catastrophes, uncertainty and insurance: overview & outlook for 2012 & beyond m200 meeting boston,...

Catastrophes, Uncertainty and Insurance: Overview & Outlook for 2012 & BeyondM200 Meeting

Boston, MAOctober 26, 2011Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

eSlide P6466 The Financial Crisis and the Future of the P/C

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Presentation OutlineReview of Recent Events What in the World is Going On? Summary of P/C Financial PerformanceCatastrophe Loss Developments & TrendsGlobalUSWill the Market Turn? Four Necessary Criteria:Underwriting Loss TrendsCapital/CapacityReinsurance MarketsPricing DisciplineOther Contributing Factors to the Underwriting CycleInvestment EnvironmentTort/Casualty EnvironmentInflationEconomic Environment


*What in the World Is Going On? Is the World Becoming a Riskier Place?What Are the Implications for Insurance and Risk Management?

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Uncertainty, Risk and Fear AboundGlobal Economic SlowdownUS Debt and Budget Crisis and S&P DowngradeEchoes of the Financial CrisisHousing CrisisPersistently High UnemploymentEuropean Sovereign Debt, Bank & Currency CrisesJapan, New Zealand, Turkey, Haiti, Chile EarthquakesNuclear FearsRecord Tornado, Flooding in the US, WildfiresCyber AttacksManmade Disasters (e.g., Deepwater Horizon)Resurgent Terrorism Risk (e.g., Bin Laden Killing)Political Upheaval in the Middle EastInflation/DeflationRunaway Energy & Commodity PricesEra of Fiscal AusterityReshuffling the Global Economic DeckChina Becomes #2 Economy in the WorldAre Black Swans everywhere or does it just seem that way?


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Impacts on P/C Insurers of S&Ps Downgrade of US Sovereign DebtS&P Downgrade of US Debt Will Have Little Practical Impact Solvency, liquidity, claims paying capacity all unaffectedUS sovereign debt accounts for 6% ($80B out of $1.3 trillion) in invested assetsInvestors Will Continue to View US Treasury Securities as the Safest Investment in the WorldOther bond raters (Moodys, Fitch) affirmed top credit ratings for USUS bond yields fell in the days after S&P issued its initial warningEvidence suggests that investors asset of choice during flight to safety remains US debtRisk Charge/Weights for US Debt Held by Finl. Firms Wont ChangeFederal bank regulators have already stated risk weights wont changeExtremely unlikey state insurance regulators would do anything differentNAIC (Aug. 7) There is no impact on insurer investments in U.S. government and government-related securities from the actions recently taken by the rating agencies. Risk-based capital and asset valuation reserves are unaffected.Interest Rates on US Debt Unlikely to Rise Due to DowngradeInsurers should see little or no need to mark down value of bondsMarket for US Debt Will Remain Largest & Most Liquid in the WorldDowngrade poses no liquidity or solvency issues


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*What is Going On in the US and Global Financial Markets?S&P Downgrade Poured Gasoline on a Fire that Was Already BurningDowngrade didnt tell us anything we didnt already know about US financesRealization that US Economy is Slowing Q1 GDP growth revised downward to 0.4%; Q2 growth was just 1.0%Job growth has been anemic for several months and unemployment remains high at 9.1% in AugustStock market sell-off was driven by fear and technical factors (e.g., margin calls, hedge fund mass selling) Need for a More Comprehensive Solution to Europes Debt ProblemsSolution developed for Greece, Italy, Spain, Ireland may be too smallDifficulties in managing multinational institutions and economic policiesECB and individual member EU countries not all on same pageSolution: Unified strategy similar to TARP; Monetary easingView that Washington is Dysfunctional and RudderlessLack of coherent, consistent medium and long term plan to deal with basic structural issues in the US economy (debt, taxes, employment, regulation, etc.)Economic Slowdown in Emerging MarketsChina, other economies less able to stimulate global economy than in 2008


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Dj Vu? Lehman II? Is This 2008 All Over Again?Why Today is Not 2008 All Over AgainThe Situation Today is Very, Very Different from 2008Credit Markets Are Not Seizing; Some Contraction in EuropeBank Balance Sheets Are in Much Stronger ShapeCapital up, charge offs fallingWe Will Not Experience the Collapses/Near Collapses Like in 2008No repeat of Lehman, AIG, Washington Mutual, WachoviaSome Additional Regulatory Controls Are Now PlaceWhat Would Be Helpful Now?Solution to European Bank/Sovereign Debt Problem, Long-Term Fiscal and Monetary Policy DirectionFed on Aug. 9 stated rates would remain low at least through mid-2013 This is not only a signal that borrowing costs will remain low over an extended period of time and that inflation will remain muted; Also tells investors that theyll need to take on risk in order to earn returns in the market. Should be bullish for stocks.Congress and the Administration need to remove regulatory and tax uncertainty ASAP and drive a pro-growth agenda


*P/C Insurance Industry Financial OverviewProfit Recovery Will Be Set Back by High CATs, Low Interest Rates, Diminishing Reserve Releases

P/C Net Income After Taxes19912011:H1 ($ Millions)2005 ROE*= 9.6%2006 ROE = 12.7%2007 ROE = 10.9%2008 ROE = 0.3%2009 ROAS1 = 5.9%2010 ROAS = 6.5%2011:H1 ROAS = 1.7%P-C Industry 2011:H1 profits were down 71.6% to $4.8B vs. 2010:H1, due to high catastrophe losses and as non-cat underwriting results deteriorated* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 2.3% ROAS for 2011:H1, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

A 100 Combined Ratio Isnt What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurers. 2011H1 combined ratio including M&FG insurers is 110.5 , ROAS = 2.3%. Source: Insurance Information Institute from A.M. Best and ISO data.Combined Ratios Must Be Lower in Todays Depressed Investment Environment to Generate Risk Appropriate ROEsA combined ratio of about 100 generated ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 2011**Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for H1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers. For 2011:H1 ROAS = 1.7% including M&FG.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.1977:19.0%1987:17.3%1997:11.6%2007:12.3%1984: 1.8%1992: 4.5%2001: -1.2%10 Years10 Years10 Years2011:2.3%*History suggests next ROE peak will be in 2016-2017ROE1975: 2.4%

P/C Insurance Industry ROE vs. Fortune 500, 1975 2011*For 2011:H1 ROAS.Source: Insurance Information Institute; NAIC, ISO.ROE

Catastrophe Loss Developments and Trends*2011 and 2010 Are Rewriting Catastrophe Loss and Insurance History

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Global Catastrophe Loss Summary: First Half 20112011 Is Already (as of June 30) the Highest Loss Year on Record GloballyExtraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss $260 Billion in Economic Losses GloballyNew record for the first six months, exceeding the previous record of $220B in 2005Economy is more resilient than most pundits presume$55 Billion in Insured Losses GloballyMore than double the first half 2010 amountOver 4 times the 10-year average$27 Billion in Economic Losses in the USRepresents a 129% increase over the $11.8 billion amount through the first half of 2010$17.3 Billion in Insured Losses in the US Arising from 100 CAT EventsRepresents a 162% increase over the $6.6 billion amount through the first half of 2010


*Source: MR NatCatSERVICENatural Loss Events, January September 2011 World Map


*Source: MR NatCatSERVICEWorldwide Natural Disasters 2011 Significant Natural Disasters (January September only)


Insured losses 2011 (January June only): US$ 60bnWorldwide Natural Disasters 2011% Distribution of Insured Losses Per Continent (January June only) *21%49%

Insured losses 1980 - 2011 (January June only): US$ 389bn *Source: MR NatCatSERVICE 2011 Munich Re58%2%21%

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Insured Loss Estimates for Selected Major Catastrophes in 2011

Japan EarthquakeApril TornadoesMay (Joplin) TornadoesEqecat$22 to $39 billion$5 billion to $7 billion$1 billion to $3 billionRMS$21 to 34 billion$3.5 to $6 billion$2 to $6 billionAIR$20 billion to $30 billion $5 billion to $7 billion$2 to $6 billion


