workers compensation overview and outlook for 2011 & beyond

Workers Compensation Overview and Outlook for 2011 & Beyond

Insurance Information Institute

Hot Springs, VAJuly 29, 2011

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

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

3

P/C Insurance Industry Financial Overview

Profit Recovery Will Be Set Back by High CATs, Low

Interest Rates, Diminishing Reserve Releases

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 $

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

4,6

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

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

-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%

The BIG Question:When Will the Market Turn?

7

Insurance Cycle Dynamics

8

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

Criteria Status Comments

Sustained Period of

Large Underwriting

LossesNot 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.

10

Workers Compensation and the Economy

Workers Comp Exposure and Performance is Intimately Linked to

the Economy and Labor Market

11

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 7/11; 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

%

3.1

%

0.4

%

1.3

% 3.2

%

3.2

%

2.2

%

2.1

%

2.3

%2

.2%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%

2011 got off to a sluggish start, but growth is expected

to accelerate in the remainder of the year. This is a major

positive for insurance demand and exposure growth.

2011 Financial Overview State Economic Growth Varied in 2010

12

Texas had one of the stronger economies in 2010 and has

generally outperformed during the economic

downturn

Hard hit Midwest and Northeast states finally

entering recovery in 2010

15

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

44

.8

25

.4

19

.8

17

.3

16

.6

14

.2

13

.9

12

.4

12

.3

11

.9

9.1

8.1

8.1

7.1

6.8

5.4

5.2

4.7

3.8

3.7

3.1

3.0

1.5

1.2

1.1

0

5

10

15

20

25

30

35

40

45

ND

SD LA

WY

OK

WV

KS IA TX

MT

NE

DE

MS

NM SC

DC

UT

AR

NC ID WA

AL

WI

AK

TN

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…

16

0.7

0.6

0.1

-0.1

-0.3

-0.5

-0.8

-1.4

-1.6

-1.7

-2.5

-2.8

-2.9

-3.4

-3.6

-4.1

-4.5

-4.7

-4.8

-5.7

-5.8

-8

-8.2

-8.3

-13

.5

-14

.2

-15

.5

-20

-15

-10

-5

0

5M

D

MO

KY IN NY

GA

MN

VA

US

PA

OR FL IL CT

VT

OH RI

CO

NJ HI

ME

NH

MA

AZ

NV 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

Direct Premiums Written: All P/C Lines Percent Change by State, 2005-2010

US Direct Premiums Written declined by 1.6% between 2005

and 2010

$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

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

17

Payroll Base* WC NWP

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

*Private employment; Shaded areas indicate recessions. Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

29% of NPW has been eroded away by the soft market and weak economy

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

$Billions $Billions

WC premium volume dropped two years before

the recession began

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

$33.8B in 2010 after peaking at $47.8B

in 2005

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

20

Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*

34

.4

23

.1

14

.2

10

.2

9.0

4.6

1.4

-3.7

-7.3

-9.3

-10

.0

-10

.3

-10

.9

-10

.9

-13

.0

-14

.7

-15

.3

-15

.9

-16

.9

-17

.8

-19

.8

-21

.4

-21

.7

-35-30-25-20-15-10-505

10152025303540

OK

MT ID LA

SD IA KS

NY WI

PA

MS IL

NM NJ

NE

MD

NC AL

CT VA

SC

AR

MN

Pe

ce

nt

ch

an

ge

(%

)

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.


Top 25 States5

,80

7.1

Only 7 (small) states showed growth in workers

comp premium volume between 2005 and 2010

21

Direct Premiums Written: Worker’s CompPercent Change by State, 2005-2010*

-22

.6

-23

.7

-24

.2

-25

.0

-25

.2

-25

.2

-25

.3

-26

.8

-26

.9

-28

.1

-28

.3

-28

.7

-29

.0

-30

.1

-32

.5

-32

.6

-33

.8

-34

.7

-36

.1

-42

.7

-45

.4

-50

.7

-51

.2

-57

.7

-70

-60

-50

-40

-30

-20

-10

0

AZ

ME

GA

KY IN NH

OR

DC

MA

TN VT

US

TX

AK

MO MI

UT RI

CO

DE

NV HI

CA

FL

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

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

the past 5 years

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.


