.57 1.

60

1.71

1.85

1.96

0.91.01.11.21.31.41.51.61.71.81.92.02.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07F08F 09F 10F11F 12F 13F 14FSource: US Department of Commerce; Blue Chip Economic Indicators (10/07), except 2008/09 figures from 8/08 edition of BCEF; Insurance Info. Institute

Exposure growth forecast for HO insurers is dim for 2008/09

Impacts also for comml. insurers with construction risk exposure

New home starts plunged 34% from 2005-2007;

Drop through 2008 trough is 54% (est.)—a net annual decline of

1.11 million units

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 2008 vs. 2005 is estimated at $971 million.

Total Industrial Production,(2007:Q1 to 2009:Q4F)

1.5%

3.2%3.6%

0.3%

-0.3%

-2.7%

0.2%

1.1%1.7%

2.3%2.7% 2.8%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/08); Insurance Info. Inst.

Industrial production shrank during Q1 2008 and is expected to shrink again in Q2, growing very

slowly thereafter

Industrial production affects exposure both directly and indirectly

Medical & Tort Cost Inflation

Amplifiers of Inflation, Major Insurance Cost Driver

Consumer Price Index for Medical Care vs. All Items, 1960-2008

215.2

364.1

0

100

200

300

400

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

Ind

ex V

alu

e (1

982-

84=

100)

All Items Medical Care

Source: Department of Labor (Bureau of Labor Statistics; Insurance Information Institute.

(Base: 1982-84=100)

Inflation for Medical Care has been surging

ahead of general inflation (CPI) for 25

years. Since 1982-84, the cost of medical care has

more than tripled

Soaring medical inflation is among the most serious

long-term challenges facing

casualty, disability and LTC insurers

Tort Cost Growth & Medical Cost Inflation vs. Overall Inflation (CPI-U), 1961-2008*

0%

2%

4%

6%

8%

10%

12%

14%

1961-70 1971-80 1981-90 1991-2000 2001-08

Tort Costs Medical Costs CPI

*Medical cost and CPI-U from BLS. Tort figure is for full-year 2008 from Tillinghast.

Tort System is an Inflation Amplifier

Avg. Ann. Change: 1961-2008*

Torts Costs: +8.4%Med Costs: +6.0%

Overall Inflation: +4.2%

Sources: US Bureau of Labor Statistics, Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs; Insurance Info. Inst.

Tort costs move with inflation but at twice the rate

Comparative 2008 Inflation Statistics Important to Insurers ( %)

3.8 3.7

2.71.8

4.0

7.4

0

1

2

3

4

5

6

7

8

CPI-U Core CPI* TotalMedical

Care

PhysicianServices

HospitalServices

LegalServices

Infl

atio

n R

ate

(%)

*Core CPI is the Consumer Price Index for all Urban Consumers (CPI-U) less food and energy costs.Source: US Bureau of Labor Statistics; Insurance Information Institute.

CPI and “Core” CPI are not representative of

many of the costs insurers face Medical/Legal costs typically

run well ahead of inflation

P/C INSURANCE FINANCIAL

PERFORMANCE

A Resilient Industry in Challenging Times

P/C Net Income After Taxes1991-2009F ($ Millions)*

$14,

178

$5,8

40

$19,

316

$10,

870

$20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$61,

940

$5,4

21

-$6,970

$65,

777

$44,

155

$20,

559

$38,

501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

08F

*ROE figures are GAAP; 1Return on avg. surplus. 2008 numbers are annualized based on 9-mos. Actual of $4.066 billion.Sources: A.M. Best, ISO, Insurance Information Inst.

2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.4%2006 ROE = 12.2%2007 ROAS1 = 12.3%2008 ROAS = 1.1%*

Insurer profits peaked in 2006.

29

-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 06 08

1975: 2.4%

1977:19.0% 1987:17.3% 1997:11.6% 2006:12.2%

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

10 Years10 Years

9 Years

Note: 2008 figure is actual 9-month result.Sources: ISO; Insurance Information Institute.