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*US Second Quarter Insured Catastrophe Losses, 20002011 Sources: ISO/PCS; Insurance Information Institute.Record Q2 (and First Half) CAT Losses Will Adversely Impact Insurer Results in 2011 $ BillionsQ2 CAT losses from 2000-2010 average $4.0 billion. 2011:Q2 CAT losses were nearly 4 times that amount at $15.09 billion2011:Q2 CAT losses totaled $15.09 billion and are the highest on record


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Top 15 Most Costly World Insurance Losses, 1970-2011*(Insured Losses, 2010 Dollars, $ Billions)

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.Three of the top 15 most expensive catastrophes in world history have occurred in the past 18 months


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Top 16 Most Costly World Insurance Losses, 1970-2011*(Insured Losses, 2010 Dollars, $ Billions)

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.Taken as a single event, the Spring 2011 tornado and thunderstorm season would likely become the 7th costliest event in global insurance history3 of the top 15 most expensive catastrophes in world history have occurred in the past 18 months


Worldwide Natural Disasters,1980 2011*

Number of Events *2011 figure is through June 30.Source: MR NatCatSERVICE*There were 355 events through the first 6 months of 2011


US$bnWorldwide Natural Disasters 19802011,Overall and Insured Losses***2011 figure is through June 30.Source: MR NatCatSERVICE 2011 Munich ReFirst Half 2011Overall Losses: $265 BillInsured Losses: $60 Bill


*JAPAN EARTHQUAKE/TSUNAMI & NUCLEAR DISASTERMarch 11 Quake/Tsunami Is Just the Most Recent of Several Large Global Catastrophe Losses

Insured Japan Earthquake Loss Estimates*12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*

*As of June 17, 2011. Towers Watson estimate includes $3.0 (low) to $4.9 billion (high) in life insurance losses. RMS estimate includes insured life/health losses of $3 to $8 billion.Sources: AIR Worldwide, Eqecat, RMS, Towers Perrin; Insurance Information Institute.(Insured Losses, $ Billions)Economic losses are likely to total in the $200-$300 billion range, meaning only a fraction of the loss is insured


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12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Recent Major Non-US Catastrophe Losses(Insured Losses, $US Billions)

Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.Insured Losses from Recent Major Catastrophe Events Exceed $60 Billion, an Estimated $53 Billion of that from EarthquakesThe March 2011 earthquake in Japan will become among the most expensive in world history in terms of insured losses (current leader is the 1994 Northridge earthquake with $22.5B in insured losses in 2010 dollars)


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Nonlife (P/C) Insurance Market Impacts of Japan Earthquake No Direct Impact for US Domestic Primary InsurersBUT: $2 - $5 Billion in Assumed Loss from Foreign Catastrophes Will Wind Up on the Books of US Insurers, Most with No Direct Exposure to Japan/Australia/NZUS reinsurersRetrocessional marketBlanket property insurance coversPrimary Insurance: Domestic Japanese Insurers Take Big LossesFew US/Foreign Insurers Had Direct Exposure to Japanese P/C MarketLow single-digit market share for a small number of companiesSignificant Absorption of Loss by Japanese GovernmentResidential earthquake damageNuclear-related property and liability damageSignificant Impacts for Global ReinsurersProperty-Catastrophe covers on Commercial LinesBusiness Interruption/Contingent Business InterruptionSupply Chain Disruption Concern (Now Waning)Currently an Earnings Event for Global ReinsurersNot a capital event: Global reinsurance markets entered 2011 with record capitalCost of Property/Cat Reinsurance Rising in Japan, New Zealand, AustraliaUp for all; Magnitude of increase is sensitive to size of lossImpact on Cost of US Property-Cat Reinsurance is Possible/LikelyMarket remains well capitalized and competitive


*SPRING 2011 TORNADO OUTBREAK2011 Will Be Among the Most Deadly and Expensive for Tornadoes In History

Insured Loss Estimates from April 2011 Tornadoes*12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*

*As of June 17, 2011. Sources: AIR Worldwide, Eqecat, RMS; Insurance Information Institute research.(Insured Losses, $ Billions)The April tornadoes killed more that 300 people and caused as much as $7 billion in insured losses


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Insured Loss Estimates from May 2011 (Joplin) Tornadoes*12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*

*As of June 17, 2011. Sources: AIR Worldwide, Eqecat, RMS; Insurance Information Institute research.(Insured Losses, $ Billions)The May tornadoes killed more that 125 people and caused as much as $6 billion in insured losses


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12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Summary of Recent Tornado ActivityThere Have Been 1,585 Tornadoes Through June 30 in the US537 People Have Been KilledThe April 27 Tornado Outbreak Killed at Least 342 PeopleNow the 2nd deadliest outbreak in US history (747 killed in march 1925 event)States impacted: AR, TN, LA, MS, GA and especially ALInsured Losses Estimated at $3.5B to $7BEconomic Losses Likely in the $7 Bill to $14 Bill RangeThe May 22 Tornado in Joplin, MO, Killed at Least 130 PeopleLargest number of deaths from a single tornadoInsured Losses Estimated at $1B to $6BP/C Insurance Industry is Very Strong and Will Encounter No Difficulties in Paying these Claims


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C**2011 is preliminary data through October 13.Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.Number of Tornadoes and Related Deaths, 1990 2011*Tornadoes have already claimed more than 500 livesThere were 1,805 tornadoes recorded in the US by Oct. 13Insurers Expect to Pay at Least $2 Billion Each for the April 2011 Tornadoes in Alabama and a Similar Amount for the May Storms in Joplin


Insurers Making a Difference in Impacted CommunitiesSource: Insurance Information Institute*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


U.S. Tornado Count, 2005-2011* *There were 1,585 tornadoes in the US in 2010, slightly above averageDeadly and costly April/ May spikeSource: http://www.spc.noaa.gov/wcm/ *Through July 2.Tornado activity was off its record pace by mid-year


Location of Tornadoes in the US, January 1October 13, 2011Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# *1,805 tornadoes killed 546 people through Oct. 13, including at least 340 on April 26 mostly in the Tuscaloosa area, and 130 in Joplin on May 22


Location of Large Hail Reports in the US, January 1October 13, 2011Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# *There were 9,287 Large Hail reports through Oct. 13, causing extensive damage to homes, businesses and vehicles


Location of Wind Damage Reports in the US, January 1Oct. 13, 2011Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# *There were 18,293 Wind Damage reports through Oct. 13, causing extensive damage to homes and, businesses


Severe Weather Reports,January 1October 13, 2011*Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html# There have been 29,385 severe weather reports through Oct. 13; including 1,805 tornadoes; 9,287 Large Hail reports and 18,293 high wind events


Tornadoes accounted for just 6% of all Severe Weather Reports through October 13 but more than 500 deaths Number of Severe Weather Reports in US, by Type: January 1October 13, 2011Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2011_annual_summary.html#

*US CATASTROPHE INSURED LOSS UPDATEFirst Half 2011 CAT Losses Already Exceed All of 2010 and Could Become One of the Most Expensive Years on Record

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*US Insured Catastrophe Losses

*Estimate through Sept. 30, 2011.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Insurance Information Institute.First Half 2011 US CAT Losses Already Exceed Losses from All of 2010. Even Modest Hurricane Losses Will Make 2011 Among the Most Expensive Ever for CATs$100 Billion CAT Year is Coming EventuallyRecord Tornado Losses Caused 2011 CAT Losses to Surge($ Billions)2000s: A Decade of Disaster2000s: $193B (up 117%)1990s: $89B

Natural Disaster Losses in the United States: First 6 Months 2011*Source: MR NatCatSERVICE


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Top 12 (13?) Most Costly Disastersin U.S. History(Insured Losses, 2010 Dollars, $ Billions)

*Losses will actually be broken down into several events as determined by PCS.Sources: PCS; Insurance Information Institute inflation adjustments.Taken as a single event, the Spring 2011 tornado season would likely become 5th costliest event in US insurance history


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Combined Ratio Points Associated with Catastrophe Losses: 1960 2011:H1**Insurance Information Institute estimates for 2010 and 2011:H1Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO; Insurance Information Institute.The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent DecadesAvg. CAT Loss Component of the Combined Ratio by Decade1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 4.15*Combined Ratio Points


NumberGeophysical (earthquake, tsunami, volcanic activity)Climatological (temperature extremes, drought, wildfire)Meteorological (storm)Hydrological (flood, mass movement)Natural Disasters in the United States, 1980 2011*Number of Events (Annual Totals 1980 2010 and First Half 2011)

*Through June 30.Source: MR NatCatSERVICE*There were 98 natural disaster events in the first half of 2011378512


U.S. Thunderstorm Loss Trends, 1980 2011**Average thunderstorm losses are up more than 8 fold since the early 1980sHurricanes get all the headlines, but thunderstorms are consistent producers of large scale loss. 2008-2011 are the most expensive years on record.Thunderstorm losses in the first half of 2011 totaled $16.4 billion, a new annual record through just 6 months*Through June 30, 2011.Source: Property Claims Service, MR NatCatSERVICE


Source: Property Claims Service, MR NatCatSERVICEU.S. Winter Storm Loss Trends, 1980 2010 (Annual Totals) vs. First Half 2011*Insured winter storm losses in 2011 totaled $1.4 billion and are up 50% since 1980.


