The View From The TopUnion League Club of ChicagoFebruary 26, 2013

J. Patrick GallagherChairman, President and CEO

Arthur J. Gallagher & Co.

Agenda

Insurance market – what is happening and why?

What you, your broker and your carrier should be doing

Greatest business on earth – let’s recruit like it!

IRMI Brochure

Agenda

Insurance market – what is happening and why

Hurricane Sandy

Top Ten Most Costly Hurricanes in the U.S.(1)

In Millions

Estimated insured loss (2)

Rank Date Location Hurricane Dollars when

Occurred

In 2011 Dollars (3)

1 Aug 25-30, 2005 AL, FL, GA, LA, MS, TN Katrina $41,100 $46,591

2 Aug 24-26, 1992 FL, LA Andrew 15,500 22,939

3 Sep 12-14, 2008 AR, IL, IN, KY, LA, MO, OH, PA, TX Ike 12,500 13,050

4 Oct 24, 2005 FL Wilma 10,300 11,676

5 Aug 13-14, 2004 FL, NC, SC Charley 7,475 8,755

6 Sep 15-21, 2004 AL, DE, FL, GA, LA, MD, MS, NJ, NY, NC, OH, PA, TN, VA, WV

Ivan 7,110 8,328

7 Sep 17-22, 1989 GA, NC, PR, SC, VA, US Virgin Is. Hugo 4,195 6,835

8 Sept 20-26, 2005 AL, AR, FL, LA, MS, TN, TX Rita 5,627 6,379

9 Sep 3-9, 2004 FL, GA, NY, NC, SC Frances 4,595 5,382

10 Aug 26-28, 2011 CT, DC, DE, MA, MD, ME, NC, NH, NJ, NY, PA, RI, VA, VT

Irene 4,300 4,300

(1) Includes hurricanes occurring through 2011.(2) Property coverage only. Does not include flood damage covered by the federally administered National Flood Insurance Program.(3) Adjusted for inflation through 2011 by ISO using the GDP implicit price deflator.

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

HurricaneSandy est. $10-20B

Estimate Value of Insured Coastal Properties Vulnerable to Hurricanes - 2012 (1)

State Coastal

Total Exposure (2)

Coastal as aPercent of Total

Florida $2,800.8 $3,562.7 79%

New York 2,679.5 4,385.7 61

Massachusetts 807.2 1,505.1 54

New Jersey 706.5 2,081.2 34

Connecticut 542.5 843.8 64

Maine 157.7 273.6 58

New Hampshire 61.0 259.9 23

Rhode Island 55.6 199.5 28

Maryland 17.1 1,262.2 1

Total $7,827.9 $14,373.7 54%

(1) Includes residential and commercial properties. Ranked by value of insured coastal property.(2) Total exposure is an estimate of the actual total value of all property in the state that is insured or can be insured, including the full replacement value of structures and their contents, additional living expenses and the time value of business interruption coverage. Source: AIR Worldwide

New England Hurricanes Hurricane Irene – August, 2011

Total $5.6 billion in damages 10th most costly U.S. hurricane $4.3 billion in insured property damage $1.3 billion insured flood damage

The Great New England Hurricane of 1938 (The Long Island Express) $400 million in damages – today would be $35 billion

Category 3 at landfall along Long Island, New York, and the Connecticut coast 600 deaths, 1,700 injuries

Hurricane Gloria – 1985 $900 million in damages along New England Coast

Hurricane Bob – 1991 $1 billion in damages in Southern New England

8

Criteria Necessary for a “Market Turn”: All Four Criteria Must Be Met

Criteria Status Comments

Sustained Period of Large

Underwriting Losses Not Yet

Happened

•Apart from Q2:2011, overall p/c underwriting losses remain modest•Combined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at onset of last hard market)•Prior-year reserve releases continue reduce u/w losses, boost ROEs

