Through the Economic Crisis & Beyond:

How the P&C Insurance Industry Is Likely to Recover from Recent Economic & Financial Turmoil

Philadelphia I-DayPhiladelphia, PA

April 8, 2011Download at: www.iii.org/presentations

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 bobh@iii.org www.iii.org

2

Presentation Outline

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry P/C Profitability Overview & Outlook The Elusive Market Turn: When, Why, How and IF

Pricing: Up, Down or Sideways? Underwriting Trends: Drivers of Future Market Firming? Investments: New Investment Reality Not Reflected in Pricing Expenses: Cyclical Increase Leverage/Capital Management: Excess Capacity and Squeezing it Out

M&A Activity in the P/C Insurance Industry External Factors Influencing Profitability

Tort System Review: Overview and Causes for Concern Inflation

Growth in the Aftermath of the Great Recession Crisis-Driven Exposure Issues: Commercial Lines

Global Issues Impacting P/C Insurance Catastrophe Loss Review Social Media Strategy Q&A

3

Part 1

The “Great Recession,” Economic Recovery and the

P/C Insurance Industry

The Outlook for the Economy Has Brightened, But the Outlook

for P/C Insurance Is Mixed

4

Reasons for Optimism, Causes for Concern in the P/C

Insurance Industry

The Outlook for the Economy Has Brightened, But the Outlook

for P/C Insurance Is Mixed

5

Uncertainty, Risk and Fear Abound: Invasion of the Black Swans? Japan, New Zealand, Haiti, Chile Earthquakes Political Upheaval in the Middle East Echoes of the Financial Crisis Housing Crisis Sovereign Debt Crises Currency Crises Inflation Runaway Energy & Commodity Prices Era of Fiscal Austerity Reshuffling the Global Economic Deck China Becomes #2 Economy in the World Nuclear Fears Resurgent Terrorism Risk Manmade Disaster (e.g., Deepwater Horizon) Apocalypse 2012: End of the Mayan Calendar on Dec. 21 (11:11PM)

Are “Black Swans” everywhere or

does it just seem that way?

6

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

Economic Recovery in US is Self-Sustaining and Strengthening No Double Dip or Second Recession Economy is more resilient than most pundits presume

Consumer Confidence is Gradually Improving Consumer Spending is Recovering Gradually Consumer and Business Lending Are Expanding Housing Market Remains Weak; Some Improvement Expected in Late 2011 Inflation Rate Will Rise Will but Will Remain Contained

Runaway inflation is highly unlikely; Fed has things under control Deflation—threat has disappeared

Private Sector Hiring is Consistently Positive for 15 Months Acceleration in hiring later in 2011 compared to 2010 No significant secondary spike in unemployment

Japan Threat to Global Economy Overstated Sovereign Debt, Muni Bond “Crises” Overblown Current Middle East Turmoil Poses Only Moderate Risk to US Economy Interest Rates Are Rising but Remain Low by Historical Standards Stock and Bond Markets More Stable, Less Volatile Political Environment Is More Hospitable to Business Interests

7

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry Era of Mass P/C Insurance Exposure Destruction Has Ended

Personal and commercial exposure growth is virtually certain in 2011

But restoration of destroyed exposure will take 3-5 years in US

Exposure Growth Returned in 2nd Half 2010, Will Accelerate in 2011

P/C Industry Saw Growth in 2010 (+0.8%) for the First Time Since 2006

Increasing Private Sector Hiring Will Drive Payrolls/WC Exposures Wage growth is also positive and could modestly accelerate

Increase in Demand for Commercial Insurance Is in its Earliest Stages and Will Accelerate in 2011 Includes workers comp, commercial auto, marine, many liability coverages, D&O

Laggards: Property, inland marine, aviation

Personal Lines: Auto leads, homeowners lags

Agent Commissions Should Begin to Rise in 2011

Demand, Capital Management Strategies Will Temper Overcapitalization

10

Summary of Japan Earthquake

The March 11 Quake is Just the Most Recent of Several Large

Catastrophe Losses

11

Location of March 11, 2011 Earthquake Near Sendai, Honshu, Japan

Source: US Geological Service; Insurance Information Institute.

Magnitude 9.0 earthquake struck Japan at 2:46PM local time (2:46AM Eastern) off the northeast cost of Honshu, 80 miles east of the city of Sendai

Quake is among the 5 strongest in recorded history and the strongest in the 140 years for which records have been kept in Japan

11,000+ fatalities

Economic loss: $100 - $300 bn

Insured losses up to $35 bn

Significant tsunami damage was recorded in Japan; relatively minor damage on the U.S. West Coast

March 11 Earthquake Factsas of 3/24/2011

LOCATION130 km (80 miles) E of Sendai, Honshu, Japan178 km (110 miles) E of Yamagata, Honshu, Japan178 km (110 miles) ENE of Fukushima, Honshu, Japan373 km (231 miles) NE of TOKYO, Japan

Insured Japan Earthquake Loss Estimates*

$- $5 $10 $15 $20 $25 $30 $35 $40

RMS

AIR Worldwide

Eqecat $12 - $25 bn

$25 - $35 bn

12

*As of March 29, 2011. Figures do not include insured tsunami losses.Sources: AIR Worldwide, Eqecat; Insurance Information Institute.

