80 Years of Property Losses: What Will it Take to Survive to

Next 80 Years?Loss Executives Association Annual Meeting

Tampa, FLFebruary 3, 2011

Download at www.iii.org/presentationsRobert P. Hartwig, Ph.D., CPCU, President & Economist

Insurance Information Institute 110 William Street New York, NY 10038Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org

2

Presentation Outline

80 Years: The Dollars and Cents Paying Claims Over the Long Haul: What Does it Take?

Claims Paying Capital & Capacity Financial Strength

Profits, Profitability and Claims Paying Ability Claims Paying and Investment Performance & Volatility

The “Great Recession” as a case study

External Challenges Shifting tort environment

Claims Paying Capacity and the Economy Insurers must maintain the ability to pay claims even in deep recessions

Catastrophe Loss Trends US Global Importance of reinsurance in claims paying capacity

Q&A

3

CONGRATULATIONS LEA!!

80 YEARS: 1931-2011

7,215,698,210,618

QUIZ: What is the significance of this number?

4

$7,215,698,210,618

ANSWER: This is the dollar value of all claims paid by P/C insurers since 1931.

5

CONGRATULATIONS LEA!!

80 YEARS: 1931-2011

12,539,027,130,890

QUIZ: What is the significance of this number?

6

$12,539,027,130,890

ANSWER: This is the dollar value of claims paid by P/C

insurers since 1931, adjusted for inflation*

*Adjusted to 2010 dollars by the Insurance Information Institute using BLS CPI-U data.

7

Dollar Value of Claims Paid by P/C Insurers to Policyholders, 1925–2010E*

*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.Note: Data are not adjusted for inflation.Sources: Insurance Information Institute research and calculations from A.M. Best data.

$0

$50

$100

$150

$200

$250

$300

$350

$400

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

*200

0

*200

5

2010

E

Since 1925, P/C insurers have paid more than $7.2 trillion in

claims to policyholders

Claim payouts increased

exponentially for decades

Claim payouts in recent years are volatile but have reached a jagged plateau

Catastrophe losses, underwriting cycle

contribute to volatility; Prolonged

soft market, recession to plateau

$ Billions

8

Cumulative Value of Claims Paid by P/C Insurers to Policyholders, 1925–2010E*

*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.Note: Data are not adjusted for inflation.Sources: Insurance Information Institute research and calculations from A.M. Best data.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

*200

0

*200

5

2010

E

It took 60 years for the industry to pay its first $1 trillion in claims in the years since 1925. Today, the industry pays

$1 trillion in claims every 3 to 4 years.

60 years (1925 – 1984)

$ Billions

7 years (1991)

4 years (1995)

5 years (2000)

3 years (2003)

3 years (2006)

4 years (2010)

9

Inflation-Adjusted Dollar Value of Claims Paid by P/C Insurers, 1925–2010E*

*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.Sources: Insurance Information Institute research and calculations from A.M. Best data.

$0

$50

$100

$150

$200

$250

$300

$350

$400

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

E

Since 1925, P/C insurers have paid more than $12.6

trillion in claims to policyholders on an

inflation-adjusted basis

Claim payouts increased

exponentially for decades, but

more erratically in the post-1980 era

On an inflation-adjusted basis, claims paid have fallen to 1990s

levels, reflecting improved underwriting results, exposure

loss during the “Great Recession” and leakage to alternative markets

$ Billions

10

Cumulative Value of Inflation-Adjusted Claims Paid by P/C Insurers, 1925–2010E*

*1925 – 1934 stock companies only. Includes workers compensation state funds 1998-2006.Sources: Insurance Information Institute research and calculations from A.M. Best data.

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

$10,000$11,000$12,000$13,000$14,000

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

*200

0

*200

5

2010

E

Adjusted for inflation, it took 36 years for the

industry to pay its first $1 trillion in claims in the years since 1925. Today, the industry

pays $1 trillion in claims every 2 to 3 years after adjusting for inflation.

36 years (1925 – 1961)

$ Billions

9 years (1970)

7 years (1977)

5 years (1982)

4 years (1986)

4 years (1990)

3 years (1993)

3 years (1996)

4 years (2000)

2 years (2002)

3 years (2005)

3 years (2008)

11

What Does it Take to Pay Out $1 Trillion Every 3-4 Years?