Material Decline in Surplus/ Capacity Surplus is At/Near

Record High

•Surplus hit a record $565B as of 3/31/11•Analysts est. excess surplus of $75-$100B•Some excess capacity may still remain in reinsurance markets•Weak growth in demand for insurance is insufficient to absorb much excess capacity

Tight Reinsurance

MarketSomewhat in

Place•Higher prices in Asia/Pacific•Modestly improved pricing for US risks

Renewed Underwriting &

Pricing Discipline

Not Broadly Evident

•Commercial lines pricing trends remain negative•Competition remains intense as many seek to maintain market share•Terms & conditions—no broad tightening

Sources: Barclays Capital; Insurance Information Institute.

-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

*

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2011*

*Profitability = P/C insurer ROEs are I.I.I. estimates. 2011 figure is an estimate based on annualized ROAS for Q1 data. Note: Data for 2008-2011 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2007:12.3%

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

10 Years

10 Years10 Years

2011:6.1%*

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

10

Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2011)

-3.2

%

-5.9

%

-7.0

%

-9.4

%

-9.7

% -8.2

%

-4.6

%

-2.7

%

-3.0

%

-5.3

%

-9.6

%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9% -1

1.0

%

-6.4

% -5.1

%

-4.9

%

-5.8

%

-5.6

%

-5.3

%

-6.4

% -5.2

%

-5.4

%

-2.9

%-0

.1%

-0.1

%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

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

KRW Effect

Pricing is flat for the first time in more than

7 years

(Percent)

Q2 2011 decreases were the smallest

since 2004, perhaps signaling a market

firming

11

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q1

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

Percentage Change (%)Market has Been Soft for 7 years and Remains Soft as Capital Hits Record Levels;

But Is Softness Moderating?

Peak = 2001:Q4 +28.5%

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever SinceKRW Effect: No Lasting Impact

Trough = 2007:Q3 -13.6%

12

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2011:Q1

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

1999:Q4 = 100

Pricing today is where is was in

Q3:2000 (pre-9/11)

Downward pricing pressure is most pronounced for

larger risks

13

Policyholder Surplus, 2006:Q4–2011:Q1

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$556.9

$564.7

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

06:Q4 07:Q1 07:Q2 07:Q3 07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1

2007:Q3Previous Surplus Peak

Quarterly Surplus Changes Since 2007:Q3 Peak

09:Q1: -$84.7B (-16.2%) 09:Q2: -$58.8B (-11.2%)09:Q3: -$31.0B (-5.9%)09:Q4: -$10.3B (-2.0%)

10:Q1: +$18.9B (+3.6%)10:Q2: +$8.7B (+1.7%)10:Q3: +$23.0B (+4.4%)10:Q4: +$35.1B (+6.7%)11:Q4: +$42.9B (+8.2%)

Surplus set a new record in 2011:Q1*

*Includes $22.5B of paid-in capital from a holding company parent for one insurer’s investment in a non-insurance business in early 2010.

The Industry now has $1 of surplus for every $0.77 of

NPW—the strongest claims-paying status in its history.

14

-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*

Soft Market Persisted in 2010 but Growth Returned: More in 2011?

(Percent)

1975-78 1984-87 2000-03

*2011 figure is an estimate based on Q1 data. Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline

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

NWP was up 0.9% in 2010

2011:Q1 growth was +3.5%; First Q1 growth since 2007

Medical Cost Inflation Has Outpaced Overall Inflation Over 50 Years

719.8

1589.8

0

300

600

900

1200

1500

1800

61 66 71 76 81 86 91 96 01 06 11*

Inde

x V

alue

(196

1=10

0)

All Items

Medical Care

*Based on change from Feb. 2011 to Feb. 2010 (latest available) Source: Department of Labor (Bureau of Labor Statistics)

A claim that cost $1,000 in 1961 would cost nearly $16,000 based on

medical cost inflation trends over the past 50 years.

$8

.2

$8

.9

$9

.4

$1

0.1

$1

1.1

$1

2.0

$1

3.3

$1

4.2

$1

6.2

$1

7.6

$1

8.9

$2

0.0

$2

1.8

$2

3.1

$2

4.5

$2

5.7

$2

7.1

$2

7.7

$8

.4

$8

.2

$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 10p

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002-2009: +6.6%

Accident Year

MedicalClaim Cost ($000s)

2010p: Preliminary based on data valued as of 12/31/20101991-2008: Based on data through 12/31/2008, developed to ultimateBased on the states where NCCI provides ratemaking services; Excludes the effects of deductible policies

Cumulative Change = 238%(1991-2010p)

Workers Comp Medical Claim Costs Continue to Rise

+2.0%+5.4%

+5.0%+6.1%

+6.1%+9.1%

+5.4%+7.7%

+8.8%+13.5%

+7.3%+10.6%

+8.3%+10.1%

+7.4%+5.1%+9.0%

-2.1%+1.3%+6.8%

Average Medical Cost per Lost-Time Claim

Does smaller pace of increase suggest that small

med-only claims are becoming lost-time claims?

P/C Insurance Claim Cost Drivers Grow Faster than even the Medical CPI Suggests

Source: Bureau of Labor Statistics; Insurance Information Institute.

1.6%1.0%

3.4%

8.8%

6.1%

3.3%

4.3%

3.1%

0%

3%

6%

9%

Overall CPI "Core" CPI Medical CPI InpatientHospitalServices

OutpatientHospitalServices

Physicians'Services

PrescriptionDrugs

Medical CareCommodities

Price Changes in 2010

Healthcare costs are a major claim cost driver in WC. They are likely to grow faster than the CPI in most years.

17

Excludes Food and Energy

Inpatient Services Rose 8.8%;

Outpatient Services Rose 6.1%

Property/Casualty Insurance Industry Investment Gain: 1994–2011:Q11

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$52.9

$13.5

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11:Q1

Investment Gains Recovered Significantly in 2010 Due to Realized Investment Gains; The Financial Crisis Caused Investment Gains to

Fall by 50% in 2008

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

($ Billions)

Investment gains in 2010 were the best

since 2007

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.3100.8

102.2101.0

6.5%7.5%7.4%

9.6%

15.9%

14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009* 2010* 2011*0%

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 generated ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

P/C Net Income After Taxes1991–2011:Q1 ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

4,6

70

$7

,80

7

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$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*

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.9% 2010 ROAS = 6.5% 2011:Q1 ROAS = 5.6%

P-C Industry 2011:Q1 profits were down 12.2% to $7.8B vs.

$8.9B in 2010:Q1, as underwriting results

deteriorated

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.5% ROAS for 2011:Q1, 7.5% for 2010 and 7.4% for 2009.Sources: A.M. Best, ISO, Insurance Information Institute

Workers Compensation Combined Ratio: 1973–2012P9

6.8 9

9.9

10

1.1 10

4.2

10

3.6

99

.49

6.4

10

1.4

10

2.8

10

3.9

11

2.5

12

1.9

11

8.8

12

1.1

11

7.6

11

8.4

11

8.2

11

7.4 12

2.6

12

1.5

10

9.1

10

2.0

97

.0 10

0.0

10

1.0

10

7.0

11

5.3 11

8.2

12

1.7

11

0.9

11

0.0

10

7.0

10

2.7

98

.41

03

.51

04

.31

09

.8 11

5.0

11

7.0

11

9.0

80

85

90

95

100

105

110

115

120

125

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

P1

1P

12

P

Workers Comp Underwriting Results Are Deteriorating Markedly

Sources: A.M. Best; Insurance Information Institute. 2010 is NCCI figure for private carriers.

WC was the worst performing of the major commercial lines in 2010.

23

-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%

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

Warra

nty

Surplu

s Line

s

Med

Mal

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*

24

WC Combined Ratio Necessary to Achieve Cost of Capital

Assumptions: 3.8% Pre-Tax Investment Yield; 2.8% Post-Tax Investment Yield; WC R/S ratio = 2.07;Based on NCCI’s 2011 Internal Rate of Return ModelSource: NCCI.

104

10199

9795

9392

9089

8887

75

80

85

90

95

100

105

110

5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

WC combined ratios need to improve substantially (115 in 2010) in order generate a risk

appropriate rate of return.

(Percent)

A 100 Combined Ratio Isn’t What ItOnce Was: Investment Impact on ROEs

Combined Ratio / ROE

* 2009 and 2010 figures are return on average statutory surplus. 2008 -2011 figures exclude mortgage and financial guaranty insurersSource: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.7

92.6

99.3100.8

102.2101.0

6.5%7.5%7.4%

9.6%

15.9%

14.3%

12.7%

4.4%

8.9%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2008* 2009* 2010* 2011*0%

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 generated ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

26

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

Sources: ISO, Insurance Information Institute.

Finally! Back-to-back quarters of net written premium growth(vs. the same quarter, prior year)

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.

3%3.

5%

-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

The long-awaited uptick. In 2011:Q1 occurring in

personal lines predominating cos.

(+3.8%) and commercial lines predominating cos.

(+3.5%)

Average 2nd Quarter 2012 Commercial Rate Increases Continued

Small

Accounts

Medium

Accounts

Large

Accounts Average

2nd Qtr 2012 4.3% 4.9% 3.7% 4.3%

1st Qtr 2012 4.2% 4.9% 4.1% 4.4%

4th Qtr 2011 3.1% 3.5% 1.6% 2.7%

3rd Qtr 2011 2.1% 1.1% -0.6% 0.9%

2nd Qtr 2011 1.0% -0.1% -1.3% -0.1%

High (4Q01) 20.8% 31.7% 33.0% 28.5%

Low (3Q07) -10.0% (1Q08) -15.0% -15.9% -13.3%

Source: The Council of Insurance Agents and BrokersChart prepared by Barclays Research

This Cycle – Change is Different Income statement driven Balance sheets are strong Loss costs escalating

“A flat renewal equals a decrease”

Is this like Benefits circa 1980??

30

Criteria Necessary for a “Market Turn”: All Four Criteria Must Be Met

Criteria Status Comments

Sustained Period of Large

Underwriting Losses Not Yet

Happened

•Apart from Q2:2011, overall p/c underwriting losses remain modest•Combined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at onset of last hard market)•Prior-year reserve releases continue reduce u/w losses, boost ROEs

Material Decline in Surplus/ Capacity Surplus is At/Near

Record High

•Surplus hit a record $565B as of 3/31/11•Analysts est. excess surplus of $75-$100B•Some excess capacity may still remain in reinsurance markets•Weak growth in demand for insurance is insufficient to absorb much excess capacity

Tight Reinsurance

MarketSomewhat in

Place•Higher prices in Asia/Pacific•Modestly improved pricing for US risks

Renewed Underwriting &

Pricing Discipline

Not Broadly Evident

•Commercial lines pricing trends remain negative•Competition remains intense as many seek to maintain market share•Terms & conditions—no broad tightening

Sources: Barclays Capital; Insurance Information Institute.

Agenda Insurance market – what is happening and

why What you, your broker and carrier should be

doing

What You Should Be Doing Get a clear picture of your account Have a planning meeting . . . early Involve carriers . . . early

Decision – Shop or Not Shop

Stay involved Loss control – essential Finances – strong Backlog manageable Differentiate your firm Expect an increase

Decision – Shop or Not Not

Stay involved Get a strong feel of incumbent’s commitment Get an early firm quote . . . in writing Expect to pay more

Agenda Insurance market – what is happening

and why? What you, your broker and your carrier

should be doing? Greatest business on earth – let’s recruit

like it!

The Greatest Business on Earth!

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