(Insured Losses, $ Billions)

Economic losses are likely to total in the $200 billion range, meaning only a fraction of the

loss is insured

13

Top 20 Nonlife Insurance Companies in Japan by DPW, 2008

Direct premiums written, 2008

Rank Companies JPY (millions)

U.S. ($ millions)

Marketshare

Cumulative Market Share

1 Tokio & Marine Nichido $2,032,131.2 $19,660.9 24.0% 24.0%

2 Sompo Japan 1,504,262.7 14,553.8 17.8 41.8%

3 Mitsui Sumitomo 1,455,161.8 14,078.7 17.2 59.0%

4 Aioi 897,182.6 8,680.3 10.6 69.6%

5 Nipponkoa 728,262.9 7,046.0 8.6 78.2%

6 Nisay Dowa 361,530.7 3,497.8 4.3 82.5%

7 Fuji 329,345.7 3,186.4 3.9 86.4%

8 AIU 253,522.8 2,452.8 3.0 89.4%

9 Kyoei 199,393.1 1,929.1 2.4 91.8%

10 Nisshin 149,735.8 1,448.7 1.8 93.6%

11 American Home 82,889.8 802.0 1.0 94.6%

12 Asahi 73,600.1 712.1 0.9 95.5%

13 Sony 60,868.3 588.9 0.7 96.2%

14 ACE 54,876.2 530.9 0.7 96.9%

15 Zurich 45,471.3 439.9 0.5 97.4%

16 SECOM 44,245.0 428.1 0.5 97.9%

17 Sumi Sei 33,594.0 325.0 0.4 98.3%

18 AXA 30,418.9 294.3 0.4 98.7%

19 Mitsui Direct 29,471.9 285.1 0.4 99.1%

20 Daido 15,690.4 151.8 0.2 99.3%

Source: © AXCO 2011.

14

Recent Major Catastrophe Losses

(Insured Losses, $US Billions)

*Midpoint of AIR Worldwide estimated insured loss range of $15 billion to $35 billion as of March 13, 2011. Does not include tsunami losses.Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute.

$25.0

$10.0$8.0

$5.0$2.0

$0.5$0

$5

$10

$15

$20

$25

$30

Cyclone Yasi(Australia) Feb

2011

Australia Floods(Dec - Feb 2011)

New ZealandQuake (Sep 2010)

Chile Earthquake(Feb 2010)

New ZealandQuake (Feb 2011)

Japan Earthquake(Mar 2011)*

Insured Losses from Recent Major Catastrophe Events Exceed $50 Billion, an Estimated $48 Billion of that from Earthquakes

The March 2011 earthquake in Japan will become among the most expensive in world history in terms of insured losses (current

leader is the 1994 Northridge earthquake with $22.5B in insured losses in 2010 dollars)

15

Nonlife Insurance Market Impacts of Japan Earthquake Primary Insurance: Downgrades of Some Domestic Japanese Insurers Significant Absorption of Loss by Japanese Government

Residential earthquake damage Nuclear-related property and liability damage

Market Share of Foreign Primary Insurers in Japan is Small Not a capital event for any non-Japanese primary insurer

Significant Impacts for Global Reinsurers Property-Catastrophe covers on Commercial Lines Business Interruption Contingent Business Interruption

Currently an Earnings Event for Global Reinsurers Not a capital event: Global reinsurance markets entered 2011 with record capital

Cost of Property/Catastrophe Reinsurance Rising in Japan, New Zealand, Australia Up for all; Magnitude of increase is sensitive to size of loss

Reinsurance Coverage Remains Available in Affected Regions Little (If Any) Impact of Cost of US Property-Cat Reinsurance

Market remains well capitalized and competitive Elevated global cat activity could halt price declines for property/cat reinsurance

16

Catastrophic Loss –Catastrophe Losses Trends Are

Trending Adversely

17

$8

.3

$7

.4

$2

.6 $1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9 $

27

.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$1

3.6

$1

.1

$1

00

.0

$7

.5

$2

.7

$4

.7

$2

2.9

$5

.5 $1

6.9

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??

US Insured Catastrophe Losses

*First quarter 2011.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.

2010 CAT Losses Were Close to “Average” Figures Do Not Include an Estimate of Deepwater Horizon Loss

$100 Billion CAT Year is Coming Eventually

2010 CAT Losses Were

About Average

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

18

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2010E

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; Insurance Information Institute estimate for 2010.

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.