Source: National Forest Service, MR NatCatSERVICEU.S. Acreage Burned by Wildfires, 1980 2010 (Annual Totals) vs. First Half 2011*2011 could be a severe year for wildfire damage. Acres burned through June 30 already exceed all of 2010.


Notable Wildfires in 2011Texas: Millions of acres burned in west and central Texas. Over 500 homes and businesses destroyed, $250 million insured loss.Arizona and New Mexico: Wallow fire largest in AZ history at 538,000 acres, Las Conchas fire near Los Alamos, 30 buildings destroyed.April JuneSource: NASA*Source: Munich Re.


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 19902011:H11Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.Excludes snow.Does not include NFIP flood lossesIncludes wildland firesIncludes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISOs Property Claim Services Unit. Hurricanes & Tropical Storms, $160.5Fires (4), $9.0Tornadoes (2), $119.5Winter Storms, $30.0Terrorism, $24.9Geological Events, $18.5Wind/Hail/Flood (3), $12.7Other (5), $0.6Wind losses are by far cause the most catastrophe losses, even if hurricanes/TS are excluded.Tornado share of CAT losses is rising


Number of Federal Disaster Declarations, 1953-2011* *Through September 30, 2011.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011The number of federal disaster declarations set a new record in 2011, with 86 declarations through Sept. 30. It is no wonder that FEMA is broke!There have been 2,036 federal disaster declarations since 1953. The average number of declarations per year is 34 from 1953-2010, though that few havent been recorded since 1995.

*Federal Disasters Declarations by State, 1953 Sept. 30, 2011: Highest 25 StatesSource: 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

*Federal Disasters Declarations by State, 1953 Sept. 30, 2011*: Lowest 25 StatesSource: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.Over the past nearly 60 years, Wyoming, Utah and Rhode Island had the fewest number of Federal Disaster Declarations

Major Lesson of 2011 Global Catastrophes: Vulnerability of Supply Chains*Catastrophe Can Produce Costly Disruptions, but Solutions Are Available

Risk Management Techniques for Managing Supply Chain DisruptionsIdentification of RiskConduct thorough supply chain mapping exerciseLook at processes as they come together to create final productsLook in reverse: starting with where profits are generated and work backwards to identify greatest financial threats AvoidanceRemove the threat of exposure to the supply chainMitigationReduce the threat associated with exposuresManageIncludes transfer of risk through insurance

US$724,000Fire Physical Risk Management Practices versus Ave. Loss Severity (2005-08)US$3,200,000US$478,000Natural Catastrophes Physical Risk Management Practices versus Average Loss Severity (2005-08)Strong PracticesUS$3,400,000Weak PracticesIf Fail to Manage the Risk, the Consequences Can Be DireStrong PracticesWeak Practices Sources: FM Global.

SolutionsAvoid or mitigate the supply chain exposuresManage the financial impactSeize the opportunity

Avoid or Mitigate the InterruptionThoroughly understand your supply chain at every tier loss control and business impact analysisMap the manufacturing processIdentify weaknessesHarden facilities, owned or otherwiseDuplicate if necessaryOverlay with financial mappingDefine acceptable riskCreate contingency and disaster plans

Avoid or Mitigate the InterruptionGovernanceRisk toleranceFinance and balance sheet considerationsManufacturing

LogisticsSales and MarketingHuman ResourcesRisk ManagementAnd More!Requires top level commitmentMust engage multiple disciplines

Risk Transfer Products Part of the solutionInsurance product is evolvingTraditionally, physical damage, business interruption, CTEBusiness Interruption, two flavorsGross earningsGross profitsCTE Typically direct and/or named, first tier

Risk TransferSolutions continue to be created

Broad master global insurance policy (DIC & DIL)First party property coverageTime element select/extended period of liabilityContingent time element Contingent time element extended

Risk Transfer (continued)Solutions continue to be created (cont.)

Service interruptionOn premises servicesCivil or military authority (typically 30 days/5 miles)Ingress/egressComputer systems physical/non physical damage

The BIG Question:When Will the Market Turn?*Are Catastrophes and Other Factors Pressuring Insurance Markets?

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Criteria Necessary for a Market Turn:All Four Criteria Must Be Met Sources: Barclays Capital; Insurance Information Institute.

CriteriaStatusCommentsSustained Period of Large Underwriting LossesEarly Stage, InevitableApart from Q2:2011, overall p/c underwriting losses remain modestCombined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at onset of last hard market)Prior-year reserve releases continue reduce u/w losses, boost ROEsMaterial Decline in Surplus/ CapacityEntered 2011 At Record High; Since FallenSurplus hit a record $565B as of 3/31/11Fell by 1% in Q2 2011Little excess capacity remains in reinsurance marketsWeak growth in demand for insurance is insufficient to absorb much excess capacityTight Reinsurance MarketSomewhat in PlaceMuch of the global excess capacity was eroded by catsHigher prices in Asia/PacificModestly higher pricing for US risksRenewed Underwriting & Pricing DisciplineSome Firming in Property, WCCommercial lines pricing trends turning from negative to flat or up in some lines (property, WC)Competition remains intense as many seek to maintain market share


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Do the Property Catastrophe Events of 2011 Impact Casualty Markets?Unlikely that Record 2011 Property CAT Loss Will Impact Casualty Markets in Any Material Way Global P/C & Reinsurance Industries Entered 2011 w/ Record CapitalEvents so far in 2011 are earnings events, rather than capital eventsNatural Catastrophe and Casualty Risks Are Largely UncorrelatedRisks are differentGeographically, mostly distinct primary carriers: Japan-Australia-NZ-USCasualty markets generally dont influence property marketsProperty and Casualty Risks Are Largely SiloedRecord Property Losses in 2004/2005 Did Not Impact Casualty Mkts.Casualty Markets Have Their Own IssuesTort environmentInflationPublic policy


1. UNDERWRITING*Have Underwriting Losses Been Large Enough for Long Enough to Turn the Market?

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*P/C Insurance Industry Combined Ratio, 20012011:H1** Excludes Mortgage & Financial Guaranty insurers 2008--2011. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=110.5 Sources: A.M. Best, ISO.; III Estimated for 2011:H1 (Q1 actual ex-M&FG was 102.2).Best Combined Ratio Since 1949 (87.6)As Recently as 2001, Insurers Paid Out Nearly $1.16 for Every $1 in Earned PremiumsRelatively Low CAT Losses, Reserve ReleasesCyclical DeteriorationHeavy Use of Reinsurance Lowered Net LossesRelatively Low CAT Losses, Reserve ReleasesAvg. CAT Losses, More Reserve ReleasesHigher CAT Losses, Shrinking Reserve Releases, Toll of Soft Market


Underwriting Gain (Loss)19752011** Includes mortgage and financial guaranty insurers in all years. 2011 figure is actual H1 underwriting losses of $24.098 billion.Sources: A.M. Best, ISO; Insurance Information Institute.Large Underwriting Losses Are NOT Sustainable in Current Investment EnvironmentThe industry recorded a $10.4B underwriting loss in 2010 compared to $3.0B in 2009Cumulative underwriting deficit from 1975 through 2010 is $455B($ Billions)Underwriting losses in 2011 will be much larger: $24.1B based on H1 data

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Number of Years with Underwriting Profits by Decade, 1920s2010s * 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.**Data for the 2010s includes 2010 and 2011.Note: Data for 19201934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.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

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*P/C Reserve Development, 19922011EReserve Releases Are Remained Strong in 2010 But Should Begin to Taper Off in 2011Note: 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*Cyclical Pattern is P-C Impairment History is Directly Tied to Underwriting, Reserving & Pricing

P/C Insurer Impairments, 19692010 Source: A.M. Best Special Report 1969-2010 Impairment Review, June 21, 2010; Insurance Information Institute.The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets8 of the 18 in 2009 were small Florida carriers. Total also includes a few title insurers.