Workers Comp DPW plunged 28.7% from

between 2005 and 2010

Crisis-Driven Exposure Drivers in Workers Comp

22

Economic Obstacles and Opportunities to Growth

23

(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

0.5

9 0.7

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 7/11); 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

The plunge and lack of recovery in homebuilding and in construction in general is

holding back payroll exposure growth

Job growth, improved credit

market conditions and demographics

will eventually boost home construction

24

16.9

16.5

16.1

13.2

10.4

11.6

12.9

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 7/11); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Manufacturing Sector.

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

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

Ma

r 1

1

Ju

n 1

1

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. 25

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 76.7% of industrial

capacity in Jun. 2011, above the June 2009

low of 68.3%

December 2007-June 2009 Recession

http://www.federalreserve.gov/releases/g17/Current/default.htm

27

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8212

,376

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

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

Business Bankruptcy Filings,1980-2011:Q1

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 as Business Bankruptcies Begin to Decline

2010 bankruptcies totaled 56,282, down 7.5% from 60,837 in 2009—which were up 40%

from 2008 and the most since 1993. 2011:Q1 filings are down 14.4% from 2010:Q1.

% Change Surrounding Recessions

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

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

28

Private Sector Business Starts, 1993:Q2 – 2010:Q3*

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

182

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 September 30, 2010 are the latest available as of July 25, 2011; Seasonally adjustedSource: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.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:Q3 526,000

http://www.bls.gov/news.release/cewbd.t08.htm

29

11 Industries for the Next 10 Years: Insurance Solutions Needed

Shipping (Rail, Marine, Trucking)

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Agriculture/Agribusiness

Natural Resources

Environmental

Technology (incl. Biotechnology)

Light Manufacturing

Export-Oriented Industries

Many industries are

poised for growth, but

many insurers do not write in

these economic segments

30

Value Contributed to GDP by Agricultural Sector, 2004-2010

$154.1

$133.1

$160.1

$144.7

$122.5$127.1

$142.7

$100

$110

$120

$130

$140

$150

$160

$170

2004 2005 2006 2007 2008 2009 2010

Sources: US Bureau of Economic Analysis; Insurance Information Institute.

Agriculture and Agribusiness will be among the growth leaders in the years ahead due to rising global demand and a low dollar--boosting exports

$ Billions

Agriculture and agribusiness are growing strongly relative to the rest

of the US economy.

31

Percentage Change in Employment in Select Industries, June 2011 vs. June 2010

-0.8% -1.0%-2.8% -2.9% -3.3%

0.9%1.0%2.1%2.4%

7.6%

10.9%

-6%-4%-2%0%2%4%6%8%

10%12%

Min

ing

&Lo

ggin

g

Edu

catio

n

Pro

f. &

Bus

ines

sS

erv.

Hea

lth &

Soc

ial A

ssis

t.

Trad

e,Tr

ansp

ort.

&U

til

Man

ufac

turin

g

Fina

naci

alA

ctiv

ities

Info

rmat

ion

Leis

ure

&H

ospi

talit

y

Gov

ernm

ent

Con

stru

ctio

n

Sources: US Bureau of Labor Statistics “Employment Situation, June 2011”; Insurance Information Institute.

There is a great deal of variation in employment growth by industry, indicating a very uneven and slow recovery

Percentage Change

Mining and Logging activities were the job growth leaders over the past

year, in percentage terms

32

Change in Number Employedin Select Industries, June 2011 vs. June 2010

-27 -61-190

-382

-666

7799223257

343396

-800

-600

-400

-200

0

200

400

600

Pro

f.B

usin

ess

Ser

v.

Hea

lth C

are

&S

ocia

l Ass

ist.