33.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

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

E

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

Combined Ratio Points

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – 2010Number of Events (Annual Totals 1980 – 2010)

Source: MR NatCatSERVICE 19

There were a record 247 natural disaster events in

the US in 2010

28

P/C Insurance Industry Financial Overview

From Crisis to Recovery

29

P/C Insurance Industry Financial Overview

Profit Recovery ContinuesEarly Stage Growth Begins

P/C Net Income After Taxes1991–2010E ($ Millions)

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

4,8

93

$2

8,3

11

-$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 10E

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.3% 2009 ROAS1 = 5.8% 2010:Q3 ROAS = 6.7%

P-C Industry 2010:Q3 profits were$26.7B vs.$16.4B in 2009:Q3,

due mainly to $4.4B in realized capital gains vs. -$9.6B in previous

realized capital losses

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 7.7% ROAS for 2010:Q3 and 4.6% for 2009. 2009:Q3 net income was $29.8 billion excluding M&FG.Sources: A.M. Best, ISO, Insurance Information Institute

31

ROE: Property/Casualty Insurance,1987–2010E*

* Excludes Mortgage & Financial Guarantee in 2008 - 2010.Sources: ISO, Fortune; Insurance Information Institute figure for 2010 is actual through 2010:Q3.

-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 10E

P/C Profitability Is Both by Cyclicality and Ordinary Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

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

Combined Ratio / ROE

* 2009 and 2010:Q3 figures are return on average statutory surplus. 2008, 2009 and 2010:H1figures 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

99.5 99.7101.0

7.7%7.3%

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:Q3*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

UNDERWRITING

33

Cyclicality is Driven Primarily by the Industry’s Underwriting

Cycle, Not the Economy

34

P/C Insurance Industry Combined Ratio, 2001–2010:Q3*

* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:Q3=101.2 Sources: A.M. Best, ISO.

95.7

99.3 99.7101.0

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:Q3

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

Cyclical Deterioration

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Lower CAT

Losses, More

Reserve Releases

35

Calendar Year Combined Ratios by Segment: 2008-2011F

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

102.4

98.9100

106

99.5

108

103.8104.5

9092949698

100102104106108110

Personal Lines Commercial Lines

2008 2009 2010P 2011F

Overall deterioration in 2011 underwriting performance is due to expected return to normal catastrophe activity along with deteriorating underwriting

performance related to the prolonged commercial soft market

Personal lines combined ratio is expected to remain stable in 2010 while commercial lines and reinsurance deteriorate

Underwriting Gain (Loss)1975–2010:Q3*

* Includes mortgage and financial guaranty insurers.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

The industry recorded a $6.2B underwriting

loss in 2010:Q3 compared to $3.2B in

2009:Q3

Cumulative underwriting deficit from 1975 through

2009 is $445B

($ Billions)

37

Number of Years with Underwriting Profits by Decade, 1920s–2000s

0 0

3

54

8

10

76

0

2

4

6

8

10

12

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s*

* 2000 through 2009. 2009 combined ratio excluding mortgage and financial guaranty insurers was 99.3, which would bring the 2000s total to 4 years with an underwriting profit.Note: Data for 1920–1934 based on stock companies only.Sources: Insurance Information Institute research from A.M. Best Data.

Number of Years with Underwriting Profits

Underwriting Profits Were Common Before the 1980s (40 of the 60 Years Before 1980 Had Combined Ratios Below 100) –

But Then They Vanished. Not a Single Underwriting Profit Was Recorded in the 25 Years from 1979 Through 2003

38

2.3

-2.1

-8.3

-2.6-6.6

-9.9 -9.8

-4.1

1

11.7

23.2

13.79.9

7.3

-6.7-9.5

-14.6-16 -15

-5

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

11

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2011E

Reserve Releases Are Remained Strong in 2010 But Should Begin to Taper Off in 2011

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: Barclay’s Capital; A.M. Best.

Prior year reserve releases totaled $8.8 billion in the

first half of 2010, up from $7.1 billion in

the first half of 2009

Financial Strength & Underwriting

41

Cyclical Pattern is P-C Impairment History is Directly Tied to

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–2010E*8

15

12

71

19

34

91

31

21

99

16

14

13

36

49

31 3

45

04

85

56

05

84

12

91

61

23

11

8 19

49 50

47

35

18

14 15 16 18

9

5

0

10

20

30

40

50

60

70

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

*2010 estimate.Source: A.M. Best Special Report “1969-2009 Impairment Review,” June 21, 2010; Insurance Information Institute.

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

8 of the 18 in 2009 were small Florida carriers. Total also

includes a few title insurers.

43

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2009

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

9*

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after Div P/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2009 estimated impairment rate rose to 0.36% up from a near record low of 0.23% in 2008 and the 0.17% record low in 2007; Rate is still less than one-half the 0.79% average since 1969

Impairment Rates Are Highly Correlated With Underwriting Performance and Reached Record Lows in 2007/08

44

Reasons for US P/C Insurer Impairments, 1969–2009

3.6%4.0%

8.8%

7.1%

7.8%

7.2%

7.8% 13.6%

40.1%

Source: A.M. Best: 1969-2009 Impairment Review, Special Report, June 21, 2010

Historically, Deficient Loss Reserves and Inadequate Pricing AreBy Far the Leading Cause of P-C Insurer Impairments.

Investment and Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems

Misc.

