p/c insurance industry financial overview · natural disasters in the united states, 1980 – 2012...

8/1/2013

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Under Pressure: P/C Insurance Markets in an Era of High Catastrophe Losses, Low Interest Rates and Tort Liability Concerns

Robert P. Hartwig, Ph.D., CPCU President & Economist

Insurance Information Institute

P/C Insurance Industry Financial Overview

Industry Performance Has Been Affected by High CAT Losses and Low Interest Rates

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2

P/C Net Income after Taxes$1

4,17

8

$5,8

40

$19,

316

$10,

870

$20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$20,

559

-$6,970

$3,0

46

$30,

029

$38,

501

$44,

155

$65,

777

$62,

496

$3,0

43

$28,

672

$35,

204

$19,

456 $3

3,52

2

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

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

• 2005 ROE*= 9.6%• 2006 ROE = 12.7%• 2007 ROE = 10.9%• 2008 ROE = 0.1%• 2009 ROE = 5.0%• 2010 ROE = 6.6%• 2011 ROAS1 = 3.5%• 2012 ROAS1 = 5.9%

High catastrophe losses and low interest rates have impacted insurer

earnings, contributing to pricing pressure

1991–2012 ($ Millions)

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute.

A 100 Combined Ratio Isn’t What It Once WasInvestment Impact on ROEs

4

97.5100.6 100.1 100.8

92.795.7

101.299.5

101

106.5

102.4

14.3%15.9%

8.8% 9.6%

12.7%10.9%

4.3%

7.4% 7.9%

4.7%6.2%

0%

3%

6%

9%

12%

15%

18%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012

Combined Ratio ROE*

Catastrophes and lower investment income pulled down ROE in 2012

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012 combined ratio including M&FG insurers is 103.2, 2011 combined ratio including M&FG insurers is 108.1, ROAS = 3.5%.

Source: Insurance Information Institute from A.M. Best and ISO data.

Combined ratios must be lower in today’s depressed investment environment to generate risk appropriate ROEs

A combined ratio of about 100 generated a ROE of just ~7.0% in 2012, ~7.5% ROE in 2009/10, 10% in 2005 and 16% in 1979

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-5%

0%

5%

10%

15%

20%

25%

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

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

1977: 19.0% 1987: 17.3% 1997: 11.6% 2006: 12.7%

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

9 Years

History suggests next ROE peak will be in 2016-2017

1975: 2.4%

2012:5.9%

*Profitability = P/C insurer ROEs. 2011 figure is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

ROE

Near Record Catastrophe Losses Continue to Pressure Rates

US Catastrophe Losses in Recent Years Have Been Very High and Vulnerability Is Rising Globally

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US Insured Catastrophe Losses

2012 was likely the third most expensive year ever

for insured CAT losses

Record tornado losses caused 2011 CAT losses

to surge*Through 6/2/13. Includes $2.6B for 2013:Q1 (PCS) and $5.32B for the period 4/1 – 6/2/13 (Aon Benfield Monthly Global Catastrophe Recap).Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars). Sources: Property Claims Service/ISO; Insurance Information Institute.

($ Billions, 2012 Dollars)

$14.

0

$4.8

$8.0

$37.

8

$8.8

$26.

4

$12.

6

$11.

0

$3.8 $1

4.3

$11.

6

$6.1

$34.

7

$7.6 $1

6.3

$33.

7

$73.

4

$10.

5

$7.5

$29.

2

$11.

5

$14.

4

$33.

6

$35.

0

$7.9

$0

$20

$40

$60

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*

2012 was the 3rd highest year on record for insured losses in US history on an inflation-adj. basis. 2011 losses were the 6th highest. YTD 2013

running below average but Q3 Is typically the costliest quarter

Top 16 Most Costly Disasters in US History

$4.4 $5.6 $5.6 $6.7 $7.1 $7.5 $7.8 $8.7 $9.2$11.1

$13.4

$18.8

$23.9 $24.6 $25.6

$48.7

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne (2004) Frances(2004)

Rita (2005) Tornadoes/T-Storms (2011)

Tornadoes/T-Storms(2011)

Hugo (1989) Ivan (2004) Charley(2004)

Wilma (2005) Ike (2008) Sandy (2012) Northridge(1994)

9/11 Attack(2001)