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2010Source: A.M. Best; Insurance Information Institute2010 impairment rate was 0.35%, down from 0.65% in 2009 and near the record low of 0.17% in 2007; Rate is still less than one-half the 0.81% average since 1969Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Reasons for US P/C Insurer Impairments, 19692010Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011. Historically, Deficient Loss Reserves and Inadequate Pricing Are By Far the Leading Cause of P-C Insurer Impairments. Investment and Catastrophe Losses Play a Much Smaller RoleDeficient Loss Reserves/ Inadequate PricingReinsurance FailureRapid GrowthAlleged FraudCatastrophe LossesAffiliate ImpairmentInvestment Problems (Overstatement of Assets)Misc.Sig. Change in Business


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Top 10 Lines of Business for US P/C Impaired Insurers, 20002010Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011. Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past DecadeWorkers CompFinancial GuarantyPvt. Passenger AutoHomeownersCommercial MultiperilCommercial Auto LiabilityOther LiabilityMed MalSuretyTitle


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Number of Recessions Endured by P/C Insurers, by Number of Years in OperationSources: Insurance Information Institute research from National Bureau of Economic Research data.Number of Recessions Since 1860Mutual Insurers, Which Account for the Majority of Centenarian Insurers, Are True SurvivorsNumber of Years in OperationThe median NAMIC member is about 120 years old. This means that the typical NAMIC member has experienced about 25 recessions during its existenceAND SURVIVED

*Performance by Segment: Commercial Lines & Reinsurance

P/C Underwriting Results: 2008-2010P

Source: All lines except WC for 2008-09, A.M. Best; Worker Comp., NCCI; 2010P data, ISO. Private carriers only.

Line of Business200820092010PPersonal Auto100.3101.3101Homeowners117.0105.6107Other Liability (incl. Prod Liab)95105110Workers Compensation101110.5115Commercial Multi Peril10497101Commercial Auto96.899.598Fire & Allied Lines (incl. EQ)998083All Other Lines11396101Total P/C Industry104101102

Source: 2011 RIMS Benchmark Survey; A.M. Best; Insurance Information InstituteCommercial Lines Combined Ratio, 1990-2011PCommercial lines in 2011 will likely experience record their worst underwriting performance since 2002

Homeowners Insurance Combined Ratio: 19902011PHomeowners Line Could Deteriorate in 2011 Due to Large Cat Losses. Extreme Regional Variation Can Be Expected Due to Local Catastrophe Loss Activity

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

Private Passenger Auto Combined Ratio: 19932011PPrivate Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry


Commercial Multi-Peril Combined Ratio: 19952011PCommercial Multi-Peril Underwriting Performance is Expected to Deteriorate Modestly

*2011P figure is III estimate for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.

Commercial Auto Combined Ratio: 19932011P

Sources: A.M. Best; Insurance Information Institute.Commercial Auto Underwriting Performance is Expected to Deteriorate Modestly

Inland Marine Combined Ratio: 19992011PInland Marine is Expected to Remain Among the Most Profitable of All Lines

Sources: A.M. Best (historical); Insurance Information Institute estimate for 2011.

Workers Compensation Combined Ratio: 19942011PWorkers Comp Underwriting Results Are Deteriorating Markedly and the Worst They Have Been in a Decade


2. SURPLUS/CAPITAL/CAPACITY*Have Large Global Losses Reduced Capacity in the Industry, Setting the Stage for a Market Turn?

US Policyholder Surplus:19752011** As of 6/30/11.Source: A.M. Best, ISO, Insurance Information Institute.Surplus is a measure of underwriting capacity. It is analogous to Owners Equity or Net Worth in non-insurance organizations($ Billions)The Premium-to-Surplus Ratio Stood at $0.78:$1 as of 6/30/11, A Near Record Low (at Least in Recent History)**Surplus as of 6/30/11 was a near-record $559.1 down 1% from the record $564.7B as of 3/31/11, but up 27.9% ($122B) from the crisis trough of $437.1B at 3/31/09. Prior peak was $521.8 as of 9/30/07. Surplus as of 6/30/11 was 7.1% above 2007 peak.

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Policyholder Surplus, 2006:Q42011:Q2Sources: ISO, A.M .Best.($ Billions)2007:Q3 Previous Surplus PeakSurplus as of 6/30/11 fell by 1% below its all time record high of $564.7B set as of 3/31/11. Further declines are likely*Includes $22.5B of paid-in capital from a holding company parent for one insurers investment in a non-insurance business in early 2010.The Industry now has $1 of surplus for every $0.78 of NPWthe strongest claims-paying status in its history.

Implied Excess (Deficit) Capital Assuming Premium/Surplus Ratio = 0.9:1Excess/(Deficit) Capital (Policyholder Surplus)Record Policyholder Surplus (Capital) Has Resulted Significant Excess Capital in the P/C Insurance Sector As of Year End 2010. Deteriorating Underwriting Losses, Higher CAT Activity, More Modest Market Returns Will Likely Shrink Excess Capital in 2011.Annual Change in Policyholder Surplus2000-2002: Tech bubble bursts, 9/11, high underwriting losses erode capital base 2005: Katrina, Rita, Wilma produce record CAT losses2006/07: Low CAT losses, strong underwriting results since 1940s increase capital2008: Financial crisis causes sharp drop in capital2009-10: End of financial crisis, rising asset prices. modest u/w losses push capital to record levelsNote: The assumption of a 0.9:1 P/S ratio is derived from a Feb. 2011 announcement by Advisen, Ltd., that the US P/C insurance industry has $74 billion in excess capital. The implied P/S ratio (calculated by III) is 0.88:1, which was rounded to 0.9:1.Source: Insurance Information Institute calculations from A.M. Best and ISO data. * Net Premiums Written

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*M&A Activity Globally Among P/C Insurers Remains Subdued: Little Capacity LeavingSources: Conning Research; Insurance Information Institute. $ Billions

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Paid-in Capital, 20052010Source: ISO; Insurance Information Institute.($ Billions)Paid-in capital for insurance operations rose by $27.4B in 2010, the largest on record dating back to 1959In 2010 One Insurers Paid-in Capital Rose by $22.5B as Part of an Investment in a Non-insurance Business$27.4

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information InstituteThe Financial Crisis at its Peak Ranks as the Largest Capital Event Over the Past 20+ Years(Percent)


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*

* 2011 NWP and Surplus figures are % changes as of H1:11 vs. H1:10. Sources: A.M. Best, ISO, Insurance Information InstituteHistorically, Hard Markets FollowWhen Surplus Growth is Negative*(Percent)Sharp Decline in Capacity is a Necessary but Not Sufficient Condition for a True Hard MarketSurplus growth still exceeds premium growth, suggesting an ongoing build-up of capacity in early 2011

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*The Premium-to-Surplus Ratio in 2011:H1 Implies that P/C Insurers Held $1 in Surplus Against Each $0.78 Written in Premiums. In 1974, Each $1 of Surplus Backed $2.70 in Premium.