Sig. Change in Business

46

Performance by Segment:Commercial/Personal Lines &

Reinsurance

Homeowners Insurance Combined Ratio: 1990–2011P

11

3.0

11

7.7

15

8.4

11

3.6

10

1.0 10

9.4

10

8.2

11

1.4 1

21

.7

10

9.3

98

.3

94

.2 10

0.1

89

.4 95

.7

11

7.0

10

5.6

10

3.5

99

.0

11

8.4

11

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 10E11P

Homeowners Line Is Expected to Improve in 2011. Extreme Regional Variation Can Be Expected Due to Local Catastrophe

Loss Activity

Sources: A.M. Best; Insurance Information Institute.

Private Passenger Auto Combined Ratio: 1993–2011P

10

1.7

10

1.3

10

1.3

10

1.0

10

9.5

10

7.9

10

4.2

98

.4

94

.3

95

.1

95

.5 98

.3 10

0.3

10

1.3

99

.0

98

.5

99

.5 10

1.1

10

3.5

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 10E 11P

Private Passenger Auto Accounts for 34% of Industry Premiums and Remains the Profit Juggernaut of the P/C Insurance Industry

Sources: A.M. Best; Insurance Information Institute.

Commercial Multi-Peril Combined Ratio: 1995–2011P

11

9.0

11

9.8

10

8.5

12

5.0

11

6.2

11

6.1

10

4.9

10

1.9

10

5.4

95

.1 97

.6

94

.2

10

0.7

11

6.8

11

3.6

11

5.3

12

2.4

11

5.0

11

7.0

97

.3

89

.0

97

.7

93

.8

83

.8

89

.8

10

8.0

98

.6 10

1.0

10

3.0

11

3.1

11

5.0 1

21

.0

80

85

90

95

100

105

110

115

120

125

130

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10E* 11P*

Commercial Multi-Peril Underwriting Performance is Expected to Deteriorate Modestly

*2010Eand 2011P figures are for the combined liability and non-liability components.Sources: A.M. Best; Insurance Information Institute.

Commercial Auto Combined Ratio: 1993–2011P

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4 94

.2 96

.8 99

.5 10

2.0

10

4.0

11

8.1

11

5.7

11

6.2

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 10E 11P

Sources: A.M. Best; Insurance Information Institute.

Commercial Auto Underwriting Performance is Expected to Deteriorate Modestly

Workers Compensation Combined Ratio: 1994–2011P

10

2.0

97

.0 10

0.0

10

1.0

11

0.9

11

0.0

10

7.0

10

2.7

98

.4 10

3.5

10

4.4 1

10

.5

11

7.5 12

1.5

12

1.7

10

7.0

11

5.3

11

8.2

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 10E 11P

Workers Comp Underwriting Results Are Deteriorating Markedly and the Worst They

Have Been in a DecadeSources: A.M. Best; Insurance Information Institute.

EXPENSES

53

Expense Ratios Are Highly Cyclical and Contribute Deteriorating Underwriting Performance

Underwriting Expense Ratio*:Personal vs. Commercial Lines, 1990-2010E**

24.3%24.7%

24.4% 24.3%

26.4%26.6%

27.7%28.2%

29.9%

24.5%

26.4%

26.4%26.2%

24.7%24.7%24.6%24.4%

23.4%23.7%

23.5%

25.0%

23.9%

25.6%

25.6%

24.8%

30.5%30.6%

25.6%

28.5%

26.4%

26.6%

25.0%

29.1%

30.0%30.5%

28.4%

28.3%27.4%

27.8%

28.7%

29.3%

29.9%

20%

22%

24%

26%

28%

30%

32%

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

E

Personal Lines Commercial Lines

*Ratio of expenses incurred to net premiums written.**2010 figures are estimates.Source: A.M. Best; Insurance Information Institute.

Commercial lines expense ratios are

highly cyclical

57

Drivers of P/C Premium and Exposure

Factors Influencing Growth and Claim Severities (Costs)

PREMIUM & PRICING TRENDS

58

Winds of Change or Moving Sideways?

59

-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 0910

E11

F

Soft Market Persisted in 2010 but May Be Easing: Relief in 2011?

(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.

NWP was up 0.5% in 2010 (est.) with forecast growth of 1.4% in 2011

60

Auto & Home vs. All Lines, Net WrittenPremium Growth, 2000–2010E

14.5%

3.0%

-0.9%0.9%

9.2%

6.0%

2.2%

5.7%

0.5%

-4.9%

15.3%

5.0%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

13%

15%

00 01 02 03 04 05 06 07 08 09 10E

Private Passenger AutoHomeownersAll Lines

Sources: A.M. Best; Insurance Information Institute.

Average 2000-2009Auto = 2.9

Home = 6.5%All Lines = 3.4%

While homeowners insurance has grown faster than auto over the past decade, auto is

generally more profitable

61

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% 3.0%

-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

The long-awaited uptick:

mainly personal lines

62

Net Written Premium Growth by Segment: 2008-2011F

-0.1%

-9.4%

2.8%

-2.0%

2.5%

0.3%

-3.1%

-0.1%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Personal Lines Commercial Lines

2008 2009E 2010P 2011F

Rate and exposure are more favorable in personal lines, whereas a prolonged soft market and sluggish recovery from the recession

weigh on commercial lines.