Financial Strength Was the Key to the Past 80 Years— It is the Key to the Next 80

As Well

Capital/PolicyholderSurplus (US)

12

Total Surplus Exhibits Little Cyclicality, While Surplus Leverage

Ratios Influence Cycle

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

$600

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

US Policyholder Surplus:1975–2010*

* As of 9/30/10; **Calculated using annualized net premiums written based on 9-month 2010 data.Source: A.M. Best, ISO, Insurance Information Institute.

“Surplus” is a measure of underwriting capacity. It is

analogous to “Owners Equity” or “Net Worth” in

non-insurance organizations

($ Billions)

The Premium-to-Surplus Ratio Stood at $0.77:$1 as of9/30/10, A Record Low (at Least in Recent History)**

Surplus as of 9/30/10 was a record $544.8B, up from $437.1B at the crisis trough at 3/31/09. Prior

peak was $521.8 as of 9/30/07. Surplus as of 9/30/10 is now 4.4% above 2007 peak; Crisis trough was as

of 3/31/0916.2% below 2007 peak.

14

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.

15

* 2010 NWP and Surplus figures are % changes as of Q3:10 vs Q3:09. Sources: A.M. Best, ISO, Insurance Information Institute

Historically, Hard Markets FollowWhen Surplus “Growth” is Negative*

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

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*

NWP % change Surplus % change

(Percent)

The Relatively Fast Growth of Claims Paying Capital (Surplus) Has Increased the Financial Strength of the Industry Over Time, Enabling it to Better Withstand Cyclical, Financial, Economic and Catastrophe Shocks

Avg. Annual Growth: 1978-2010* PHS: 9.8% NWP:

5.7%

Growth in claims paying capital has great exceeded that of underling

premium growth for decades

16

Ratio of Insured Loss to Surplus for Largest Capital Events Since 1989*

* Ratio is for end-of-quarter surplus immediately prior to event. Date shown is end of quarter prior to event** Date of maximum capital erosion; As of 9/30/09 (latest available) ratio = 5.9%Source: PCS; Insurance Information Institute

3.3%

9.6%

6.9%

10.9%

6.2%

13.8%

16.2%

0%

3%

6%

9%

12%

15%

18%

6/30/1989Hurricane

Hugo

6/30/1992HurricaneAndrew

12/31/93NorthridgeEarthquake

6/30/01 Sept.11 Attacks

6/30/04Florida

Hurricanes

6/30/05Hurricane

Katrina

FinancialCrisis as of3/31/09**

The Financial Crisis at its Peak Ranks as the Largest

“Capital Event” Overthe Past 20+ Years

(Percent)

17

Paid-in Capital, 2005–2010:9M

Source: ISO.

($ Billions)

$14.4

$3.8 $3.2

$12.3

$1.3$6.5

$22.5

$0

$5

$10

$15

$20

$25

2005 2006 2007 2008 2009 2010:Q1

Paid-in capital for insurance operations in 2009:9M was $3.9B. In 2010:9M it was a

record $23.8B

In 2010:H1 One Insurer’s Paid-in Capital Rose by $22.5Bas Part of an Investment in a Non-insurance Business

$23.8The p/c insurance industry has

been able to quickly attract large amounts of capital after natural

disaster (2004/2005) and financial crises (2008) alike. The ability to

attract and retain capital is critical to claims paying over the long

run.

18

Global Reinsurance Capacity Source of Decline in 2008

Global Reinsurance Capacity Shrankin 2008, Mostly Due to Investments

$360

$300

$350

$270

$290

$310

$330

$350

$370

2007 2008 2009E

55% 14%

31%

Source: AonBenfield Reinsurance Market Outlook 2009; Insurance Information Institute estimate for 2009.

Global Reinsurance CapacityFell by an Estimated 17% in 2008

Change inUnrealizedCapital Losses

RealizedCapitalLosses

Hurricanes

Financial Strength is Synonymous With Claims

Paying Ability

19

Industry is Resilient but Cyclical Pattern in P-C Impairment History is Directly Tied to Underwriting,

Reserving & Pricing

P/C Insurer Impairments, 1969–20098

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

7 65

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

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

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

5 of the 11 are Florida companies (1 of these

5 is a title insurer)

21

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

22

Reasons for US P/C Insurer Impairments, 1969–2008

38.1%

14.3%8.1%

7.6%

7.9%

7.0%

9.1%

4.2%

3.7%

Source: A.M. Best: 1969-2008 Impairment Review, Special Report, Apr. 6, 2009

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.