Trad

e,Tr

ansp

ort.

&U

tiliti

es

Edu

catio

n

Man

ufac

turin

g

Min

ing

&Lo

ggin

g

Info

rmat

ion

Fina

ncia

lA

ctiv

ities

Con

stru

ctio

n

Leis

ure

&H

ospi

talit

y

Gov

ernm

ent



Thousands Professional Business Services, Health Care, and Trade, Transportation &

Utilities) were the job growth leaders in the past year.

33

Percentage Change in Employment in Select Sub-Industries, June 2011 vs. June 2010

-6.2%

2.2%

-2.9%

1.9% 1.7%

6.1%6.0%

-2.9%-3.9%

-7.2%

7.8%

-8%-6%-4%-2%0%2%4%6%8%

10%O

il &

Gas

Ext

ract

ion

Logg

ing

Con

stru

ctio

nof

Bui

ldin

gs

Con

str

uctio

n--

Hea

vy &

Mfg

--P

rimar

yM

etal

sM

fg--

Fabr

icat

edM

etal

s

Mfg

--Woo

dP

rodu

cts\

Tran

spor

t--Tr

uck

Tran

spor

t--W

ater

Hea

lth C

are

Hea

lth C

are-

-Nur

sing

&R

esid

entia

l



% ChangeOil and Gas

Extraction was among the fastest growing industry

sub-segments over the past

year, in % terms

34

Change in Number Employed in Select Sub-Industries, June 2011 vs. June 2010

-22

27

-2

162

5479

22

-26-49

-4

12

(100)

(50)

0

50

100

150

200O

il &

Gas

Ext

ract

ion

Logg

ing

Con

stru

ctio

nof

Bui

ldin

gs

Con

str

uctio

n--

Hea

vy &

Mfg

--P

rimar

yM

etal

sM

fg--

Fabr

icat

edM

etal

s

Mfg

--Woo

dP

rodu

cts\

Tran

spor

t--Tr

uck

Tran

spor

t--W

ater

Hea

lth C

are:

Abu

lato

ryS

erv.

Hea

lth C

are-

-Nur

sing

&R

esid

entia

l



ThousandsIndustries related to

natural resource extraction,

processing and manufacturing are doing well, along with health care

Where Will the Growth in WC Exposure Come From?

35

Industry and Occupation Growth Analysis

36

Fastest Growing Occupations, 2008–2018:Health/Science/Tech Dominate

Sources: US Bureau of Labor Statistics: Occupational Outlook Handbook, 2010-2011 Edition; Insurance Information Institute

OccupationsPercent change

Number of

new jobs(in thousands)

Wages (May 2008 median) Education/training category

Biomedical engineers 72 11.6 $ 77,400 Bachelor's degree

Network systems and data communications analysts

53 155.8 71,100 Bachelor's degree

Home health aides 50 460.9 20,460 Short-term on-the-job training

Personal and home care aides 46 375.8 19,180 Short-term on-the-job training

Financial examiners 41 11.1 70,930 Bachelor's degree

Medical scientists, except epidemiologists

40 44.2 72,590 Doctoral degree

Physician assistants 39 29.2 81,230 Master's degree

Skin care specialists 38 14.7 28,730 Postsecondary vocational award

Biochemists and biophysicists 37 8.7 82,840 Doctoral degree

Athletic trainers 37 6.0 39,640 Bachelor's degree

Physical therapist aides 36 16.7 23,760 Short-term on-the-job training

Dental hygienists 36 62.9 66,570 Associate degree

Veterinary technologists and technicians

36 28.5 28,900 Associate degree

Dental assistants 36 105.6 32,380 Moderate-term on-the-job training

Computer software engineers, applications

34 175.1 85,430 Bachelor's degree

Medical assistants 34 163.9 28,300 Moderate-term on-the-job training

Physical therapist assistants 33 21.2 46,140 Associate degree

Veterinarians 33 19.7 79,050 First professional degree

Self-enrichment education teachers

32 81.3 35,720 Work experience in a related occupation

Compliance officers, except agriculture, construction, health and safety, and transportation