Andrew (1992)Katrina (2005)

Superstorm Sandy could become 5th costliest event in

US insurance history

Hurricane Irene in 2011 ranks as the 12th most expense hurricane in US history

Includes Tuscaloosa, AL, tornado

Includes Joplin, MO, tornado

12 of the 16 most expensive events in US history have occurred over the past decade

(Insured Losses, 2012 Dollars, $ Billions)

Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

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The Past Two Years Have Not Been Kind to Insurers or Utilities

Hurricane Irene: Aug. 27-29, 2011

Insured losses: $4.3 billion

Customers w/o power: 5 million

“Snowtober” Blizzard: Oct. 29, 2011

Insured losses: ~$1 billion

Customers w/o power: 2.7 million

Derecho: June 29, 2012

Insured losses: ~$1+ billion


Superstorm Sandy: Oct. 29-30, 2012

Insured losses: $18.8 billion


Source: Insurance Information Institute research.

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperatureextremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2012

41

19

121

3

There were 184 natural disaster events in the US in 2012

Number of Events (Annual Totals 1980 – 2012)

Source: MR NatCatSERVICE

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(2012 Dollars, $ Billions)

Losses Due to Natural Disasters in the US, 1980–2012(Overall and Insured Losses)

Source: MR NatCatSERVICE Overall losses (in 2012 values) Insured losses (in 2012 values)

2012 was the 2nd most expensive year on record for

insured catastrophe losses in the US (incl. NFIP flood)

Approximately 57% of the overall cost of catastrophes in the US was covered by insurance in 2012

2012 LossesOverall : $101.1 billionInsured: $57.9 billion

42.0%

33.9%

7.3%

6.3%

4.7%3.8%

1.6%

Other (5), $1.40.4%

Inflation Adjusted US Catastrophe Losses by Cause of Loss 1992–20111

12

Insured CAT losses from 1992-2011 totaled $384.3

billion, an average of $19.2 billion per year or $1.6

billion per month

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Wind losses by far cause the most catastrophe

losses, even if hurricanes / tropicalstorms are excluded

Tornado share of CAT losses is rising

Hurricanes & Tropical Storms

$161.3

Fires (4), $6.0

Tornadoes (2), $130.2

Winter Storms, $28.2

Terrorism, $24.4

Geological Events, $18.2

Wind/Hail/Flood (3), $14.8

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US Thunderstorm Loss Trends1980 – 2012

13

Average thunderstorm losses are up 7-fold since

the early 1980s. The 5-year running

average loss is up sharply.

Hurricanes get all the headlines, but thunderstorms are consistent producers

of large scale loss. 2008-2012 are the most expensive years on record.

Thunderstorm losses in 2012 totaled $14.9 billion, the 2nd highest on record

Source: Property Claims Service, MR NatCatSERVICE

Top 16 Most Costly World Insurance Losses, 1970-2012*

$7.8 $8.1 $8.5 $8.7 $9.2 $9.6 $11.1 $13.4 $13.4 $13.4$18.8

$23.9 $24.6 $25.6

$38.6

$48.7

$0

$10

$20

$30

$40

$50

$60

Hugo(1989)

WinterStormDaria(1991)

ChileQuake(2010)

Ivan(2004)

Charley(2004)

TyphoonMirielle(1991)

Wilma(2005)

ThailandFloods(2011)

NewZealandQuake(2011)

Ike(2008)

Sandy(2012)

Northridge(1994)

WTCTerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)

Katrina(2005)

5 of the top 14 most expensive catastrophes in

world history have occurred within the past 3 years

(2010-2012)Superstorm Sandy is now the 6th costliest event in global insurance

history

2012 insured CAT losses totaled $60 billion; economic losses totaled $140

billion, according to Swiss Re

*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.