Investment 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

23

The Ability to Pay Claims Begins With Sustained

Profitability

Profits Are Volatile but Resilient in the P/C Insurance Industry

P/C Net Income After Taxes1991–2010:Q3 ($ 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

$2

6,7

00

$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 10:Q3

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

25

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)

26

ROE vs. Equity Cost of Capital:U.S. P/C Insurance:1991-2010:9-Months*

* Return on average surplus in 2008-2010 excluding mortgage and financial guaranty insurers.Source: The Geneva Association, Insurance Information Institute

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

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

ROE Cost of Capital

-13

.2 p

ts +1

.7 p

ts

+2

.3 p

ts

-9.0

pts

-6.4

pts

-3.2

pts

The P/C Insurance Industry Fell WellShort of Its Cost of Capital in 2008 but

Narrowed the Gap in 2009 and 2010

US P/C Insurers Missed Their Cost of Capital by an Average 6.7 Points from

1991 to 2002, but on Target or Better 2003-07, Fell Short in 2008-2010

The Cost of Capital is the Rate of Return Insurers Need to

Attract and Retain Capital to the Business

(Percent)

-2.7

pts

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

Claims Paying Ability Must Be Maintained Over the Cycle

28

Industry’s Ability to Pay Claims Was Unimpaired by Protracted

Period of Weak/Negative Growth

29

-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

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 0.8% through 10:Q3 vs. -4.5% through 09:Q3

30

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%

-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

The long-awaited uptick:

mainly personal lines

31

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.

Claims Paying Ability Must Be Maintained Irrespective of

Investment Climate

32

Investment Volatility Shouldn’t Matter to Policyholders

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

34

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

35

Treasury Yield Curves: Pre-Crisis (July 2007) vs. December 2010

0.09% 0.14% 0.19% 0.29%0.62%

2.66%

3.29%

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

1.93%

0.99%

4.42%4.17%

0%

1%

2%

3%

4%

5%

6%

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

October 2010 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 as economy improves. Investment

income is falling as a result.

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

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

QE2 Target

36

-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*

37*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

38

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.

40

Strength Through Underwriting: Underwriting Profits Support

Claims Paying Capability When Investments Can’t

41

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

Underwriting Gain (Loss)1975–2010:Q3*

* Includes mortgage and financial guarantee 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 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

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)

43

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

45

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

Legal Liability & Tort Environment Can Stress

Claims Paying Ability

46

Tort Trends Have a Major Impact on the Price/Availability of Insurance

47

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

$0

$50

$100

$150

$200

$250

$300

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

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

Sources: Towers Watson, 2010 Update on US Tort Cost Trends, Appendix 1A

Tort Costs Have Remained High but Relatively Stable Since the mid-2000s. As a Share of GDP they Should Fall as

the Economy Expands

Cost of US Tort System ($ Billions)$1

29

$130 $1

41

$144

$148 $1

59

$156

$156 $1

67

$169 $1

80 $205 $2

33 $246 $2

60

$261

$247

$252

$255

$248 $2

70

$259 $2

70

$0

$50

$100

$150

$200

$250

$300

90 92 94 96 98 00 02 04 06 08

10E

12E

* Restated in 2009 dollars, based on CPI.Source: Towers Watson, 2010 Update on US Tort Cost Trends.

Per capita “tort tax” was $808 in 2009, up from $793 in 2000*

Tort costs consumed 1.74% of GDP in 2009, down from 2.21% in 2003

Business Leaders Ranking of Liability Systems in 2010

Best States

1. Delaware

2. North Dakota

3. Nebraska

4. Indiana

5. Iowa

6. Virginia

7. Utah

8. Colorado

9. Massachusetts

10. South Dakota

Worst States

41. New Mexico

42. Florida

43. Montana

44. Arkansas

45. Illinois

46. California

47. Alabama

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2010 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2010

North Dakota Massachusetts South Dakota

Drop-offs

Maine Vermont Kansas

Newly Notorious

New Mexico Montana Arkansas

Rising Above

Texas South Carolina Hawaii

Midwest/West has mix of good and bad states.