*2011 data are as of 6/30/11.Sources: Insurance Information Institute calculations from A.M. Best data.Ratio of Net Premiums Written to Policyholder Surplus, 1970-2011*The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.76:1 in 2010. It has decreased as PHS grows more quickly than NPW, with the effect of holding down profitability.Record High P-S Ratio was 2.7:1 in 1974Record Low P-S Ratio was 0.76:1 as of 12/31/10, rising slightly to 0.78:1 as of 6/30/11


*3. REINSURANCE MARKET CONDITIONSRecord Global Catastrophes Activity is Pressuring Pricing

Source: Holborn; RAA.* 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.

Significant Market Losses, 1985-2011*

Source: Holborn, RAA. *2011 events as of March 31 are preliminary and may change as loss estimates are refined further.Significant Market Losses by Event, 1985-2011*Reinsurers are bearing a very high share of recent catastrophe lossesLosses are putting pressure on property cat reinsurance prices in affected regions. The impact for US property catastrophe pricing is uncertain.

Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011.Global Property Catastrophe Rate on Line Index, 1990-2011 YTD (6/1/11)A modest increase in global property catastrophe reinsurance pricing was evident in June 1 renewals in the wake of record global catastrophe losses. Larger increase could occur for the Jan.1, 2012 renewals

4. RENEWED PRICING DISCIPLINE*Is There Evidence of a Broad and Sustained Shift in Pricing?

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Soft Market Persisted in 2010 but Growth Returned: More in 2011?(Percent)1975-781984-872000-03*2011 figure is for H1 vs. 2010:H1. Shaded areas denote hard market periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.Net Written Premiums Fell 0.7% in 2007 (First Decline Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.NWP was up 0.9% in 20102011:H1 growth was +2.6%


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*P/C Net Premiums Written: % Change, Quarter vs. Year-Prior QuarterSources: ISO, Insurance Information Institute. Pricing and more stable exposure environment are contributing to consistent positive growth in recent quarters (vs. the same quarter, prior year)Positive premium growth continued into through the first half of 2011.

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Average Commercial Rate Change,All Lines, (1Q:20043Q:2011)Source: Council of Insurance Agents & Brokers; Insurance Information InstituteKRW EffectPricing as of Q3:2011 is positive for the first time since 2003(Percent)Q2 2011 marked the 30th consecutive quarter of price declines


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q3Source: Council of Insurance Agents and Brokers; Insurance Information Institute.Percentage Change (%)Peak = 2001:Q4 +28.5%Pricing Turned Negative in Early 2004 and Has Been Negative Ever SincePricing turned positive (+0.9%) in Q3:2011, the first increase in nearly 7 years (Q4:2003)KRW Effect: No Lasting ImpactTrough = 2007:Q3 -13.6%


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q3Source: Council of Insurance Agents and Brokers; Insurance Information Institute.Downward pricing pressure still evident for large accounts, down 0.6% in Q3:2011Despite Q3:2011 gain of 0.9%, pricing today is where is was in late 2000 (pre-9/11)1999:Q4 = 100


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Change in Commercial Rate Renewals, by Line: 2011:Q3Source: Council of Insurance Agents and Brokers; Insurance Information Institute.Major Commercial Lines Renewed Uniformly Upward in Q3:2011 for the First Time Since 2003, With Workers Up More than Any Other LinePercentage Change (%)


Workers Comp Rate Changes,2008:Q4 2011:Q3Source: Council of Insurance Agents and Brokers; Information Institute.The Q3 2011 WC rate change was the largest among all major commercial lines(Percent Change)

*Insurance Information Institute estimates for 2011.Source: 2011 RIMS Benchmark Survey; A.M. Best; Insurance Information InstituteCost of Risk vs. Commercial Lines Combined RatioThe cost of risk cannot continue to fall as actual results deteriorate

How the Risk Dollar is Spent (2011)Source: 2011 RIMS Benchmark Survey, Advisen; Insurance Information InstituteFirms w/Revenues < $1 BillionFirms w/Revenues > $1 BillionTotal liability costs account for 35% - 40% of the risk dollar

*Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010Sources: SNL Financial LC.; Insurance Information Institute.Top 25 StatesNorth Dakota is the growth juggernaut of the P/C insurance industrytoo bad nobody lives there

*Sources: SNL Financial LC; Insurance Information Institute.Bottom 25 StatesStates with the poorest performing economies also produced the most negative net change in premiums of the past 5 yearsDirect Premiums Written: All P/C Lines Percent Change by State, 2005-2010US Direct Premiums Written declined by 1.6% between 2005 and 2010

Workers Comp Rate Changes,2008:Q4 2011:Q2Source: Council of Insurance Agents and Brokers; Information Institute.The Q2 2011 WC rate change was first increase in many years(Percent Change)

*The Unfortunate Nexus: Opportunity, Risk & InstabilityMost of the Global Economys Future Gains Will be Fraught with Much Greater Risk and Uncertainty than in the Past

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Global Real (Inflation Adjusted) NonlifePremium Growth: 1980-2010Source: Swiss Re, sigma, No. 2/2010.Nonlife premium growth in emerging markets has exceeded that of industrialized countries in 27 of the past 31 years, including the entirety of the global financial crisis..Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as well as a lack of consistent cyclicalityAverage: 1980-2010Industrialized Countries: 3.8%Emerging Markets: 9.2%Overall Total: 4.2%

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Nonlife Real Premium Growth Ratesby Region: 2000-2009 and 2010Source: Swiss Re, sigma, No. 2/2011.Every emerging market region except Central and Eastern Europe experienced growth during the financial crisis and into 2010Many emerging market economies continued to grow during the global financial crisis and continued to benefit from foreign direct investment

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Distribution of Nonlife Premium: Industrialized vs. Emerging Markets, 2009Sources: NAIC; Insurance Information Institute research.Although premium growth throughout the industrialized world was negative in 2009, its share of global nonlife premiums remained very high at nearly 86%--accounting for nearly $1.5 trillion in premiums. The financial crisis and sluggish recovery in the major insurance markets will accelerate the expansion of the emerging market sectorPremium Growth FactsIndustrialized Economies

$1, 485.8Emerging Markets$248.82009, $BillionsDeveloping markets now account for 47% of global GDP but just 14% of nonlife premiums


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Nonlife Real Premium Growth in 2010Source: Swiss Re, sigma, No. 2/2011.Latin and South American markets performed relatively well during and after the global financial crisis in terms of growthThere was also growth in the Middle East, East and South Asia as well as Australia and New Zealand

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Political Risk in 2010: Greatest Business Opportunities Are Often in Risky Nations Source: MaplecroftThe fastest growing markets are generally also among the politically riskiestHeightened risk has insurance implications

Source: International Monetary Fund, World Economic Outlook Update, June 2011; Ins. Info. Institute.Emerging economies (led by China) are expected to grow by 6.6% in 2011 and 6.4% in 2012. Role of FDI in exposure growth key.GDP Growth: Advanced & Emerging Economies vs. World, 1970-2012FAdvanced economies are expected to grow at a relative modest 2.2% in both 2011 and 2.6% in 2012.World output is forecast to grow by 4.3% in 2011 and 4.6% in 2011, following growth of 3.0% in 2010 and a 0.6% drop in 2009.GDP Growth (%)

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Relative Shares of Global Output,Advanced vs. Developing Economies, 2009Source: EDC Economics, The Moment of Truth: Global Export Forecast Fall 2010, at http://www.edc.ca/english/docs/gef_e.pdf The gap is closing quickly. China became the worlds second largest economy in 2010 and before long the developing worlds share of GDP will exceed that of advanced economies.


*Real GDP Growth Forecasts for Advanced Economies: 2011 - 2012Sources: Blue Chip Economic Indicators (10/2011 issue); Insurance Information Institute.Growth projections could slow for 2011 and 2012 have been revised downward as austerity measures take effect and concerns related to sovereign debt worsen

*Growth in emerging and developing economies will greatly outpace advanced country growth in 2011/12. This will accelerate the growth of insurance exposures in emerging markets relative to the U.S., W. Europe and Japan.Real GDP Growth Forecasts for Key Developing Economies: 2011 - 2012Sources: Blue Chip Economic Indicators (10/2011 issue); Insurance Information Institute.Growth in China and India remain high, though China is tapping on the breaks to slow inflation. These markets are promising but foreign firms must contend with many barriers to entry.

*Growth in industrialized Asian economies will greatly outpace much of the rest of the world in 2011/12. This will accelerate the growth of insurance exposures in emerging markets relative to the U.S., W. Europe and Japan.Real GDP Growth Forecasts for Other Key Trading Economies: 2011 - 2012Sources: Blue Chip Economic Indicators (10/2011 issue); Insurance Information Institute.Asia/Pacific trading nations should show strong growth in 2011/12 compared to Europe and the US

*Other Cycle-Influencing FactorsCould Other Factors Act as a Catalyst to Turn the Market?

INVESTMENTS: THE NEW REALITY*Investment Performance is a Key Driver of Profitability Does It Influence Underwriting or Cyclicality?

Property/Casualty Insurance Industry Investment Gain: 19942011:H11Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to Fall by 50% in 20081 Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.* 2005 figure includes special one-time dividend of $3.2B.Sources: ISO; Insurance Information Institute.($ Billions)2011 investment gains are likely to come in below 2010 due to lower interest rates and poor stock market returns

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Treasury Yield Curves: Pre-Crisis (July 2007) vs. Sept. 2011* Treasury yield curve remains near its most depressed level in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2013.The End of the Feds Quantitative Easing Is Unlikely to Push Interest Rates Up Substantially Given Ongoing Economic Weakness

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


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Treasury Yield Curves Before and After S&P DowngradeTreasury actually fell in the wake of the S&P downgrade, despite (theoretically) higher riskS&Ps Downgrade on August 5th Did Not Increase the Borrowing Costs of the US Government. In Fact, Treasury Yields Fell Afterwards

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


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

Shifting Legal Liability & Tort Environment*Is the Tort Pendulum Swinging Against Insurers?

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical($ Billions)Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1ATort Costs Have Remained High but Relatively Stable Since the mid-2000s. As a Share of GDP they Should Fall as the Economy Expands


Business Leaders Ranking of Liability Systems in 2010Best StatesDelawareNorth DakotaNebraskaIndianaIowaVirginiaUtahColoradoMassachusettsSouth DakotaWorst StatesNew MexicoFloridaMontanaArkansasIllinoisCaliforniaAlabamaMississippiLouisianaWest VirginiaSource: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.Midwest/West has mix of good and bad states.

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*The Nations Judicial Hellholes: 2010Source: American Tort Reform Association; Insurance Information InstituteSouth FloridaWest VirginiaIllinoisCook CountyNevadaClark CountyCaliforniaLos Angeles and Humboldt CountiesPhiladelphia


Avg. Jury Awards 1999 vs. 2003 and 2008*Award trends in wrongful deaths of adult males.Source: Jury Verdict Research; Insurance Information Institute.

Sum of Top 10 Jury Awards 2004-2010Source: Insurance Information Institute from Lawyers USA, January 2005, 2006, 2007, 2008, 2009, and 2010.

Inflation*Is it a Threat to Claim Cost Severities

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Annual Inflation Rates, (CPI-U, %),19902017F Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/11 (forecasts). The slack in the U.S. economy suggests that inflation should not heat up before 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concernsAnnual 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 2009/10Higher energy, commodity and food prices are pushing up inflation in 2011, but not longer turn inflationary expectations.


Medical Cost Inflation Has Outpaced Overall Inflation Over 50 Years*Based on change from Feb. 2011 to Feb. 2010 (latest available) Source: Department of Labor (Bureau of Labor Statistics)A claim that cost $1,000 in 1961 would cost nearly $16,000 based on medical cost inflation trends over the past 50 years.

Regulatory Environment & Financial Services Reform*Insurers Not as Impacted as Banks, But Dodd-Frank Implementation Has Been a Concern for Insurers

Source: James Madison Institute, February 2008.MENHMACTPAWVVANCLATXOKNENDMNMIILIAIDWAORAZHINJRI BDEALVTNYMDSCGATNALFLMSARNMKYMOKSSDWIINOHMTCANVUTWYCOAK= A= B= C= D= F= NGSource: Heartland Institute, May 2011BB+B+DBC-B-B+B+C-B+C-BC+C-C-B-D-BFDC-C-C+B+B+B+A+A+C-BAABC+C+B-B-C+CFD+FD+BC+FFD-2010 Property and Casualty InsuranceRegulatory Report CardNot Graded: District of ColumbiaPennsylvanias regulatory environment got a grade of C in 2010

Dodd-Frank & Insurance One Year:Status Report*Expectations vs. Reality

*Dodd-Frank ImplementationStatus Report for Insurers: Slow StartFinancial Stability Oversight CouncilSlow to Consider Insurer ConcernsFSOC deliberates largely behind closed doorsCriteria and process for designation of Systemically Important Financial Institutions (SIFIs) were not announced until October 12, 2011Possible that small number of US insurers will be designated as SIFIsOperated/deliberated until late September 2011 without a voting member representing the insurance industryRoy Woodall, approved by Senate in Sept. 27, 2011, is the sole voting representative for the entire p/c and life insurance industry (was Kentucky Ins. Comm. 1966-1967; Worked in other insurance trade posts, Treasury)Two non-voting FSOC members represent insurance interests:FIO Director Michael McGraith (started June 1, 2011)Missouri Insurance Director John Huff (started in Sept. 2010)Not allowed to brief fellow regulators on FSOC discussionsSource: Insurance Information Institute (I.I.I.) updates and research

*Dodd-Frank Implementation:SYSTEMIC RISK CRITERIAAll Banks with Assets > $50B Considered Systemically ImportantNon-Bank Financial Groups with Global Consolidated Assets > $50B Will Be Examined for Systemic Riskiness, But Not Automatically Labeled as a Systemically Important Financial Institution (SIFI)Foreign firms with assets in the US exceeding $50 billion will also fall under reviewIf Firm Exceeds the $50B Threshold, a 3-Stage Test AppliesSTAGE 1: Non-Banks Financial Groups with $50B+ Assets Will Be Evaluated on Five Uniform Quantitative Thresholds, at Least One of Which Will Have to Be Met to Trigger a Further (Stage 2) Review Potentially Leading to a SIFI DesignationLeverage: Would have to be leveraged more than 15:1 (insurers unlikely to trigger)ST Debt-to-Assets: Would have to a ratio of ST debt (less than 12 months to maturity) to consolidate assets exceeding 10%Debt: Have total debt exceeding $20 billion (i.e., loans borrowed and bond issues)Derivative Liabilities: Have derivative liabilities exceeding $3.5 billionCredit Default Swaps: Have more than $30 billion CDS outstanding for which the nonbank financial firm is the reference entity (i.e., CDS written against firms failure) Thresholds Considered to Be GuidepostsNot all companies that breach a barrier will be deemed systemically importantRegulators retain right to include firms that do meet any of the criteria

Source: Financial Stability Oversight Council; Insurance Information Institute (I.I.I.) research.

*Dodd-Frank Implementation:SYSTEMIC RISK CRITERIA (continued)STAGE 2: Analysis of Firms Triggering Uniform Quantitative ThresholdsFirms triggering one or more of the quantitative thresholds in Stage 1 will be analyzed using publicly available information in order to conduct a more thorough reviewNo data call will be required at this stageFirms viewed as potentially systemically important (candidate SIFIs) will subject to a Stage 3 analysisSTAGE 3: Analysis of Candidate Systemically Important Financial InstitutionsFirms deemed in Stage 2 to be potentially systemically important will be subjected to more detailed analysis including data not available during the Stage 2 analysisStage 3 firms will be notified by the FSOC that they are under consideration and will have the opportunity to contest their considerationSIFI DESIGNATION PROCEDURE: 2-Stage Voting Procedure by FSOC is Required Before a Final SIFI Designation is MadeAt the conclusion of the Stage 3, FSOC has the authority to propose a firm be designated as a SIFIRequires 2/3 majority vote of FSOC members, including affirmation of the Chair (Treasury Secretary)Potential SIFI firm will be given written explanation for the determinationFirm can request a hearing to contest the determinationFinal determination requires another 2/3 majority of FSOC members and affirmation of the Chair

Source: Financial Stability Oversight Council; Insurance Information Institute (I.I.I.) research.

*Dodd-Frank Implementation:FSOC MEMBERSMembers of the Financial Stability Oversight CouncilThere are 10 voting members of the FSCOTreasury Secretary and FSOC Chair: Timothy GeithnerFederal Reserve Chairman: Ben BernankeSecurities & Exchange Commission Chairman: Mary ShapiroCommodities Futures Trading Commission Chairman: Gary GenslerNational Credit Union Administration Chairman: Debbie Matz(Acting) Comptroller of the Currency: John WalshFederal Housing Finance Agency (Acting) Director: Edward DeMarcoConsumer Financial Protection Bureau Director: Position is Currently VacantIndependent Insurance Expert: Roy Woodall There are 2 nonvoting members of the FSOC representing insurance interestsFederal Insurance Office Director Mike McGraithJohn Huff, Director of the Missouri Insurance DepartmentSource: Financial Stability Oversight Council; Insurance Information Institute (I.I.I.) research.

Total Assets Greater than $50 Billion: Publically Traded US InsurersSource: Barclays Capital*While quite a few US insurers exceed the $50B threshold, few will meet the other criteria for a SIFI designation


Derivative Liabilities: Publically Traded US InsurersSource: Barclays Capital*Few US insurers exceed the $3.5B threshold for derivatives liabilities


Total Debt: Publically Traded US InsurersSource: Barclays Capital*Few US insurers exceed the $20B threshold for total debt


Gross Notional Credit Default Swaps: Publically Traded US InsurersSource: Barclays Capital*Very few US insurers exceed the $30B threshold for CDS written against them


*Dodd-Frank Implementation:Federal Insurance Office: Very QuietFIOs First Director Did Not Assume Office Until June 1, 2011Former Illinois Insurance Director Michael McGraithSmall staff (10-12) and modest budgetMcGraith has made few appearances or public commentsStudy on State of Insurance Regulation Due Jan. 21, 2012Report will likely review previously identified inefficiencies and strengths of current regulatory system with an eye toward modernization.Treasury Will Likely Exert Heavy Influence on the Report

Source: Insurance Information Institute (I.I.I.) updates and researchFormer President of P/C Insurance at The Hartford

The Strength of the Economy Will Influence P/C Insurer Growth Opportunities*Growth Would Also Help Absorb Excess Capital

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*US Real GDP Growth**Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 10/11; Insurance Information Institute.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 BroadlyReal GDP Growth (%)Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction has been severe but modest recovery is underwayThe Q4:2008 decline was the steepest since the Q1:1982 drop of 6.8%2011 got off to a sluggish start, but growth is expected to proceed at a more modest, though still relatively weak pace through 2012


2011 Financial Overview State Economic Growth Varied in 201012/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Texas had one of the stronger economies in 2010 and has generally outperformed during the economic downturnHard hit Midwest and Northeast states finally entering recovery in 2010


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*(Millions of Units)New Private Housing Starts, 1990-2022FSource: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11); Insurance Information Institute.Little Exposure Growth Likely for Homeowners Insurers Until 2014. Also Affects Commercial Insurers with Construction Risk Exposure, SuretyNew home starts plunged 72% from 2005-2009; A net annual decline of 1.49 million units, lowest since records began in 1959The plunge and lack of recovery in homebuilding and in construction in general is holding back payroll exposure growthJob growth, improved credit market conditions and demographics will eventually boost home construction


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*(Millions of Units)Auto/Light Truck Sales, 1999-2022FSource: U.S. Department of Commerce; Blue Chip Economic Indicators (10/11); Insurance Information Institute.Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector.New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2011-12 is still far below 1999-2007 average of 17 million units, but a recovery is underway.Job growth and improved credit market conditions will boost auto sales in 2011 and beyond


Recovery in Capacity Utilization is a Positive Sign for Commercial ExposuresSource: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. *Percent of Industrial CapacityHurricane KatrinaMarch 2001-November 2001 recession Full CapacityThe closer the economy is to operating at full capacity, the greater the inflationary pressureThe US operated at 77.5% of industrial capacity in July 2011, above the June 2009 low of 68.3%December 2007- June 2009 Recession

ISM Manufacturing Index(Values > 50 Indicate Expansion)January 2010 through August 2011The manufacturing sector has been expanding and adding jobs. The question is whether this will continue. Source: Institute for Supply Management; Insurance Information InstituteOptimism among manufacturers dropped sharply beginning in May.

Consumer Sentiment Survey (1966 = 100)January 2010 through August 2011Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact comsumers.Source: University of Michigan; Insurance Information InstituteOptimism among consumers plunged amid the debt debate debacle and S&P downgrade

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Number of Private Business Establishments, 2001:Q1-2010:Q3Sources: U.S. Bureau of Labor Statistics; Insurance Information InstituteIn 2009:Q1 a net of 165,000 businesses disappeared. By 2010:Q3 73,000 new ones appeared, returning us to the level first attained three years before, in 2007:Q3. MillionsNo net growth in number of businesses since 2007

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Business Bankruptcy Filings,1980-2011:H1

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ; Insurance Information InstituteSignificant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline 2010 bankruptcies totaled 56,282, down 7.5% from 60,837 in 2009which were up 40% from 2008 and the most since 1993. 2011:H1 filings are down 15.1% from 2010:Q2.

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Private Sector Business Starts, 1993:Q2 2010:Q4*Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure* Data through December 31, 2010 are the latest available as of September 8, 2011; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm. (Thousands)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 Starts 2006: 872,000 2007: 843,000 2008: 790,000 2009: 697,000 2010: 722,000

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*11 Industries for the Next 10 Years: Insurance Solutions NeededShipping (Rail, Marine, Trucking)Health SciencesHealth CareEnergy (Traditional)Alternative EnergyAgricultureNatural ResourcesEnvironmentalTechnology (incl. Biotechnology)Light ManufacturingExport-Oriented IndustriesMany industries are poised for growth, but many insurers do not write in these economic segments


*Labor Market TrendsMassive Job Losses Sapped the Economy and Commercial/Personal Lines Exposure, But Trend is Improving

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Unemployment and Underemployment Rates: Stubbornly High in 2011Unemployment stood at 9.1% in SeptemberUnemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.Peak rate in the last 30 years: 10.8% in November - December 1982Source: US Bureau of Labor Statistics; Insurance Information Institute.U-6 went from 8.0% in March 2007 to 17.5% in October 2009; Stood at 16.5% in Sept. 2011January 2000 through September 2011, Seasonally Adjusted (%)Recession ended in November 2001 Unemployment kept rising for 19 more monthsRecession began in December 2007Stubbornly high unemployment and underemployment will constrain overall economic growthSep 11

Monthly Change in Private EmploymentJanuary 2008 through September 2011* (Thousands)Private Employers Added 2.764 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 JobsSource: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information InstituteMonthly Losses in Dec. 08Mar. 09 Were the Largest in the Post-WW II Period137,000 private sector jobs were created in September

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Change in Number Employedin Select Industries, June 2011 vs. June 2010 Sources: US Bureau of Labor Statistics Employment Situation, June 2011; Insurance Information Institute. There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recoveryThousandsProfessional Business Services, Health Care, and Trade, Transportation & Utilities) were the job growth leaders in the past year.


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Monthly Change Employment*Monthly Losses in Dec. 08Mar. 09 Were the Largest in the Post-WW II PeriodSource: US Bureau of Labor Statistics: http://www.bls.gov/ces/home.htm; Insurance Information InstituteJob Losses Since the Recession Began in Dec. 2007 Peaked at 8.4 Mill in Dec. 09; 14.0 Million People are Now Defined as UnemployedJanuary 2008 through August 2011* (Thousands)The job gain and loss figures in 2010 were severely distorted by the hiring and termination of temporary Census workers. In 2010, 1.178 million nonfarm jobs were created. Zero nonfarm jobs were created in August

*Unemployment Rates by State, September 2011:Highest 25 States**Provisional figures for September 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.In September, 25 states reported over-the-month unemployment rate decreases, 14 had increases, and 11 and the District of Columbia had no change.

*Unemployment Rates By State, September 2011: Lowest 25 States**Provisional figures for September 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.In September, 25 states reported over-the-month unemployment rate decreases, 14 had increases, and 11 and the District of Columbia had no change.

*Unemployment Rates by State, August 2011:Highest 25 States**Provisional figures for August 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.In August, 26 states and the District of Columbia reported over-the-month unemployment rate increases, 12 had decreases, and 12 had no change.

*Unemployment Rates By State, August 2011: Lowest 25 States**Provisional figures for August 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.In August, 26 states and the District of Columbia reported over-the-month unemployment rate increases, 12 had decreases, and 12 had no change.

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Labor Underutilization: Broader than Just Unemployment% of Labor ForceMarginally Attached and Unemployed Persons Account for 16.5% of the Labor Force in September 2011 (1 Out Every 6 People). Unemployment Rate Alone was 9.1%. Underutilization Shows a Broader Impact on WC and Other Commercial ExposuresNOTE: Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule. Source: US Bureau of Labor Statistics; Insurance Information Institute.

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*US Unemployment RateRising unemployment eroded payrolls and workers comps exposure base.Unemployment peaked at 10% in late 2009.* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (10/11); Insurance Information Institute 2007:Q1 to 2012:Q4F*Unemployment forecasts remain stubbornly high through 2011, but still imply millions of new jobs will created.Jobless figures have been revised upwards for 2011/12


Estimated Effect of Recessions* on Payroll (Workers Comp Exposure)*Data represent maximum recorded decline over 12-month period using annualized quarterly wage and salary accrual dataSource: Insurance Information Institute research; Federal Reserve Bank of St. Louis (wage and salary data); National Bureau of Economic Research (recession dates).Recessions in the 1970s and 1980s saw smaller exposure impacts because of continued wage inflation, a factor not present during the 2007-2009 recessionThe Dec. 2007 to mid-2009 recession caused the largest impact on WC exposure in 60 years(Percent Change)(All Post WWII Recessions)Recession Dates (Beginning/Ending Years)

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Payroll Base* WC NWPWage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums*Private employment; Shaded areas indicate recessions. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.29% of NPW has been eroded away by the soft market and weak economy7/90-3/913/01-11/0112/07-6/09$Billions $BillionsWC premium volume dropped two years before the recession beganWC net premiums written were down $14B or 29.3% to $33.8B in 2010 after peaking at $47.8B in 2005


*Direct Premiums Written: Workers CompPercent Change by State, 2005-2010**Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.Top 25 StatesOnly 7 (small) states showed growth in workers comp premium volume between 2005 and 2010

*Direct Premiums Written: Workers CompPercent Change by State, 2005-2010*Bottom 25 StatesStates with the poorest performing economies also produced the most negative net change in premiums of the past 5 years*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.Workers Comp DPW plunged 28.7% from between 2005 and 2010

www.iii.orgThank you for your time and your attention!Twitter: twitter.com/bob_hartwigDownload at www.iii.org/presentationsInsurance Information Institute Online:

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Leading Captive Domiciles, 2008-2010Source: Business Insurance.


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Captives by State, 2009-2010 Source: Business Insurance.


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*World Captive Growth, 2005-2010 Source: Business Insurance.


12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*State Captive Growth, 2005-2010 Source: Business Insurance.


Workers Compensation Operating Environment*The Weak Economy and Soft Market Have Made the Workers Comp Operating Increasingly Challenging

Workers Compensation Premium Continues Its Sharp Decline

Net Written Premium*$ BillionsCalendar Yearp Preliminary

Source:19902009 Private Carriers, Best's Aggregates & Averages; 2010p, NCCI19962010p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual StatementsState Funds available for 1996 and subsequent

Chart1

30.996355121199030.99635512129.6218333333

31.316294561199131.31629456129.6218333333

29.753761604199229.75376160429.6218333333

30.505050416199330.50505041629.6218333333

29.077386128199429.07738612829.6218333333

26.321967199526.32196729.6218333333

25.2022542292.978528.18075422929.6218333333

24.1837901242.68160564926.86539577329.6218333333

23.2946400432.64489657325.93953661629.6218333333

22.3046468712.70238460225.00703147329.6218333333

24.9569314073.68248656928.63941797629.6218333333

26.1339284426.01172184932.14565029129.6218333333

29.2496146158.42109217137.67070678629.6218333333

31.11759665611.15621781542.27381447129.6218333333

34.66200689111.81904513146.48105202229.6218333333

37.78456117610.06547.84956117629.6218333333

38.611554647.84336603846.45492067829.6218333333

37.5876696676.72832548144.31599514829.6218333333

33.7553302085.545318139.30064830829.6218333333

30.34.334.629.622

29.93.933.829.622

Private Carriers ($ B)

State Funds ($ B)

Label Placeholder

AVG

Sheet1

Updated by JuanApril 17, 2009 (AIS 2008 QC Template5.xls)Private Carriers ($ B)State Funds ($ B)Label PlaceholderAVG2005 is missing for MD State

199030.99630.99629.622

199131.31631.31629.622

199229.75429.75429.622

199330.50530.50529.622

199429.07729.07729.622

199526.32226.32229.622

199625.2022.97928.18129.622

199724.1842.68226.86529.622

199823.2952.64525.94029.622

199922.3052.70225.00729.622

200024.9573.68228.63929.622

200126.1346.01232.14629.622

200229.2508.42137.67129.622

200331.11811.15642.27429.622

200434.66211.81946.48129.622

200537.78510.06547.85029.622

200638.6127.84346.45529.622

200737.5886.72844.31629.622

200833.7555.54539.30129.622

200930.3004.30034.60029.622

2010p29.9003.90033.80029.622

12/01/09 - 9pmeSlide P6466 The Financial Crisis and the Future of the P/C*Workers Compensation Net Premiums Written and Annual Growth Rates: 1970-2010P($ Billions)

Sources: A.M. Best (1973-2009); Insurance Information Institute calculations and estimates for 2010. WC premium growth hit a 40+ year low in 2009 at -13%. Improving labor markets began to help in 2010/11.


Workers Comp Rate Changes,2008:Q4 2011:Q1Source: Council of Insurance Agents and Brokers; Information Institute.The Q1 2011 WC rate change was the smallest decrease in many years(Percent Change)

Average Approved BureauRates/Loss Costs*PercentCalendar Year

* States approved through 4/23/2010Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating organization

Cumulative19901993+36.3%Cumulative 20002003+17.1%Cumulative 20042011-26.2%Cumulative 19941999-27.8%*States approved through 4/8/11.Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.History of Average WC Bureau Rate/Loss Cost Level Changes

Chart1

12.112.1

7.47.4

1010

2.92.9

-6.4-6.4

-3.2-3.2

-6-6

-8-8

-5.4-5.4

-2.6-2.6

3.53.5

1.21.2

4.94.9

6.66.6

-6-6

-5.1-5.1

-5.7-5.7

-6.6-6.6

-3.1-3.1

-2-2

-1.1-1.1

0.20.2

Sheet1

Updated by: Matt CrottsApr 13, 2010

9012.112.1

917.47.4

921010

932.92.9

94-6.4-6.4

95-3.2-3.2

96-6-6

97-8-8

98-5.4-5.4

99-2.6-2.6

003.53.5

011.21.2

024.94.9

036.66.6

04-6-6

05-5.1-5.1

06-5.7-5.7

07-6.6-6.6

08-3.1-3.1

09-2-2

10-1.1-1.1

11*0.20.2

Sheet2

Average Approved BureauRates/Loss Costs*Calendar YearPercentCumulative 2000201013.6% All States10.4% All States Excl. CA

* States approved through 4/8/2011Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating organizationSource: NCCIAll States vs. All States Excluding California

Chart1

3.5-0.1

1.2-0.8

4.90

6.61.8

-60.5

-5.10.5

-5.7-0.7

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