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Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperatureextremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters Worldwide, 1980 – 2013

41

19

121

3

There were 460 natural disaster events globally in the first half of 2013 and 905

for full-year 2012

Number of Events

Source: MR NatCatSERVICE

Outlook for 2013 Hurricane Season: Above Average Activity Expected

Hurricanes and Tropical Storms Drive Some of the Largest Losses Utilities Experience Each Year

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Top 12 Most Costly Hurricanes in US History

$4.4 $5.6 $5.6 $6.7 $7.8 $8.7 $9.2 $11.1 $13.4$18.8

$25.6

$48.7

$0

$10

$20

$30

$40

$50

$60

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita(2005)

Hugo(1989)

Ivan(2004)

Charley(2004)

Wilma(2005)

Ike(2008)

Sandy*(2012)

Andrew(1992)

Katrina(2005)

Superstorm Sandy became the 3rd costliest hurricane in US insurance historyHurricane Irene became

the 12th most expensive hurricane in US history in 2011

10 of the 12 most costly hurricanes in insurance history occurred over the past 9 years (2004 - 2012)

*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.


Hurricane Sandy: Claim Payments to Policyholders, by State

18

$9,600

$6,300

$700 $500 $410 $295 $292 $210 $103 $84 $58 $57 $55 $37 $36 $13 $0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

NY NJ PA CT MD VA OH MA RI DE WV NC NH DC ME VT

Insurers will pay at least $18.75 billion to 1.52 million policyholders across 15 states and DC in the wake of Superstorm Sandy

At $9.6 billion and $6.6 billion, respectively, NY and NJ suffered, by far, the largest

losses from Superstorm Sandy

TOTAL = $18.75 Billion*

($ Thousands)

Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 - 31, 2012) from PCS as of Jan. 18, 2013; Insurance Information Institute .

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Superstorm Sandy: Insured Loss by Claim Type*

Although commercial lines accounted for

only 13% of total claims, they account for 48%

of all claim dollars paid. In most hurricanes,

commercial lines accounts for about one third of insured losses.

Total Claim Value = $18.75 Billion*

($ Millions)

*PCS insured loss estimates as of 1/18/13. Catastrophe modeler estimates range up to $25 billion. All figures exclude losses paid by the NFIP.Source: PCS; Insurance Information Institute.

Auto$2,72915%

Commercial$9,02448%

Homeowner$6,99737%

Outlook for 2013 Hurricane Season: 75% Worse Than Average

Forecast ParameterMedian

(1981-2010) 2013F

Named Storms 12.0 18

Named Storm Days 60.1 95

Hurricanes 6.5 9

Hurricane Days 21.3 40

Major Hurricanes 2.0 4

Major Hurricane Days 3.9 9

Accumulated Cyclone Energy 92.0 165

Net Tropical Cyclone Activity 103% 175%

Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 2013, accessed at http://tropical.atmos.colostate.edu/forecasts/2013/jun2013/jun2013.pdf; Insurance Information Institute.

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Landfall Probabilities for 2013 Hurricane Season: Above Average

Average* 2013F

Entire US East & Gulf Coasts 52% 72%

US East Coast Including Florida Peninsula 31% 48%

Gulf Coast from Florida Panhandle to Brownsville 30% 47%

Caribbean 42% 61%

*Average over the past century.Source: Philip Klotzbach and Dr. William Gray, Colorado State University, June 2013.

0.63

0.78

0.81

0.91

0.94

1

1.07

1.27

1.6

2.1

2.47

2.62

3.25

3.5

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00

Connecticut: Sandy (2012)Texas: Rita (2005)

New Jersey: Irene (2011)Katrina: Katrina (2005)New York: Irene (2011)

Mississippi: Katrina (2005)Alabama: Ike (2008)

Pennsylvania: Sandy (2012)Florida: Charley (2004)

New York: Sandy (2012)Texas: Ike (2008)

New Jersey: Sandy (2012)Florida: Wilma (2005)

Florida: Frances (2004)

Sources: US Dept. of Energy, Vertyx, AP analysis; Insurance Information Institute.

Selected Large Outages Associated with Tropical Systems, by State

Hurricanes and tropical storms have produced significant losses for

insurers in recent years, including Sandy in 2012

(Millions of Customers)

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$2,923.1$2,862.3

$1,175.3$849.6

$713.9$567.8

$293.5$239.3

$182.3$164.6$163.5

$118.2$106.7

$81.9$64.0$60.6$58.3

$17.3

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500

New YorkFloridaTexas

MassachusettsNew JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

Source: AIR Worldwide.

