p/c insurance industry overview and outlook: focus on the construction sector

P/C Insurance Industry Overview and Outlook:

Focus on the Construction Sector

Insurance Information InstituteJune 11, 2014

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

Tel: 212.346.5520 Cell: 917.453.1885 [email protected] www.iii.org

The Strength of the U.S. Economy Will Influence P/C

Insurer Growth Opportunities

2

U.S. Growth Will Expand Insurer Exposure Base Across Most Lines

2

3

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 6/14; Insurance Information Institute.

2.7%

0.5%

3.6%

3.0%

1.7%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

1.4%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

1.1% 2.

5%4.

1%2.

4%-1

.0%

3.7%

3.1%

3.1%

3.0%

3.0%

3.0%

2.9%

0.4%

-8.9%

4.1%

1.1% 1.

8% 2.5% 3.

6%3.

1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q07

:2Q

07:3

Q07

:4Q

08:1

Q08

:2Q

08:3

Q08

:4Q

09:1

Q09

:2Q

09:3

Q09

:4Q

10:1

Q10

:2Q

10:3

Q10

:4Q

11:1

Q11

:2Q

11:3

Q11

:4Q

12:1

Q12

:2Q

12:3

Q12

:4Q

13:1

Q13

:2Q

13:3

Q13

:4Q

14:1

Q14

:2Q

14:3

Q14

:4Q

15:1

Q15

:2Q

15:3

Q15

:4Q

Demand for Insurance Should Increase in 2014/15 as GDP Growth Accelerates Modestly and Gradually Benefits the Economy Broadly

Real GDP Growth (%)

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

market contraction was severe

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

2014/15 are expected to see a

modest acceleration in growth

4

Real GDP by State Percent Change, 2012:Highest 25 States

13.4

4.8

3.9

3.6

3.5

3.5

3.4

3.3

3.3

3.3

2.7

2.7

2.6

2.4

2.4

2.4

2.4

2.2

2.2

2.2

2.2

2.1

2.1

2.1

2.1

2.0

0

2

4

6

8

10

12

14

ND TX OR WA CA MN UT IN TN WV NC SC AZ FL IA MD MS MA MI OH US CO GA MT OK MO

Perc

ent C

hang

e (%

)

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

North Dakota was the economic growth juggernaut of the US

in 2012—by far

Only 10 states experienced growth in excess of 3%, which is what we would see nationally in

a more typical recovery

5

1.9

1.7

1.6

1.5

1.5

1.5

1.5

1.4

1.4

1.4

1.3

1.3

1.3

1.2

1.2

1.1

1.1

0.7

0.5

0.5

0.4

0.2

0.2

0.2

0.2

-0.1

-0.4-0.20.00.20.40.60.81.01.21.41.61.82.0

IL PA HI LA NE NV WI KS KY RI AR NJ NY AL VT AK VA DC ME NH ID DE NM SD WY CT

Perc

ent C

hang

e (%

)Real GDP by State Percent Change, 2012: Lowest 25 States

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

Connecticut was the only state to shrink in 2012

Growth rates in 8 states (and DC) were still below

1% in 2012

State-by-State Leading Indicatorsthrough 2014:Q3

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 6

The economic outlook for most of the US is generally

positive, though negative for 9 states

http://www.philadelphiafed.org/index.cfm

74.4

73.6

73.6

72.2 73.6 76

67.8 68.9

68.2

67.7 71

.6 74.5

74.2 77

.567

.5 69.8

74.3

71.5

63.7

55.7 59

.5 60.9 64

.169

.975

.075

.376

.276

.4 79.3

73.2

72.3 74

.382

.682

.774

.573

.8 77.6 78.6

84.5

84.1

85.1

82.1

77.5

73.2 75

.182

.581

.281

.680

.0 84.1

81.9

76.4

40

45

50

55

60

65

70

75

80

85

90

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Consumer Sentiment Survey (1966 = 100)

January 2010 through May 2014

Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact consumers, but improved substantially over the past 2+ years, though

uncertainty in Washington sometimes takes a toll.Source: University of Michigan; Insurance Information Institute

Optimism among consumers improved in the first part of 2014

7

Impact of 2011 budget impasse

$0

$10

$20

$30

$40

$50

$60

$70

$80

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

2013

2014

:Q1

Net Worth of Households*Recently Hit A Historic High

*Includes nonprofit organizations. Data are not seasonally adjusted or inflation-adjusted.Source: Federal Reserve Board: http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf ; Insurance Information Institute.

2008-09 recession: -15.7% $ Trillions

2001 recession

1992 recession

1982 recession

Housing “bubble”

Rising net worth fuels a “wealth affect” that helps fuel consumer

spending, which accounts for 70% of spending in the U.S. economy

http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf

http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf

NFIB Small Business Optimism Index

January 1985 through April 2014

Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 9

Small business optimism in April exceeded for the first

time its level when the crisis began in Dec. 2007.

http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif

13

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8247

,806

40,0

7533

,212

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Business Bankruptcy Filings,1980-2013

Sources: American Bankruptcy Institute (1980-2012) at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; 2013 data from United States Courts at http://news.uscourts.gov; Insurance Information Institute.

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

2013 bankruptcies totaled 33,212, down 17.1% from 2012—the fourth

consecutive year of decline. Business bankruptcies more than tripled during the financial crisis.

% Change Surrounding Recessions

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

13

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

http://news.uscourts.gov/

50.7 52

.7 54.1

54.6

54.8

53.5

53.7

52.8 53

.9 54.6 56

57.1

59.4

59.7

56.3

54.4

53.3

53.4

53.8

52.6

52.6

52.6

52.6

53.0

56.8

56.1

55.0

53.7

54.1

52.7

52.9 54

.3 55.2

54.8

54.8 55

.755

.2 56.0

53.1 53.7

52.2

56.0

58.6

54.4 55

.453

.953

.0 54.0

51.6 53

.1 55.2 56

.3

54.4

40

45

50

55

60

65

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)January 2010 through May 2014

Non-manufacturing industries have been expanding and adding jobs. This trend is likely to continue through 2014.

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

Optimism among non-manufacturers has been

increasing despite uncertainty in Washington

14

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

NFIB Small Business Optimism Index

January 1985 through April 2014

Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 15

Small business optimism in April exceeded for the first

time its level when the crisis began in Dec. 2007.

http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif

16

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking, Pipelines)

231

5217

052

126

573

-71

32 64 81 553

-115

-106

-221

-215

-206

-261

-258

-422

-486

-776 -6

93-8

21-6

98-8

10-8

01-2

94-4

26-2

72 -232

-141

-271

-15

-232

20-3

819

294 11

012

011

710

7 199

149

94 7222

323

1 320

166

186 21

912

526

817

719

1 222

364

228

246

102 131

7517

213

615

9 255

211

215

219 26

316

4 188 22

220

117

018

015

3 247 272

8616

6 201

200 27

021

6

113

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan-

07Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08Fe

b-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr

-09

May

-09

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Monthly Change in Private Employment

January 2007 through May 2014 (Thousands, Seasonally Adjusted)

Private Employers Added 9.39 million Jobs Since Jan. 2010 After Having Shed 5.01 Million Jobs in 2009 and 3.76 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

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

Monthly losses in Dec. 08–Mar. 09 were

the largest in the post-WW II period

216,000 private sector jobs were

created in May. In March 2014, the last of the private jobs lost in the Great Recession were

recovered

17

Jobs Created2013: 2.368 Mill2012: 2.294 Mill2011: 2.400 Mill2010: 1.277 Mill

1,053,000 jobs created so far

in 2014

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

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

18

The Construction Sector Is Critical to the Economy and the P/C Insurance Industry

18

19

Value of New Private Construction: Residential & Nonresidential, 2003-2014*

Billions of Dollars

$0$100$200$300$400$500$600$700$800$900

$1,000

03 04 05 06 07 08 09 10 11 12 13 14*

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2014: Value of new pvt. construction hits $686.5B as of Apr. 2014, up 37%

from the 2010 trough but still 25% below 2006 peak

19

$261.8

$238.8

$308.0

$378.5

*2014 figure is a seasonally adjusted annual rate as of April.Sources: US Department of Commerce; Insurance Information Institute.