31 80.8 48,890 Long-term on-the-job training

SOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook

WC exposure growth the fastest in the health, science and tech areas

37

Occupations with Largest Numerical Growth, 2008–2018: Health, Services Dominate


Dollar growth in WC exposures should grow the most (at current rate levels) in the health and services industries

Occupations

Number of

new jobs(in thousands) Percent change

Wages (May 2008 median) Education/training category

Registered nurses 581.5 22 $ 62,450 Associate degree

Home health aides 460.9 50 20,460 Short-term on-the-job training

Customer service representatives 399.5 18 29,860 Moderate-term on-the-job training

Combined food preparation and serving workers, including fast food

394.3 15 16,430 Short-term on-the-job training

Personal and home care aides 375.8 46 19,180 Short-term on-the-job training

Retail salespersons 374.7 8 20,510 Short-term on-the-job training

Office clerks, general 358.7 12 25,320 Short-term on-the-job training

Accountants and auditors 279.4 22 59,430 Bachelor's degree

Nursing aides, orderlies, and attendants

276.0 19 23,850 Postsecondary vocational award

Postsecondary teachers 256.9 15 58,830 Doctoral degree

Construction laborers 255.9 20 28,520 Moderate-term on-the-job training

Elementary school teachers, except special education

244.2 16 49,330 Bachelor's degree

Truck drivers, heavy and tractor-trailer


Landscaping and groundskeeping workers


Bookkeeping, accounting, and auditing clerks

212.4 10 32,510 Moderate-term on-the-job training

Executive secretaries and administrative assistants

204.4 13 40,030 Work experience in a related occupation

Management analysts 178.3 24 73,570 Bachelor's or higher degree, plus work experience

Computer software engineers, applications

175.1 34 85,430 Bachelor's degree

Receptionists and information clerks


Carpenters 165.4 13 38,940 Long-term on-the-job trainingSOURCE: BLS Occupational Employment Statistics and Division of Occupational Outlook

39

(Thousands)

704

654

446

322

304

256

236

118

102

788

838

1,431

1,683

2,657

4,017

0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500

Health Care and Social Assistance

Professional, Scientific, Tech. Srvs.

Education Services

Administration, Support, Waste Mgmt & Removal

Accomodation & Food Services

Government

Other Services (excl. Govt.)

Retail Trade

Transportation and Warehousing

Finance & Insurance

Arts, Entertainment & Recreation

Wholesale Trade

Real Estate, Rental & Leasing

Information

Mgmt. of Companies & Enterprises

Health, Science and Education will be

important sources of exposure growth for WC

insurers this decade


Numeric Change in Wage and Salary Employment in Service-Providing Industries: 2008-2018P

45

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

46

Unemployment and Underemployment Rates: Falling 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 rose to 9.2%

in June

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 16.2%

in June 2011

January 2000 through June 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

Jun 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

22

95

1 61 1

17

14

31

12 1

93

12

8 16

79

42

61

21

92

41

73

57

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

Ap

r-1

1M

ay-

11

Jun

-11

Monthly Change in Private Employment

January 2008 through June 2011* (Thousands)

Private Employers Added 2.368 million Jobs Since Jan. 2010 After Having Shed 4.66 Million Jobs in 2009 and 3.81 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs

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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

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

1.435 million for the year

57,000 private sector jobs were created in June

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

49

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

12.1

11.7

10.9

10.6

10.3

10.3

10.0

9.8

9.8

9.8

9.7

9.7

9.6

9.4

9.4

9.3

9.1

9.1

9.1

8.9

8.9

8.7

8.6

8.6

8.2

0

2

4

6

8

10

12

14

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

Une

mpl

oym

ent R

ate

(%)

*Provisional figures for May 2011, seasonally adjusted.

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

In May, 24 states reported over-the-month unemployment rate decreases, 13 states and the

District of Columbia had increases, and 13 had no change.