Total Value of Insured Coastal Exposure in 2012(2012 Dollars, $ Billions)

$2.923 trillion insured coastal exposure in New

York in 2012

In 2012, New York ranked as the #1 most exposed state to hurricane loss, overtaking Florida with $2.862

trillion. Texas is very exposed too, and ranked #3 with $1.175 trillionin insured coastal exposure

The insured value of all coastal property was $10.6 trillion in 2012, up 20% from $8.9 trillion in 2007 and up 48% from $7.2 trillion in 2004

0.8 1.1

1.1

0.1 0.

93.

60.

4 1.2

0.4 0.8 1.

30.

30.

4 0.7 1.

51.

00.

40.

4 0.7

1.8

1.1

0.6 1.

4 2.0

1.3 2.

00.

50.

50.

73.

01.

2 2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6 3.

48.

7 9.4

0

2

4

6

8

10

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

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

2009

2010

2011

2012

E

Combined Ratio Points

Combined Ratio Points Associated with Catastrophe Losses 1960 – 2012*

The catastrophe loss component of private insurer losses has increased sharply in recent decades

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.

Average CAT loss component of the combined ratio

by decade1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 7.20*

Catastrophe losses as a share of all losses reached a record high in 2012

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Federal Disaster Declarations Patterns: 1953-2013

Disaster Declarations Set New Records in Recent Years

1317 18 16 16

7 712 12

22 2025 25

11 1119

2917 17

48 46 4638

3022 25

4223

1524 21

3427 28

2311

3138

43 4532

3632

7544

6550

45 4549

5669

4852

6375

5981

9947

27

0

20

40

60

80

100

120

53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Number of Federal Disaster Declarations, 1953-2013*

*Through July 7, 2013.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.

The number of federal disaster declarations set a new record in 2011, with 99, shattering 2010’s

record 81 declarations

There have been 2,117 federal disaster

declarations since 1953. The average number of

declarations per year is 35 from 1953-2012, though that few haven’t been recorded since 1995

27 federal disasters were declared so far in 2013*

The number of federal disaster declarations is rising and set new records in 2010 and 2011. Superstorm Sandy produced 13 declarations in 2012 / 13.

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Severe Weather Report Update: 2013

Damage from Tornadoes, Large Hail and High Winds Keep Insurers Busy

Severe Weather Reports, 2012

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012 annual summary.html#

There were 22,503 severe

weather reports in 2012; including

1,119 tornadoes; 7,033 “large hail”

reports and 14,351 high wind events

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Location of Tornado Reports 2013, through July 3

Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013 annual summary.html#; PCS.

There were 630 tornadoes through July 3,

causing extensive property damage in

several states

The storm system that spawned the

deadly EF-5 tornado on May 19 in Moore,

OK, produced insured losses of

$1.575 billion

Location of Large Hail Reports 2013, through July 3


Large hail reports were heavily concentrated

in the Plains states

There were 3,716 “large hail” reports through July 3, causing

extensive property and

vehicle damage

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Location of High Wind Reports 2013, through July 3


Wind damage reports were more heavily

concentrated in the Southeast

There were 7,371 “wind damage” reports through July 3, causing

extensive property damage

Severe Weather Reports 2013, through July 3

There were 11,717 severe weather reports through July 3; including 630 tornadoes;

3,716 “large hail” reports and 7,371 high wind events


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2013 count is running well below average

There were 1,897 tornadoes in the US in 2011 – far above

average, but well below 2008’s record

*Through July 6, 2013. Source: http://www.spc.noaa.gov/wcm/.

US Tornado Count, 2005-2013*

Investments: The New Reality

Investment Performance Is a Key Driver of Profitability

Depressed Yields Will Necessarily Impact Underwriting & Pricing

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$38.9$37.1 $36.7

$38.7 $39.6

$49.5

$52.3$54.6

$51.2

$47.1 $47.6$49.2

$47.7$45.5

$30

$35

$40

$45

$50

$55

$60

0 1 2 3 4 5 6 7 8 9 10 11 12 13*

Investment earnings are running 16.7% below their

2007 pre-crisis peak

Property / Casualty Insurance Industry Investment Income: 2000–2013*1

($ Billions)

1 Investment gains consist primarily of interest and stock dividends..*Estimate based on annualized actual Q1:2013 investment income of $11.385B.Sources: ISO; Insurance Information Institute.

Investment income fell in 2012 and is falling in 2013 due to persistently low interest rates, putting additional pressure on (re) insurance pricing

36

P/C Insurer Net Realized Capital Gains / Losses, 1990-2013:Q1

Insurers posted net realized capital gains in 2010, 2011 and 2012 following two years of realized losses during the financial crisis. Realized capital losses were a primary cause of

2008 / 2009’s large drop in profits and ROE.

($ Billions)

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

$2.9

$4.8 $9

.9

$9.8

$1.7 $6

.0 $9.2

$10.

8 $18.

0

$13.

0

$16.

2

$6.6

-$1.

2

$6.6 $9

.1

$9.7

$3.5 $8

.9

-$19

.8

-$7.

9

$5.9

$7.0

$6.2

$1.4

-$25-$20-$15-$10-$5$0$5

$10$15$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213:Q1

Realized capital gains in 2012 were down 12% from 2011 and down 30% from 2007

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$35.4$42.8

$47.2$52.3

$58.0$51.9

$56.9

$44.4$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7$39.2

$53.4 $56.2 $53.9

$12.8

$0$10$20$30$40$50$60$70

94 95 96 97 98 99 0 1 2 3 4 05* 6 7 8 9 10 11 12 13:Q1

Investment gains in 2012 were approximately 16% below their pre-crisis peak

Property / Casualty Insurance Industry Investment Gain: 1994–2013:Q11

($ Billions)

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

Investment gains slipped in 2012 as low interest rates reduced investment income and realized investment gains fell; the financial crisis caused investment gains to fall by 50% in 2008.

Reduced investment earnings are pressuring rates / pricing.

$54.8$64.5

$69.1$74.8

$81.7

$71.5$75.9

$57.6

$45.9$56.5 $59.4

$69.8$63.4

$70.9

$33.8$42.0

$56.2 $57.4 $53.9 $50.0

$0$10$20$30$40$50$60$70$80$90

94 95 96 97 98 99 0 1 2 3 4 05* 6 7 8 9 10 11 12 13E

1994-2012 average yearly gain: $61 billion hasn’t been achieved since 2007

P/C Industry Investment Gains, Inflation-Adjusted: 1994–2013E1

($ Billions)

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.*2005 figure includes special one-time dividend of $3.2B; 2013F figure is I.I.I. estimate for 2013:Q1, annualized.Sources: ISO; Insurance Information Institute.

Because the Federal Reserve Board aims to keep interest rates exceptionally low until the unemployment rate hits 6.5%—likely well into 2014—maturing bonds will be re-invested at still

low rates even once “tapering” begins

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US 10-Year Treasury Note YieldsA Long Downward Trend, 1990–2013*

1%

2%

3%

4%

5%

6%

7%

8%

9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Yields on 10-Year US Treasury Notes have been essentially below

5% for a full decade

Yields on 10-Year US Treasury Notes recently plunged to record modern-era lows and remain low by historical

standards

*Monthly, through June 2013. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come

US Treasury Security YieldsA Long Downward Trend, 1990–2013*

0%1%2%3%4%5%6%7%8%9%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13Recession 2-Yr Yield 10-Yr Yield

Yields on 10-Year US Treasury Notes have been essentially below

5% for a full decade

US Treasury security yields

recently plunged to record lows

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come

*Monthly, constant maturity, nominal rates, through June 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

8/1/2013

21

0.03% 0.05% 0.09% 0.14% 0.33%0.58%

1.20%1.71%

2.30%

3.07%3.40%

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

0%

2%

4%

6%

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

June 2013 Yield Curve Pre-Crisis (July 2007)

Treasury Yield Curves Pre-Crisis (July 2007) vs. June 2013

Treasury yield curve remains near its most depressed level in at least 45 years. Investment income is falling as a result. If as Fed I “tapers” rates are unlikely to

return to pre-crisis levels anytime soon

The Fed Is actively signaling that it Is determined to keep rates low until unemployment drops below 6.5% or until inflation expectations exceed 2.5%; low rates add to pricing pressure for insurers

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

16.0%

15.2%

15.7%

16.2%

16.3%

15.2%

16.5%

29.5%

30.0%

32.4%

36.2%

39.5%

41.4%

40.4%

34.1%

33.8%

31.2%

28.7%

26.7%

26.8%

27.6%

13.1%

12.9%

12.7%

11.7%

11.1%

10.3%

9.8%

7.4%

8.1%

8.1%

7.3%

6.4%

6.3%

5.7%

0% 20% 40% 60% 80% 100%

2006

2007

2008

2009

2010

2011

2012

Under 1 year

1-5 years

5-10 years

10-20 years

Over 20 years

Distribution of Bond Maturities,P/C Insurance Industry, 2003-2012

The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. Since 2006, the industry trimmed its holdings of bonds with maturities greater than 10 years from 20.5% in 2006 to 15.5% in

2012 and then trimmed bonds in the 5-10-year category from 34.1% in 2006 to 27.6% in 2012) . Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in investment income along with lower yields.

Sources: SNL Financial; Insurance Information Institute.

8/1/2013

22

43

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

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.

-1.8

%

-1.8

%

-2.0

%

-3.6

% -1.9

%

-2.1

%

-3.1

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3

%-8%

-6%

-4%

-2%

0%

Per

sona

l Lin

es

Pvt

Pas

s A

uto

Per

s P

rop

Com

mer

cial

Com

ml A

uto

Cre

dit

Com

m P

rop

Com

m C

as

Fid

elity

/Sur

ety

War

rant

y

Sur

plus

Lin

es

Med

Mal

WC

Rei

nsur

ance

**$4.9 $5.1

$3.0 $3.2$2.4 $2.9 $2.8 $2.6

$1.5$1.9

$3.3 $3.4

$1.3

$2.5 $2.3$3.0

$3.8

$2.8

$3.8

-$0.4

$1.6

$3.2

$2.1$1.5

$1.9

-1.00.01.02.03.04.05.06.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F14F

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

bubble reduced inflationary pressures in 2009/10

Annual Inflation Rates, (CPI-U, %),1990–2014FAnnual Inflation Rates (%)

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 7/13 (forecasts).

The slack in the US economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and commodity prices, plus US debt burden,

remain longer-run concerns.

Inflationary expectations remain quite low, allowing the

Fed to continue its QE3 program into 2014

8/1/2013

23

Workers’ Compensation Operating Environment

Rising Medical and Indemnity Lost Time Claim Severities Continue to Rise

Persistently Low Interest Rates Have a Larger Impact on Long-Tail Lines Like WC

$102.0

$97.0$100.0$101.0

$107.0

$115.3$118.2

$121.7

$112.6$108.6

$105.1$102.7

$98.5

$103.5$104.5

$110.6

$115.0$115.0

$109.0

$80

$90

$100

$110

$120

$130

94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12

WC showed a better-than-expected improvement for private carriers in 2012

Workers’ Compensation Combined Ratio1994–2012P

Sources: A.M. Best (1994-2009); NCCI (2010-2012P) and are for private carriers only; Insurance Information Institute.

Workers’ comp results began to improve in 2012. Underwriting results deteriorated markedly from 2007-2010 / 11 and were the worst they had been in a decade.

8/1/2013

24

$8.1

$8.2

$8.1

$8.8

$9.2

$9.9

$10.9

$11.8

$13.1

$14.0

$15.9

$17.3

$18.7

$19.7

$21.2

$22.3

$23.7

$25.3

$26.4

$26.7

$27.7

$28.5

+6.8%+1.3% 2.1% +9.0%+5.1%+7.4%+10.1%+8.3%+10.6%+7.3%

+13.5%+8.8%

+7.7%+5.4%+7.8%+5.4%

+6.3%+6.6%+4.1%+1.4%+3.6% +3%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

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

Workers’ Compensation Medical SeverityModerate Increase in 2012Average Medical Cost per Lost-Time Claim

2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Medical Claim Cost ($000s)

Accident Year

Cumulative change = 252%(1991-2012p)

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2011: +5.7%

Annual Change 1991–1993: -1.7%Annual Change 1994–2001: +7.3%Annual Change 2002–2011: +3.2%

$9.8

$9.5

$9.2

$9.7

$9.8

$10.4

$11.2

$12.2

$13.5

$14.8

$16.2

$16.7

$17.5

$17.7

$18.2

$19.2

$20.4

$22.2

$22.4

$21.7

$22.2

$22.4

1.0% -3.1%-2.8% 4.9% 1.7% 5.9% 7.7%9.0%

10.1%10.1%

9.2% 3.1% 4.6% 1.0% 3.1%5.6%

6.2%8.8% 0.7% -3.0% 2.2% 1.0%

0.0

5.0

10.0

15.0

20.0

25.0

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

Workers’ Comp Indemnity Claim Costs: Small Increase in 2012Average Indemnity Cost per Lost-Time Claim

2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Indemnity claim cost ($ 000s)

Accident Year

Average indemnity costs per claim were up 1%

in 2012 to $22,400

8/1/2013

25

p PreliminarySource:1990–20102p Private Carriers, Annual Statement Data, NCCI.1996–2012p 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

31.0

31.3

29.8

30.5

29.1

26.3

25.2

24.2

23.3

22.3

25.0

26.1

29.2

31.1

34.7

37.8

38.6

37.6

33.8

30.3

29.9

32.3

35.2

31.0 31.3 29.8 30.5 29.126.3 28.2 26.9 25.9 25.0

28.632.1

37.742.3

46.5 47.8 46.544.3

39.334.6 33.8

36.439.6

0.0

10.0

20.0

30.0

40.0

50.0

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

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

Workers’ Compensation Premium: Second Consecutive Year of IncreaseNet Written Premium($ Billions)

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2011: +5.7%

Private carrier NWP growth was +9.0% in 2012, as pricing reacts to poor

underwriting results and low interest rates

Cyber Risk

Cyber Risk is a Rapidly Emerging Exposure for Businesses Large and Small in Every Industry

NEW III White Paper: www.iii.org/assets/docs/pdf/paper_CyberRisk_2013.pdf

8/1/2013

26

Data Breaches 2005-2013 By Number of Breaches and Records Exposed

51

157

321

446

656

498

662

419 447

66.9

19.1

127.7

35.7

222.5

16.222.9 17.3

0306090120150180210240

0100200300400500600700

2005 2006 2007 2008 2009 2010 2011 2012# Data Breaches # Records Exposed (Millions)

# Data Breaches / Millions of Records Exposed

*2013 figures as of March 19, 2013.Source: Identity Theft Resource Center

The total number of data breaches and number of records exposed fluctuates from year to year and over time

2012 Data Breaches By Category, By Number of Records Exposed

Source: Identity Theft Resource Center, http://www.idtheftcenter.org/ITRC%20Breach%20Report%202012.pdf.

Government / Military7.7 million (44.4%)

Medical / Healthcare2.2 million (12.9%)

Banking / Credit / Financial 470,048 (2.7%)

Educational2.3 million (13.3%)

Business4.6 million (26.7%)

Government / military and business organizations accounted for the majority of records exposed by data breaches during 2012

8/1/2013

27

Main Causes of Data Breach

Source: 2011 Cost of Data Breach Study: United States, Ponemon Institute, March 2012

Negligent employees and malicious attacks are most often the cause of the data breach. Some 39 percent of incidents involve a negligent employee or contractor, while 37 percent concern a malicious or criminal attack.

Negligence39%

System Glitch 24%

Malicious or Criminal Attack

37%

$5.50

$7.20

$6.80

$6.70

$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10

2011

2010

2009

2008

*Findings of this benchmark study pertain to the actual data breach experiences of 49 U.S. companies from 14 different industry sectors, all of which participated in the 2011 study. Total breach costs include: lost business resulting from diminished trust or confidence of customers ;costs related to detection, escalation, and notification of the breach; and ex-post response activities, such as credit report monitoring. Source: 2011 Annual Study: U.S. Cost of a Data Breach, the Ponemon Institute.

Average Organizational Cost of a Data Breach, 2008-2011*

Government / military and business organizations accounted for the majority of records exposed by data breaches during 2012

($ Millions)

8/1/2013

28

The Ever-Shifting Legal Liability & Tort Environment

Mixed Experience Depending on the Age of Claims

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

56

1.50%

1.75%

2.00%

2.25%

2.50%

$0

$50

$100

$150

$200

$250

$300

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 1011E12E13E

Tort C

osts a

s % o

f GD

PTo

rt S

yste

m C

ost

s

Tort Sytem Costs Tort Costs as % of GDP

Tort costs in dollar terms have remained high but relatively stable since the mid-2000s., but

are down substantially as a share of GDP

Deepwater Horizon Spike in

2010

1.68% of GDP in 2013

2.21% of GDP in 2003 = pre-tort

reform peak

($ Billions)

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

8/1/2013

29

1.66%

1.19%1.05%

0.78% 0.77%0.68% 0.67% 0.63% 0.56%

0.46% 0.43% 0.42% 0.40%

0.0%

0.3%

0.6%

0.9%

1.2%

1.5%

1.8%

US

Can

ada

UK

Irel

and

Italy

Ger

man

y

Spa

in

Eur

ozon

e

Fra

nce

Den

mar

k

Por

tuga

l

Bel

gium

Net

herla

nds

Liability Costs as a Fraction of GDP, 2011

The US has by far the most costly tort system in the

industrialized world. The very long-tailed nature of many

liabilities is one reason.

Sources: US Chamber of Commerce; Insurance Information Institute.

$2.3

-$0.4 -$0.6 -$0.7-$1.1 -$1.3

-$4.6

-$0.5-$0.9

-$4.2-$5-$4-$3-$2-$1$0$1$2$3

Prior to2003

3 4 5 6 7 8 9 10 11

Which Accident Years Generated Reserve Changes in 2012: Old Claims Still a Problem

Reserves for older accident years (claims occurring many years ago) are actually increasing in cost—requiring insurers to add $2.3 billion

to their reserves in 2012 alone. Old environmental claims are contributing to this deterioration.

Sources: SNL Financial; Insurance Information Institute.

($ Billions)

Insurance liabilities, especially in areas such as environmental claims, can be very long-lived and can develop adversely even decades later

8/1/2013

30

50

100

150

200

250

300

1933

1935

1937

1939

1941

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

*

1933: $343 million

2011 (est.): $253 billion (770 times more than 1933)

A clear flattening of tort cost has occurred in recent years after 7 decades of increases

Claims that occurred in the “Tort Era” can and

still do flare up and adversely impact

insurers today, decades later

Tort Costs: Rose for Seven Decades: Old Claims Can Be ProblematicGrowth in Tort Costs, Current (Nominal) Dollars,1933-2011($ Millions)

* ProjectedSources: Trends in Tort Costs, Towers Watson; Insurance Information Institute.

-15.0%

-5.0%

5.0%

15.0%

25.0%

35.0%

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

1949

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

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

2009

2010

2011

(es

t.)

Sources: Trends in Tort Costs, Towers Perrin, Insurance Information Institute.

Explosion in Tort Costs Lasted for Much of the 20th CenturyAnnual Change in Inflation-Adjusted Tort Costs

End of WWII The postwar era: In 40 years of 43, tort costs rose faster than inflation

Mid-80s liability crisis

Decline in 6 of last 7

DeepwaterHorizon

8/1/2013

31

2.00%

13.50%

11.60%

9.90%

11.90% 11.80%

3.20% 3.50%

1.10%

11.20%

6.00%7.00%

10.40%

7.60%

5.50%4.30%

0.0%

4.0%

8.0%

12.0%

16.0%

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

Tort Costs Nominal GDP

From the 1940s through the 1980s, Tort Costs Grew Much Faster than GDP Some older liability

claims from the era of explosive tort costs

continue to suffer from adverse development,

requiring insurers to add to their reserves

Sources: Trends in Tort Costs, Towers Perrin, Insurance Information Institute.

136%

66%

47%

71%

19%10%

-10%-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

1950s 1960s 1970s 1980s 1990s 2000s 2010s

Change in Tort Costs by Decade, Even After Adjusting for Inflation, Still Showed Rapid Growth

Liability claims from decades past grew with explosive

momentum and still increase in cost today

Sources, Trends in Tort Costs, Towers Watson, Insurance Information Institute.

Change from Prior Decade

8/1/2013

32

Energy Supply and Demand

The World Will Remain Energy Hungry and Demand Will Increase Steadily for Decades on a Global Scale Utilizing All Fuel Sources

Global Electricity Generation by Fuel Source, 2010-2040

64

Electricity demand will

continue to rise on a global scale

Billions of kWH

Source: Energy Information Administration, International Energy Outlook 2013.

8/1/2013

33

Thank you for your time and your attention!

www.iii.org

Twitter: twitter.com/bob_hartwig

Download at: www.iii.org/presentations

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