2008F: 1.1%

P/C Insurance Industry ROEs,1975 – 2008E*

30

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

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

ROE Cost of Capital

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2008:Q3

*Excludes mortgage and financial guarantee insurers.Source: The Geneva Association, Ins. Information Inst.

The p/c insurance industry fell well short of is cost of capital in 2008

-13.

2 p

ts

US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on

target or better 2003-07

-1.7

pts

+2.

3 p

ts

-9.0

pts

The cost of capital is the rate of return

insurers need to attract and retain

capital to the business

-9.7

pts

31

90

95

100

105

110

115

120

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

08F

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000s: 102.0*

Sources: A.M. Best; ISO, III *A.M. Best year end estimate of 103.2; Actual 9-mos. result was 105.6.

P/C Insurance Combined Ratio, 1970-2008F*

32

115.8

107.5

100.198.4

100.8

92.6

101

103.3101.2

95.7

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2008* 2009F

P/C Insurance Industry Combined Ratio, 2001-2009E

*Includes Mortgage & Financial Guarantee insurers. Sources: A.M. Best.

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

Including Mortgage

& Fin. Guarantee insurers

Cyclical Deterioration

33

2005 ratio benefited from heavy use of reinsurance which lowered net losses

110.

3

110.

2

107.

6

103.

9

109.

7

112.

3

111.

1

122.

3

110.

2

102.

5

105.

4

91.1

95.1

106.

5

105.

1

102.

0

112.

5

85

90

95

100

105

110

115

120

125

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

2006/07 benefited from favorable loss cost trends, improved tort environment, low CAT

losses, WC reforms and reserve releases. Most of these trends reversed in 2008 and

mortgage and financial guarantee segments have big influence. 2009 is transition year.

Commercial coverages have exhibited significant

variability over time.

Commercial Lines Combined Ratio, 1993-2009F

Mortgage and financial guarantee may account for up to 4 points on the commercial

combined ratio in 2008

Sources: A.M. Best (historical and forecasts)

-55-50-45-40-35-30-25-20-15-10-505

101520253035

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

Source: A.M. Best, ISO; Insurance Information Institute * Includes mortgage & finl. guarantee insurers

$ B

illi

ons

Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the

second since 1978. Cumulative underwriting deficit from 1975 through 2007 is $422 billion.

Underwriting Gain (Loss)1975-2008:Q3*

$19.877 Bill underwriting loss in 08:9M incl. mort. & FG insurers

36

Number of Years With Underwriting Profits by Decade, 1920s –2000s

67

10

8

45

0 0

3

0

2

4

6

8

10

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

Note: Data for 1920 – 1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data. *2000 through 2008.

Number of Years with Underwriting ProfitsUnderwriting profits were common before the 1980s (40 of the 60 years

before 1980 had combined ratios below 100)—but then they vanished. Not a single underwriting profit was recorded in the 25 years from 1979

through 2003.

37

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

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

Strength of Recent Hard Marketsby NWP Growth

1975-78 1984-87 2000-03Shaded areas denote “hard

market” periods

Net written premiums fell 1.0%

in 2007 (first decline since 1943)

and by 0.4% in 2008, the first back-

to-back decline since 1930-33

38

Year-to-Year Change in Net Written Premium, 2000-2008E*

*2008 figure is 9-month actual result from ISO.Source: A.M. Best (historical)

5.0%

8.4%

15.3%

10.0%

3.9%

0.5%

4.2%

-1.0% -0.4%2000 2001 2002 2003 2004 2005 2006 2007 2008F

P/C insurers are experiencing their

slowest growth rates since 1930-33

Slow growth means retention is critical

Protracted period of

negative or slow growth is possible due to soft

markets and slow

economy

39

Distribution of P/C Insurance Industry’s Investment Portfolio

Cash & Short-Term Investments

7.2%

Common Stock17.9%

Bonds66.7%

Preferred Stock1.5%

Real Estate0.8%

Other5.9%

Portfolio Facts

•Invested assets totaled $1.3 trillion as of 12/31/07

•Insurers are generally conservatively invested, with 2/3 of assets invested in bonds as of 12/31/07

•Only about 18% of assets were invested in common stock as of 12/31/07

•Even the most conservative of portfolios was hit hard in 2008

Source: NAIC; Insurance Information Institute research;.