Personal lines growth resumed in 2010 and will continue in 2011, while commercial lines contracted

again in 2010 and but will stabilize in 2011

Sources: A.M. Best; Insurance Information Institute.

63

Monthly Change* in Auto Insurance Prices, 1991–2011*

*Percentage change from same month in prior year; through February 2011; 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

Cyclical peaks in PP Auto tend to occur

approximately every 10 years (early 1990s, early

2000s and likely the early 2010s)

“Hard” markets tend to occur

during recessionary

periods

A pricing peak may be occurring

Feb. 2011 change

was 4.2%, down from

5.4% in Nov. 2010

65

Average Commercial Rate Change,All Lines, (1Q:2004–3Q:2010)

-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

%

-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

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

KRW Effect

Magnitude of Price Declines Shrank

During Crisis, Reflecting Shrinking

Capital, Reduced Investment Gains,

Deteriorating Underwriting

Performance, Higher Cat Losses and

Costlier Reinsurance

(Percent)

Market Remains Soft as Capital Restored and

Underwriting Losses Remain Modest

66

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2010:Q3

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

Percentage Change (%)

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

Pricing Turned Negative in Early

2004 and Has Been Negative

Ever Since KRW Effect

Market has Been Soft for 6+ years and Remains Soft as Capital is Restored and

Underwriting Losses Remain Modest

ECONOMIC IMPACTS ON EXPOSURE GROWTH

69

The Great Recession Took a Heavy Toll, Restoration of Exposure Will Take Years

70

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 3/11; Insurance Information Institute.

2.7

%

0.9

%

3.2

%

2.3

%

2.9

%

-0.7

%

0.6

%

-4.0

%

-6.8

% -4.9

%

-0.7

%

1.6

%

5.0

%

3.7

%

1.7

%

2.6

%

2.8

%

3.4

%

3.4

%

3.4

%

3.4

%

3.1

%

3.2

%

3.2

%3

.3%

4.1

%

1.1

%

1.8

%

2.5

% 3.6

%

3.1

%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

12

:3Q

12

:4Q

Demand for Insurance Continues To Be Impacted by Sluggish Economic Conditions, but the Benefits of Even Slow Growth Will Compound and

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit

crunch, housing slump, labor market contraction has

been severe but modest recovery is underway

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

Economic growth projections for 2011 have been revised

upward. This is a major positive for insurance demand

and exposure growth.

2011 Financial Overview State Economic Growth Varied in 2009

72

Mountain, Plains states still growing the fastest

Some Southeast states growing well, but others

among the weakest

73

Direct Premiums Written: All Lines Percent Change by State, 2004-2009

42

.9

23

.8

22

.0

18

.8

17

.2

15

.4

14

.8

14

.2

14

.1

14

.0

13

.5

13

.0

13

.0

12

.9

12

.8

12

.3

12

.2

11

.5

10

.7

7.9

5.8

5.5

5.1

5.0

4.6

0

5

10

15

20

25

30

35

40

45

ND LA

SD

WY

MT

UT

OK

DE IA

NM

MS

WV

SC

DC

TX

NE

KS

NC ID AL

FL

WA

GA

AR HI

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota is the growth juggernaut of the P/C

insurance industry—too bad nobody lives there…

74

4.5

4.2

2.6

2.5

2.4

2.0

0.9

0.7

0.6

0.5

0.0

-0.1

-2.8

-3.1

-3.5

-3.7

-5.2

-8.2

-9.2

-14

.8

-15

.2

-0.5

-1.2

-1.6

-1.8

-2.4

-20

-15

-10

-5

0

5A

K

VA

TN

KY

MD

MO AZ

OR WI

NV

NY IN PA

MN

VT

CO

CT RI

NJ IL

ME

OH

NH

MA MI

CA

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC; Insurance Information Institute.

Bottom 25 States

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

the past 5 years

Over the 5 years from 2004-2009, 15 states saw premiums shrink,one had no growth, and 4 others grew premiums by less than 1%

Direct Premiums Written: All Lines Percent Change by State, 2004-2009

75

11 Industries for the Next 10 Years: Insurance Solutions Needed

Shipping (Rail, Marine)

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Agriculture

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

76

16.9

16.5

16.1

13.2

10.4

11.6

13.2 14

.0 14.7 15

.1

15.0 15

.5

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

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

(Millions of Units)

Auto/Light Truck Sales, 1999-2016F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 3/11); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, but High Unemployment, Tight Credit Are Still Restraining Sales in 2011

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2011-12 is

still far below 1999-2007 average of 17 million units, but a recovery is underway.

Job growth and improved credit market conditions will boost auto sales in

2011 and beyond

77

(Millions of Units)

New Private Housing Starts, 1990-2016F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

6 0.8

6

1.2

0 1.3

3 1.4

3

1.5

0

1.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

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 11F12F13F14F15F16F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (10/10 and 3/11); Insurance Information Institute.

