Challenge, Change & Opportunity:Growth and the Future of the P/C Insurance

Industry in 2018 and Beyond

Robert P. Hartwig, Ph.D., CPCUClinical Associate Professor of Finance, Risk Management & Insurance

Darla Moore School of Business ♦ University of South CarolinaRobert.Hartwig@moore.sc.edu ♦ 803.777.6782

January 4, 2018

2

The Case for Growth (and a Correction?) in the P/C Insurance Industry: 2018 and BeyondDrivers of Growth: Personal and Commercial Lines Price Exposure

Role of the Economy and Shifting Demographics

Pressure from Record Catastrophe Activity

Industry Financial Performance Pricing and capacity implications

Financial Market Pressure

Regulatory and External Influences

A Look Ahead: Technology, Disruptors and Insurance

3

P/C Insurance Growth Overview and Outlook

Drivers of Growth in 2018

Economic Growth Fuels Exposure & Record CAT Losses Are Pressuring Rates

Price Competition Remains Rational

3

4

-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 15 16 17*

Net Premium Growth (All P/C Lines): Annual Change, 1971—2017E(Percent)

1975-78 1984-87 2000-03

*Q2:2017 over Q2:2016. Shaded areas denote “hard market” periodsSources: A.M. Best (1971-2013), ISO (2014-16).

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.

2017:Q2: 4.1%2016: 2.7%2015: 3.5%2014: 4.2

2013: 4.4%2012: +4.2%

Outlook2017F: 3.1%2018F: 3.0%

Y-o-Y Growth Rates, Direct Premiums Written, Commercial vs. Personal Lines,

2012:Q4 - 2017:Q2

0%

1%

2%

3%

4%

5%

6%

7%

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

14:Q

2

14:Q

3

14:Q

4

15:Q

1

15:Q

2

15:Q

3

15:Q

4

16:Q

1

16:Q

2

16:Q

3

16:Q

4

17:Q

1

17:Q

2

Personal LinesCommercial Lines

Sources: NAIC, via SNL Financial; ISO; Insurance Information Institute calculations.

Since 2014, personal lines Direct Premiums Written have generally grown faster than commercial lines DPW, and that growth has been less volatile.

Personal Lines

growth is twice that

Commercial Lines

6

2016 Growth in Net Written Premium: Personal vs. Commercial

5.7%

3.1%

-1.4%

2.7%

5.3%

3.3%

1.5%

3.5%

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

Personal Lines Predominating

Diversified Commercial LinesPredominating

All Insurers

2015 2016Annual Change in NWP

The divergence in growth between personal and commercial lines is large and has been expanding rapidly

Source: ISO.

Commercial lines growth has been exceedingly weak

Business Investment Is a Potent Driver of Property Insurance Premium Growth*

*Commercial property direct premiums written (fire, allied lines, CMP, inland marine, burglary and theft); business fixed investment (structures, equipment, and software).Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: https://fred.stlouisfed.org/series/PNFI#0; National Bureau of Economic Research (recession dates); Insurance Information Institute.

-20%

-10%

0%

10%

20%

30%

07:Q2 08:Q2 09:Q2 10:Q2 11:Q2 12:Q2 13:Q2 14:Q2 15:Q2 16:Q2 17:Q2

Recession

% change, property ins premiums

% change, fixed investment

4.9%

% change from same quarter, prior year

Business fixed investment is forecast to grow at 5%–6% in 2017:2H and at 4.5%–5.5% in 2018.

Investment in equipment and software is expected to grow but investment in structures is expected to shrink.

2016: Components of Commercial DWP Growth

EXPOSURE, 4.1%

RATE, -1.0%

DWP, 3.1%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Commercial Market

EXPOSURE RATE DWP

Direct Written Premium (DWP) in US lines covered by ISO MarketStance grew 3.1 percent in 2016

Soft market conditions counteracted moderate 4.1 percent exposure growth

Anecdotal evidence: insureds spent rate reductions on new/broader coverages (CIAB, 2017).

Source: Verisk Insurance Solutions.

2016 Commercial Market Growth by Coverage

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

EXPOSURE RATE DWP

Commercial auto rates increased as carriers reacted to ongoing challenges

Property, Workers’ Compensation under most severe rate pressures

Umbrella, excess, specialty lines liability growth may have reflected trading price for quantity (i.e. demand elasticity)

Stand-alone cyber DWP, policies in force reported to NAIC doubled in 2016, and DWP>earned premiums, all signals of market growth

Source: Verisk Insurance Solutions.

10

M&A Trends

Consolidation Among P&C (Re)Insurers and Within

Distribution Channels Will Likely Continue at a Modest Pace

11

U.S. INSURANCE MERGERS AND ACQUISITIONS,P/C SECTOR, 1994-2016 (1)

$5,1

00

$11,

534

$8,0

59

$30,

873

$19,

118

$40,

032

$1,2

49

$486

$20,

353

$425

$9,2

64

$35,

221

$13,

615

$16,

294

$3,5

07 $6,4

19

$12,

458

$4,6

85

$4,3

93

$6,7

23

$40,

006

$8,4

98

$55,825

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Tran

sact

ion

valu

es

0

20

40

60

80

100

120

140

Number 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 in 2015 totaled $39.6B, its highest level since

2000, but fell sharply in 2016 in dollar terms

12

U.S. INSURANCE MERGERS AND ACQUISITIONS,DISTRIBUTION, 1996-2016 (1)

$1,9

34

$2,7

20

$55,

903

$1,6

33

$542

$689

$446

$60

$212

$944

$15,

205

$5,8

12

$615 $1,7

27

$2,6

06

$4,2

25 $8,2

46

$2,5

81

$18,

695

$4,2

04

$7$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Tran

sact

ion

valu

es

0

50

100

150

200

250

300

350

400

450

Number 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 Distribution sector in 2016 totaled $4.2B, a steep (73.5%) drop from $18.7B in 2015USI announced the

acquisition of Wells Fargo Insurance

Services on 6/26/16

13

Drivers of M&A Activity: P/C Insurers & DistributionP/C Insurers Distribution SegmentSoft Market Conditions/Limited Organic Growth Opportunities: Mostly commercial lines and reinsurance

Slow Growth: Acquisition provides surest and fastest path to growth

Expense Ratios: Desire to lower ERs via realization of economies of scale

Diverse Universe of Buyers: Agencies, brokerages, MGAs/MGUs, insurers, private equity firms, banks

Interest Rates: Low yields continue to pressure longer-tailed lines but can encourage debt-financed M&A

Lack of Succession: Avg. age of an insuranceagent is now 59 and rising. Difficulty attracting younger generation of talent.

Capital Management/Valuations: Prevalence of excess capital even after share repurchases; View that M&A may be more accretive to earns than share repurchases

Scale and Efficiency: Need/desire to improve efficiency; New InsurTech start-ups active in the distribution segment.

Source: Adapted from Conning “Global Insurance Distribution & Services Sector: Mergers & Acquisitions, 2017.

THE ECONOMY

14

The Strength of the Economy Will Greatly Influence Growth in Insurers’ Exposure

Base Across Most LinesHow Will “Trumponomics” Impact

the Industry?

14

15

Animal Spirits: Unleashed from the Oval Office?