As of December 31, 2007

40

Property/Casualty Insurance Industry Investment Gain:1994- 2008:Q3 1

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$63.6

$28.3

$56.9$51.9

$57.9

$0

$10

$20

$30

$40

$50

$60

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain. *2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.

Investment gains are off sharply in 2008 due to lower yields and poor equity market conditions.

41

P/C Insurer Net Realized Capital Gains, 1990-2008:Q3

$2.88$4.81

$9.89

$1.66

$6.00

$9.24$10.81

$13.02

$16.21

$6.63

-$1.21

$6.61

$8.97

-$9.71

$18.02

$3.52

$9.70$9.13$9.82

-$10-$8-$6-$4-$2$0$2$4

$6$8

$10$12$14$16$18$20

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

08:Q

3

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

Realized capital gains exceeded $9 billion in 2004/5 but fell sharply in

2006 despite a strong stock market. Nearly $9 billion again in 2007, but

$-9.7 billion in 2008 through Q3.

$ Billions

42

Workers Compensation

Review:

Underwriting andOperating Performance

102

97

111 110107

103

93

99100 101

107

115118

122

80

85

90

95

100

105

110

115

120

125

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007p

Percent

p Preliminary. Sources: Calendar Years 1994-2006, A.M. Best Aggregates & Averages; Calendar Year 2007p NCCIIncludes dividends to policyholders

Workers Comp Combined Ratios, (Calendar Year, Private Carriers) 1994-2007p

WC insurers lopped 30 points off the

combined ratio in just 5 years

Workers Comp Calendar Year vs. Ultimate Accident Year – Private Carriers

101

97

111

110

107

103

93

101 10

6

119

133

142

136

123

88

85 84

9210

1.5

99.0

100

101 10

7 115 11

8 122

97

105

96

80

90

100

110

120

130

140

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

Calendar Year Accident Year

Percent

p Preliminary AY figure. Accident Year data is evaluated as of 12/31/2007 and developed to ultimateSource: Calendar Years 1994-2006, A.M. Best Aggregates & Averages; Calendar Year 2007p and Accident Years 1994-2007pbased on NCCI Annual Statement Analysis.

Includes dividends to policyholders *2008 figure from A.M. Best.

Workers Comp Combined Ratios, 1994-2008F*

A.M. Best expects 2008 combined ratio to rise by 2.5 points

$ Billions

Calendar Year

2

5

10

15

1820

21

18

15

12

9

42

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

2007 Tabular Discount Is $5.5 Billion

Considers all reserve discounts as deficienciesLoss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selectionsSource: NCCI analysis

Calendar Year Reserve Deficiencies Continue to Decline

WC Loss and LAE Reserve Deficiency: Private Carriers

Workers CompCost Drivers

Medical/Indemnity Frequency & Severity

Trends

Workers Compensation Medical Claim Trends

$8.4 $8.5 $8.3$9.1 $9.5

$10.3$11.3

$12.2$13.5

$14.5

$16.5$17.7

$19.0$20.2

$22.1

$24.0$25.4

$5

$10

$15

$20

$25

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07p

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002-2006: +7.8%

Accident Year

MedicalClaim Cost ($000s)

2007p: Preliminary based on data valued as of 12/31/20071991-2006: Based on data through 12/31/2006, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies

Workers Comp Medical Claims Costs Continue to Climb

Cumulative Change = +200%(1993-2007p)

4.5%3.5%

2.8% 3.2% 3.5%4.1%

4.6% 4.7%4.0% 4.4% 4.2% 4.0% 4.4%

5.1%

7.4%

10.1%

8.3%

10.6%

7.3%

13.6%

7.6% 7.2%6.2%

9.2%8.6%

6.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007p

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Rising at Double the Medical CPI Rate

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

Average annual increase in WC medical severity from

1995 through 2007 was more than twice the medical CPI

rate (8.2% vs. 4.0%)

Med Costs Share of Total Costs is Increasing Steadily

Indemnity54%

Medical46%

Source: NCCI (based on states where NCCI provides ratemaking services).