Little Exposure Growth Likely for Homeowners Insurers Until 2013. Also Affects Commercial Insurers with Construction Risk Exposure, Surety

New home starts plunged

72% from 2005-2009; A

net annual decline of 1.49 million units, lowest since

records began in 1959

I.I.I. estimates that each incremental 100,000 decline in housing starts costs home insurers

$87.5 million in new exposure (gross premium). The net exposure loss in 2009 vs. 2005 is

estimated at about $1.3 billion

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

80

Wage and Salary Disbursement (Private Employment) vs. WC NWP ($ Billions)

2011 Financial Overview Wage and Salary Disbursements (Payroll Base) vs. Workers Comp Net Written Premiums

* Average Wage and Salary data as of 7/1/2010. Shaded areas indicate recessions. **Estimated “official” end of recession June 2009.Source: US Bureau of Economic Analysis; Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; I.I.I. Fact Books

Weakening payrolls have eroded $2B+ in workers comp premiums; nearly 29% of NPW has been eroded away by the soft market and weak economy

7/90-3/91 3/01-11/01

$0

$1,000

$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*

$0

$10

$20

$30

$40

$50

$60

Wage & SalaryDisbursements

WC NPW

WC net premiums written were down $13.7B or 28.7%

to $34.1B in 2009 after peaking at $47.8B in 2005

12/07-6/09

66%

68%

70%

72%

74%

76%

78%

80%

82%

Ma

r 0

1

Ju

n 0

1

Se

p 0

1

De

c 0

1

Ma

r 0

2

Ju

n 0

2

Se

p 0

2

De

c 0

2

Ma

r 0

3

Ju

n 0

3

Se

p 0

3

De

c 0

3

Ma

r 0

4

Ju

n 0

4

Se

p 0

4

De

c 0

4

Ma

r 0

5

Ju

n 0

5

Se

p 0

5

De

c 0

5

Ma

r 0

6

Ju

n 0

6

Se

p 0

6

De

c 0

6

Ma

r 0

7

Ju

n 0

7

Se

p 0

7

De

c 0

7

Ma

r 0

8

Ju

n 0

8

Se

p 0

8

De

c 0

8

Ma

r 0

9

Ju

n 0

9

Se

p 0

9

De

c 0

9

Ma

r 1

0

Ju

n 1

0

Se

p 1

0

De

c 1

0

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 81

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 76.3% of industrial

capacity in Feb. 2011, above the June 2009

low of 68.3%

December 2007-June 2009 Recession

82

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

5371

,549

70,6

4362

,304

52,3

7451

,959

53,5

4954

,027

44,3

6737

,884

35,4

7240

,099

38,5

4035

,037

34,3

1739

,201

19,6

95 28,3

2243

,546

60,8

3743

,016

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 0910

:3Q

Business Bankruptcy Filings,1980-2010:Q3

Sources: American Bankruptcy Institute at http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633 ; Insurance Information Institute

Significant Exposure Implications for All Commercial Lines

There were 60,837 business bankruptcies in 2009, up 40% from 2008 and the most since 1993. 2010:Q3

bankruptcies totaled 29,059, down 5.5% from 2009:Q3

% Change Surrounding Recessions

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

83

Private Sector Business Starts, 1993:Q2 – 2010:Q2*

175

186

174

180

186

192

188

187 18

918

6 190 19

419

119

9 204

202

195

196

196

206

206

201

192

198

206

206

203

211

205

212

200 20

520

420

419

720

320

920

1

192

192

193

201 20

420

221

0 212

209

216 22

0 223

220

220

210

221

212

204

218

209

207

207

199

191 19

317

2 176

169

184

172

172

203

150

160

170

180

190

200

210

220

230

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

Business Starts Were Down Nearly 20% in the Recession, Holding Back Most Types of Commercial Insurance Exposure

* Data through June 30, 2010 are the latest available as of March 10, 2011; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t07.htm.

(Thousands)

344,000 new business starts were recorded through the first half of 2010, which was likely the slowest year for

new business starts since 1993.

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010:H1: 344,000

Inflation

85

Is it a Threat to Claim Cost Severities?

86

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

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.6

2.2 2.1 2.2 2.2

2.92.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 10/10 and 3/11 (forecasts).

The slack in the U.S. economy suggests that inflation should not heat upbefore 2012, but other forces (commodity prices, inflation in countries from which we import, etc.), plus U.S. debt burden, remain longer-run concerns

Annual Inflation Rates (%)

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

term inflationary pressures

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 liability, med pay, and PIP claim cost driver. They are likely to grow faster than the CPI for the next few years, at least

87

Excludes Food and Energy

88

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

89

Unemployment and Underemployment Rates: Falling Faster in 2011?

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment rate fell to 8.8%

in March

Unemployment peaked at 10.1% in October 2009, highest monthly rate since 1983.