50

8.2

8.0

8.0

7.9

7.8

7.7

7.6

7.4

7.4

7.4

7.3

7.3

6.9

6.8

6.6

6.6

6.0

6.0

6.0

6.0

5.4

5.3

4.8

4.8

4.1

3.2

0

2

4

6

8

10

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

Une

mpl

oym

ent R

ate

(%)

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

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

In May, 24 states reported over-the-month unemployment rate

decreases, 13 states and the District of Columbia had increases, and 13

had no change.

The unemployment rate in Louisiana was 6.6% in May, well below the 9.0% overall US rate

52

US Unemployment Rate

4.5

%

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

%

8.9

%

8.7

%

8.6

%

8.4

%

8.2

%

8.1

%

9.6

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

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

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

Rising unemployment eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10% in

late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (7/11); Insurance Information Institute

2007:Q1 to 2012:Q4F*

Unemployment forecasts remain stubbornly high

through 2011, but still imply millions of new

jobs will created.

Jobless figures have been revised

downwards for 2011/12

61

Frequency: 1926–2008A Long-Term Drift Downward

Note: Recessions indicated by gray bars.Sources: NCCI from US Bureau of Labor Statistics; National Bureau of Economic Research

Manufacturing – Total Recordable CasesRate of Injury and Illness Cases per 100 Full-Time Workers

0

5

10

15

20

25

30

'26 '29 '32 '35 '39 '42 '45 '48 '52 '55 '58 '61 '65 '68 '71 '74 '78 '81 '84 '87 '91 '94 '97 '00 '04 '07

Workers Compensation Operating Environment

65

The Weak Economy and Soft Market Have Made the Workers Comp Operating

Increasingly Challenging

Workers Compensation Premium Continues Its Sharp DeclineNet Written Premium

$ Billions

Calendar Yearp Preliminary

Source: 1990–2009 Private Carriers, Best's Aggregates & Averages; 2010p, NCCI1996–2010p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

67

Workers Compensation Net Premiums Written and Annual Growth Rates: 1970-2010P

$3.5

$41.

8

$30.

5

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

WC

Ne

t P

rem

ium

s W

ritt

en

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

An

nu

al %

Ch

an

ge

in W

C N

PW

WC Net Premiums Written

Annual % Change in NPW

($ Billions)

Sources: A.M. Best (1973-2009); Insurance Information Institute calculations and estimates for 2010.

WC premium growth hit a 40+ year low in

2009 at -13%. Improving labor

markets began to help in 2010/11.

Workers Comp Rate Changes,2008:Q4 – 2011:Q2

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

-5.5%

-4.6%-4.0%

-4.6%

-3.7% -3.9%

-5.4%

-3.7%-3.4%

-1.6%

2.6%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

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

The Q2 2011 WC rate change was the first

increase in many years

(Percent Change)

Average Approved BureauRates/Loss Costs

12.1

7.4

10.0

2.9

-6.4

-3.2

-6.0

-8.0

-5.4

-2.6

3.5

1.2

4.9

6.6

-6.0-5.1

-5.7-6.6

-3.1-2.0

-1.1

0.2

-10

-5

0

5

10

15

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

Percent

Calendar Year* States approved through 4/23/2010Countrywide approved changes in advisory rates, loss costs, and assigned risk rates as filed by the applicable rating organization

Cumulative1990–1993

+36.3%

Cumulative 2000–2003

+17.1%


-26.2%


-27.8%

*States approved through 4/8/11.Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.

History of Average WC Bureau Rate/Loss Cost Level Changes

Current NCCI Voluntary MarketFiled Rate/Loss Cost ChangesExcludes Law-Only Filings

71

Ratio

States filed through 4/15/2011

•IN and NC filed in cooperation with state rating bureauSource: NCCI

Impact of Discounting on Workers Compensation Premium

72

Policy Yearp PreliminaryDividend ratios are based on calendar year statisticsNCCI benchmark level does not include an underwriting contingency provisionBased on data through 12/31/2010 for the states where NCCI provides ratemaking servicesSource: NCCI

Percent NCCI States—Private Carriers

73

Final Premium vs. Estimated Premium by Policy Effective Quarter: 2006:Q1 – 2009:Q3

Note: WC Statistical Plan audited premium compared to policy-estimated premium. Based on states where NCCI provides ratemaking services, including state funds; excludes high deductible policies and mid-term cancellations.Source: NCCI

6.0%

5.1%4.7%

4.3%

2.4% 2.3%

1.1%

-1.3%

-3.4%

-4.6%-3.8% -3.6%

-2.6%

4.6%

7.1%

-6%

-4%

-2%

0%

2%

4%

6%

8%

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

The recession led to negative premium audit adjustments

Recession

Workers Compensation Combined Ratio: 1973–2012P

96

.8 99

.91

01

.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.

Workers CompensationInvestment Returns

76

Percent

Calendar Yearp=Preliminary

Source: 1990–2009, Annual Statement Data; 2010p, NCCIInvestment Gain on Insurance Transactions includes Other Income•Adjusted to include realized capital gains to be consistent with 1992 and afterSource: NCCI

Average (1990–2009): 14.6%

Investment Gain on Insurance Transactions-to-Premium RatioPrivate Carriers

Calendar Year

Workers Compensation ResultsModest Operating Loss

77

Percent

Calendar Yearp Preliminary

Source: 1990–2009, Annual Statement Data; 2010p, NCCIOperating Gain Equals 1.00 minus (Combined Ratio Less Investment Gain on Insurance Transactions and Other Income)•Adjusted to include realized capital gains to be consistent with 1992 and afterSource: NCCI

Average (1990–2009): 6.3%

Pre-Tax Operating Gain RatioPrivate Carriers

78

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)

$ Billions

Calendar Year

2

5

10

15

1820

21

18

15

12

6

910

9

42

0

5

10

15

20

25

30

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009

2010 Tabular Discount Is $5.5 Billion

Considers all reserve discounts as deficienciesLoss and LAE figures are based on NAIC Annual Statement data for each valuation date and NCCI latest selectionsSource: NCCI analysis

WC Loss and LAE Reserve Deficiency: Private Carriers

Calendar Year Reserve Deficiency Increased in 2010

Workers Compensation Medical & Indemnity Claim Cost Trends

81

Rising Medical Costs Exert Pressure While Indemnity Costs Rise Well Ahead of

Wage Inflation

$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?

4.5%

3.5%2.8%

3.2% 3.5%4.1%

4.6% 4.7%4.0%

4.4% 4.2% 4.0%4.4%

3.7%3.2% 3.4%

5.1%

7.4%

10.1%10.6%

13.5%

5.4%

9.1%

6.1%

5.0%5.4%

2.0%

6.1%

8.8%

7.7%

7.3%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1995 1997 1999 2001 2003 2005 2007 2009

Change in Medical CPI

Change Med Cost per Lost Time Claim

WC Medical Severity Generally Outpaces the Medical CPI Rate—Not in 2010

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

Average annual increase in WC medical severity form 1995 through 2009 was nearly twice the medical CPI (7.6% vs. 3.9%). But in 2010, WC med severity figure plunged. Are small (low severity) med-only claims

becoming lost-time claims?

84

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

3.0

2.2 2.1 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, 3/11 and 7/11 (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 reduced inflationary pressures in 2009/10

Higher energy, commodity and food prices are pushing up inflation in 2011, but not longer turn

inflationary expectations.

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.

85

Excludes Food and Energy

Inpatient Services Rose 8.8%;

Outpatient Services Rose 6.1%

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 ItemsMedical 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.

87

Workers Compensation Lost-Time Claim Frequency Increased in 2010*

-4.4

%

0.3

%

-6.5

%

-4.5

%

0.5

%

-3.9

%

-2.3

%

-4.5

%

-6.9

%

-4.5

%

-4.1

%

-3.7

%

-6.6

%

-4.5

%

-2.1

%

-4.1

%

-5.5

%

3.0%-9

.2%

-4.2

%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

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

(Percent) Lost-Time Claims

Claim frequency increased by 3% in

2010. Improving economy played a role.

Cumulative Change of -56.4%

(1991 – 2009)

2010p: Preliminary based on data valued as of 12/31/2010; *Frequency is defined as the number of lost-time claims per 100,000 workers.1991-2009: Based on data through 12/31/2009, developed to ultimate 2010 figure is adjusted by NCCI. Unadjusted figure is +9%.Based on the states where NCCI provides ratemaking services including state funds; Excludes the effects of deductible policies

Indemnity Claim Cost Trends

91

Indemnity Costs Continue to Rise at a Pace Above Wage Inflation

$1

0.0

$9

.7

$9

.4

$9

.9

$1

0.1

$1

0.7

$1

1.5

$1

2.5

$1

3.8

$1

5.2

$1

6.6

$1

7.1

$1

7.9

$2

2.8

$2

3.0

$2

2.3

$2

0.8

$1

9.9

$1

8.2

$1

8.8

+5.9%

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

+7.7%+9.0%

+10.1%

+10.1%

+9.2%+3.1%+4.6%+1.6%

+3.4%+5.6%

5

7

9

11

13

15

17

19

21

23

25

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010p

IndemnityClaim Cost ($ 000s)

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2009:+4.1%

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 servicesExcludes the effects of deductible policies

Accident Year

-3%

Workers Comp Indemnity Claim Costs Decline in 2010

+8.2%+0.8%

Claiming behavior has changed significantly. Large numbers of lost time,

low severity claims have entered the system—claims that previously were medical only, driving down average

indemnity costs per claim.

Average Indemnity Cost per Lost-Time Claim

4.2%

5.2%5.6%

4.7%

6.3%

2.3%

1.1%

2.7%

4.3%4.7% 4.6%

2.3%

5.9%

7.7%

9.0%

10.1%

4.6%

3.4%

5.6% 5.9%

8.2%

2.0%

-0.6%

3.5%

3.6%

0.8%

-3.0%

1.6%1.7%

10.1%

9.2%

3.1%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1995 1997 1999 2001 2003 2005 2007 2009

Change in CPS Wage Change in Indemnity Cost per Lost-Time Claim

WC Indemnity Severity vs. Wage Inflation, 1995 -2010p

2010p: Preliminary based on data valued as of 12/31/2010; 1991-2009: Based on data through 12/31/2009, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI

WC indemnity severity fell in 2010 even

though wages rose

Annual Change 1991–1993:+1.9%Annual Change 1994–2001:+8.9%Annual Change 2002–2009:+6.7%

Workers Compensation Residual Market Trends

95

Residual Markets Remain Very Small

Percent

Calendar Year

9

1618

17

2224

26

2928

24

43

5

1113 13

1210

86

5 53

17

11

8

0

5

10

15

20

25

30

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 10p

*NCCI Plan states plus DE, IN, MA MI, NJ, NCp: PreliminarySource: NCCI.

WC Insurance Plan States*Premium as a Percentage of Direct Written Premiums

WC Residual Market Share Holds Steady in 2010

101

P/C Insurance Industry Profitability

Profit Recovery Continues

P/C Net Income After Taxes1991–2010 ($ 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

4,6

70

$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

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

P-C Industry 2010 profits were$34.7B vs.$28.7B in 2009, due mainly to $5.7B in realized capital

gains vs. -$7.9B in previous realized capital losses

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

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, 2009 and 2010 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

99.3100.8101.0

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*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

RNW for Major P/C Lines,2000-2009 Average

19.1%

8.5% 8.0% 7.4% 7.0% 6.4%4.7% 4.7%

-3.9%

19.8%

12.2%

7.2%

-5%

0%

5%

10%

15%

20%

Fire InlandMarine

AllOther

CommAuto

CMP MedMal

PPAuto

AllLines

WC OtherLiab

HO Allied

Source: NAIC; Insurance Information Institute

10-year returns for some lines are excellent, though homeowners is a major

laggard, largely due to major catastrophes. WC returns are slipping.

Investment Performance

107

Investments Are a PrincipleSource of Declining Profitability

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

109

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

0.02% 0.04% 0.10% 0.18%0.41%

2.29%

3.00%

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

1.58%

0.71%

4.23%3.91%

0%

1%

2%

3%

4%

5%

6%

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

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

Treasury yield curve remains near its most depressed level

in at least 45 years. Investment income is falling as a result. Fed is unlikely to hike rates until well into 2012.

The End of the Fed’s Quantitative Easing Is Unlikely to Push Interest Rates Up Substantially Given Ongoing Economic Weakness

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

QE2 Target

110

-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*

Financial Strength & Underwriting

111

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

Underwriting, Reserving & Pricing

P/C Insurer Impairments, 1969–20108

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

11

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

Source: A.M. Best Special Report “1969-2010 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.

114

Reasons for US P/C Insurer Impairments, 1969–2010

3.6%4.0%

8.6%

7.3%

7.8%

7.1%

7.8%13.6%

40.3%

Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.

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 (Overstatement of Assets)

Misc.

Sig. Change in Business

115

Top 10 Lines of Business for US P/C Impaired Insurers, 2000–2010

2.0%4.4%

4.8%

6.5%

6.9%

7.7%

8.1%

10.9%

22.2%

26.6%

Source: A.M. Best: 1969-2010 Impairment Review, Special Report, April 2011.

Workers Comp and Pvt. Passenger Auto Account for Nearly Half of the Premium Volume of Impaired Insurers Over the Past Decade

Workers Comp

Financial Guaranty

Pvt. Passenger Auto

Homeowners

Commercial Multiperil

Commercial Auto Liability

Other Liability

Med Mal

SuretyTitle

P/C Premium Growth Primarily Driven by the

Industry’s Underwriting Cycle, Not the Economy

123

124

-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

125

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%)

P/C Net Written Premiums by Line:2008-2010P

Line of Business 2008 2009 2010P 2009-2010P

Change

Personal Auto $150.0B $156.6B $159.1B +1.6%

Homeowners $55.6 $56.9 $61.2 +7.6%

Other Liab (incl. Prod Liab) $42.0 $39.1 $38.2 -2.4%

Workers Compensation $33.8 $30.3 $29.9 -1.3%

Commercial Multi Peril $30.1 $28.5 $28.7 +0.8%

Commercial Auto $23.7 $21.8 $20.9 -4.3%

Fire & Allied Lines (incl EQ) $24.2 $23.4 $22.6 -3.4%

All Other Lines $67.7 $61.9 $61.6 -0.5%

Total P/C Industry $434.9B $418.4B $422.1B +0.9

Source: All lines except WC for 2008-09, A.M. Best; Worker Comp., NCCI; 2010P data, ISO; Private carriers only.

129

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

130

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%

131

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


1999:Q4 = 100

Pricing today is where is was in

Q3:2000 (pre-9/11)

Downward pricing pressure is most pronounced for

larger risks

132

Change in Commercial Rate Renewals, by Line: 2011:Q2


Major Commercial Lines Renewed Mixed in Q2:2011, With Workers Up More than Any Other Line

Percentage Change (%)

0.5%1.0%

2.2%2.6%

-1.5%

-0.7%-0.4% -0.2%

0.3% 0.5%

-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%

Capital/PolicyholderSurplus (US)

134

Shrinkage, but Not Enoughto Trigger Hard Market

136

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.

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwig

Insurance Information Institute Online:

workers compensation overview and outlook for 2011 & beyond

Documents

roe figures

q1 roas

q1 data

millions2005 roe

roe peak

roescombined ratio roe

market turn

q1 profits