Indemnity47% Medical

53%

Indemnity41%

Medical59%1987

1997

2007p

WC Med Cost Will Equal 70% of Total by 2017 if Trends Hold

Source: Insurance Information Institute.

Indemnity30%

Medical70%

2017 Estimate

This trend will likely be supported

by the increased labor force

participation of workers age 55 and

older.

Indemnity Claim Cost Trends

$9

.9

$9

.6

$9

.4

$9

.8

$1

0.0

$1

0.6

$1

1.4

$1

2.4

$1

3.7

$1

5.0

$1

6.4

$1

6.8

$1

7.5

$1

9.8

$1

9.1

$1

7.7

$1

8.2

+4.0%

+1.0%-3.1%-2.8%+4.9%+1.7%+5.9%

+7.7%+9.0%

+10.1%

+10.1%

+8.9%+2.3%+4.5%+1.1%+2.7%

+5.0%

5

7

9

11

13

15

17

19

21

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007p

IndemnityClaim Cost ($ 000s)

Annual Change 1991–1993: -1.7%Annual Change 1994–2001: +7.3%Annual Change 2002–2006: +3.1%

2007p: Preliminary based on data valued as of 12/31/20071991–2006: Based on data through 12/31/2006, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies

Workers Compensation IndemnityClaim Costs Growth Is Moderate

Lost-Time Claims

Accident Year

3.0%

4.3%5.0%

4.4%5.2%

4.4%

2.4%2.0%

2.4%2.8%

3.4% 3.3%

5.9%

7.7%

9.0%

10.1%

4.8%

1.9%

3.0%

5.5%

4.0%

3.0% 2.4%

9.7%10.9%

1.7%

0%

2%

4%

6%

8%

10%

12%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007p

Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim

WC Indemnity Severity vs. Wage Inflation

2006p: Preliminary based on data valued as of 12/31/2006; 1991-2005: Based on data through 12/31/2005, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI

WC indemnity severity is once again outpacing

wage inflation

Residual Market Overview

-945

-1,396

-2,087

-1,714

-1,222

-581

-143-16 -57 -47 -67 -125-106

110281

-114-155-85 -115-124

-1,807-1,906

-2,500

-2,000

-1,500

-1,000

-500

0

500

$ Millions

Policy Year

Workers Compensation ResidualMarket Underwriting Results

NCCI-Serviced Workers Compensation Residual Market Poolsas of December 31, 2007

* Incomplete Policy Year Projected to UltimateSource: NCCI

Investment Performance

13.0

18.116.7

14.4

16.817.6

20.421.3

20.519.5

10.7 10.411.2

14.0 14.012

10.010.9

0

5

10

15

20

25

1990*1991* 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20062007p

Workers Compensation InvestmentReturns Remain Below Historical Average

Investment Gain on Insurance Transactions-to-Premium RatioPrivate CarriersPercent

p Preliminary* Adjusted to include realized capital gains to be consistent with 1992 and after Investment Gain on Insurance Transactions includes Other IncomeSource: 1990–2006, Best's Aggregates & Averages; 2007p, NCCI

Calendar Year

Average (1990–2006): 15.3%

Premium Growth &Pricing Environment

31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3

25.0 26.129.2 31.1

34.737.637.8 38.7

31.0 31.329.8 30.5

29.126.3

28.226.9 25.8 24.9

28.4

31.9

37.3

41.8

45.944.0

47.2 46.3

0.0

10.0

20.0

30.0

40.0

50.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20062007p

State Funds ($ B)Private Carriers ($ B)

Total Workers Compensation Premium Declined Again in 2007

Net Written Premium

Calendar Year

$ Billions

p Preliminary

Source: 1990–2006 Private Carriers, A.M. Best Aggregates & Averages; 2007p, NCCI 1996–2007p State Funds: AZ, CA, CO, HI, ID, KY, LA, MO, MT, NM, OR, RI, TX, UT Annual Statements State Funds available for 1996 and subsequent