Peak rate in the last 30 years:

10.8% in November -

December 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 15.7% in March 2011

January 2000 through March 2011, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemploymentwill constrain payroll growth, which directly affects WC exposure

Mar 11

18

67

92

13

65 1

27

42

15

-10

9-1

46

5 97

23

-12

-85 -58

-16

1-2

53

-23

0-2

57

-34

7-4

56

-54

7-7

34 -66

7-8

06 -7

07

-74

4 -64

9-3

34

-45

2-2

97 -2

15

-18

6-2

62

75

-83

16 6

2

24

15

1 61 1

17

14

31

12 1

93

12

8 16

79

42

40

23

0

14

4

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Fe

b-0

7M

ar-

07

Ap

r-0

7M

ay-

07

Jun

-07

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Monthly Change in Private Employment

January 2008 through March 2011* (Thousands)

Private Employers Added 1.999 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (Local

Govt. Employment is Down 416,000 Since Sept. 2008 Peak)

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

Private employers added jobs in every month in 2010 for a total of

1.435 million for the year

230,000 private sector jobs were created in

March

94

Unemployment Rates by State, February 2011:Highest 25 States*

13.6

12.2

11.5

11.2

10.4

10.4

10.2

10.2

10.2

10.2

9.7

9.7

9.6

9.6

9.5

9.4

9.4

9.3

9.3

9.2

9.2

9.1

9.0

8.9

8.9

8.8

0

2

4

6

8

10

12

14

16

NV CA FL RI KY MI GA MS OR SC ID NC AZ TN DC MO WV AL CO NJ OH WA CT IL US IN

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for February 2011, seasonally adjusted.

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

In February, 27 states and the District of Columbia had over-the-month

unemployment rate decreases, 7 had increases, and 16 had no change.

23 states + DC had unemployment rates above

the US average in Feb. 2011, 17 states were below.

95

8.7

8.5

8.2

8.2

8.2

8.0

7.9

7.8

7.7

7.6

7.5

7.4

7.4

7.1

6.8

6.7

6.5

6.4

6.3

6.2

6.1

5.6

5.4

4.8

4.3

3.7

0

2

4

6

8

10

NM DE MA NY TX PA LA AR UT AK ME MT WI MD KS MN OK VA HI WY IA VT NH SD NE ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates By State, February 2011: Lowest 25 States*

*Provisional figures for February 2011, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In February, 27 states and the District of Columbia had over-the-month

unemployment rate decreases, 7 had increases, and 16 had no change.

100

Regulatory Concerns

Very High State Regulator Turnover in 2011

Federal Insurance Office— A New Unknown

Turnover Among Insurance Regulators is Very High in 2011

101

At least 22 new state insurance

commissioners will take office in 2011, implying a steep collective learn

curve and the need for a significant

educational effort

Source: James Madison Institute, February 2008.

ME

NH

MA

CT

PA

WV

VA

NC

LA

TX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJRI C

DE

AL

VT

NY

MD

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SDWI

IN

OH

MT

CA

NV

UT

WY

CO

AK

= A= B= C= D= F= NG

Source: Heartland Institute, May 2010

A- A-

A-

B-

B-

B-

B-

B-

B-B-

B-B-

B-

B-

B-

B-

B- C-

C-

C-

C -

C-

D-D-

A

A

A

A

B+

B+

B+

B

B

B

B

B

B

C+

C+

C

D+

D+D+

D

NG

NG

D F

F

2010 Property and Casualty InsuranceReport Card

Not Graded: District of ColumbiaMississippiLouisiana

103

Financial Services Reform: Impact on Insurers Resolution Authority/Systemic Risk: Regulators may seize and break-up

troubled financial firms whose collapse might cause widespread damage (i.e., systemically important companies)

Regulator would recoup fees with more than $50B in assets Sets up liquidation procedure run by FDIC Establishes 10-member oversight council to monitor and address risks to

financial stability Eliminates Office of Thrift Supervision

Volcker Rule: Largely bars largest firms largest investment firms from trading with their own funds

Exempts insurers, asset managers and trust/custody banks, though Fed could impose Volcker Rule and capital standards on individual firms if warranted

Derivatives: Requires routine derivatives to be traded on exchanges and routed through clearinghouses

Imposes capital, margin, reporting and record keeping and business conduct rules on firms that deal in derivatives

Consumer Financial Protection Bureau: To be housed within Fed Will it be limited to banks/creditors, but concern that it could morph Federal Insurance Office: To be established within Treasury to

monitor and gather information in the insurance industry IL Insurance Director Michael McGraith will be FIO’s first director

Source: Insurance Information Institute.

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Insurance Information Institute Online:

INVESTMENTS: THE NEW REALITY

105

Investment Performance is a Key Driver of Profitability

Does It Influence Underwriting or Cyclicality?

Property/Casualty Insurance Industry Investment Gain: 1994–2010:Q31

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.0 $39.5

$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:Q3In 2008, Investment Gains Fell by 50% Due to Lower Yields and

Nearly $20B of Realized Capital Losses 2009 Saw Smaller Realized Capital Losses But Declining Investment Income

Investment Gains Recovered Significantly in 20101 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) 2009:Q3 gain was $29.3B

Investment gains in 2010 are on track to be their best since 2007

107

P/C Insurer Net Realized Capital Gains, 1990-2010:Q3

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.