50

The Nation’s Judicial Hellholes: 2010

Source: American Tort Reform Association; Insurance Information Institute

South Florida

West VirginiaIllinoisCook County

NevadaClark County

Watch List Madison County, IL Atlantic County, NJ St. Landry Parish,

LA District of Columbia NYC & Albany, NY St. Clair County, IL

Dishonorable Mention

MI Supreme Court City of St. Louis CO Supreme Court

CaliforniaLos Angeles

and Humboldt Counties

Philadelphia

Excess Liability Market CapacityNorth America ($ Billions)

Source: Marsh, 2008 Limits of Liability Report

$2

.01

5

$1

.66

0

$1

.64

5

$1

.57

0

$1

.53

5

$1

.42

5

$1

.57

5

$1

.71

0

$2

.04

5

$1

.94

1

$2

.01

1

$1

.72

1

$1

.40

5

$1

.33

4

$1

.43

2

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

Claims Paying Ability and the Economy

52

Insurers Must Have the Ability to Pay Claims Even in Times of Economic

Turmoil and Panic

53

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 1/11; 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

%

3.2

%

3.2

%

3.3

%

3.3

%

3.5

%

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.

54

Inflation Rate (CPI-U), 1925–2010*

Sources: US Bureau of Labor Statistics; Insurance Information Institute

(15)

(10)

(5)

0

5

10

15

20

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

*200

0

*200

5

2010

E

Rate of inflation can dramatically impact claim severities and

trends

Deflation during the Great

Depression

Very low inflation during the “Great

Recession”

Inflation Rate (%) High inflation during the 1970s and early 1980s increased claim

severities significantly

55

Capital/Capacity Are Not Enough

Risk Management Matters

56

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

57

Examples Where Attention Risk Management Reduces Claims

Workplace Safety

Automobile and Highway Safety

Aviation

Marine

Health & Environmental Safety

Food Safety

Medicine

Energy

Corporate Governance (D&O)

58

Catastrophic Loss –Catastrophe Losses Trends Are

Trending Adversely

59

$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

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*20??

US Insured Catastrophe Losses

*Estimate from Munich Re.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

First Half 2010 CAT

Losses Were Down 19% or $1.4B from

first half 2009

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

60

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 61

There were a record 247 natural disaster events in

the US in 2010

Sources: MR NatCatSERVICE

Significant Natural Catastrophes, 1950 – 2010

Number of Events ($1 billion economic loss and/or 50 fatalities)

65

There were 5 significant natural catastrophes in the

US in 2010

Number of U.S. Landfalling Tropical Cyclones,1900 – 2010

Source:NOAA; Munich Re 67

Only 1 tropical cyclone, Bonnie, made landfall in the

US in 2010

Source: Property Claims Service, MR NatCatSERVICE

U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals)

69

Insured winter storm losses in 2010 are one of the top five in US history, totaling

$2.6 billion in 2010

U.S. Thunderstorm Loss Trends, 1980 – 2010 (Annual Totals)

Source: Property Claims Service, MR NatCatSERVICE 70

Thunderstorm losses in 2010 totaled $9.5 billion, the

3rd highest ever

Average thunderstorm losses have now quintupled since

the early 1980s

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss

73

Top 12 Most Costly Disastersin US History

(Insured Losses, 2009, $ Billions)

Sources: PCS; Insurance Information Institute inflation adjustments.

$11.3 $12.6$17.2

$22.2 $22.7

$45.1

$8.5$8.1$6.6$6.2$5.2$4.2

$0$5

$10$15$20$25$30$35$40$45$50

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

Andrew(1992)

9/11Attacks(2001)

Katrina(2005)

8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;

8 of the Top 12 Disasters Affected FL

Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US

and World History

Share of Losses Paid by Reinsurers for Major Catastrophic Events

30%25%

60%

20%

45%

33%

0%

10%

20%

30%

40%

50%

60%

70%

HurricaneHugo (1989)

HurricaneAndrew (1992)

Sept. 11Terrorist

Attack (2001)

2004Hurricane

Season

2005Hurricane

Season

2008 TexasHurricane

Source: Wharton Risk Center, Disaster Insurance Project, Renaissance Re, Insurance Information Institute.