* States approved through 4/11/2008Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by the applicable rating organization

History of Average WC Bureau Rate/Loss Cost Level Changes

12.1

7.4

10.0

2.9 3.5

1.2

4.9

6.6

-7.2

-2.7

-6.0

-2.6

-5.4

-8.0

-6.0

-3.2

-6.4-5.1

-5.7

-10

-5

0

5

10

15

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007* 2008*

Cumulative1990-1993

+36.3%

Cumulative 1994-1999

-27.8%

Percent

Cumulative 2000-2003

+17.1%

Cumulative 2004-2008

-24.0%

Calendar Year

States filed through 4/18/2008Source: NCCI

Current NCCI Voluntary MarketFiled Rate/Loss Cost Changes

Excludes Law-Only FilingsPercent

-19

.3

-18

.4

-10

.9

-10

.1 -8.8

-8.2

-7.6 -6

.1 -4.9 -3

.7 -2.8

-2.3

-2.2

-1.7 -0

.3

-0.2

3.4 4.0 4.1 5

.6 7.2

-10

.5 -9.5 -8.6 -7

.2 -4.7

-4.2

-4.0 -1

.2 -0.4

1.6 2.5 3.2

-12

.8

-6.3

-1.8

23

.7

-25

-20

-15

-10

-5

0

5

10

15

20

25

HI FL AR AK NV MO AL CO LA UT DC TN RI KY NM MS VT NE ID NH OR ME MT MD WVSD IA IN NC VA GA CT IL AZ KS OK SC

Effective Dates 1/1/08 and Prior Effective Dates Subsequent to 1/1/08 Filed and Pending

Alternative Risk Transfer MarketSaps Traditional WC Carriers

Automobile, 12%

Property, 10%Workers Comp,

43%

Liability (excl. Auto), 35%

Source: MarketStance.

Workers Comp account for the

largest share of the alternative market,

particularly captives

$ Billions

FREQUENCY & SEVERITY TRENDS

Injury & Fatality Incidence Rates and Claim Cost

Trends

Rate of Work-Related Injuries Decreases Over Time Due to Improved Working Conditions

Rate of Injury per 100 FTE Workers

0

5

10

15

20

25

Private Industry Injuries and Illnesses per 100 Full-Time WorkersManufacturing Industry Injuries and Illnesses per 100 Full-Time Workers

Source: US Department of Labor, Bureau of Labor Statistics; NCCI

Lost-Time Claims

-4.2 -4.4

-6.9

-4.5 -4.1 -3.9

-6.7

-2.5

-9.2

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5

-6.6

-10

-8

-6

-4

-2

0

2

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07p

Cumulative Change of –53.3%since 1991 means that lost work

time claims have been cut by more than half

Accident Year

Percent Change

Workers Comp Lost-Time Claim Frequency Down More than 50% Since 1991

2007p: Preliminary based on data valued as of 12/31/20061991-2006: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI

1997

1997

2006

2006

1997

1997

1997

2006

2006

2006

-36%-25% 4% -27% -40%

0.0000

0.0002

0.0004

0.0006

0.0008

0.0010

0.0012

Fatal Permanent Total Permanent Partial Temporary Total Lost-Time

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

All NCCI states except NV and TXSource: NCCI Unit Statistical Plan data, First Report

1997-2006: Claim Frequency Declined for All Injury Types Other Than Permanent Total

Percentage Change Between Policies Expiring in 1997 and 2006Claim Frequency per $1M of Wage-Adjusted Payroll

2002

2002

2002

2002

2002

2006

2006

2006

20062006

-18%-20%-19%-14% -14%

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

Manufacturing Contracting Office & Clerical Goods & Services Miscellaneous

Lost-Time Claim FrequencyDeclined for All Industry Groups

Percentage Change Between Policies Expiring in 2002 and 2006Claim Frequency per $1M of Wage-Adjusted Payroll

All NCCI states except NV and TXSource: NCCI Unit Statistical Plan data, First ReportSource: NCCI

2002

2002

2002

2002

2002

2006

2006

2006

2006

2006

40%30% 20% -8% 12%

0.0000

0.0005

0.0010

0.0015

0.0020

0.0025

0.0030

Manufacturing Contracting Office & Clerical Goods & Services Miscellaneous

Permanent Total ClaimFrequency by Industry Group

Percentage Change Between Policies Expiring in 2002 and 2006Claim Frequency per $1M of Wage Adjusted Payroll

All NCCI states except NV and TXSource: NCCI Unit Statistical Plan data, First ReportSource: NCCI

WHY YOU SHOULD FEEL GOOD ABOUT

WHAT YOU DO Saving Lives, Increasing

Productivity and Much More

It’s Not Just About the Money

Did You Know That When You Prevent a Workplace Injury You…

• Keeping Workers Comp Costs Down is Just the Beginning• You Help Companies Remain Productive1

Permanently Disabling Injuries 565 Lost Future Work Days on Avg. Fatal Injuries 5,850 Lost Future Work Days on Average

• You Increase/Preserve Worker Incomes Seriously Injured Workers Have Lower Lifetime Earnings, on Average Reduced Likelihood of Filing Bankruptcy Less Likely to Need Public Assistance

• You Maintain/Improve the Quality of Worker’s Home Life Higher Incidence of Divorce, Substance Abuse, Depression Among Seriously

Injured

ALL REASONS TO BE PROUD OF WHAT YOU DO!!

1 US Census Bureau: http://www.census.gov/compendia/statab/tables/07s0639.xls

Lost-Time Claims

-4.2 -4.4

-6.9

-4.5 -4.1 -3.9

-6.7

-2.5

-9.2

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5

-6.6

-10

-8

-6

-4

-2

0

2

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07p

Cumulative Change of –53.3%since 1991 means that lost work

time claims have been cut by more than half

Accident Year

Percent Change

Workers Comp Lost-Time Claim Frequency Down More than 50% Since 1991

2007p: Preliminary based on data valued as of 12/31/20061991-2006: Based on data through 12/31/2005, developed to ultimateBased on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policiesSource: NCCI

Number of Fatal Work Injuries is Continues to Fall, 1992 – 2007p

5,48

8

6,05

56,23

8

6,20

2

6,27

5

6,63

2

6,33

1

6,21

7

6,05

4

5,92

0

5,91

5

5,53

4

5,57

5 5,76

4

5,73

4

5,84

0

5,000

5,200

5,400

5,600

5,800

6,000

6,200

6,400

6,600

6,800

92 93 94 95 96 97 98 99 00 01* 02 03 04 05 06 07pSource: US Bureau of Labor Statistics, US Department of Labor; III. *Excludes 9/11 deaths.

Workers comp insurers & the entire workplace safety

community have contributed to the 17% decline in workplace

fatalities since 1994

Lives Saved Due to Reduction inFatal Work Injury Rate, 1995–2006

1,8981,717

1,6231,7581,757

357

585 610

833

1,0771,210

1,382

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

95 96 97 98 99 00 01 02 03 04 05 06Source: Insurance Information Institute from BLS data.

Workers comp insurers are a major force in saving worker lives

Reduction in Occupational Deaths Due to Fall in Fatality Rate from 5.3 per 100,000 Workers in 1994 to 4.0 in 2006

Nearly 2,000 work lives are saved annually due to

improved workplace safety!

Cumulative Lives Saved Due toReduction in Fatal Work Injury Rate

357 9421,552

2,3853,463

4,6736,055

7,811

9,569

11,192

12,909

14,807

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

95 96 97 98 99 00 01 02 03 04 05 06Source: Insurance Information Institute from BLS data.

Saving a Life, Saves a Family

Cumulative Lives Saved Due to Fall in Fatality Rate from 5.3 per 100,000 Workers in 1994 to 4.0 in 2006

Since 1994, nearly 15,000 worker lives have been saved due to improved

workplace safety!

EMERGING TRENDS & CHALLENGES IN WORKERS COMP

#1Emerging (Mega) Trend

The Obesity Epidemic

WC Medical Claims Costs are 6.8x Higher for the Most Obese Workers

$7,1

09

$13,

338

$19,

661

$3,9

24

$5,3

96 $13,

569

$34,

293

$7,5

03

$51,

091

$23,

373

$23,

633

$59,

178

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

BMI <18.5(Underweight)

18.5-24.9(Healthy Weight)

25-29.9(Overweight)

30-34.9 (ObeseClass I)

35-39.9 (ObeseClass II)

40+ (ObeseClass II)

Medical Claims Costs Indemnity Claims Costs

Source: Ostbye, T., et al, “Obesity and Workers Compensation,” Archives of Internal Medicine, April 23, 2007.

Indemnity costs are 11 times higher for the most obese workers than for healthy-

weight workers.

Some people with high BMI also have other characteristics that contribute to disability and/or death. They… Smoke and/or regularly drink alcohol heavily

Are older and/or male

Have chronic diseases (e.g., diabetes, heart disease)

Have other conditions/circumstances (e.g., no health

insurance, don’t exercise) that are related to poor health

Failure to adjust for these “confounding factors” likely results in overstating the effect of obesity.

It’s Not All Because of Obesity: “Confounding Factors”

Source: Flegal, Graubard, Williamson, and Gail, “Excess Deaths Associated with Underweight, Overweight, and Obesity,” JAMA Vol. 293, No. 15 (April 20, 2005) pp. 1861-1867.

#2Emerging (Mega)Trend

The Aging Workforce

Source: US Bureau of Labor Statistics, 2004.

40.5

39.0

35.8

34.335.2

36.6

38.0

39.440.6 40.7

30

32

34

36

38

40

42

1962 1970 1975 1980 1985 1990 1995 2000 2005 2008Year

U.S. Workforce is Aging: Significant Implications for Workers Comp

Median Age of U.S. Worker

The median age of US workers as the Baby Boomer begin to retire is about 41 years. Immigration will hold this

number down and may even lower the figure.

Older and less healthy workforce

Fatal Work Injury RatesClimb Sharply With Age

5.04.2

3.73.32.72.8

0.9

11.2

0

2

4

6

8

10

12

16-17 18-19 20-24 25-34 35-44 45-54 55-64 65+

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

The fatality rate for workers 65 and older is triple that of workers age 35-44. The workplace of the future will have to be completely redesigned to accommodate

the surge in older workers.

Fatal Work Injuries per 100,000 Workers (2006)

Older Workers Have More Lost Time from Work Due to Injury or Illness

1211

10

8

6

44

0

2

4

6

8

10

12

14

16-19 20-24 25-34 35-44 45-54 55-64 65+

Source: US Bureau of Labor Statistics, US Department of Labor

There will be more lost time as the

workforce ages in the future.

Median Days Away From Work (2005)

Age 65+ workers median lost time is 50% greater than workers age 35-44

Percentage of Non-Commissioned Officers Suffering from Symptoms of PTSD by Number of Deployments…

12.0%

18.5%

27.0%

0%

5%

10%

15%

20%

25%

30%

% Suffering from PTSD

First Deployment

Second Deployment

Third or Fourth Deployment

Symptoms of PTSD are 54% more likely to be

observed in second deployments and 125% higher in third or fourth

deployments

Source: Brookings Institution, Iraq Index Archive, updated August 18, 2008.

#3Emerging (Mega) Trend

Non-EnglishSpeaking Workers

Fatal Worker Injury Rates byRace and Ethnicity, 2006

4.03.7

5.0

0.00.51.01.52.02.53.03.54.04.55.0

White Black or AfricanAmerican

Hispanic

Source: U.S. Dept. of Labor, Bureau of Labor Statistics, Census of Fatal Occupational Injuries, 2006

Hispanic workers experience highest rate of fatal injuries on the job

Fatality Rate per 100,000 Workers Employed

Insurance Information Institute On-Line

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