Source: https://twitter.com/realDonaldTrump

Awakening America’s“Animal Spirits”

16 16

Economic Policy and the Insurance Industry

Consumer and Business Confidence Are Key

17

US Real GDP Growth*

*Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 12/17; Insurance Information Institute.

2.7%

1.8%

-1.8

%1.

3%-3

.7%

-5.3

%-0

.3%

5.0%

2.3%

2.2% 2.6%

2.4%

0.1%

2.5%

1.3%

4.1%

2.0%

1.3%

3.1%

0.4%

2.7%

1.8%

3.5%

-0.9

%4.

6%4.

3%2.

1%2.

0% 2.6%

2.0%

0.9%

0.8% 1.

4%3.

5%2.

1%1.

2%3.

1%3.

2%2.

7%2.

3% 2.6%

2.4%

2.3%

-8.9%

4.5%

1.4%

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

20

07

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

16:1

Q16

:2Q

16:3

Q16

:4Q

17:1

Q17

:2Q

17:3

Q17

:4Q

18:1

Q18

:2Q

18:3

Q18

:4Q

Demand for Insurance Should Increase in 2017-18 as GDP Growth Continues at a Steady and Perhaps Accelerating Pace and Gradually

Benefits the Economy Broadly

Real GDP Growth (%)

Recession began in Dec, 2007

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

2017/18 GDP forecasts were revised upwards by ~0.2%

following Trump election. Tax reform could add 0.1% - 0.2%

to real GDP growth in 2018

First consecutive

quarters of 3%+ GDP growth since 2014

The Economy Drives P/C InsuranceIndustry Premiums: 2006:Q1 – 2017:Q2Direct Premium Growth (All P/C Lines) vs. Nominal GDP: Quarterly Y-o-Y Pct. Change

Sources: SNL Financial; U.S. Commerce Dept., Bureau of Economic Analysis; I.I.I.

-6%

-3%

0%

3%

6%

9%

12%

2006:Q1

2006:Q3

2007:Q1

2007:Q3

2008:Q1

2008:Q3

2009:Q1

2009:Q3

2010:Q1

2010:Q3

2011:Q1

2011:Q3

2012:Q1

2012:Q3

2013:Q1

2013:Q3

2014:Q1

2014:Q3

2015:Q1

2015:Q3

2016:Q1

2016:Q3

2017:Q1

DWP y-o-y change y-o-y nominal GDP growth

Direct Written Premiums track Nominal GDP—not quarter by quarter but overall fairly well.

19

Consumer Confidence Index: Jan. 1987 – Dec. 2017

Source: The Conference Board; Wells Fargo Research.

Outlook: Consumers are optimistic about the future, which is consistent with expectations for stronger economic growth (consumers account for nearly 70% of all spending in the economy). Should positively influence

business investment.

The Conference Board’s Consumer Confidence Index stood at 122.1 in Dec., close to its

post-recession high

20

NFIB Small Business Optimism Index:Jan. 1988 – November 2017

Source: National Federal of Independent Business; Wells Fargo Research.

Outlook: Small businesses are much more optimistic about the future

The NFIB’s Index of Small Business Optimism is at

recent highs. Tax reform, reduced regulations and strong sales will drive investment,

hiring and exposures

21

Small Business Capital Spending,Jan. 1988 – November 2017

Source: National Federal of Independent Business; Wells Fargo Research.

Small business optimism is translating into more capital spending which will increase

insurable commercial exposures

Small business capital spending is close to post-

crisis highs;

Tax cuts and accelerated depreciation could push

capital spending higher—and commercial

insurance exposures—along with it

22

Manufacturing: ISM Manufacturing Composite & Industrial Production, Jan. 2000 – Nov. 2017 (>50 implies expansion)

Source: Institute for Supply Management (ISM); Wells Fargo Securities.

Manufacturing activity remains near its cyclical

high, which bodes well for

commercial exposures

23

16.9

16.5

16.1

13.2

10.4

11.6 12

.714

.4 15.5 16

.4 17.4

17.5

17.1

16.9

16.8

16.7

16.7

16.7

16.9

16.9

16.617

.117.5

17.8

17.4

910111213141516171819

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17F18F 19F 20F21F 22F 22F

(Millions of Units)

Auto/Light Truck Sales, 1999-2023F

New auto/light truck sales fell to the lowest level since the

late 1960s. Forecast for 2014-15 is still below 1999-2007 average of 17 million units,

but a robust recovery is well underway.

Job growth and improved credit market conditions boosted auto

sales to near record levels in recent years

Truck, SUV purchases remain strong but have slumped a bit

Yearly car/light truck sales are slowing slightly, as demand tapers following the recovery from the recession. PP Auto premium might grow by 3.5% - 5%.

Sales have returned to pre-

crisis levels

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (12/17 for 2017-18; 10/17 for 2018-23F; Insurance Information Institute.

24

Construction Spending:Jan. 2000 – Oct. 2017 ($ Bill)

Source: US Dept. of Commerce; Wells Fargo Securities.

Private (but not public) construction spending remains relatively strong.

Public construction spending could

benefit from a boost in infrastructure

investment

25

(Millions of Units)

New Private Housing Starts, 1990-2023F

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 1.00 1.

11 1.17 1.20 1.

27 1.36 1.40 1.43 1.45 1.48

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 14 15 16 17F18F19F20F21F22F23F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (12/17 for 2017-18; 10/17 for 2018-23F; 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, still-low mortgage

rates and demographics should continue to stimulate new home

construction for several more years

26

Economic Outlook: Labor Market Focus

Labor Markets Are Healthy: Favorable Implications for Workers

Comp and Many Other Lines

27

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.

6%6.

2%6.

1%5.

7%5.

6%5.

4%5.

2%5.

0%4.

9%4.

9%4.

9%4.

7%4.

7%4.

4%4.

3%4.

1%4.

1%4.

0%4.

0%3.

9%

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

16:Q

116

:Q2

16:Q

316

:Q4

17:Q

117

:Q2

17:Q

317

:Q4

18:Q

118

:Q2

18:Q

318

: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 (12/17 edition); Insurance Information Institute.

2007:Q1 to 2018:Q4F*

Unemployment forecasts have been revised modestly downwards. Optimistic

scenarios put the unemployment as low as 3.7 by Q4 2018.

Jobless figures have been revised

downwards for 2018

The Nov. 2017 unemployment rate was 4.1%, a 17-year low

28

Average Hourly Earnings:Jan. 2007 – Oct. 2017 ($ Bill)

Source: US Bureau of Labor Statistics; Wells Fargo Research.

Hourly earnings fell in October, but should

soon begin to respond to tightening labor market conditions

29

Wages Are Responding to Tight Labor Market Conditions in More Cities

Source: US Bureau of Labor Statistics; Wall Street Journal.

Workers in cities with unemployment rates below the national average are seeing accelerating wage

gains—WC insurers will benefit as well

18 states and 20 cities increased their minimum wage as of

Jan. 1, 2018—increasing payrolls

by $5 billion!

30

Catastrophe Loss Update: Major Driver of Rate Pressure

2017 Was One of the Costliest Years Ever for US Insurers

Hurricanes Harvey, Irma and Maria, California Wildfires Exact a Huge Toll

30

31

$21 $3

5

$60

$30

$55

$137

$76

$46

$37

$38

$135

$55

$18

$52

$23 $28

$63

$136

$0

$20

$40

$60

$80

$100

$120

$140

$160

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*

Global Insured Catastrophe Losses, 2000 – 2017E

*EstimateSources: Swiss Re, RMS, Barclays Research.