Reinsurance plays a very large role in claims payouts

associated with major catastrophes

75

Total Value of Insured Coastal Exposure

(2007, $ Billions)

Source: AIR Worldwide

$224.4$191.9

$158.8$146.9$132.8

$92.5$85.6$60.6$55.7$51.8$54.1

$14.9

$479.9$635.5

$772.8$895.1

$2,378.9$2,458.6

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

$895B Insured Coastal

Exposure in Texas in 2007

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B

in insured coastal exposure

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

76

US Residual Market Exposure to Loss

$372.3$430.5 $419.5

$656.7

$771.9

$696.4

$292.0$244.2$221.3

$281.8

$150.0

$54.7

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1990 1995 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: PIPSO; Insurance Information Institute

Hurricane Andrew

4 Florida Hurricanes

Katrina, Rita, and Wilma

In the 19-year Period Between 1990 and 2008, Total Exposure to Loss in the Residual Market (FAIR & Beach/Windstorm) Plans Has Surged from

$54.7B in 1990 to $696.4B in 2008

($ Billions)

77

Global Catastrophe Loss Trends

Claims Paying Capacity Will Need to Increase in the Future if Current

Disaster Trends Continue

2010 2009

Average of the last 10

years2000-2009

Average of the last 30

years1980-2009

Number of events 950 900 785 615

Overall losses (US$m)

130,000 60,000 110,000 95,000

Insured losses (US$m)

37,000 22,000 35,000 23,000

Fatalities 295,000 11,000 77,000 66,000

Natural Catastrophes, 2010Overview and comparison with previous years

Source: Geo Risks Research, NatCatSERVICE 78

The number and cost of natural catastrophes on a global scale was far above

average in 2010

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Hydrological events(flood, mass movement)

Climatological events(extreme temperature, drought, wildfire)

Selection of significant loss events (see table)

Natural catastrophes

Volcanic eruption Island, March/April

Heat wave/ WildfiresRussia, July-Sept.

Severe storms, floodsUnited States, 13 -15 March

EarthquakeHaiti, 12 Jan.

Hurricane Karl, floodsMexico, 15-21 Sept.

Earthquake, tsunamiChile, 27 Feb.

Winter Storm Xynthia, storm surgeWestern Europe, 26-28 Feb.

Flash floodsFrance, 15 June

Floods, flash floodsPakistan, July-Sept.

Earthquake China, 13 April

FloodsEastern Europe, 2-12 June

Floods, flash floods,landslidesChina, 13-29 June

Landslides, flash floodsChina, 7 Aug.

Hailstorms, severe stormsAustralia, 22 March/6-7 March

EarthquakeNew Zealand, 4 Sept.

Severe storms, hailUnited States, 12-16 May

Severe storms, tornadoes, floodsUnited States, 30 April – 3 May

Typhoon MegiChina, Philippines,Taiwan, 18-24 Oct.

FloodsAustralia, Dec.

Natural Catastrophes, 2010950 loss events

Source: Geo Risks Research, NatCatSERVICE 79

Insurance is a global business and claims paying ability

is interconnected via reinsurance

markets

41%

Natural Catastrophes, 2010Insured losses US$ 37bn - % distribution by continent

22%

15%

<1%

2%

20%

Source: Geo Risks Research, NatCatSERVICE 81

US accounts for the greatest share of

losses over the past 30 years, but more losses in the future

will originate in developing countries

66% 20%

9%

2%3%

<1%

Source: Geo Risks Research, NatCatSERVICE 82

Natural Catastrophes, 1980 - 2009

US accounts for the greatest share of

losses over the past 30 years, but more losses in the future

will originate in developing countries

Costliest Natural Catastrophes Since 1950Rank by insured losses - in values of 2010

Year Event Region Insured lossUS$m, 2010 values

2005 Hurricane Katrina USA 69,900

1992 Hurricane Andrew USA 26,500

1994 EQ Northridge USA 22,500

2008 Hurricane Ike USA, Caribbean 18,700

2004 Hurricane Ivan USA, Caribbean 16,000

2005 Hurricane Wilma USA, Mexico 14,000

2005 Hurricane Rita USA 13,500

1991 Typhoon Mireille Japan 11,200

2004 Hurricane Charley USA, Caribbean 9,250

1989 Hurricane Hugo USA, Caribeean 9,000

1990 Winter Storm Daria Europe 8,500

2010 Earthquake Chile 8,000

Source: Geo Risks Research, NatCatSERVICE 83© 2011 Munich Re

Natural Catastrophes Worldwide, 1980 – 2010 (Number of events with trend)

Number

Meteorological events(Storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami,

volcanic eruption)

200

400

600

800

1 000

1 200

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

Source: Geo Risks Research, NatCatSERVICE 84© 2011 Munich Re

Increased claims paying capacity will be required on

a global scale if current trends continue (as is

expected)

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