20

Value of Construction Put in Place, April 2014 vs. April 2013*

1.2%

-29.3%

2.0%8.6%

11.7%17.2%

5.6%

-40%

-30%

-20%

-10%

0%

10%

20%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up, But Growth Is Almost Entirely in the Private Sector as State/Local Government Budget Woes Continue

Growth (%)

Private sector construction activity is up in the

residential and nonresidential segments

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Private: +11.7% Public: +1.2%

Public sector construction activity remains depressed

but better than a year ago (-5.2%)

http://www.census.gov/construction/c30/c30index.html

21

Value of Private Construction Put in Place, by Segment, April 2014 vs. April 2013*

8.1%

-3.5% -4.1% -5.2%

12.2%

21.4%

-3.9%

7.3%

15.9%11.7%

17.2%

5.6%

17.2%

25.6%

-10%-5%0%5%

10%15%20%25%30%

Tota

l Priv

ate

Cons

truct

ion

Resi

dent

ial

Tota

lNo

nres

iden

tial

Lodg

ing

Offi

ce

Com

mer

cial

Heal

th C

are

Educ

atio

nal

Relig

ious

Amus

emen

t &Re

c.

Tran

spor

tatio

n

Com

mun

icat

ion

Pow

er/U

tility

Man

ufac

turin

g

Private Construction Activity is Up in Many Segments, Including the Key Residential Construction Sector; Bodes Well for the Remainder of 2014

Growth (%) Led by the Residential Construction, Lodging and Communication segments, Private

sector construction activity is rising after plunging during the “Great Recession.”



22

Value of Public Construction Put in Place, by Segment, Apr. 2014 vs. Apr. 2013*

-13.8%

4.9%

-12.4%-5.7%

6.3% 4.9%

-4.8%-7.2%

18.5%15.6%

1.2%

-29.3%

2.0%

-0.8%

-28.9%-40%

-30%

-20%

-10%

0%

10%

20%

30%

Tota

l Pub

licCo

nstru

ctio

n

Resi

dent

ial

Tota

lNo

nres

iden

tial

Offi

ce

Com

mer

cial

Heal

th C

are

Educ

atio

nal

Publ

ic S

afet

y

Amus

emen

t &Re

c.

Tran

spor

tatio

n

Pow

er

High

way

&St

reet

Sew

age

&W

aste

Dis

posa

l

Wat

er S

uppl

y

Cons

erva

tion

&De

velo

p.

Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2015.

Growth (%)


Public sector construction activity is down substantially in many segments, a situation that will likely persist, dragging

on public entity risk exposures

Transportation, Power and Conservation

projects lead public sector construction


23

Real (Inflation-Adjusted) Nonresidential Construction, 2000-2014*

*Through Q1 2014.

Source: US Dept. of Commerce; Wells Fargo Securities (June 6, 2014 research report).

Construction activity has generally been positive since late

2010 but has occasionally be

erratic. Forecast is for slowing

improving growth

(Bar = CAGR; Line = Y/Y Growth Rate)

24

Commercial & Industrial Loans Outstandingat FDIC-Insured Banks, Quarterly, 2006-2014:Q1

$1.1

6$1

.18

$1.2

2

$1.4

4$1

.48

$1.4

9$1

.50

$1.4

9$1

.43

$1.3

7$1

.27

$1.2

1$1

.18

$1.1

7$1

.17

$1.1

8$1

.20

$1.2

4$1

.28 $1

.35

$1.3

7 $1.4

2$1

.45 $1.5

0$1

.52

$1.5

5$1

.57

$1.6

0$1

.61

$1.1

3

$1.2

5 $1.3

0 $1.3

9

$1.0

$1.1

$1.2

$1.3

$1.4

$1.5

$1.6

$1.7

06:Q

1

06:Q

3

07:Q

1

07:Q

3

08:Q

1

08:Q

3

09:Q

1

09:Q

3

10:Q

1

10:Q

3

11:Q

1

11:Q

3

12:Q

1

12:Q

3

13:Q

1

13:Q

3

14:Q

1

Outstanding Commercial Loan Volume Has Been Growing for Over Two Years and Is Now Nearly Back to Early Recession Levels. Bodes Very Well for the Creation of Current and Future Commercial Insurance Exposures

Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.

$Trillions

Commercial lending plunged by 21.2% ($330B) during the financial crisis and ensuing

period of tight credit

Commercial lending activity exceeds pre-crisis levels (+36.75% or $430B above

mid-2010 trough)

http://www2.fdic.gov/qbp/

25

Percent of Non-current Commercial & Industrial Loans Outstanding at FDIC-Insured Banks,Quarterly, 2006-2014:Q1

0.70

%0.

74%

0.64

%

0.67

%0.

81%

1.07

%1.

18% 1.

69% 2.

25% 2.

80%

3.57

%3.

43%

3.05

%2.

83%

2.73

%2.

44%

1.89

%1.

65%

1.49

%1.

29%

1.17

%1.

09%

0.98

%0.

88%

0.80

%0.

74%

0.72

%0.

62%

0.60

%

0.71

%

0.63

%0.

62%

0.63

%

0%

1%

2%

3%

4%

06:Q

106

:Q2

06:Q

306

:Q4

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

;Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

1

Non-current loans (those past due 90 days or more or in nonaccrual status) are below even pre-recession levels, fueling bank willingness to lend.

Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.

Back to “normal” levels of noncurrent industrial

& commercial loans

Recession

http://www2.fdic.gov/qbp/

27

$314.9 $304.0$286.4 $279.0 $271.4 $267.0

$216.1 $220.2$234.2

$255.4

$289.1$308.7

$0

$50

$100

$150

$200

$250

$300

$350

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

($ Billions)

Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Continues to Contract As State/Local Governments

Grapple with Deficits and Federal Sequestration Takes Hold

Value of New Federal, State and Local Government Construction: 2003-2014*

*2014 figure is a seasonally adjusted annual rate as of April; http://www.census.gov/construction/c30/historical_data.html Sources: US Department of Commerce; Insurance Information Institute.

Construction across all levels of government

peaked at $314.9B in 2009

Austerity Reigns Govt. construction is still shrinking, down $47.9B or

15.2% since 2009 peak

http://www.census.gov/construction/c30/historical_data.html

http://www.census.gov/construction/c30/historical_data.html

28

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.48

1.47 1.

62 1.64

1.57 1.60 1.

71 1.85 1.

96 2.07

1.80

1.36

0.91

0.55 0.59 0.61

0.78 0.

92 1.05

1.27

1.44 1.

501.

511.

50

1.351.

461.

291.

201.

011.

19

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14F15F16F17F18F19F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (5/14 and 3/13); Insurance Information Institute.

Insurers Are Continue to See Meaningful Exposure Growth in the Wake of the “Great Recession” Associated with Home Construction: Construction Risk

Exposure, Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage rates and demographics should continue to stimulate new home construction

for several more years

Florida Total Private Housing Starts,2000 – 2017F

29

The economic outlook for most of

the US is positive for the first time in many

years

Source: University of Central Florida Institute for Economic Competitiveness: http://iec.ucf.edu/post/2014/01/07/Florida-Metro-Forecast-December-2013.aspx

CRASH, CRATER, RECOVERY Homebuilding in FL continues

to recover, adding substantially to coastal exposures.

(Thousands of Units)

http://iec.ucf.edu/post/2014/01/07/Florida-Metro-Forecast-December-2013.aspx

30

Construction Employment,Jan. 2010—May 2014*

*Seasonally adjusted.Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

5 5,47

85,

485

5,49

75,

524

5,53

05,

547

5,54

65,

583

5,57

65,

577

5,61

25,

629

5,64

45,

640

5,63

65,

615

5,62

25,

627

5,63

05,

633

5,64

95,

673

5,71

15,

735 5,78

35,

799

5,79

25,

791

5,80

15,

804

5,80

55,

822

5,83

05,

849

5,87

6 5,92

75,

927

5,96

45,

998

6,00

4

5,400

5,500

5,600

5,700

5,800

5,900

6,000

6,100

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-12

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Construction employment is +569,000 above

Jan. 2011 (+10.5%) trough

(Thousands)

Construction and manufacturing employment constitute 1/3 of all payroll exposure.

http://data.bls.gov/

31

Construction Employment, Jan. 2003–May 2014

Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

5,000

5,500

6,000

6,500

7,000

7,500

8,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

The “Great Recession” and housing bust destroyed 2.3 million constructions jobs

The Construction Sector Could Be a Growth Leader in 2014 as the Housing Market, Private Investment and Govt. Spending Recover. WC Insurers Will Benefit.

Construction employment troughed at 5.435 million in

Jan. 2011, after a loss of 2.291 million jobs, a 29.7% plunge

from the April 2006 peak

31

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of

May 2014 totaled 6.0 million, an increase of 569,000 jobs or

10.5% from the Jan. 2011 trough

Gap between pre-recession

construction peak and today: 1.7 million jobs

32

Logging Employment,Jan. 2010—May 2014*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

48.8 49

.150

.351

.250

.950

.550

.650

.849

.849

.548

.347

.7 48.2

49.1

50.8

48.7

48.1

47.8

48.8

48.4

48.6

47.4

49.1 49

.5 50.0

49.7

49.8

49.1

50.9

51.1

50.8

50.5 50

.850

.850

.750

.649

.951

.5 51.9 52

.352

.552

.651

.7 52.5 52

.9 53.2

55.2

54.3

54.3

54.1

55.4

54.3

53.9

45

47

49

51

53

55

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

132/

30/2

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

132/

30/2

Mar

-13

Apr

-13

May

-13

Logging employment has been somewhat volatile but is up more than

10% from its 2010/2011 lows. Home construction activity in the US and some foreign demand should help this sector

(Thousands)


33

Logging Employment, Jan. 2003–May 2014

Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

45

50

55

60

65

70

75

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

The “Great Recession” and housing bust destroyed at least 15,000 logging jobs

The Logging Sector Is Benefitting from Residential Home Construction, Renewable Energy Regulations in Europe (encourage wood burning) and some Asian pulp demand

Logging employment troughed at

47,400 in Oct. 2011

33

Logging employment

peaked at about 71,000 in early 2003

(Thousands)Logging employment as of May 2014 totaled 53,900, an increase of

6,500 jobs or 12.9% from the Oct. 2011

trough

34

Construction Jobs: Largest Gains & Losses by Metro Area, Apr. 2014 vs. Apr. 2013*

-3,700 -2,900-1,600 -1,300 -1,200 -1,200

11,1009,500 8,500 8,100

6,100 5,200

(6,000)(4,000)(2,000)

02,0004,0006,0008,000

10,00012,000

Los

Ang

eles

Dal

las

San

ta A

na/

Ana

heim

Atla

nta

Bal

timor

e

Orla

ndo

Bet

hesd

a/R

ockv

ille,

MD

Gar

y, IN

New

ark

Ber

gen/

Pas

saic

, NJ

Taco

ma,

WA

Alb

uque

rque

,N

M

Construction Employment Is Expanding—Albeit Modestly—in Much of the US

Change

Construction employment expanded in 220 out of the

339 metro areas in the US in April 2014

*Seasonally adjusted; Source: Associated General Contractors: http://www.agc.org/galleries/news/Metro_Empl_1404_Rank.pdf; Ins. Information Institute.

Largest Increases Largest Losses

http://www.agc.org/galleries/news/Metro_Empl_1404_Rank.pdf



35

Interest Rate on Convention 30-Year Mortgages: Up a Bit, 1990–2014*

*Monthly, through May 2014. 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.

0%

2%

4%

6%

8%

10%

12%

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Yields on 30-Year mortgages have been below 6% for a six

years

Rising mortgage interest rates have impacted home sales but are unlikely to derail the recovery on housing

Mortgages rates plunged to near-record lows in early 2013 but rose as the Fed initiated tapering in its

QE program

35

http://www.federalreserve.gov/releases/h15/data.htm

36

Mortgage Interest Rates Were Expected to Continue to Rise as the Fed Pursued Tapering and the Economy Recovered; Rates Are

Still Low by Historical Standards

4.53

%

4.51

%

4.41

%

4.39

%

4.32

%

4.23

% 4.28

% 4.33

%

4.37

%

4.28

%

4.37

%

4.32

% 4.40

%

4.41

%

4.34

%

4.27

% 4.33

%

4.29

%

4.21

%

4.20

%

4.14

%

4.12

%

4.14

%

3.9%

4.0%

4.1%

4.2%

4.3%

4.4%

4.5%

4.6%

03-J

an

10-J

an

17-J

an

24-J

an

31-J

an

07-F

eb

14-F

eb

21-F

eb

28-F

eb

07-M

ar

14-M

ar

21-M

ar

28-M

ar

04-A

pr

11-A

pr

18-A

pr

25-A

pr

02-M

ay

09-M

ay

16-M

ay

23-M

ay

30-M

ay

06-J

un

30-year mortgage rates are down nearly 40 basis points since

early January

30-Year Mortgages in 2014 Are Falling! What Will Be the Impact on Construction?

*Weekly through June 5, 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.; Insurance Information Institutes.


MANUFACTURING SECTOR OVERVIEW & OUTLOOK

37

The U.S. Is Experiencing a Mini Manufacturing Renaissance That Is Benefitting the US Economy and the P/C Insurance Industry

37

38

Manufacturing Employment,Jan. 2010—May 2014*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

4111

,870

11,9

1011

,920

11,9

2611

,935

11,9

5711

,943

11,9

2511

,931

11,9

3811

,951

11,9

6511

,988

11,9

8411

,977

11,9

7211

,965

11,9

4811

,963

11,9

9312

,011

12,0

4612

,053

12,0

6112

,081

12,0

8512

,089

12,0

99

11,250

11,500

11,750

12,000

12,250Ja

n-10

Feb-

10M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb-

11M

ar-1

1A

pr-1

1M

ay-1

1Ju

n-11

Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Ja

n-12

2/30

/2M

ar-1

2A

pr-1

2M

ay-1

2Ju

n-12

Jul-1

2A

ug-1

2S

ep-1

2O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb-

13M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3S

ep-1

3O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb-

14M

ar-1

4A

pr-1

4M

ay-1

4

Manufacturing employment is a surprising source of strength in the economy. Employment in the sector is at a multi-year high.

*Seasonally adjusted. Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

(Thousands) Since Jan 2010, manufacturing employment

is up (+639,000 or +5.6%)and still growing.


39

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Apr. 2014

* Seasonally adjusted; Data published June 3, 2014.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments in Apr. 2014 exceeded the pre-crisis (July 2008) peak. Manufacturing is energy-intensive and growth leads to gains in many commercial

exposures: WC, Commercial Auto, Marine, Property, and various Liability Coverages.

$ Millions

39

The value of Manufacturing Shipments in Apr. 2014 was $497.6B—a new record high.

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

42

2.5%

4.9%

6.3%

7.8%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

2013 2014F 2015F 2016F

Business Investment: Expected to Accelerate, Fueling Commercial Exposure Growth

Accelerating business investment will be a potent driver of

commercial property and liability insurance exposures and should drive employment and WC payroll

exposures as well (with a lag)

Source: IHS Global Insights as of Jan. 13, 2014; Insurance Information Institute.

ENERGY SECTOR: OIL & GAS INDUSTRY FUTURE IS BRIGHT

44

US Is Becoming an Energy Powerhouse; Domestic Demand

and Exports Are KeyNeed Infrastructure Investment

44

20.2 19.9 20.0 19.5 18.9 19.420.2

21.1 21.622.4

24.025.3 25.6

20.6

10

12

14

16

18

20

22

24

26

28

00 01 02 03 04 05 06 07 08 09 10 11 12 13

U.S. Natural Gas Production, 2000-2013

Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.

Trillions of Cubic Ft. per Year

The U.S. is already the world’s largest natural gas producer—

recently overtaking Russia. This is a potent driver of commercial

insurance exposures

5.19 5.08 5.005.35 5.47 5.65

6.49

7.44

8.379.13

5.09

0

12

3

45

6

7

89

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

U.S. Crude Oil Production, 2005-2015P

Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.

Millions of Barrels per Day

Crude oil production in the U.S. is expected to increase by 82.6% from 2008 through 2015—and could overtake

Saudi Arabia as the world’s largest oil producer

48

Oil & Gas Extraction Employment,Jan. 2010—May 2014*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

616

9.3

170.

117

1.0

172.

517

3.6

176.

317

8.2

178.

518

0.9

181.

918

3.1

184.

818

5.2

185.

718

6.8

187.

618

8.0

188.

018

8.2

190.

019

1.7

191.

919

3.4

192.

419

2.6

193.

119

3.3

195.

019

6.5 199.

720

0.6

203.

020

4.1

205.

320

7.8

207.

520

8.9

210.

5

150

160

170

180

190

200

210

220

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Oil and gas extraction employment is up 34.6% since Jan. 2010 as the energy sector booms. Domestic energy production is essential to any robust economic recovery in

the US.

(Thousands) Highest since Aug.

1986


354.8

523.9

629.8

729.2

819.6

406.0

0

100

200

300

400

500

600

700

800

900

1990 2000 2010 2020P 2030P 2040P

World Primary Energy Consumption, 1990-2040P

Source: Energy Information Administration, 2013 International Energy Outlook, Insurance Information Institute.

Between 2010 and 2040, energy consumption in projected to increase by

56.4% worldwide

Quadrillion BTUsGrowth in worldwide

energy consumption will create more risk and

vulnerabilities (natural and manmade); Innovations in

risk management and insurance are needed.

51

US Electric Power Generation by Fuel Source, 2010-2035F (Billions of Kilowatt Hours)

3225 26 26 27 27

776903 874 882 983 1,074

807 830 887 917 914 887390 504 544 579 594 630

1,799 1,531 1,604 1,710 1,757 1,803

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2010 2015 2020 2025 2030 2035

Coal Petroleum Natural Gas Nuclear Renewable Other

Source: US Energy Information Administration, Annual Energy Outlook 2012, Appendix A7.

Demand for Electricity Is Expected to Grow at a 0.6% Annual Rate Through 2035. Renewables and Natural Gas Will Account for an Increasing Share of Fuel Source

3,806 3,796 3,937 4,118 4,279 4,427

54

U.S. Private Power Construction,2000-2014* (% Change, 3-Month Moving Avg.)

*Through April 2014.

Source: US Dept. of Commerce; Energy Information Administration, Wells Fargo Securities (June 6, 2014 research report).

Power construction accounts for a large share of all construction activity. The

recent slowdown was in part due to the expiration of renewable production tax credits. Going forward, about 75% of

new capacity will be for gas fired plants

55

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

55

56

Unemployment and Underemployment Rates: Still Too High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Jan14

"Headline" Unemployment Rate U-3

Unemployment + Underemployment RateU-6

“Headline” unemployment

was 6.3% in May 2014. 4% to 6% is

“normal.”

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

January 2000 through May 2014, Seasonally Adjusted (%)

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

56

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 12.2%

in May 2014.8% to 10% is

“normal.”

57

US Unemployment Rate Forecast4.

5%4.

5% 4.6% 4.8% 4.9% 5.

4%6.

1%6.

9%8.

1%9.

3% 9.6% 10

.0%

9.7%

9.6%

9.6%

8.9% 9.1%

9.1%

8.7%

8.3%

8.2%

8.0%

7.8%

7.7%

7.6%

7.3%

7.0%

6.7%

6.4%

6.3%

6.1%

6.0%

5.9%

5.8%

5.7%

9.6%

4%

5%

6%

7%

8%

9%

10%

11%

07:Q

107

:Q2

07:Q

307

:Q4

08:Q

108

:Q2

08:Q

308

:Q4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

110

:Q2

10:Q

310

:Q4

11:Q

111

:Q2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

312

:Q4

13:Q

113

:Q2

13:Q

313

:Q4

14:Q

114

:Q2

14:Q

314

:Q4

15:Q

115

:Q2

15:Q

315

:Q4

Rising unemployment

eroded payrolls

and WC’s exposure base.Unemployment peaked at 10%

in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (6/14 edition); Insurance Information Institute.

2007:Q1 to 2015:Q4F*

Unemployment forecasts have been revised slightly

downwards. Optimistic scenarios put the

unemployment as low as 5.9% by Q4 of this year.

Jobless figures have been revised

slightly downwards for 2014/15

58

Unemployment Rates by State, April 2014:Highest 25 States*

8.3

8.0

7.9

7.8

7.7

7.5

7.5

7.4

7.0

6.9

6.9

6.9

6.9

6.9

6.8

6.7

6.6

6.6

6.4

6.3

6.3

6.2

6.2

6.1

6.0

6.0

6.0

0

2

4

6

8

10

RINV IL CA KY DC MS MI

GA AL AZCT NJ OR NM NY AR

MO AK TN US FL NC WA CO MA WV

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for April 2014, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In April, 43 states had over-the-month unemployment rate decreases, 2

states had increases, and 5 states and the District of Columbia had no

change.

59

5.8

5.8

5.7

5.7

5.7

5.7

5.5

5.3

5.2

5.0

4.9

4.8

4.8

4.7

4.6

4.5

4.4

4.4

4.3

3.8

3.8

3.7

3.6

3.3

2.6

0

1

2

3

4

5

6

7

DE WI IN ME OH PA MD SC TX ID VA KS MT MN OK LA HI NH IA SD UT WY NE VT ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, April 2014: Lowest 25 States*

*Provisional figures for April 2014, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In April, 43 states had over-the-month unemployment rate decreases, 2

states had increases, and 5 states and the District of Columbia had no

change.

231

5217

052

126

573

-71

32 64 81 553

-115

-106

-221

-215

-206

-261

-258

-422

-486

-776 -6

93-8

21-6

98-8

10-8

01-2

94-4

26-2

72 -232

-141

-271

-15

-232

20-3

819

294 11

012

011

710

7 199

149

94 7222

323

1 320

166

186 21

912

526

817

719

1 222

364

228

246

102 131

7517

213

615

9 255

211

215

219 26

316

4 188 22

220

117

018

015

3 247 272

8616

6 201

200 27

021

6

113

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

Jan-

07Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08Fe

b-08

Mar

-08

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr

-09

May

-09

Jun-

09Ju

l-09

Aug

-09

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10Fe

b-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11Fe

b-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Monthly Change in Private Employment

January 2007 through May 2014 (Thousands, Seasonally Adjusted)



Monthly losses in Dec. 08–Mar. 09 were

the largest in the post-WW II period

216,000 private sector jobs were

created in May. In March 2014, the last of the private jobs lost in the Great Recession were

recovered

60

Jobs Created2013: 2.368 Mill2012: 2.294 Mill2011: 2.400 Mill2010: 1.277 Mill

1,053,000 jobs created so far

in 2014


0.05

50.

058

-0.0

57-0

.163

-0.3

84-0

.599

-0.8

05-1

.066

-1.3

24-1

.746

-2.2

32-3

.008

-3.7

01-4

.522

-5.2

20-6

.030

-6.8

31-7

.125

-7.5

51-7

.823

-8.0

55-8

.196

-8.4

67-8

.482

-8.7

14-8

.694

-8.7

32-8

.619

-8.4

27-8

.333

-8.2

23-8

.103

-7.9

86-7

.879

-7.6

80-7

.531

-7.4

37-7

.365 -6.9

11-6

.591

-6.4

25-6

.239

-6.0

20-5

.895

-5.6

27-5

.450

-5.2

59-5

.037

-4.6

73-4

.445

-4.1

99-4

.097

-3.9

66-3

.891

-3.7

19-3

.583

-3.4

24-3

.169

-2.9

58-2

.743

-2.5

24-2

.261

-2.0

97-1

.909

-1.6

87-1

.486

-1.3

16-1

.136

-0.9

83-0

.736

-0.4

64-0

.378

-0.2

12-0

.011

0.18

90.

459

0.67

5

-7.1

42-10

-8

-6

-4

-2

0

2

Dec

-07

Apr

-08

Aug

-08

Dec

-08

Apr

-09

Aug

-09

Dec

-09

Apr

-10

Aug

-10

Dec

-10

Apr

-11

Aug

-11

Dec

-11

Apr

-12

Aug

-12

Dec

-12

Apr

-13

Aug

-13

Dec

-13

Apr

-14

Mill

ions

Cumulative Change in Private Employment: Dec. 2007—May 2014December 2007 through May 2014 (Millions)


Cumulative job losses peaked at 8.765 million

in February 2010

It took more than 6 ½ years (79 months) to

recover all of the private sector jobs lost in the Great Recession

61


Pvt. employment hit 116.6 million in April 2014—

617,000 above its pre-crisis peak of 116.0 million


65

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2014:Q1

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

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,250

$7,50005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

13:Q

213

:Q3

13:Q

414

:Q1

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2014:Q1) was $7.29 trillion, a new peak--$1.04 trillion above 2009 trough

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

5.3% from prior peak

Payrolls are 16.6% above

their 2009 trough and up 3.6% over

the past year

65

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


$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

66

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2013P

*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2013 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Gains Suggest WC NWP Will Grow Again in 2014; +8.6% Growth Estimated for 2013

7/90-3/91 3/01-11/0112/07-6/09

$Billions $Billions

WC premium volume dropped two years before

the recession began

WC net premiums written were down $14B or 29.3% to

$33.8B in 2010 after peaking at $47.8B

in 2005


Workers Compensation Operating Environment

67

Workers Comp Results Have Improved Substantially in Recent Years

67

Workers Compensation Combined Ratio: 1994–2015F

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5 10

3.5

104.

5 110.

6 115.

0

115.

0

108.

0

101.

0

99.0

98.0

121.

7

107.

0

115.

3

118.

2

80

85

90

95

100

105

110

115

120

125

130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13E14F 15F

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. Sources: A.M. Best (1994-2009); NCCI (2010-2013P) and are for private carriers only; Insurance Information Institute (2014-15). 68

WC results have improved markedly

since 2011

Workers Compensation Premium: Third Consecutive Year of IncreaseNet Written Premium

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 130

10

20

30

40

50

31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3

25.0 26.129.2 31.1

34.737.8 38.6 37.6

33.830.3 29.9 32.3

35.1 37.0

35.3 35.7 34.3 35.433.6

30.128.5

26.9 25.9 25.0

28.632.1

37.7

42.3

46.5 47.8 46.544.3

39.3

34.6 33.836.4

39.641.9

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

Pvt. Carrier NWP growth was +5.4% in 2013 and

8.7% in 2012

$ Billions

Calendar Yearp Preliminary

Source: 1990–2013p Private Carriers, Annual Statement Data, NCCI.1996–2013p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

70

2013 Workers Compensation Direct Written Premium Growth, by State*

PRIVATE CARRIERS: Overall 2013 Growth = +5.4%

*Excludes monopolistic fund states (in white): OH, ND, WA and WY.Source: NCCI.

While growth rates varied widely, all states experienced positive growth in 2013

Workers Compensation Lost-Time Claim Frequency Declined in 2013Lost-Time Claims

71

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

-8-6-4-202468

1012

-4.2 -4.4

-9.2

0.3

-6.5

-4.5

0.5

-3.9-2.3

-4.5

-6.9

-4.5 -4.1 -3.7

-6.6

-4.5

-2.2

-4.3-5.7

11

-4

-6.1

-2.0

3.5

-1

AdjustedIndicated

Frequency Change: 2007—2012Contracting: 7.97.1 -9.3%

Manufacturing: 13.612.0 -11.8%

Percent

Accident Year*Adjustments primarily due to significant audit activity.2013p: Preliminary based on data valued as of 12/31/20131991–2012: Based on data through 12/31/2012, developed to ultimateBased on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policiesFrequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost levelSource: NCCI.

Cumulative Change of –55.4%(1991–2011 adj.)

Workers Compensation Medical SeverityModerate Increase in 2013

72

Accident Year

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2010: +6.0%

Average Medical Cost per Lost-Time ClaimMedicalClaim Cost ($000s)

$8.1

$8.2

$8.1

$8.8

$9.1

$9.8

$10.8

$11.7

$12.9

$13.9

$15.7

$17.1

$18.4

$19.4

$21.0

$22.2

$23.5

$25.1

$26.1

$26.4

$27.1

$27.9

$28.8

+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%+5.8%

+6.1%+6.8%

+4.0%+1.2%+2.6%

+3.0%+3%

5

10

15

20

25

30

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

2013p: Preliminary based on data valued as of 12/31/2013.1991-2012: Based on data through 12/31/2012, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Cumulative Change = 256%(1991-2013p)

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2013: +5.2%

Accident Year

4.5%3.5%

2.8%3.2%3.5%4.1%4.6%4.7%

4.0%4.4%4.2%4.0%4.4%3.7%

3.2%3.4%3.0% 3.0%

5.1%

7.4%

10.1% 10.6%

13.5%

5.4%

7.8%

6.1%6.8%

4.0%3.0%

2.0%

4%

3%

1.2%

5.8%

8.8%7.7%

7.3%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13p

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Generally Outpaces the Medical CPI Rate

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

Average annual increase in WC medical severity form 1995 through 2011 was well above the medical CPI (6.8% vs. 3.8%), but

the gap is narrowing.

$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

$22.3

$22.5

$22.1

$22.2

$22.7$18.2

$17.7

$19.2

$20.8

$21.9

+2+0.5%-2.7%

+1.0%+9.1% +1.1%

+5.9%+3.1%+1.0%+4.6%+3.1%+9.2%

+10.1%+10.1%

+9.0%+7.7%

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

+6.5%

5

7

9

11

13

15

17

19

21

23

25

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

IndemnityClaim Cost ($ 000s)

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2013:+3.3%

Accident Year

Workers Comp Indemnity Claim Costs: Small Increase in 2013

Average indemnity costs per claim were up 2% in

2013 to $22,700

Average Indemnity Cost per Lost-Time Claim

2013p: Preliminary based on data valued as of 12/31/2013.1991-2011: 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.

Workers Comp Rate Changes,2008:Q4 – 2014:Q1

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

-5.5

%

-4.6

%

-4.0

%

-4.6

%

-3.7

%

-3.9

%

-5.4

% -3.7

%

-3.4

% -1.6

%

2.6% 4.

1%

7.5%

7.4% 8.

3%

8.1% 9.

0% 9.8%

8.3%

5.8%

4.9%

4.1%

-8%-6%

-4%-2%

0%2%4%

6%8%

10%12%

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

WC rate changes have been positive for 12

consecutive quarters, longer than any other

commercial line

(Percent Change)

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

81

P/C Insurance Industry Financial Overview

2013: Best Year in the Post-Crisis Era

Performance Improved with Lower CATs, Strong Markets

81

P/C Net Income After Taxes1991–2013 ($ Millions)

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 = 6.1% 2013 ROAS1 = 10.3%

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.8% ROAS in 2013, 6.3% 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

$14,

178

$5,8

40

$19,

316

$10,

870 $20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$62,

496

$3,0

43

$35,

204

$19,

456

$35,

074

$63,

784

$28,

672

-$6,970

$65,

777

$44,

155

$20,

559

$38,

501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

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

2013 ROAS was 10.3%

Net income in 2013 was up substantially

(+81.9%) from 2012

-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 13

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013*

*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2011: 4.7%

ROE

1975: 2.4%

2013: 9.8 %

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEsCombined Ratio / ROE

* 2008 -2013 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2013 combined ratio including M&FG insurers is 96.1; 2012 =103.2, 2011 = 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO Verisk Analytics data.

97.5100.6 100.1 100.8

92.7

101.299.5

101.0

96.7

102.4

106.5

95.7

14.3%15.9%

12.7%10.9%

7.4% 7.9%

4.7%6.2%9.6%8.8%

4.3%

9.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 20130%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Lower CATs helped ROEs

in 2013

85

Policyholder Surplus, 2006:Q4–2013:Q4

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8$559.2 $559.1

$538.6$550.3

$567.8$583.5$586.9

$607.7$614.0$624.4

$653.3

$570.7$566.5

$505.0$515.6$517.9

$400

$450

$500

$550

$600

$650

$700

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

3

09:Q

4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

2007:Q3Pre-Crisis Peak

Surplus as of 12/31/13 stood at a record high $653.3B

2010:Q1 data includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business .

The industry now has $1 of surplus for every $0.73 of NPW,close to the strongest claims-paying status in its history.

Drop due to near-record 2011 CAT losses

The P/C insurance industry entered 2014in very strong financial condition.

87

U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 2002-2013 (1)

$486

$20,353

$425

$9,264

$35,221

$13,615$16,294

$3,507

$6,419

$12,458

$4,651 $4,397

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012

Tran

sact

ion

valu

es

0

10

20

30

40

50

60

70

80

90

Num

ber of transactions

($ Millions)

(1) Includes transactions where a U.S. company was the acquirer and/or the target.

Source: Conning proprietary database.

M&A activity in the P/C sector remains below

pre-crisis levels.

P/C UNDERWRITING

88

Underwriting Losses in 2013 Much Improved After High

Catastrophe Losses in 2011/1288

89

P/C Insurance Industry Combined Ratio, 2001–2013*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

96.7

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Sandy Impacts

Lower CAT

Losses

90

Combined Ratios by Predominant Business Segment, 2013 vs. 2012*

*Excludes mortgage and financial guaranty insurers.Source: ISO/PCI; Insurance Information Institute

102.3101.1

102.3

104.8

96.797.6

94.3

98.7

90

92

94

96

98

100

102

104

106

All Lines Personal LinesPredominating

Commercial LinesPredominating

Diversified Insurers

2012 2013

(Percent)

The combined ratios for both personal and

commercial lines improved substantially in 2013

Underwriting Gain (Loss)1975–2013*

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

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 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

Cumulative underwriting deficit from 1975 through

2012 is $510B

($ Billions) Underwriting profit in 2013

totaled $15.5B

High cat losses in 2011 led to the highest

underwriting loss since 2002

93

2

(2)

(8)

(3)(7)

(10)(10)

(4)(0)

11

24

1512 10

(4)(9)

(13)(12)(10)(14)

(11)(10)(7) (7)

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$3092 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

13E

14E

15E

Prio

r Yr.

Res

erve

Rel

ease

($B

)

-6

-4

-2

0

2

4

6

8 Impact on C

ombined R

atio (Points)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2015E

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: A.M. Best, ISO, Barclays Research (estimates for 2013-2015).

95

Performance by Segment

95

109.

4

110.

211

8.8

109.

5 112.

5

110.

210

7.6

104.

110

9.7

110.

2

102.

5 105.

4

91.1 93

.6

104.

298

.9

102.

110

6.7

104.

910

2.1

101.

4

101.

3

102.

0

111.

1

112.

3

122.

3

90

95

100

105

110

115

120

125

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

14F

15F

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2011); Conning (2012-2015F) Insurance Information Institute

Commercial Lines Combined Ratio, 1990-2015F*

Commercial lines underwriting

performance is expected to improve as

improvement in pricing environment persists

96

Commercial Auto Combined Ratio: 1993–2015F

112.

1

112.

0

113.

0

115.

9

102.

7

95.2

92.9

92.1

92.4 94

.3 96.8 99

.4

98.0

104.

6

107.

1

101.

7

100.

3

99.8

118.

1

115.

7

116.

2

80

85

90

95

100

105

110

115

120

125

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F 14F 15F

Commercial Auto is Expected to Improve as Rate Gains Outpace Any Adverse Frequency and Severity Trends

97Sources: A.M. Best (1990-2012E);Conning (2012-2015F); Insurance Information Institute.

General Liability Combined Ratio: 2005–2015F

112.

9

95.1 99

.0

94.2

101.

4

104.

4

105.

8

108.

3

107.

1 110.

8

99.8

80

85

90

95

100

105

110

115

05 06 07 08 09 10 11 12 13F 14F 15F

Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years

Source: Conning Research and Consulting. 99

Inland Marine Combined Ratio: 1999–2015F

101.9

92.8

100.2

83.8

77.379.5

93.3

89.386.2

97.7 96.7

89.7 89.6 89.5

80.882.5

89.9

70

75

80

85

90

95

100

105

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F 15F

Inland Marine is Expected to Remain Among the Most Profitable of All Lines

Sources: A.M. Best (1999-2011); Conning (2012-2015F) 100

102

U.S. Insured Catastrophe Loss Update

2013 Was a Welcome Respite from the High Catastrophe Losses in Recent Years

102

103

$12.

6

$11.

0$3

.8$1

4.3

$11.

6$6

.1

$34.

7$7

.6 $16.

3$3

3.7

$73.

4

$10.

5$7

.5

$29.

2$1

1.5

$14.

4$3

3.6

$35.

0$1

2.9

$14.

0

$4.8 $8

.0

$37.

8$8

.8

$26.

4

$0

$10

$20

$30

$40

$50

$60

$70

$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*

U.S. Insured Catastrophe Losses

*Through 12/31/13.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.

2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Well

Below 2011 and 2012 YTD Totals.

2012 was the third most expensive year ever for insured CAT

losses

Record tornado losses caused

2011 CAT losses to surge

($ Billions, $ 2012)

103

104

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2013*

*2010s represent 2010-2013.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.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

3.4

8.7 8.9

3.43.6

0.9

0.1

1.1

1.1

0.8

0123456789

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

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

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 6.1E*

Combined Ratio Points Catastrophe losses as a share of all losses reached

a record high in 2012

105

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

$7.8 $8.7 $9.2 $11.1 $13.4$18.8

$23.9 $24.6$25.6

$48.7

$7.5$7.1$6.7$5.6$5.6$4.4

$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)

Hurricane Sandy became the 5th

costliest event in US insurance history

Hurricane Irene became the 12th most expense hurricane

in US history in 2011

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have

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

106

Top 10 States for InsuredCatastrophe Losses, 2013

$1,995

$1,509

$1,190

$909 $907$805 $773 $762

$677$593

0200400600800

1,0001,2001,4001,6001,8002,000

Oklahoma

Texas

Illinois

Minnesota

Colorado

Mississ

ippi

Nebras

ka

Georg

ia

Indiana

Louisiana

Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.

$ Millions

Oklahoma had the highest CAT losses

in the US in 2013

Num

ber

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2013Number of Events (Annual Totals 1980 – 2013)

Source: MR NatCatSERVICE 108

22

19

81

6

50

100

150

200

250

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

There were 128 natural disaster events in 2013

Losses Due to Natural Disasters in the US, 1980–2013

109

Overall losses (in 2012 values) Insured losses (in 2013 values)

Source: MR NatCatSERVICE

(2013 Dollars, $ Billions) (Overall and Insured Losses)

50

100

150

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

2013 CAT LossesOverall : $21.8BInsured: $12.8B

Indicates a great deal of losses are uninsured (~40%-50% in the US) =

Growth Opportunity

2013 losses were far below 2011 and 2012 and were 44% lower

than the average from 2000-2012

111

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1993–20121

0.1%

1.7%

3.8%4.7%

6.3%

7.1%

36.0%

40.4%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2012 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.

Hurricanes & Tropical Storms, $158.2

Fires (4), $6.5

Tornadoes (2), $140.9

Winter Storms, $27.8

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.9

Other (5), $0.2

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1993-2012

totaled $391.7B, an average of $19.6B per year or $1.6B

per month

113Sources: Munich Re NatCatSERVICE; Insurance Information Institute.

Winter Storm and Winter Damage Events in the US and Canada, 1980-2013 (2013 US$)

Three of the four most costly years ever for insured losses from

winter storms and damage occurred in the 1990s, led by the “Storm of the Century” in 1993.

Insured losses from

severe winter events

totaled $2 billion in

2013.

Insured winter storm and damage losses in Jan. 2014 already totaled $1.5 billion. Continued severe weather since then makes it likely that

2014 will become one of the top 5 costliest winters since 1980.

Insured Losses (Millions, $ 2013)

5-year running average

http://www.spc.noaa.gov/wcm/torngraph-big.png



U.S. Thunderstorm Insured Loss Trends, 1980 – 2013

116Source: Property Claims Service, MR NatCatSERVICE

Thunderstorm losses in 2013 totaled $10.3 billion, the 6th

highest on record

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. 2008-2013 are the most expensive

years on record.

118

Outlook for the 2014 Atlantic Hurricane Season

Somewhat Below Average Activity, Fewer Landfalls

Expected

Outlook for 2014 Hurricane Season: 30% Less Active Than Typical Year

Median* 2005(Katrina Year)

2014F

Named Storms 12.0 28 10

Named Storm Days 60.1 115.5 40

Hurricanes 6.5 14 4Hurricane Days 21.3 47.5 15Major Hurricanes 2.0 7 1

Major Hurricane Days 3.9 7 3

Accumulated Cyclone Energy 92.0 NA 65

Net Tropical Cyclone Activity 103% 275% 70%

*Over the period 1981-2010.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 2, 2014.

Probability of Major Hurricane Landfall (CAT 3, 4, 5) in 2014

Average* 2014F

Entire US Coast 52% 40%

US East Coast Including Florida Peninsula

31% 22%

Gulf Coast from FL Panhandle to Brownsville, TX

30% 23%

ALSO…Above-Average Major HurricaneLandfall Risk in Caribbean for 2011 (32% vs. 42%)

*Average over the past century.Source: Dr. Philip Klotzbach and Dr. William Gray, Colorado State University, June 2, 2014.

PRICING & GROWTH

135

P/C Insurance Industry Will Grow by $16B - $20B in 2014

135

136

-5%

0%

5%

10%

15%

20%

25%

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Net Premium Growth: Annual Change, 1971—2014F(Percent)

1975-78 1984-87 2000-03

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

Net Written Premiums Fell 0.7% in 2007 (First Decline

Since 1943) by 2.0% in 2008, and 4.2% in 2009, the First 3-Year Decline Since 1930-33.

2014F: 4.0%2013: 4.6%

2012: +4.3%

137

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

Sources: ISO, Insurance Information Institute.

Sustained Growth in Written Premiums(vs. the same quarter, prior year) Will Continue through 2014

10.2

%15

.1%

16.8

%16

.7%

12.5

%10

.1%

9.7%

7.8%

7.2%

5.6%

2.9%

5.5%

-4.6

%-4

.1%

-5.8

%-1

.6%

10.3

%10

.2% 13

.4%

6.6%

-1.6

%2.

1%0.

0%-1

.9%

0.5%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

1.3% 2.

3%1.

7% 3.5%

1.6%

4.1%

3.8%

3.0% 4.

2% 5.1%

4.8%

4.1% 4.7%

3.8%

5.8%

-10%

-5%

0%

5%

10%

15%

20%

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

2011

:Q2

2011

:Q3

2011

:Q4

2012

:Q1

2012

:Q2

2012

:Q3

2012

:Q4

2013

:Q1

2013

:Q2

2013

:Q3

2013

:Q4

Premium growth in Q4 2013 was up 5.8% over Q4 2012, marking the

15th consecutive quarter of growth

138

4.0%

7.2%

9.0%

5.4%4.2% 4.1%

5.0%

0.6%

4.6%

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

10%

PersonalAuto

Home OtherLiability*

WC CMP Fire & Allied

Comm. Auto

All OtherLines

Total P/C

Growth by Major P/C Line, 2013

Other Liability and Homeowners were the fastest growing

lines in 2013

*Includes Products Liability.Source: Annual Statement data for by line statistics; NCCI for WC; ISO for Total P/C; Insurance Information Institute.

139

Change in Commercial Rate Renewals, by Line: 2014:Q1

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

Major Commercial Lines Renewed Generally Upward in Q4:2014 for the 11th Consecutive Quarter; D&O, Employment Practices and Workers Comp Leading

the Way; Lower Cat Losses and Falling Reinsurance Prices Have Pressured Property Coverages Lower; Low Interest Rates Still Exert Upward Rate Pressure

Percentage Change (%)

3.3%

4.1%4.9% 5.2%

0.0%0.7% 0.9%

1.5% 1.7% 2.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Com

mer

cial

Pro

perty

Bus

ines

sIn

terru

ptio

n

Sur

ety

Gen

eral

Liab

ility

Um

brel

la

Con

stru

ctio

n

Com

mer

cial

Aut

o

Wor

kers

Com

p

EP

L

D&

O

D&O increases are large than any other line,

followed by EPL and Workers Comp


Commercial Umbrella Rate Changes,2010:Q1 – 2014:Q1

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

-4.6

%

-6.0

% -4.4

%

-4.5

%

-1.7

%

-1.5

%

1.3% 2.

3% 3.3% 3.

8%

3.1% 3.5% 4.

6%

3.7%

2.9%

2.3%

1.7%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

13:Q

3

13:Q

4

14:Q

1

Commercial Umbrella rate changes have been

positive for 11 consecutive quarters

(Percent Change)


141

Average Commercial Rate Change,All Lines, (1Q:2004–1Q:2014)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11.

3%-1

1.8%

-13.

3%-1

2.0%

-13.

5%-1

2.9% -11.

0%-6

.4%

-5.1

%-4

.9%

-5.8

%-5

.6%

-5.3

%-6

.4%

-5.2

%-5

.4% -2

.9%

2.7% 4.

4%4.

3%3.

9% 5.0%

5.2%

4.3%

3.4%

2.1%

1.5%

-0.1

% 0.9%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14


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

KRW Effect

Pricing as of Q1:2014 was positive for the 11th

consecutive quarter.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

142

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2014:Q1

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


Percentage Change (%)

KRW : No Lasting Impact

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5% Pricing turned positive in

Q3:2011, the first increase in nearly 8 years; Q1:2014 renewals were up 1.5%; Some insurers posted

stronger numbers.

Trough = 2007:Q3 -13.6%

143

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2014:Q1



1999:Q4 = 100Despite 11 consecutive

quarters of gains (Q1:2014 = +1.5%), pricing today is where

is was in mid-2001 (around 9/11), suggesting additional

rate need going forward, esp. in light of record low interest

rates

144

Cumulative Qtrly. Commercial Rate Changes, by Line: 1999:Q4 to 2014:Q1

1999:Q4 = 100



Rate levels are rising but at different paces rather all being up sharply as in the early 2000s

146

Growth Analysis by State and Business Segment

Post-Crisis Paradox? Premium Growth Rates Vary

Tremendously by State146

147

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

74.6

36.9

31.9

27.4

25.2

24.9

22.5

22.2

16.6

15.9

15.7

14.5

14.5

14.3

12.6

11.9

11.8

11.2

10.5

10.3

9.9

9.8

9.3

9.1

9.0

8.6

0

1020

30

40

5060

70

80

ND SD OK NE

KS IA VT TX WY

TN MN AR

AK IN WI

CO MI

KY

OH NJ LA SC VA AL

MO

NM

Pece

nt c

hang

e (%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota was the country’s growth leader over the past 6 years with premiums written

expanding by 74.6%

148

Direct Premiums Written: Total P/CPercent Change by State, 2007-2013

8.5

8.2

7.9

7.8

7.6

7.3

7.0

6.9

6.2

5.9

5.6

5.3

4.2

4.1

3.5

1.6

1.0

0.4

-0.7

-1.7

-1.9

-4.1

-5.7

-6.7

-12.

6

-15.

3

-20

-15

-10

-5

0

5

10

MS

CT

US

NC GA

NY

MD

MA

UT

WA

PA IL RI

NH ID MT

ME

OR CA FL DC AZ

WV HI

NV

DE

Pece

nt c

hang

e (%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Growth was negative in 7 states and DC between

2007 and 2013

149

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013

91.1

42.1

41.4

33.7

26.3

25.8

23.6

19.1

15.6

14.0

11.3

10.0

9.8

6.8

6.7

6.5

4.1

3.2

3.1

3.0

2.7

2.2

2.0

1.7

1.3

0.6

0102030405060708090

100

ND

OK SD VT NE IA KS ID AK

TX WY

MN IN AR

TN WI

OH

MA

CT

NM LA MS NJ

NY

US

MO

Pece

nt c

hang

e (%

)

Sources: SNL Financial LLC.; Insurance Information Institute.

Top 25 States

Only 30 states showed any commercial lines growth from 2007 through 2013

150

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2013

0.5

0.4

0.2

0.1

-0.5

-0.8

-0.9

-1.0

-1.1

-1.1

-1.9

-2.0

-2.1

-2.7

-3.3

-3.7

-4.3

-4.9

-10.

7

-11.

4

-11.

7

-12.

6

-12.

7

-13.

6

-22.

4

-25.

1

-30

-25

-20

-15

-10

-5

0

5

MD

NH PA CO IL WA VA KY

NC

ME RI

MI

SC AL

GA

CA

UT

DC

OR

MT HI

DE FL AZ

WV

NV

Pece

nt c

hang

e (%

)

Bottom 25 States

Sources: SNL Financial LLC.; Insurance Information Institute.

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

the past 6 years

Nearly half the states have yet to see commercial lines premium

volume return to pre-crisis levels

151

Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2013*

32.9

30.8

24.3

21.5

13.4

11.5

11.0

10.6

8.1

4.8

4.5

3.0

1.5

-0.3

-0.6

-1.0

-2.3

-2.4

-2.9

-3.0

-3.7

-4.1

-5.7

-5.8

-8.0

-15-10-505

101520253035

OK IA SD NY CA

CT NJ

KS

NE IN MI

VT MN

DC WI IL N

H US

NM TX PA VA MD TN AR

Pece

nt c

hang

e (%

)

*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 States

Only 13 states have seen works comp premium volume

return to pre-crisis levels

152

Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2013*

-8.1

-8.4

-8.7

-8.8

-11.

1

-11.

3

-12.

0

-14.

7

-15.

3

-15.

4

-16.

0

-16.

3

-17.

1

-22.

1

-23.

0

-26.

5

-27.

5

-32.

5

-33.

3

-33.

5

-43.

8

-71.

0

-80-75-70-65-60-55-50-45-40-35-30-25-20-15-10-50

MS

MA RI

GA

NC AK ID CO LA ME AZ

MO SC AL

KY

UT FL OR DE HI

NV

MT

Pece

nt c

hang

e (%

)

Bottom 25 States

*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.

States with the poorest performing economies also produced some of the most

negative net change in premiums of the past 6 years

Terrorism Update

153

TRIA’s SuccessConsequences of Expiration

Download III’s Terrorism Insurance Report at: http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2014.html

153

http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2014.html

http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2014.html

156

*Data for 27 states with sufficient data.Source: Marsh 2014 Terrorism Risk Insurance Report; Insurance Information Institute.

The overall US take-up rate for terrorism coverage was 62% in 2013 and ranged from

a lows of 41% in Michigan to a high of

84% in Massachusetts (where demand likely increased due to the

April 2013 Boston Marathon bombing)

Terrorism Insurance Take-Up Rates by State for 2013*

158

Terrorism Risk Insurance Program Testified before House Financial Services Nov. 2013 Testified before Senate Banking Cmte. in Sept. 2013 Provided testimony at NYC hearing in June 2013 Provided Capitol Hill Joint House/Senate Staff Briefing in

April 2014 I.I.I. Published Several Updates to its Study on Terrorism

Risk and Insurance Working with Trades, Congressional Staff, GAO & Others

Senate Banking Committee, 9/25/13House Financial Services Subcommittee, 11/13/13

159

Summary of President’s Working Group Report on TRIA (April 2014)

Insurance for terrorism risk is available and affordable Availability/affordability have has not changed appreciably since 2010

Prices for terrorism risk insurance vary considerably depending on the policyholder’s industry and location of risk

Prices have declined since TRIA was enacted Currently ~3% to 5% of commercial property insurance premiums

Take-up rates have improved since adoption of TRIA Overall take-up rate is steady at ~60% (62% in 2013 per Marsh)

Market capacity is currently tightening given uncertainty over TRIA reauthorization

The private market does not have the capacity to provide reinsurance for terror risk to the extent currently provided by TRIA

In the absence of TRIA, terrorism risk insurance would likely be less available. Coverage that would be available likely would be more costly and/or limited in scope

Source: Report of the President’s Working Group on Financial Markets,The Long-Term Availability and Affordability of Insurance for Terrorism Risk,April 2014.

INVESTMENTS: THE NEW REALITY

160

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

160

Property/Casualty Insurance Industry Investment Income: 2000–20131

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.4

$39.6

$49.5$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Investment Income Fell in 2012 and 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing

1 Investment gains consist primarily of interest and stock dividends...Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings are running below their 2007

pre-crisis peak

162

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

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

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

90

$5.8

5

$7.0

4

$6.1

8 $11.

43

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$25-$20-$15-$10

-$5$0$5

$10$15$20

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

Insurers Posted Net Realized Capital Gains in 2010 - 2013 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital

Losses Were the Primary Cause of 2008/2009’s Large Drop in Profits and ROE

($ Billions) Realized capital gains were up sharply as equity markets rallied

164

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Persona

l Line

s

Pvt Pass

Auto

Pers P

rop

Commerc

ial

Comml A

uto

Credit

Comm P

rop

Comm C

as

Fidelity

/Sure

ty

Warra

nty

Surplus

Line

s

Med M

al

WC

Reinsu

rance

**

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

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

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

164

166

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2014*

*Monthly, constant maturity, nominal rates, through May 2014.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

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 '13 '14

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

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.

U.S. Treasury yields plunged to historic lows in 2013. Longer-

term yields have rebounded a bit.

166



167

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

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

Persona

l Line

s

Pvt Pass

Auto

Pers P

rop

Commerc

ial

Comml A

uto

Credit

Comm P

rop

Comm C

as

Fidelity

/Sure

ty

Warra

nty

Surplus

Line

s

Med M

al

WC

Reinsu

rance

**

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

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

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

167

171

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2012

90

95

100

105

110

115

12069 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

Com

bine

d R

atio

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Impairm

ent Rate

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2012 impairment rate was 0.69%, down from 1.11% in 2011; the rate is lower than the 0.82% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007; Recent Increase Was Associated

Primarily With Mortgage and Financial Guaranty Insurers and Not Representative of the Industry Overall

176

REINSURANCE MARKET CONDITIONS

Ample Capacity as Alternative Capital is

Transforming the Market—And Pushing Down

Prices176

Global Reinsurance Capital (Traditional and Alternative), 2007 - 2013

Source: Aon Benfield Reinsurance Market Outlook, April 1, 2014; Insurance Information Institute.

Total reinsurance capital reached a record $540B in 2013, up 58.8% from 2008. Of that, $50B (9.3%) is alternative capacity, up 163% from

$19B since 2008

Reinsurance Pricing: Rate-on-Line Index by Region, 1990 – 2014*

*As of Jan. 1.Source: Guy Carpenter

Lower CATs and a flood of new

capital has pushed reinsurance pricing

down in most regions, including

the US

Catastrophe Bonds: Issuance and Outstanding, 1997- 2014:Q1*Risk Capital Amount ($ Millions)

*Through Jan. 31, 2014.Source: Guy Carpenter; Insurance Information Institute.

633.

0

846.

1

984.

8

1,13

0.0

966.

9 2,72

9.2

3,39

1.7

4,60

0.3

4,10

8.8

5,85

2.9

7,08

3.0

1,41

0.0

1,991.11,142.8

1,729.8

6,99

6.3

4,69

3.4

1,219.5

$3,4

50.0

$4,0

40.4

$4,9

04.2 $8

,541

.6

$14,

024.

2

$12,

043.

6

$12,

508.

8

$12,

185.

0

$12,

139.

1

$14,

835.

7 $18,

516.

7

$2,9

50.0

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14:Q1Risk Capital IssuedRisk Capital Outstandng at Year End

Catastrophe Bond Issuance Is Approaching Pre-Crisis Levels While Risk Capital Outstanding Stands at an All-Time Record

CAT bond issuance reached a record high in 2013

Risk capital outstanding

reached a record high in 2013

Financial crisis depressed issuance

Shifting Legal Liability & Tort Environment

180

Will the Tort PendulumSwing Against Insurers?

180

181

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

$0

$50

$100

$150

$200

$250

$300

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

Tort

Syst

em C

osts

1.50%

1.75%

2.00%

2.25%

2.50%

Tort Costs as %

of GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

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

Tort costs in dollar terms have remained high but relatively stable

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

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

185

The Nation’s Judicial Hellholes: 2012/2013

Source: American Tort Reform Association; Insurance Information Institute

West VirginiaIllinoisMadison County

New YorkAlbany and

NYC

Watch List Philadelphia,

Pennsylvania South Florida Cook County, Illinois New Jersey Nevada Louisiana

Dishonorable Mention

MO Supreme Court WA Supreme Court

California

MarylandBaltimore

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Insurance Information Institute Online:

186

p/c insurance industry overview and outlook: focus on the construction sector

Documents

economic growth juggernaut

growth rates

9pm3us real gdp growth

economy broadlyreal

economic outlook

blue economic indicators

state percent change

growth34real gdp