2017 was one of the top 3 costliest years ever for

insurers on a global scale($ Billions, $ 2017)

31

32

$13.

0$1

1.3

$3.9

$14.

8$1

1.9

$6.3

$35.

8$7

.8 $16.

8$3

4.7

$10.

9$7

.7$3

0.1

$11.

8$1

4.9

$34.

6$3

6.1

$13.

1$1

5.5

$15.

2 $21.

6$7

1.8$75.7

$14.

4$5

.0 $8.2

$38.

9$9

.1$2

7.2

$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 14 15 16 17*

U.S. Insured Catastrophe Losses, 1989 – 2017 YTD*

*As of Nov. 14, 2017. Stated in 2017 dollars. Excludes NFIP losses.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.

2017 is likely to become the second costliest year ever for insured CAT losses in the US

($ Billions, $ 2015)

32

33

Top 10 US Catastrophe Losses of 2017,by Insured Loss

(Insured Losses, 2017 Dollars, $ Billions)*

$7.3

$15.9$18.0

$21.9

$1.9$1.6$1.5$1.4$1.3$1.0$0

$5

$10

$15

$20

$25

June Hailstorm March Storms FebruaryStorms

March Storms March Storms May ColoradoStorm

CaliforniaWildfires

HurricaneHarvey

Hurricane Irma Hurricane Maria

YTD insured CAT losses in the US totaled $72

billion by late 2017, the second costliest year on record, led by Hurricanes

Maria, Irma and HarveyNot all insured

losses in 2017 were due to hurricanes. More than $15B in

other losses occurred from coast-to-coast.

*As of Nov. 14, 2017.Sources: PCS; Insurance Insider: http://www.insuranceinsider.com/-1270818/9.

34

Top 18 Most Costly Disastersin U.S. History—Katrina Still Ranks #1(Insured Losses, 2017 Dollars, $ Billions)*

$9.3 $9.7 $11.7 $14.2 $15.9 $18.0 $19.8 $21.9$25.3 $26.0 $27.1

$51.6

$8.3$7.9$7.5$7.1$6.0$5.9

$0

$10

$20

$30

$40

$50

$60

Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Harvey (2017)

Irma (2017)

Sandy(2012)

Maria (2017)

Northridge(1994)

9/11 (2001)

Andrew(1992)

Katrina(2005)

Harvey, Irma and Maria combined caused an

estimated $55B in privately insured losses

in the US

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

15 of the 18 Most Expensive Insurance Events in US History Have Occurred Since 2004—3 of those in 2017

*2017 values are as of Nov. 14, 2017.Sources: PCS, RMS, Karen Clark & Co; USC Center for Risk and Uncertainty Management adjustments to 2017 dollars using the CPI.

35

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1997–20161

0.2%2.0%7.0%

5.9%

6.7%

39.9%

38.2%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2016 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, $161.1

Fires (4), $8.4

Events Involving Tornadoes (2), $168.1

Winter Storms, $28.2

Terrorism, $25.0

Other Wind/Hail/Flood (3), $29.7

Other (5), $0.8

Wind losses, by far, cause the most

catastrophe losses, even if hurricanes/TS

are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1997-2016

totaled $421.2B, an average of $21.1B per year or $1.76B

per month

Winter storm losses were much above average in 2014/15 pushing

this share up

36

Origins of Pricing Pressure Arising from Near-Record CAT Activity

*Some programs above and below this range.**Higher end of range applies to loss-affected accounts.Sources: Adapted from Barclay’s Capital research.

+10% to +20%*

+5% to +15%**

+3% to +10%

Retrocessional Reinsurance markets (reinsurance for reinsurance companies) is pushing pressure through the

reinsurance markets and into both commercial and personal lines

37

0

50

100

150

200

250

300

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 15 16 17 18*

(Percent)

US Reinsurance Pricing Is Sensitive to CAT Activity and Ultimately Impacts Primary Insurance Pricing, Terms and Conditions

Post-Andrew surge

US Property Catastrophe Rate-on-Line Index: 1990 – 2018*

*As of January 1 each year. 2018 is a full-year estimate (Center for Risk and Uncertainty Management, Univ. of South Carolina.Source: Guy Carpenter; Artimes.bm accessed at: http://www.artemis.bm/indices/regional-property-cat-rate-on-line-index.html

Post-9/11 Adjustment

Post Katrina, Rita, Wilma

period

Post-Ike adjustment

Adjustment following

record tornado losses in 2011 and Sandy in

2012

Near-Record CATs in 2017 will likely lead US reinsurance prices in

2018 to increase

Catastrophe Claims and Hard Markets

Year CAT claims over $35 billion

($2016, billions)

Growth of (NWP-GDP) in following year

Hard Market?

1992 $39.6 0.9% No2001 $36.4 12.0% Yes2004 $36.4 -6.2% No2005 $77.1 -3.1% No2011 $35.2 0.2% No2012 $36.8 1.3% No2017 $80+ ? ?

Contrary to conventional

wisdom, heavy CAT

activity does not generally precipitate a hard market

Source: Insurance Information Institute.

Policyholder Surplus (Capacity) and Hard Markets

Year Surplus decline

Growth of (NWP-GDP) in following year

Hard Market?

1984 -2.7% 14.6% Yes1999 -0.9% -1.5% No2000 -4.7% 5.1% Yes2001 -8.0% 12.0% Yes2008 -12.5% -2.2% No2011 -0.8% 0.2% No2017 >0%? ? ?

Declines in surplus

(capacity) are a less reliable predictor of

hard markets

Source: Insurance Information Institute.

P/C Insurance Industry ROE and Hard Markets

Year P/C Industry ROE less than 4%

Growth of (NWP-GDP) in following year

Hard Market?

1975 2.4% 10.7% Yes

1984 1.8% 14.6% Yes

2001 -1.2% 12.0% Yes

2002 2.1% 5.1% Yes

2017 <4% ? ?

Source: Insurance Information Institute.

Depressed ROEs are a historically

reliable predictor of

hard markets

Hard Markets: Conclusion & Implications for 2018

Low ROE is the best predictor of a hard market (likely well below 4% in 2017), but does this mean a hard marker is a sure thing? No…but some “correction” is likely

Surplus in 2017 was flat or down slightly from a vastly overcapitalized peak. Capacity remains generally abundant and seems likely to grow–not drop–due to

asset value growth, implying that a true hard market is unlikely to develop.

CAT Losses: 2017 was one of the worst years on record for cat losses–implying a hard market–but this predictor does not appear to be an accurate one, at least in isolation Greatest impacts are driven through property cat reinsurance and retro markets on

loss impacted areas and accounts

42

P/C Insurance Industry Financial Overview

CATS, Non-CAT Underwriting Losses Impacted Insurer Balance Sheets

Industry Remains Strong, But Only Risk-Appropriate Premiums Can Ensure Long-Term Strength

42

P/C Industry Net Income After Taxes,1991–2017E

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% 2013 ROAS1 = 10.2% 2014 ROAS1 = 8.4% 2015 ROAS = 8.4% 2016 ROAS = 6.2% 2017E ROAS =0.0%*

•ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 8.2% ROAS in 2014, 9.8% ROAS in 2013, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009; 2016E is annualized figure based actual figure through Q3 of $31.8B.Sources: A.M. Best, ISO; USC RUM Center estimate (2017 based on actual NIAT of $15.5B though Q2 and ROAS of 4.4% adj. for Q3/4 activity).

$14,

178

$5,8

40$1

9,31

6$1

0,87

0 $20,

598

$24,

404 $3

6,81

9$3

0,77

3$2

1,86

5

$3,0

46$3

0,02

9

$62,

496

$3,0

43

$35,

204

$19,

456 $3

3,52

2$6

3,78

4$5

5,87

0$5

6,82

6$4

2,60

9$2

$38,

501

$20,

559

$44,

155

$65,

777

-$6,970

$28,

672

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,00091 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E

Net income will fell

sharply in 2017 as high CAT losses

took their toll

$ Millions

-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 14 15 16 17*

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2017E

*Est. for 2017 based on actual ROAS of 4.45 through Q2; Profitability = P/C insurer ROEs. 2011-16 figures are estimates based on ROAS data. Note: Data for 2008-2014 exclude mortgage and financial guaranty insurers.Source: NAIC, ISO, A.M. Best, Conning, USC RUM Center estimates.

1977:19.0% 1987:17.3%

1997:11.6% 2006:12.7%

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

9 Years

ROEs in 2017 plunged to their lowest levels since

2001 and 9/11. This creates extreme pricing pressure.

ROE

1975: 2.4%

2013 9.8%

2016 6.2%

2015: 8.4%

2017E 0.0%

45

ROE: Property/Casualty Insurance by Major Event, 1987–2017E

*2017 Estimate based on actual ROAS through Q2 of 4.4% with USC Center for Risk and Uncertainty Management estimate for the full year.Excludes Mortgage & Financial Guarantee in 2008 – 2014. Sources: ISO, Fortune; USC RUM Center.

-5%

0%

5%

10%

15%

20%

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 15 16 17*

P/C Profitability Is Influenced Both by

Cyclicality and Volatility

Hugo

Andrew, Iniki Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

Record Tornado Losses

Sandy

Low CATs

Harvey, Irma, Maria,

CA Wildfires

46

P/C Insurance Industry Combined Ratio, 2001–2017E*

* Excludes Mortgage & Financial Guaranty insurers 2008--2014. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2; 2013: = 96.1; 2014: = 97.0.; 2017 (est.) based on actual 100.7 through Q2. Sources: A.M. Best, ISO (2014-2015); Figure for 2010-2013 is from A.M. Best P&C Review and Preview, Feb. 16, 2016.

95.7

99.3101.1

106.5

102.5

96.4 97.0 97.8100.7

110.0

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E

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

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Sandy Impacts

Lower CAT

Losses

Best Combined Ratio Since 1949 (87.6)

Avg. CAT Losses,

More Reserve Releases

Cyclical Deterioration

Sharply higher CATs are driving

large underwriting losses and

pricing pressure

Personal Lines Combined Ratio: 2006–2017E

93.9 97

.6

104.

7

102.

6

98.3 99.4 10

0.7

102.

5 106.

3

102.

7 107.

8

102.

6

80

85

90

95

100

105

110

06 07 08 09 10 11 12 13 14 15 16 17E

Personal Lines Underwriting Losses Rose in 2017 Due to Record CATs and Adverse Auto Severity

Source: A.M. Best (2006-2016); USC RUM (2017E).47

109.

411

0.2

118.

810

9.5 11

2.5

110.

210

7.6

104.

110

9.7

110.

2

102.

5 105.

491

.194

.510

4.4

100.

7 103.

8 107.

310

5.4

96.3

96.0

95.1

99.1

109.

0

102.

0

111.

1

112.

3

122.

3

90

95

100

105

110

115

120

12590 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

17E

Com

mer

cial

Lin

es C

ombi

ned

Rat

io

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2016); USC RUM Center (2017E).

Commercial Lines Combined Ratio, 1990-2017F*

Commercial lines underwriting performance deteriorated materially in

2017 as record CATs. diminishing prior year

reserves, rising loss cost trends and pricing

pressure in some lines are pushing combined ratios

higher

48

49

Policyholder Surplus, 2006:Q4–2017:Q4E

Sources: ISO, A.M .Best; 2018 estimate from the Center for Risk and Uncertainty Management, University of South Carolina.

($ Billions)$4

87.1

$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

.4

$671

.6

$673

.9

$675

.2

$674

.2

$673

.7

$676

.3 $700

.9

$717

.0

$690

.0

$662

.0

$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

14:Q

1

14:Q

2

14:Q

3

14:Q

4

15:Q

2

15:Q

4

16:Q

1

16:Q

4

17:Q

2

17:Q

4

Financial Crisis Surplus (Capacity) as of

12/31/17 is likely to fall by $20 to $30 billion

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 .

Drop due to near-record 2011 CAT losses

Capacity/Capital “shocks” typically drive a firming of the pricing environment

INVESTMENTS: THE NEW REALITY

50

Investment Performance is a Key Driver of Insurer Profitability

The “Trump Bump” Has Lifted Stock Markets and Interest Rates

Will the Gains Help Insurers?

50

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

*Through Dec. 31, 2017.Source: NYU Stern School of Business: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html Ins. Info. Inst.

Tech Bubble Implosion

Financial Crisis

Annual Return

Energy Crisis

2016: +9.5%2017: 19.4%

S&P 500 Index Returns, 1950 – 2017*

Fed Raises Rate

Stock markets rose sharply following the 2016 election and continued to rise throughout 2017.

Trump Bump: Sharp surge in stock post-election

Property/Casualty Insurance Industry Investment Income: 2000–2017E*

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$48.0 $47.3 $46.4 $47.2 $46.3 $46.8

$39.6

$49.5$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E*

Due to persistently low interest rates, investment income fell in 2012, 2013 and 2014 but showed a small (1.7%) increase in 2015—

though 2016 experienced another decline. ~ Flat in 2017.1 Investment gains consist primarily of interest and stock dividends. Sources: ISO; Insurance Information Institute.*2017 estimate based on annualized $23.4B actual figure for 1st Half 2017.

($ Billions)Investment earnings in

2017E were still ~14% below their 2007 pre-crisis peak

53

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2017*

*Monthly, constant maturity, nominal rates, through Nov. 2017.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 '15 '16 '17

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially

below 5% for more than a 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.

Late 2016 “Trump Bump” in the

aftermath of the 2016 election—shrank in 2017

53

Net Investment Yield on Property/ Casualty Insurance Invested Assets, 2007–2016*

4.4

4.0

4.6 4.5

3.73.8

3.7

3.4

3.7

3.2 3.1

4.6

4.2

3.9

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

03 04 05 06 07 08 09 10 11 12 13 14 15 16

The yield on invested assets remains low relative to pre-crisis yields. Fed rate increases beginning in late 2015 have pushed up some yields, albeit

quite modestly.

Sources: NAIC data, sourced from S&P Global Market Intelligence; Insurance Information Institute.

(Percent)

Investment yields in 2016 were down about 150 BP

from pre-crisis levels

P/C Insurer Investment Yields: Lowest in Half a Century

0

1

2

3

4

5

6

7

8

9

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Yield on average cash and investment assets,%

Average yields in 2016 dropped to 3.1%, their lowest

level since the mid-1960s

% Change

56

Commercial Lines Growth, Underwriting Performance

& Pricing Cyclicality

Cyclicality in Growth, Price Are the NormRising Rates Are a Normal Part of

Adjustment Process

56

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17E

Economic Shocks, Inflation:

1976: 22.2%Tort Crisis

1986: 30.5%

Post-9/112002: 22.4%

Great Recession:2009: -9.0%

ROE

2017: +2.3%

Commercial Lines NPW Premium Growth:1975 – 2017E

Recessions:1982: 1.1%

Commercial lines is prone to far more cyclical volatility that

personal lines.

1988-2000: Period of

inter-cycle stability

Commercial lines premium growth

has been sluggish for years, reflecting

weak pricing environment. Large underwriting losses

will necessarily pressure rates upward in 2018

Note: Data include state funds beginning in 1998. Source: A.M. Best; Insurance Information Institute. 2017 estimate: Univ. of South Carolina Center for Risk and Uncertainty Management.

Post-Hurricane Andrew Bump:

1993: 6.3%

Post Katrina Bump:

2006: 7.7%

2016: -1.3%

58

CIAB: Average Commercial Rate Change, All Lines, 2011:Q1–2017:Q3*, 2018F

-0.1

%

0.9% 2.

7% 4.4%

4.3%

3.9% 5.

0% 5.2%

4.3%

3.4%

2.1%

1.5%

-0.5

%

0.1%

-0.7

%

-2.3

%

-3.3

%

-3.1

%

-2.8

%

-3.7

%

-3.9

%

-3.2

%

-3.3

%

-2.5

%

-2.8

% -1.3

%

1.0%

-2.9

%

-16%

-11%

-6%

-1%

4%

9%

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

2018

F

*Latest available.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.Source: Council of Insurance Agents & Brokers; Center for Risk and Uncertainty Management, Univ. of South Carolina.

Smallest Decrease in 11 QuartersCommercial programs have generally

renewed downwards since late 2014, but will need to move to positive renewals in 2018, just as they did following large CAT losses

in 2011-2012

(Percent)

Renewals turned positive in late 2011

in the wake of record tornado

losses and Hurricane Sandy

2017’s results may exert enough

pressure on markets to push overall rates

up by 1+% in 2018

59

Change in Commercial Rate Renewals, by Line: 2017:Q3

Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.

Percentage Change (%)

0.4% 0.4% 0.7% 0.9%

7.3%

-2.3%-0.8% -0.7% -0.4%

0.1% 0.1%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Wor

kers

Com

p

Gen

eral

Liab

ility

Cyb

er

Um

brel

la

Sure

ty

Busi

ness

Inte

rrupt

ion

Con

stru

ctio

n

D&O EP

L

Com

mer

cial

Prop

erty

Com

mer

cial

Auto

Commercial Property, Business Interruption

will need to reflect record CAT losses and

pressure from reinsurance markets

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

Commercial Auto was only major line with materially positive renewals in 2017

60

Commercial Lines with Largest Demand Increase, 2017:Q3

Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Percentage Indicating Increase

Peak = 2001:Q4 +28.5%Cyber is seeing the largest increases in

demand

61

Commercial Lines with Largest Capacity Increase: 2017:Q3

Source: Council of Insurance Agents and Brokers; USC Center for Risk and Uncertainty Management.

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

Cyber is seeing the largest capacity

increases in capacity

Commercial Auto Combined Ratio: 1993–2017F

112.

1

112.

0

113.

0

115.

9

102.

7

95.2

92.9

92.1

92.4 94

.1 96.8 99

.1

97.8

103.

4

106.

8

106.

7

103.

3 108.

8

109.

4

109.

9

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 12 13 14 15 16F17F

Commercial Auto Results Are Challenged as Rate Gains Have Yet to Fully Offset Adverse Frequency and Severity Trends

62Sources: A.M. Best (1990-2015); Insurance Information Institute. (2015E-2017F).

Direct Premiums Written: Commercial Auto, Percent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

80

.7

42

.0

30

.7

28

.0

26

.1

23

.8

22

.3

21

.6

20

.0

18

.6

16

.4

16

.0

15

.6

15

.3

15

.0

14

.6

14

.4

13

.5

13

.2

12

.6

12

.5

12

.4

12

.2

12

.2

11

.8

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

ND TX NE DC MI KS OK IL NY IA AR MT CA CO MN WA US GA MO FL TN PA LA WI KY

ND’s energy boom has fueled growth in

every line

Top 25 States

Direct Premiums Written: Commercial Auto,Percent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

10

.7

9.7

8.8

8.7

8.3

8.0

7.6

7.0

7.0

6.2

5.5

5.4

4.0

3.0

2.1

1.0

-0.5

-1.9

-2.6

-3.9

-4.3

-5.8

-6.1

-8.3

-21

.3

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

ID NJ MS OH OR ME NV MA VA UT CT SC MD NC NM WY NH WV RI AZ VT AL AK HI SD

Bottom 25 States

D&O Pressure: Number of Federal Securities Class Actions, 2013 – 2017*

Number of Class Actions

*As of Nov. 16, 2017.Source: Stanford University Law School: http://securities.stanford.edu/

165 170207

271

363

0

50

100

150

200

250

300

350

400

2013 2014 2015 2016 2017

The number of securities class actions is rising sharply, putting

pressure on D&O coverage

66

Workers Comp Spotlight

Underwriting Results Remain Strong

Exposure Outlook Is Outstanding as Job Growth Continues and

Wage Gains Accelerate

Workers Compensation Combined Ratio: 1994–2016P

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

109.

0

102.

0

100.

0

94.0

94.0

121.

7

107.

0

115.

3

118.

2

80859095

100105110115120125130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16P

Workers Comp Is an Example of a Line that Was Recently Restored to Health Through the Return

of Rate AdequacySources: A.M. Best (1994-2009); NCCI (2010-2016P) and are for private carriers only.. 67

WC results have improved markedly

since 2011

Workers Compensation Premium: Flat in 2016 After 5 Years of IncreaseNet Written Premium

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 36.9 38.5 39.7 40.1

35.335.734.335.433.6

30.128.5

26.925.925.0

28.632.1

37.7

42.3

46.547.846.544.3

39.3

34.633.836.4

39.541.8

44.245.545.5

0

10

20

30

40

50

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 15 15

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

Pvt. Carrier NWP growth was 0% in 2016, +2.9% in 2015,

+4.3% in 2014, +5.1% in 2013 and 8.7% in 2012

$ Billions

Calendar Yearp Preliminary

Source: NCCI from Annual Statement Data.Includes state insurance fund data for the following states: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT.Each calendar year total for State Funds includes all funds operating as a state fund that year.

69

2016 Workers Compensation Direct Written Premium Growth, by State*

PRIVATE CARRIERS: Overall 2016 Growth = +1.0%

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

While growth rates varied

widely, overall growth for

private carriers was up very

slightly in 2016

As Hiring Gains Continue, WC Exposures Follow

Sources: U.S. Department of Commerce, Census Bureau; Insurance Information Institute.

0

5,000

10,000

15,000

20,000

25,000

07:Q1 08:Q1 09:Q1 10:Q1 11:Q1 12:Q1 13:Q1 14:Q1 15:Q1 16:Q1 17:Q1

Manufacturing Construction Mining & other extraction

20,09522,391

17,668

Employment in the three industries that are the heart of workers composition exposure is not quite back yet to the level reached before the Great Recession.

(000s at quarter-end)

Direct Premiums Written Growth: Workers CompPercent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

44

.3

39

.4

37

.7

28

.0

26

.1

19

.5

19

.4

14

.1

13

.2

12

.5

12

.4

11

.9

10

.7

10

.4

9.9

9.0

8.6

5.4

5.4

3.8

1.2

0.5

0.4

-0.2

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

ND CA NY IA SD NJ MN CT WI GA NE RI CO IN VA US MA ID VT MI MD KS IL MS PA

20

44

.Top 25 States

Direct Premiums Written Growth: Workers CompPercent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

-2.1

-3.1

-3.9

-4.0

-4.5

-5.2

-5.3

-6.8

-7.9

-9.6

-10

.5

-13

.1

-13

.6

-13

.7

-14

.3

-14

.9

-19

.0

-20

.2

-22

.4

-22

.5

-25

.8

-25

.9

-29

.8

-51

.7

-56

.3-60.0

-50.0

-40.0

-30.0

-20.0

-10.0

0.0SC DC AZ NM NH OK MO ME TN AL FL AR UT TX HI LA AK KY MT DE OR OH NV WA WY

Bottom 25 States

73

Personal Lines Growth Drivers

Rate and Exposure are Both Presently Important

Growth Drivers

74

Top Growth Factors: Personal LinesRate: Favorable rate trends in both auto and home Record CAT losses in 2017 will further pressure property lines Adverse severity trends are pressuring personal auto

Economic Strength: Economic growth, supported by low unemployment and rising consumer confidence are supporting strength in new auto sales and new home construction

Household Formation: Millennials are finally becoming home and car buyers in larger numbers, driving exposures upward

High Net Worth Consumers: This segment has seen consistent (and profitable) growth as the “wealth effect” grows

Tax Cuts: Will tax reform fuel additional growth?

Market Discipline: Major personal lines insurers remain generally price disciplined

75

Monthly Change in Auto Insurance Prices, 1991–2017*

*Percentage change from same month in prior year; through Nov. 2017; seasonally adjustedNote: Recessions indicated by gray shaded columns.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-2%

0%

2%

4%

6%

8%

10%

'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 '15 '16 '17

Cyclical peaks in PP Auto tend to occur roughly every 7-10 years (early 1990s,

early 2000s, early and late 2010s)

“Hard” markets often tend to occur during recessionary

periods

Last pricing peak occurred in late

2010 at 5.3%, falling to 2.8% by Mar. 2012

Nov. 2017 reading of 8.0% is up from 6.7%

a year earlier. Current rate trend is strongest

since 2002-03.

76

$119

.7

$128

.0 $139

.7 $151

.2

$159

.6

$158

.5

$157

.2

$160

.1

$163

.3

$168

.1

$174

.9

$183

.5

$192

.5 $206

.6 $220

.0 $234

.0

$160

.3

$159

.6

$157

.3

$100

$120

$140

$160

$180

$200

$220

$240

$260

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

PP Auto premiums written continue to recover from a period of flat growth attributable to the weak economy impacting new vehicle sales, car choice, and increased

price sensitivity among consumers

Sources: A.M. Best (1990-2016); USC RUM (2017F-2018F).

Private Passenger Auto InsuranceNet Written Premium, 2000–2018F

$ Billion

PPA NWP volume in 2017 was up an estimated $62.8B or 39.9% since the

2009 trough; By 2017 the gain is expected to be $76.8B or 48.9%

PPA will generate $10B - $14B in new premiums annually

through 2018

Direct Premiums Written: Pvt. Passenger Auto, Percent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

59

.8

51

.6

48

.5

45

.6

42

.8

42

.8

41

.6

41

.1

40

.6

40

.4

40

.2

35

.5

33

.3

32

.7

32

.6

32

.2

32

.2

31

.7

30

.8

30

.0

29

.5

29

.3

29

.3

29

.0

28

.8

28

.7

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

TX CO ND MI OK SC GA UT SD FL NE TN OR WI LA AL IA US MO KY DE KS NC NY ID IN

Top 25 States

Direct Premiums Written: Pvt. Passenger AutoPercent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

28

.6

27

.9

26

.8

26

.7

26

.5

26

.2

26

.0

26

.0

25

.9

24

.5

24

.5

24

.3

22

.6

22

.6

22

.3

22

.1

21

.6

21

.6

19

.0

18

.2

15

.7

14

.1

13

.9

13

.7

10

.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

VA AR MT DC WA NJ RI MN MD MS CA OH WY IL NV MA AZ NM CT PA NH VT AK WV ME

Bottom 25 States

79

Homeowners Insurance Net Written Premium, 2000–2018F

$45.8$49.5

$52.2$54.8 $55.2

$61.1$63.5

$66.9$71.9

$77.0$79.5 $80.2 $81.5 $82.7

$57.5$56.2

$32.4

$40.0

$35.2

$30$35$40$45$50$55$60$65$70$75$80$85$90$95

$100

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

Sources: A.M. Best; USC RUM Center.

$ BillionsHomeowners insurance NWP continues to rise

(up 152% 2000-2017E) despite very little unit growth during the real estate crash. Reasons include rate increases, especially in coastal

zones, ITV endorsements (e.g., “inflation guards”), compulsory for mortgaged properties

and resumption of home building activity

The Homeowners line will generate about

$1.5B in new premiums annually through 2018

58

60

62

64

66

68

70

72

74

76

78

32

34

36

38

40

42

44

46

90:Q

1

91:Q

1

92:Q

1

93:Q

1

94:Q

1

95:Q

1

96:Q

1

97:Q

1

98:Q

1

99:Q

1

00:Q

1

01:Q

1

02:Q

1

03:Q

1

04:Q

1

05:Q

1

06:Q

1

07:Q

1

08:Q

1

09:Q

1

10:Q

1

11:Q

1

12:Q

1

13:Q

1

14:Q

1

15:Q

1

16:Q

1

16:Q

3

17:Q

3

Renter-occupied Owner-occupied

The number of owner-occupied homes is

finally starting to rise and renting declines

To Rent or to Buy?

Sources: U.S. Census Bureau at http://www.census.gov/housing/hvs/data/histtabs.html, Table 8; Insurance Information Institute.

Millions of owner-occupied housing units

Millions of renter-occupied housing units

Since 2004 the number of renter-occupied housing units has grown by about 10.5 million units (+34%), but there has been no growth in the number of owner-occupied housing units in 12 years. Did this streak end in 2017?

Direct Premiums Written: Homeowners MPPercent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

85

.7

82

.9

82

.0

78

.7

77

.9

75

.0

74

.3

69

.0

68

.4

66

.7

66

.3

65

.1

65

.1

63

.3

63

.0

62

.2

61

.9

55

.5

55

.5

53

.4

52

.3

51

.9

50

.8

50

.1

49

.6

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

SD OK CO NE ND WY MT MN TN GA KS MO AR TX IA KY WI DE ID NM IN UT OH SC NC

Top 25 States

Direct Premiums Written: Homeowners MPPercent Change by State, 2007-2016

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

47

.9

47

.0

46

.4

45

.5

45

.2

44

.9

43

.3

42

.4

42

.0

41

.0

40

.9

40

.3

39

.3

38

.9

38

.2

37

.4

34

.3

33

.8

31

.7

30

.3

27

.2

26

.8

18

.9

17

.5

17

.4

0.0

10.0

20.0

30.0

40.0

50.0

60.0

CT RI VA ME NJ AL MS WA MD MA US NH PA WV OR LA AZ NY DC AK MI VT CA HI NV

Bottom 25 States

83

State of the Personal Lines Market

Auto Frequency and Severity Are an Immediate Challenge

Homeowners Majorly Impacted by CATs in 2017

83

84

Return on Net Worth: All P-C Lines vs. Homeowners & Pvt. Pass. Auto, 1990-2016*

*Latest available.**Excludes 1992, the year of Hurricane Andrew. If 1992 is included the resulting homeowners RNW is 2.2%Sources: NAIC; Insurance Information Institute.

-10%

-5%

0%

5%

10%

15%

20%

25%

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 15 16

US All LinesUS HomeUS PP Auto

(Percent) Average RNW: 1990-2016*All P-C Lines: 7.7%

PP Auto: 7.6% Homeowners: 4.9%**

Homeowners is Now Outperforming Pvt.Pass. Auto and P-C Industry as a Whole. HO Volatility is Associated Primarily With Coastal Exposure Issues

Excluding 1992’s Hurricane Andrew

Homeowners Insurance Combined Ratio: 1990–2017E

113.

011

7.7

158.

411

3.6

101.

0 109.

410

8.2

111.

4 121.

710

9.3

98.2

94.4 10

0.3

89.0 95

.611

6.6

105.

810

6.9

122.

310

4.1

90.4

92.4

91.9

93.2

106.

0118.

411

2.7 12

1.7

80

90

100

110

120

130

140

150

160

170

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E

1

Homeowners Performance Had Improved Markedly Since 2011/12’s Large Cat Losses…until 2017’s Record Catastrophe Loss Activity.

85

Hurricane Ike

Hurricane Sandy

Record tornado activity

Hurricane Andrew

Sources: A.M. Best (1990-2016); USC RUM Center (2017E).

Hurricanes Harvey, Irma,

Maria, CA Wildfires

Private Passenger Auto Combined Ratio: 1993–2017E

101.

710

1.3

101.

310

1.0

109.

510

7.9

104.

298

.494

.395

.195

.5 98.3 10

0.2

101.

310

1.0

102.

010

2.1

101.

610

2.3

104.

610

6.3

106.

5

99.5 10

1.1

103.

5

80

85

90

95

100

105

110

115

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17E

Private Passenger Auto Underwriting Performance Is Showing the Strains of Rising Frequency (and Severity) Trends in Many States

86Sources: A.M. Best (1990-2016); USC RUM Center (2017E).

87

Claim Trends in Private Passenger Auto Insurance

Rising Frequencies and Severities in Many Coverages

Will that Pattern Be Sustained?

88

Collision Coverage: Severity & Frequency Trends Are Both Higher in 2017*

2.8%1.3%

4.2%

1.4%

5.7% 5.1%

2.1%

-1.8%

-3.6%

2.5%

-2.4% -1.8%

4.4%

1.2% 1.2%2.2%

3.9%3.1%

0.1% 0.5%

-2.3%

-0.1%-1.4%-0.5%

0.9%2.3%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Severity Frequency

Annual Change, 2005 through 2017*

The Recession, High Fuel Prices Helped Temper Frequency and Severity, But this Trend Has Clearly Reversed, Consistent with

Experience from Past Recoveries*Four quarters ending with 2017 Q2. Source: ISO/PCI Fast Track data; Insurance Information Institute

89

Collision Loss Ratio Trending Upward:Private Passenger Auto, 2010 – 2017*

76.9%

73.8%

67.7%69.3% 69.4%

73.5%74.9%

76.7%

62%

64%

66%

68%

70%

72%

74%

76%

78%

2010 2011 2012 2013 2014 2015 2016 2017*

Loss Ratio

Collision Loss Ratios Were Trending Steadily Upward Until Early 2017

*2017 figure is for the 4 quarters ending in 2017:Q2Source: ISO/PCI Fast Track data; Insurance Information Institute

90

Bodily Injury: Severity Trend Is Up, Frequency Decline Has Ended—For Now…

2.1% 1.7%3.6%

1.8%

4.3%5.6%

7.7%

-5.4%-3.8% -4.0% -4.2%

-2.2%

0.0%

-1.1%

3.4%

0.0%

-1.1%

3.0%2.0%

5.9%5.7%4.7%

2.9%1.1%

0.0% 0.0%

-8%-6%-4%

-2%0%2%4%

6%8%

10%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Severity FrequencyAnnual Change, 2005 through 2017*

BI Severity Trend is a Major Cost Driver

*2017 figure is for the 4 quarters ending 2017:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute

91

Property Damage Liability: Severity and Frequency Are Up

1.8% 1.9%

4.1%3.5%

6.3% 6.0%

4.2%

-1.6%

-3.5% -3.4%

0.6% 0.6%

-0.3%

1.4% 1.4%0.8% 0.6%

2.9%3.6%

2.0% 2.0%

-0.4%

0.4%0.9% 1.2%0.3%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Severity Frequency

Annual Change, 2005 through 2017*

Severity/Frequency Trends Have Been Volatile, But Rising Severity since 2011 Is a Concern

*2017 figure is for the 4 quarters ending 2017:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute

92

Comprehensive Coverage: Frequency and Severity Trends Are Volatile

15.4% 15.3%

-14.6%

6.5%

-1.3%

21.6%

11.1%

-9.8%-6.3%

1.3%5.8%

-8.9%-5.6%

2.1%

-1.1%

15.5%

-1.4% -1.5%

12.6%

-8.1%-5.9% -2.1%

3.5%

-3.1%

1.8%6.2%

-20%-15%-10%

-5%0%5%

10%15%20%25%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

Severity Frequency

Annual Change, 2005 through 2017*

Weather Creates Volatility for Comprehensive Coverage. Enormous Comprehensive Losses Are Expected in Q3:2017 Due to Hurricanes Harvey and Irma

Severe weather is a principal cause of the spikes in both

frequency and severity

*2017 figure is for the 4 quarters ending with 2017:Q2.Source: ISO/PCI Fast Track data; Insurance Information Institute

93

A Few Factors Driving Adverse Private Passenger Auto Loss Trends

More Jobs, Better Economy, More People Driving, Lower Gas

Prices, More Expensive Cars, Higher Speed Limits…

America is Driving More Again: 2000-2016Percent Change, Miles Driven*

*2000-2015: Moving 12-month total vs. prior year. 2016 data through Dec. 2016, the latest available, vs. Dec. 2015.Sources: Federal Highway Administration; National Bureau of Economic Research (recession dates); Insurance Information Institute.

2.5%

1.8%2.1%

1.2%

2.5%

0.8% 0.8%0.6%

-1.8%

-0.7%

0.4%

-0.5%

0.6% 0.6%

1.3%

3.5%

2.8%

2000 2002 2004 2006 2008 2010 2012 2014 2016-2.5%

-1.5%

-0.5%

0.5%

1.5%

2.5%

3.5%

Fastest Growth Since 2000

Tremendous Growth In Miles Driven. The More People Drive, The More Frequently They Get Into Accidents.

Billions of miles driven in prior year

Sources: Federal Highway Administration; Rolling four-quarter average frequency from Fast Track Monitoring System; Insurance Institute for Highway Safety; Insurance Information Institute.

5.5

5.6

5.7

5.8

5.9

6.0

6.1

6.2

2,900

2,950

3,000

3,050

3,100

3,150

3,200

3,250

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

14:Q

3

15:Q

1

15:Q

3

16:Q

1

16:Q

3

17:Q

1

Miles driven Collision claim frequency

Recession

Overall collision claims per 100 insured vehicles

The correlation between miles driven and collision claim frequency is very tight. Will technology weaken this correlation in the years ahead?

Recession

More Miles Driven More Collisions, 2006-2017:Q3

Overall Collision Claims Per 100 Insured Vehicles

Trumponomics, Insurance and Politics

96 96

How Might the Trump Presidency Impact the Insurance Industry?

97

Trumponomics: The Essential Elements

5 Elements Tax ReformDeregulation Infrastructure InvestmentHealthcare Fair Trade Immigration Reform/Enforcement

Most of these have direct impacts for insurers

Tax Reform…and More

98 98

Tax Reform Could Have Could Favorably Impact the Insurance Industry

99

Tax Reform Implications for P/C Insurers and Reinsurers

Reduction of Corporate Tax Rate from 35% to 21%...

All Insurers Benefit…But Not EquallyCompanies generating most of their profits from underwriting income

now taxed at 35% benefit the most

Companies generating proportionately more or the Net Investment Income from (taxable) Corporate Bonds benefit more than companies with heavier muni bond holdings– In P/C industry, insurers with underwriting losses tend to hold

proportionately more in corporates

Leveling the Playing Field: Domestic (re)insurers taxed at 35% will benefit relative to (re)insurers domiciled in Bermuda, etc.– Diminished advantage for foreign-owned insurers that cede premium offshore

100

Tax Reform Implications for Select Industries

All IndustriesReduction in corporate income tax rate from 35% to 21% is an

unambiguous boost to virtually US corporations, including insurers

Financial ServicesTax bill is generally favorableAmplifies lightening of regulatory burden with scaling back of Dodd-

Frank, FSOC SIFI designations, CFPB, Fiduciary Rule

Manufacturing Immediate expensing of capital investments for next 5 years

Energy: House bill repeals some energy tax credits, including on renewables;

Senate preserves most energy credits

101

Tax Reform Implications for Select Industries

HealthcareHospitals and others upset about repeal of the ACA’s

individual mandate requirement

CBO estimates that 15 million fewer people will be insured over time

Providers argue they’ll be stuck with the tab for uncompensated care for people who drop coverage but still seek care

House bill would reduce the ability of many hospitals to float in tax-advantaged debt (Advanced Refunding Bonds)

102

Trump Administration: Likely Issues Impacting Insurers

Dodd-Frank

TRUMP DODD-FRANK QUOTES– Dodd-Frank is a “disaster”– Vowed to “do a big number” on the Act

NEW: Financial CHOICE Act (June 2017 in House)– Ends authority of the FSOC to designate non-bank SIFIs MetLife, Prudential and even AIG SIFI designations rescinded

– Repeal Volker Rule– Some loosening of liquidity requirements for well-capitalized

financial institutions; Less frequent stress tests– Weaken Consumer Financial Protection Bureau

103

Trump Administration: Likely Issues Impacting Insurers Infrastructure Spending Insurance industry could benefit from stepped-up

infrastructure spending as promised by Trump

Competition for federal dollars will be fierce

Privatization of government infrastructure could provide growth opportunity for commercial insurers

If infrastructure spending materializes, will benefit all major commercial lines:– WC– Commercial Property – Commercial Liability– Surety– Commercial Auto

104

INDUSTRY DISRUPTORS

Technology, Society and the Economy Are All

Changing at a Rapid PaceReality vs. Drinking the Silicon Valley Kool Aid

104

105

The Internet of Things and the Insurance Industry

The “Internet of Things” will create trillions in economic value throughout the global economy by 2025

What opportunities, challenges will this create for insurers?

What are the impact on the insurance industry “value chain”?

Sources: McKinsey Global Institute, The Internet of Things: Mapping the Value Beyond the Hype,June 2015; Insurance Information Institute.

106

The Internet of Things and the Insurance Industry Value Chain

Source: Willis Capital Markets & Advisory; Insurance Information Institute.

Who owns the data? Where does It flow? Who does the analytics? Who is the capital provider?

107

Distribution Trends

Distribution by Channel Type Continues to Evolve Around

the World

108

All P/C Lines Distribution Channels,Direct vs. Independent Agents, 1983-2015

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

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 15Direct Independent Agents

Independent agents steadily lost market share from the early 1980s through the early 2000s across all P/C

lines, made some games in the mid-2000s, but then lost share again in the late 2000s. Loss rate has slowed in in the 2010s. Direct channels include

exclusive agency companies, direct marketers and direct sales (e.g., internet)

109

Personal Lines Distribution Channels, Direct vs. Independent Agents, 1972-2015

Source: Insurance Information Institute; based on data from Conning and A.M. Best.

0%

10%

20%

30%

40%

50%

60%

70%

80%

72 8384 8586 8788 8990 9192 9394 9596 9798 9900 0102 0304 0506 0708 0910 1112 1314 15Direct Independent Agents

Independent agents have lost significant personal lines market share since the early 1970s. That

trend trend slowed from 2000-2007, but accelerated during the financial crisis, though it

may be slowing again.

110

Commercial Lines Distribution Channels, Direct vs. Independent Agents, 2011-2015

Source: Calculations based on data from A.M. Best.

29.72% 30.51% 30.18% 29.41% 29.53%

67.24% 66.53% 66.89% 67.43% 67.11%

0%

10%

20%

30%

40%

50%

60%

70%

80%

11 12 13 14 15Direct Independent Agents

Independent agent market share in commercial lines has held steady in recent years

111

INSURANCE TECHNOLOGY:FIN TECH ZEROES IN

Number and Value of Deals Is Increasing

An Industry that Has Always Been Accepting of Change and Innovation

InsurTech Annual Financing,2011 – 2016

Value of Deals ($ Millions)

Source: CB Insights at https://www.cbinsights.com/blog/2016-insurance-tech-funding/

$140$350 $270

$870

$2,670

$1,690

91

4628

122

173

63

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2011 2012 2013 2014 2015 2016 020406080100120140160180200220

Value of Deals Number of Deals

No. of Deals

Insurance tech deals reached a new record in 2016 but funding was higher in 2015

2 out of every 3 InsurTech deals in 2016 was at the early stage!

113

Top 25 P/C Insurers by Direct Written Premium, 2015

Sources: NAIC from CB Insights at https://www.cbinsights.com/blog/largest-pc-insurers-rank-startup-investments/

Are large P/C insurers more likely to invest in InsurTech start-ups?

114

Start-Up InsurTech Investments by Top 25 P/C Insurers, 2015 - 2017*

*As of June 23, 2017.Sources: NAIC from CB Insights at https://www.cbinsights.com/blog/largest-pc-insurers-rank-startup-investments/

USAA and AmFam lead in P/C InsurTech

investment

10 of the Top 25 P/C insurers have made InsurTech start-up investments since 2015.—but

there is little correlation between size and number of

investments within this group

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigFor a copy of this presentation, email me at robert.hartwig@moore.sc.edu

115