98

$4.4

3

-$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 0910:Q3

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

Driver of Its Recovery in 2010

($ Billions)Capital losses have

turned to capital gains, aiding earnings

108

Treasury Yield Curves: Pre-Crisis (July 2007) vs. February 2011

0.11% 0.13% 0.17% 0.29%

0.77%

2.96%

3.58%

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

2.26%

1.28%

4.65%4.42%

0%

1%

2%

3%

4%

5%

6%

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

February 2011 Yield Curve*Pre-Crisis (July 2007)

Treasury yield curve is near its most depressed level in at least 45 years, though longer yields rose in late 2010/early 2011 as

economy improved. Investment income is falling as a result.

The Fed’s Announced Intention to Pursue Additional Quantitative Easing Could Depress Rates in the 7 to 10-Year Maturity Range through

June

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

QE2 Target

109

-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

War

rant

y

Surplu

s Line

s

Med

Mal

WC

Reinsu

ranc

e**

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*

110*Net admitted assets. Sources: NAIC; Insurance Information Institute research.

Invested assets totaled $1.26 trillion

Generally, insurers invest conservatively, with over 2/3 of invested assets in bonds

Only 18% of invested assets were in common or preferred stock

Portfolio Factsas of 12/31/2009

68.8%

6.2%18.0%

7.0%

Bonds

Common & Preferred Stock

As of December 31, 2009

Cash & Short-term

Investments

Other

Distribution of P/C Insurance Industry’s Investment Portfolio

111

2011 Financial Overview About Half of the P/C Insurance Industry’s Bond Investments Are in Municipal Bonds

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

Investments in “Political Subdivision [of states]” bonds were $102.5 billion

Investments in “States, Territories, & Possessions” bonds were $58.9 billion

Investments in “Special Revenue” bonds were $288.2 billion

All state, local, and special revenue bonds totaled 48.2% of bonds, about 35.7% of total invested assets

Bond Investment Factsas of 12/31/09

0.9%

2.0%15.5%

6.3%

11.0%

31.0%33.3%

U.S. Government

Special Revenue

As of December 31, 2009

States, Terr., etc.

Industrial

Foreign Govt

Political Subdivisions

2011 Financial Overview When P/C Insurers Invest in Higher Risk Bonds,It’s Corporates, Not Munis

Data are as of year-end 2009. Sources: SNL Financial; Insurance Information Institute.

The NAIC’s Securities Valuation Office puts bonds into one of 6 classes: class 1 has the lowest expected impairments; successively higher

numbered classes imply increasing impairment likelihood.

CAPITAL MANAGEMENT & LEVERAGE

117

Excess Capital is a Major Obstacle to a Market Turn;

Capital Management Decisions Will Impact Market Direction

119

Policyholder Surplus, 2006:Q4–2010:Q3

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

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

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

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%)

Surplus set a new record in 2010:Q3*

*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.

124

2.1

1.9

2.7

2.5

2.3

1.8

1.7

1.7

1.9

1.9

1.9

1.9

1.7

1.6

1.6

1.4

1.4

1.3

1.3

1.1

1.1

0.9

1.1

30

.94

0.8

60

.84

1.2

91

.17

1.0

70

.99

0.8

40

.91

0.7

90.9

50

.82

1.6

2.0

2.52.5

1.8

2.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98 0

02

04

06

08

10

*

The Premium-to-Surplus Ratio in 2010 Implies that P/C Insurers Held $1 in Surplus Against Each $0.79 Written in Premiums. In 1974, Each $1 of

Surplus Backed $2.70 in Premium.*2010 data are is estimated using annualized NWP data through 2010:Q3.Sources: Insurance Information Institute calculations from A.M. Best data.

Ratio of Net Premiums Writtento Policyholder Surplus, 1970-2010*

The premium-to-surplus ratio (a measure of leverage) hit a record low at just 0.79:1 in 2010. It has decreased as PHS grows

more quickly than NPW, with the effect of holding down profitability.

Record High P-S Ratio was 2.7:1

in 1974

Record Low P-S Ratio was 2.7:1

in 2010*

Merger & Acquisition

125

Capital Cycles Can Drive Consolidation

U.S. P/C M&A Activity Rising, Volume Bouncing Back

128

Sources: Conning Research & Consulting through 2009; 2010 vol. est. from A.M. Best (2010 deal count N/A); Insurance Information Institute.

After a severe drop due to the capital crunch, M&A volume began to rebound in 2010. Levels remain below 1998-2000 and 2006 peaks.

Buyers are consistently more profitable than targets, rest of industry

The year before merger, eventual targets have earnings that lag industry average. Buyers’ earnings are higher than the industry.

Sources: SNL Financial; Insurance Information Institute.

Type of acquisition is shifting

There were 16 mutual targets in 2008-2010, up from 10 in the three prior years.

Sources: SNL Financial; Insurance Information Institute.

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Insurance Information Institute Online: