ipc 0914 CLOSE 09-12-14 · 2015-01-28 · Companies Inc. reporting results. Travelers reported second quarter after-tax operating income of $673 million, down 18% from the $816 million

Please see General Disclaimers on the last page of this report.

Current Environment ............................................................................................ 1

Industry Profile ...................................................................................................... 9

Industry Trends ..................................................................................................... 9

How the Industry Operates ............................................................................... 21

Key Industry Ratios and Statistics ................................................................... 30

How to Analyze a Property-Casualty Insurance Company ......................... 31

Glossary ................................................................................................................ 34

Industry References ........................................................................................... 36

Comparative Company Analysis ...................................................................... 37

This issue updates the one dated April 2014.

Industry Surveys Insurance: Property-Casualty Catherine A. Seifert, Financials Sector Equity Analyst

SEPTEMBER 2014

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S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into a computer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; Charles L. Teschner, Jr., Executive Vice President, Global Strategy; and Kenneth M. Vittor, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Copyright © 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, S&P SMALLCAP 600, and S&P EUROPE 350 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

INDUSTRY SURVEYS INSURANCE: PROPERTY-CASUALTY / SEPTEMBER 2014 1

CURRENT ENVIRONMENT

Insurance fundamentals: on a downward slope?

The second-quarter 2014 earnings reporting season kicked off in late July 2014 with The Travelers Companies Inc. reporting results. Travelers reported second quarter after-tax operating income of $673 million, down 18% from the $816 million it reported in the second quarter of 2013. The company has been using its excess capital to buy back shares, a trend that continued in the second quarter of 2014. Thanks to a buyback-driven 9% decline in share count, Travelers posted operating earnings of $1.93 a share for the quarter, down 9% from $2.13 a share in the second quarter of 2013.

Travelers’ underwriting results in the second quarter of 2014 were negatively impacted by an uptick in weather-related and catastrophe losses. However, the company noted that it is receiving rate that is adequate to cover loss costs in most lines of business. Simply put, the company is getting premium rates for many lines of business that are adequate to offset claim costs and still provide the company with an underwriting profit. However, the increasingly erratic and severe weather in recent years has affected insurance companies, including Travelers, and this pattern shows no sign of subsiding any time soon.

Against this backdrop of a softening of rate adequacy (at least for some insurers) and an increase in weather losses (that might not be covered by reinsurance and thus would impact insurers’ profitability), many investors may be wondering if there is any more room for further premium pricing improvement in the broader property-casualty underwriting arena. The answer is: it depends. S&P Capital IQ (S&P) has a positive fundamental outlook on the property-casualty insurance industry, largely because we think the industry’s fundamentals remain fairly healthy. Moreover, most segments of this industry have emerged from the credit crisis relatively unscathed, from both a financial and a regulatory standpoint. Although they now have a degree of federal regulatory oversight, most insurers have seen little to no change in their business models. Finally, while this period of prolonged low interest rates has crimped investment income growth for all insurers, we note that the property-casualty industry has a better “match” between their assets and liabilities since they are able to re-price their policies every six to 12 months. To put this another way, life insurers selling a variable annuity of whole life product with certain embedded guarantees have struggled during this recent interest rate cycle since (in many cases) the rate of the guarantee (or the liability) was greater than the rate achieved on invested assets used to fund that liability. Property-casualty insurers were certainly not immune to the impact of low interest rates, but since their policies typically come up for renewal every six to 12 months, they are able (theoretically) to adjust their premium rates to reflect changes in interest rates.

We expect underwriting results for most insurers in our coverage universe to be relatively healthy for the remainder of 2014. We think the focus will be on insurers’ top-line results, specifically the degree to which both premium and investment revenues rise.

The pricing cycle Central to an analysis of the property-casualty insurance industry is an examination of the so-called pricing cycle. (For more detailed information on this, please refer to the “How the Industry Operates” section of this Survey.) The pricing cycle is the tendency of property and casualty insurance premiums, profits, and availability of coverage to rise and fall with some regularity over time. A cycle begins when insurers tighten their underwriting standards and sharply raise premiums after a period of severe underwriting losses or negative stocks to capital (i.e., after a significant catastrophe or a sharp rise in investment losses, for example). Stricter standards and higher premium rates lead to an increase in profits and accumulation of capital. The increase in capital or underwriting capacity increases competition, which in turn drives premium rates down and relaxes underwriting standards, thereby causing underwriting losses and setting the stage for the cycle to begin again.

2 INSURANCE: PROPERTY-CASUALTY / SEPTEMBER 2014 INDUSTRY SURVEYS

While net written premium growth has gradually trended upward—rising 2.9% in 2011, 3.4% in 2012, and 4.6% in 2013—we would not characterize market conditions as “hard.” Rather, we would characterize the insurance pricing environment as “improving,” with a number of lines of business achieving rate adequacy (i.e., premiums are covering loss costs). Insurers grow premium revenues in two ways: through rate increases and through exposure growth. While rates for many lines of coverage have started to trend upward, the other variable in the market cycle equation is exposure growth (i.e., the ability to expand or write new business). This will depend to a large degree on the rebound in economic activity. Many insurers in our coverage universe have held the line on pricing and have achieved rate increases. For some, however, the offset has been a decline in retention levels. During 2013, retention levels varied rather widely among carriers. Some of this is intentional: as firms seek to manage their risk profile and businesses, they may let certain business go.

UNDERWRITING RESULTS WERE MIXED IN THE FIRST QUARTER OF 2014

The Insurance Services Office Inc. (ISO), an industry research and trade organization, released preliminary industry financial results for the first quarter of 2014 on July 16, 2014. Insurers in the ISO study (representing about 96% of industry participants) reported net written premiums of $121.4 billion in the three months ended March 31, 2014, up 3.6% from $117.2 billion in the same period in 2013. Results

(which are indicative of the coming 12 months’ earned premium levels) varied slightly by type of insurer. Personal lines writers (whose results tend to be more stable, since auto and homeowners’ insurance usually are mandated types of coverage) posted a 5.4% rise in written premiums, year over year, in the first quarter of 2014. Balanced lines underwriters (who write both personal and commercial lines of coverage) posted a 3.4% rise in net written premiums. Commercial lines writers, whose results have been under pressure, reported only a 1.5% rise in net written premiums in the first quarter of 2014.

Earned premiums for the industry totaled $117.9 billion in the first quarter of 2014, up 4.3% from $113.09 billion in the same period in 2013. The industry also saw an increase in earned premiums in 2013 (to $467.9 billion, up 4.2%); 2012 (to $448.9 billion, up 3.3%); and in 2011 (to $434.4 billion, up 2.9%). These results still contrast rather sharply with the “hard” market that ensued after the September 11 terrorist attacks: earned premiums advanced 11.9% in 2002, 10.9% in 2003, and 7.1% in 2004.

Investment results improved slightly despite a persistently low interest rate environment Investment income is an important revenue source for property-casualty insurers, historically accounting for 15%–20% (and sometimes more) of total revenues. Investment results for insurers in the ISO study showed a slight advance, year to year, in the first quarter of 2014. Net investment income (a revenue component) dropped 1.8% to about $11.2 billion in the first quarter of 2014, from $11.4 billion in the 2013 interim. For most insurers, cash flows available for investment stabilized and for some improved, though persistent low investment yields pressured investment income. We expect the rise in interest rates to gradually flow through to higher investment yields and, ultimately, investment income for the industry, although not until at least 2015. Net realized investment gains, which nearly doubled in 2013 ($11.4 billion, from gains of $6.2 billion in 2012), also advanced rather sharply in the first quarter of 2014. Industry-wide net capital gains exceeded $2.9 billion in the first three months of 2014, more than double the $1.4 billion of gains posted in the first quarter of 2013. [Note: Analysts’ earnings estimates typically exclude realized investment gains and/or losses.]

Underwriting results rebound Loss costs are the largest expense item for an insurer, so a change in the direction of these expenses can have a big impact on underwriting results. Trends in loss costs vary from firm to firm, sometimes significantly,

Table B04: P-C operating results

PROPERTY-CASUALTY OPERATING RESULTS(In millions of dollars)

NET NET PRETAX

UNDERWRITING INVESTMENT OPERATING

YEAR GAIN (LOSS) INCOME INCOME

2014* 2,235 11,180 13,6542013* 4,521 11,413 15,947

2013 15,509 47,352 64,3212012 (15,366) 48,007 35,0322011 (36,229) 49,194 15,4282010 (10,514) 47,567 38,1702009 (2,981) 47,057 44,9832008 (21,173) 51,466 30,6452007 19,304 55,052 73,3632006 31,115 52,309 84,6072005 (5,612) 49,729 45,1452004 4,263 39,966 43,9632003 (4,853) 38,648 33,7522002 (30,840) 37,225 5,581*Three months ended March. Source: Insurance Services Office.


depending on their mix of business and exposure to catastrophe claims. Thus, a commercial lines insurer with a book of business heavily weighted with casualty (or liability) lines of business will not likely be as affected by catastrophe losses as a personal lines carrier with a large book of homeowners business.

Incurred losses and loss adjustment expenses during the first quarter of 2014 totaled $80.8 billion, up 8.6% from $74.4 billion in the first quarter of 2013. ISO estimated that insured net losses and loss adjustment expenses from catastrophes in the first quarter of 2014 rose to $3.2 billion, from $2.5 billion in the 2013 interim.

Recent underwriting results also benefited from favorable development of loss and loss adjustment expense (LAE) reserves. Insurers in the ISO survey reported $16 billion of favorable development in 2013, compared with $10.2 billion of favorable development in 2012. Put simply, during 2013, insurers had put

aside $16 billion in excess of what they needed to pay certain claims. The release of these reserves (which flow back into the income statement) also helped insurer profitability in 2013. At the end of the first quarter of 2014, insurers in the ISO survey reported loss and LAE reserves of $574.6 billion, down fractionally from $576.5 billion on March 31, 2013.

The combination of modest top-line growth and an erosion in the claim environment during the first quarter of 2014 led to insurers posting a $2.2 billion pretax underwriting gain in this period, down rather sharply from a pretax underwriting gain of $4.5 billion in the first quarter of 2013.

A key performance gauge improves The combined ratio is a key measure of an insurer’s underwriting performance. As its name implies, it is a combination of several ratios: the loss ratio (incurred losses divided by earned premiums), the expense ratio (other underwriting expenses divided by written premiums), and, where applicable, the dividend ratio. A combined ratio of less than 100% indicates an underwriting profit, while one in excess of 100% indicates an underwriting loss.

During the first quarter of 2014, insurers in the ISO study reported a deterioration in their combined ratio, which ended the first three months of 2014 at a still-profitable 97.3%, versus 94.9% a year earlier. The deterioration was broad-based, though results varied by type of insurer. Commercial lines writers experienced the greatest deterioration in their underwriting results, with a first quarter 2014 aggregate combined ratio of 95.0%, compared with 91.5% in the first quarter of 2013. Personal lines writers experienced the second greatest deterioration in the first quarter of 2014, as their combined ratio ended the quarter at 98.5%, compared with 96.2% recorded in the first three months of 2013. Balanced lines writers saw the least amount of deterioration in underwriting results during the first quarter of 2014. This group’s combined ratio slipped modestly, to 98.2% on March 31, 2014, from 97.7% in the year-ago first quarter.

Surplus remains abundant Property-casualty insurers in the ISO study reported consolidated net surplus (or net worth) of $662.0 billion as of March 31, 2014. This measure of the industry’s capital was up 1.3% from year-end 2013, (when surplus totaled $653.3); and up 8.6% from a year ago (when surplus equaled $609.8). Because insurers leverage their surplus to write business, the ratio of net written premiums to policyholders’ surplus is a good way to measure industry leverage (or lack thereof). The premium-to-surplus ratio stood at 0.73-to-1 on March 31, 2014, unchanged from December 31, 2013, and down slightly from 0.76-to-1 as of March 31,

Chart H06: UNDERWRITING PROFITS

(60)

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(20)

(10)

0

10

20

30

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1999 00 01 02 03 04 05 06 07 08 09 10 11 12 2013 '13* '14*

UNDERWRITING PROFITS(In billions of dollars)

*Three months ended March.Source: Insurance Services Office.


2013. In other words, insurers, on average, on March 31, 2014, were writing $0.73 worth of premiums for every $1.00 of capital. According to the ISO study, the 0.73 premium-to-surplus ratio first reached on December 31, 2013, was a record low, looking at the quarterly data dating back to 1959. The year-end 2013 and first quarter of 2014 premium-to-surplus ratio of 0.73 is only about half the 1.45 average premium-to-surplus ratio for the 55 years from 1959 to 2013.

To put this in perspective, if we assume insurers would “typically” (and at this juncture, theoretically) leverage their surplus two times, we estimate the industry had more than $375 billion of excess underwriting capacity on December 31, 2013, a factor that may limit the degree to which premium rates rise for most lines of coverage. We calculate this so-called excess underwriting capacity by using the following 2013 data points: the $481.9 billion in net written premiums for the 12 months ended March 31, 2014, and the $662.0 billion surplus on March 31, 2014. The actual amount of surplus required to support the industry’s existing level of written premiums is approximately $241.0 billion, according to our estimates. Subtracting this minimum level of surplus from actual surplus leaves us with about421 billion in surplus that, for purposes of this exercise, can be deemed “excess.” This so-called excess capital could support $840 billion or so of written premiums, much more than the industry is currently writing.

Obviously, a significant change in the direction of underwriting profits or investment results could extract some of this excess capacity from the marketplace. Another variable in the supply/demand equation for insurance is the degree to which an economic recovery in 2014 and beyond will spur demand for insurance (particularly in the commercial lines arena).

REINSURANCE UPDATE

The reinsurance industry may be on the cusp of a weakening in rates for many lines of coverage. Like their partners in the insurance industry, many reinsurers have seen their capital levels increase amid decent top-line growth and relatively favorable claim trends. The other competitive factor in this market is the presence of alternative risk transfer mechanisms and capital sources. The supply and demand curves for reinsurance are also similar to those in the insurance market, although the reinsurance market is more fluid. (For additional information on the reinsurance industry, refer to the “Industry Trends” and “How the Industry Operates” sections of this Survey.)

Although most reinsurers are enduring a competitive pricing environment like their primary insurance counterparts, the nature of the competitive forces is slightly different for reinsurers. Unlike most primary insurers, reinsurers face competition from government-sponsored programs and from alternative risk transfer mechanisms. To illustrate this point, homeowners’ insurance for consumers is available from insurance companies, who compete for consumers’ business (usually based on price). The insurer that writes those homeowners’ policies can transfer its risk through a reinsurer, through a government-sponsored entity (like state-funded catastrophe funds) in some cases, or through the capital markets (via the issuance of catastrophe bonds). Companies use a combination of these as part of their risk-management strategies.

According to the Reinsurance Association of America (RAA), an industry research organization, net written premiums among its member companies (which represent approximately two-thirds of reinsurance coverage provided by US reinsurers) declined to $61.0 billion in 2013, from $74.6 billion in 2012. (We caution against using these figures as a “run rate” since they appear to include a number of nonrecurring transactions.) Earned premiums (which constitute the amount of premiums recorded on the income statement as a revenue component) totaled $66.3 billion in 2013, compared with $70.6 billion of earned premiums reported in 2012.

Underwriting results for this group of reinsurers improved on a year-over-year basis in 2013. This largely reflected the 18.0% drop in loss and loss adjustment expenses incurred by this representative group of companies. Reinsurers in the RAA study reported incurred loss and loss adjustment expenses (LAE) of $37.0 billion in 2013, down from $45.0 billion in 2013.


The combination of improved claim trends and well-contained underwriting expenses led to almost a tripling of the industry’s underwriting profit in 2013. Reinsurers in the RAA study reported a nearly $9 billion underwriting gain in 2013, compared with an underwriting gain of $3.1 billion in 2012.

Investment results improved in 2013 Investment activities, which are an important revenue and profit source for reinsurers, improved in 2013. Reinsurers in the RAA study reported a mere 1.4% rise in investment income in 2013, to $21.2 billion from $20.9 billion. However, realized investment gains of nearly $2.5 billion contrasted with investment losses of some $898.9 million.

The combination of improved underwriting profits and a turnaround in investment activities helped to produce a 33% rise in pretax profits for reinsurers in the RAA study. This group earned $30.2 billion in 2013, up from pretax profits of $22.8 billion in 2012. After paying taxes of $3.3 billion (or 10.9% of pretax profits), versus $3.7 billion (16.2%) in 2012, the reinsurers in the RAA study earned $26.9 billion in 2013, up from net income of $19.1 billion in 2012.

SECTOR STOCK PERFORMANCE WEAKENS SLIGHTLY IN 2014

After rising 31.6% in 2013 (versus a 30.1% rise in the S&P 1500 SuperComposite stock index), the financial services sector has slightly underperformed the broader market year to date through August 8, 2014, when the S&P Financials index rose 2.0% while the S&P 1500 index was up 4.1%. Within the sector, performance trends varied. In 2013, the Diversified Capital Markets, Life and Health Insurance, and Specialized Finance sub-industry indexes were the best performers, rising 80.2%, 60.3%, and 59.6%, respectively. The weakest performers for the year were all in the Real Estate Investment Trust (REIT) sub-industries: Residential REITs and Retail REITs declined 9.1% and 3.3%, respectively, and Specialized REITs rose only 0.2%. The sector’s year-to-date performance (through August 8, 2014) reflected both a continuation of some of the trends in 2014 and a reversal of others. The strength of the Diversified Capital Markets sub-industry index continued into 2014, and the group rose 28%. An array of REIT sub-industry groups (including Office, Residential and Retail REITS) reversed course in 2014 and began to strengthen.

In the insurance underwriting space, the Life and Health Insurance sub-industry index turned in the strongest performance in 2013, rising 60.3%. Year to date through August 8, 2014, the life and health insurance space gave back some of its earlier gains, declining 3.6%. The second best-performing insurance group in 2013 was the Multiline Insurance sub-industry index, which rose 46.0% in 2013, following a strong performance in 2012 (+24.8%). This group’s performance largely reflected the turnarounds at American International Group (discussed in more detail later in this section) and The Hartford Financial Services Group. Year to date through August 8, 2014, the multiline space retreated 2.0%. The Property & Casualty Insurance sub-industry index had the third-best performance among insurance groups in 2013, rising 36.5%, but then gave back some of its earlier gains by retreating 2.8%, year to date, through August 8, 2014. The Reinsurance sub-industry index also turned in a decent performance in 2013 that continued into 2014: it rose 34.0% during 2013 and another 3.3% year to date through August 8, 2014. The Insurance Brokers sub-industry was a relative laggard in 2012, but then outperformed the broader market in 2013 by rising 43.6%, though it has advanced only 1.6% year to date through August 8, 2014.

AIG COMPLETES ITS TRANSFORMATION AS IT WELCOMES A NEW CEO

“Under Bob Benmosche’s incomparable leadership and vision, AIG has achieved remarkable, and at times, unthinkable, milestones and successes. Bob worked tirelessly to transform AIG and position it for this next chapter: fully repaying the $182 billion of government support AIG received in 2008, plus a profit of $22.7 billion, the largest turnaround in the history of corporate America…”

Those words, spoken by AIG Chairman Robert Miller as he announced the retirement of AIG CEO Robert Benmosche (who is being replace by current AIG executive Peter Hancock on September 1, 2014), accurately summed up Mr. Benmosche’s tenure at AIG from mid-2009 (when AIG shares were trading at around $23 a share) to now (when the shares are trading at approximately $54 a share).


The last significant step in AIG’s recovery occurred in mid-May 2014 when it completed the sale of International Lease Finance Corp. (ILFC), its airline leasing unit (determined to be a non-core asset), to AerCap Holdings N.V. (AER), another leasing concern. In the transaction, AerCap paid AIG $3 billion in cash and issued 97,560,976 new common shares (with a value of about $4.6 billion as of mid-May 2014). The combination of ILFC and AerCap will likely create the largest airline leasing firm in the world. This deal follows an earlier, aborted deal involving the sale of ILFC to a Chinese-based consortium that fell apart in the fall of 2013.

AIG also made progress on its capital strengthening and management initiatives, and announced on August 1, 2013, that it had achieved sufficient capital adequacy to resume the payment of cash dividends and the repurchase of its stock. AIG declared a quarterly cash dividend of $0.10 a share, its first since its near-death spiral amid the credit crisis. Further, the company authorized the repurchase of up to $1 billion of its common stock. These actions, while seemingly routine for most other insurers, are remarkable when one considers that AIG at one point was on financial life support from various government entities for upwards of $182 billion.

AIG’s progress so far Perhaps the most significant milestone occurred on December 14, 2012, when the US Treasury ended its ownership of AIG through the sale of some 34.2 million shares (at $32.50 a share) for proceeds of some $7.6 billion. This followed several earlier sales in 2012, including on October 2 (the sale of some $20.7 billion of AIG shares), August 8 (some $5.7 billion of shares), early May ($5.8 billion of shares), and March 8 ($6 billion of shares). At one point, the US Treasury had controlled 92% of the voting power of AIG common stock. However, in the end, the US Treasury realized a $22.7 billion gain on its investment in AIG.

Central to AIG’s rescue and subsequent restructuring has been the sale of assets as the company reformulates itself around its core (and recently re-branded) AIG property-casualty unit and its SunAmerica life and retirement services unit. So far, the company has made significant progress in selling an array of non-core units.

In December 2012, AIG completed the sale of its remaining interest in AIA Group, an Asian life insurer, for proceeds of $6.5 billion and a net gain of $240 million. In early February 2011, AIG completed the sale of two Japan-based life insurance units—AIG Star Life Insurance Co. and AIG Edison Life Insurance Co.—to Prudential Financial Group Inc. for $4.8 billion. In late August 2011, AIG completed the sale of Nan Shan Life Insurance Co. Ltd., its Taiwan-based life insurance company, for proceeds of some $2 billion.

One of the more notable turnarounds is happening at the AIG Financial Products Group. This unit, which sold credit default swaps and became the source of AIG’s liquidity and solvency issues during the credit crisis, had some 44,000 outstanding trade positions. The notional value of those outstanding derivatives totaled some $2 trillion on September 30, 2008. Since then, this group is being wound down as part of AIG’s restructuring.

The wind-down of the AIG Financial Products derivatives book and the sale of ILFC will help AIG de-leverage its balance sheet. This is critical, as AIG faces heightened regulatory scrutiny that will likely limit the extent to which it may leverage its capital. AIG received notice on July 8, 2013, from the US Treasury’s Financial Stability Oversight Council that it had been designated as a systemically important financial institution (or SIFI) pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. AIG did not contest the designation.

So how is AIG doing? In our view, AIG has made significant progress at turning itself around and we think credit for “righting the ship” belongs to CEO Robert Benmosche. Although the company’s financial condition remains somewhat volatile and its quarterly financial results are often laced with an array of nonrecurring items and charges, we nevertheless believe the underpinnings of the company are improving.

AIG’s recent history: the problems and where they began The company’s woes began a number of years ago, with investigations by the New York Attorney General and the Securities and Exchange Commission (SEC) into AIG’s use of nontraditional insurance products and


certain assumed reinsurance transactions (sometimes called finite reinsurance). This culminated in a number of events, including a management shakeup that led to the resignation of AIG’s long-time CEO Maurice “Hank” Greenberg; a write-down against earnings from 2000–2004 totaling nearly $4 billion; and a write-down of shareholders’ equity of $2.26 billion. During 2005, AIG incurred after-tax charges totaling $1.5 billion to settle its numerous regulatory issues and set aside $1.19 billion to boost loss reserves.

During 2007, AIG’s management team (led at that point by long-time AIG employee Martin Sullivan) was confronted with another significant issue: the downward spiral of the US residential mortgage market and subsequent deterioration in broader credit and capital market conditions—a situation that persisted into 2008. The deteriorating mortgage market exacerbated the financial strength ratings downgrades that AIG was receiving, which prompted the company to post additional collateral in some of its financial services units. To help replenish its capital position, in late May 2008 the company raised $20 billion of new capital that included the sale of nearly 197 million common shares for $7.47 billion. These moves proved insufficient, however, and on September 22, 2008, AIG was forced to accept an emergency line of credit from the US Federal Reserve.

Initial terms of the $85 billion, two-year revolving credit facility included an interest rate of LIBOR plus 8.5%, plus commitment fees. (LIBOR, the London Interbank Offered Rate, is the interest rate that banks charge one another for loans.) The credit facility was secured by a pledge of AIG’s assets. In early November 2008, loan modifications were made, including a reduction in the interest rate (to LIBOR plus 3%) and an extension of the term to five years. AIG also sold $40 billion of a new issue of preferred stock to the US Treasury (under the TARP plan) and entered into a securities lending agreement with the Federal Reserve.

This infusion caused yet another management shakeup: retired Allstate CEO Edward M. Liddy assumed the role of chairman and CEO of AIG. Paula Reynolds, former CEO of Safeco Corp., was hired as vice chairman and chief restructuring officer. Ms. Reynolds effectively oversaw the sale of Safeco, her former employer, to Liberty Mutual for $68.25 a share in cash. (Ironically, that deal closed on September 22, 2008, the same day AIG accepted a deal of quite another sort with the Federal Reserve and the US Treasury.) Since AIG pledged virtually all of its assets against its loan from the Fed, the company has had to scramble to sell enough units to satisfy terms of the loan.

In October 2008, CEO Liddy announced AIG’s intention to retain its US property-casualty and foreign general insurance operations, as well as an ownership interest in its foreign life insurance units. However, S&P believed at the time that AIG would have difficulty raising enough proceeds from the sale of its remaining business to be able to implement that plan. In late December 2008, AIG agreed to sell Hartford Steam Boiler to Munich Re for $742 million. This was AIG’s most significant transaction as of that date, though unfortunately the sale price was below the $1.2 billion AIG paid for Hartford Steam Boiler in 2000.

After a small flurry of restructuring/unwinding activity in January and February 2009, AIG announced in early March 2009 yet another significant element in its restructuring strategy. Certain AIG operating units, including American Life Insurance Co. and American International Assurance Co., were placed into special-purpose vehicles whose equity interests were pledged to the Federal Reserve Bank of New York in exchange for a further reduction in AIG’s Fed borrowings. Central to this development was another easing in certain of the original terms of the government assistance that was designed to reduce AIG’s leverage and give it an adequate amount to restructure itself and sell enough assets to repay the government. The US Treasury also provided AIG with another $30 billion credit facility.

In early March 2009, reversing course from earlier proclamations that it intended to retain its property-casualty operations, AIG announced plans to form a separate holding company, AIU Holdings Inc., that would contain AIG’s commercial property-casualty insurance group, its foreign general insurance unit, and other property-casualty insurance operations. The formation of AIU will help AIG sell this unit, possibly through an initial public offering of shares of AIU. In early June 2009, AIG completed the sale of most of its approximately 59% equity interest in reinsurer Transatlantic Holdings Inc. (TRH) through a secondary stock offering of approximately 29.9 million TRH common shares; gross proceeds totaled more than $1.1 billion.


AIG’s board of directors underwent a restructuring of its own in late May 2009, as several long-time board members stepped aside. On August 3, 2009, AIG’s board of directors elected Mr. Benmosche president and CEO of the company, making Benmosche (former CEO of MetLife) the fifth CEO at AIG since long-time CEO Maurice Greenberg was forced out in 2005.

The company announced in November 2010 that it had completed the sale of its ALICO unit to MetLife Inc. for gross proceeds of $16.2 billion and reported that gross proceeds from its recent initial public offering of its AIA unit totaled $20.5 billion (including an overallotment option).


INDUSTRY PROFILE

Industry market share remains concentrated among a handful of firms

The US property-casualty (P/C) industry comprises thousands of companies, each vying for a share of the multibillion-dollar market for personal and commercial lines insurance coverage. However, a small group of

companies dominates the market.

According to Insurance Information Institute (III), a research and trade association, the 10 largest P/C insurer groups (based on net written premium volume for P/C insurance) wrote approximately $244.8 billion of premiums in 2013 (latest available), which accounted for around 51.2% of that year’s $477.7 billion in written premiums industry-wide. The five largest insurer groups wrote approximately $154.9 billion in premiums, for a market share of around 29.1%. The two largest P/C insurers, State Farm Group and Liberty Mutual, had a 15.6% share of the US P/C market. Combined, they wrote some $84.9 billion in premiums in 2013.

Some US companies (notably AIG) historically have had a long-established presence in numerous

overseas markets. Although an increasing number of P/C insurers have sought to increase their presence in certain foreign markets, US-based P/C insurers operate primarily in the United States for the most part.

INDUSTRY TRENDS

The property-casualty insurance industry has emerged from the credit crisis and the “Great Recession” relatively unscathed—both financially and from a regulatory standpoint—especially when compared with other financial institutions. In addition, following several years of heavy storm and catastrophe losses in 2011–2012, industry premium rates have firmed, although they may have weakened a bit as of the first quarter of 2014. The degree to which the industry will be able to grow its premium base will largely depend on the demand for insurance. An economic recovery in the US (even a modest one) should help the demand curve for insurance.

Although claims from Superstorm Sandy put a crimp in fourth-quarter earnings for many insurers, their full-year 2012 results improved compared with the catastrophe-laden 2011. Investment results in 2011 and 2012 were mixed, as persistently low interest rates continued to pressure net investment income. However, a recovery in most areas of the bond market helped fuel an improvement in investment gains.

UNDERWRITING RESULTS IMPROVED IN 2013, BUT WERE MIXED IN FIRST-QUARTER 2014

In 2013, net written premiums grew 4.6%, year to year, to $477.7 billion from $456.7 billion in 2012, according to data provided by the Insurance Services Office Inc. (ISO), an industry research and trade organization. (Written premiums represent business produced in a given period. Insurers account for this business over the life of a policy—typically 12 months.) The net written premiums further propelled in the first quarter of 2014, as growth was sustained during this period and rose 3.6%, year to year, to $121.4 billion from $117.2 billion. Hence, the general volume and direction of written premiums in one year is usually a good indication of the level of earned premiums (a revenue component on the income statement) the following year.

Table B02 Top 10 P-C underwriters

TOP 10 PROPERTY-CASUALTY UNDERWRITERS—2013(Ranked by direct premiums written)

DIRECT PREMIUMS

WRITTEN† (MIL. $) MARKET

UNDERWRITER 2013 SHARE‡

1. State Farm 55,994 10.32. Liberty Mutual 28,906 5.33. Allstate 27,584 5.14. AIG 23,169 4.25. Travelers Cos. 22,843 4.26. Berkshire Hathaw ay 18,284 3.47. Farmer's Insurance Group 18,080 3.38. Nationw ide Mutual Group 17,803 3.39. Progressive 17,563 3.2

10. USAA Insurance Group 14,562 2.7†Before reinsurance transactions. ‡ US total including territories. Source: Insurance Information Institute.


Personal lines. The industry’s largest sector, personal lines, accounts for 43.1% of the total industry written premiums for the first quarter of 2014. During this period, the personal lines sector advanced 5.2%, compared with a 5.0% growth rate in the same quarter of 2013. In 2013, this sector grew 5.3% and accounted for 42.3% of the total industry written premiums.

This group’s business consists primarily of personal auto and homeowners’ coverage, which is highly regulated and not prone to large pricing swings. However, premium rates for auto insurance have been under pressure for the last several years, and indications are that competition has remained intense.

Commercial lines. The commercial lines sector accounts for 33.9% of total industry written premiums, and increased to 3.3% in the first quarter of 2014 versus a 5.3% growth in the prior-year period. In 2013, this sector rose 4.1% and accounted for 34.8% of the total industry written premiums.

Balanced lines. Balanced lines underwriters, who write a combination of personal and commercial lines coverage, accounted for the 23% of total industry written premiums in the first quarter of 2014. This group posted a 3.7% year-over-year increase during the first-quarter 2014 versus a 3.7% growth in the prior-year period. In 2013, this sector grew 4.0% and accounted for 23.1% of the total industry written premiums.

Earned premiums for insurers in the ISO study grew 4.3% to $117.9 billion in the first quarter of 2014 from $113.0 billion during the same period in 2013. In 2013, earned premiums increased 4.2% to $467.9 billion from $448.9 billion. This growth, however, was modest compared with the double-digit rise in premiums that occurred in the “hard market” that ensued in the aftermath of the September 11 terrorist attacks: earned premiums advanced 11.9% in 2002, 10.9% in 2003, and 7.1% in 2004.

Investment results paint a mixed picture Investment income is an important revenue source for insurers, often accounting for 15%–20% or more of an insurer’s total revenues historically. During the past several years, investment results have been mixed, as persistent low investment yields pressured investment income. Equity and fixed-income markets recovered from the credit crisis–induced selloff in 2009, enabling insurers to recoup some of the lost value of their investment holdings. In 2011, the situation worsened as unrealized investment losses amounted to $4.4 billion, compared with unrealized investment gains of $16.0 billion in 2010, which itself was a significant decline from the gains of $23.1 billion in 2009. In 2012, unrealized investment gains amounted to $18.8 billion. However, net investment income for property-casualty insurers declined 2.4% to $48.0 billion in 2012, from $49.2 billion in 2011, which in turn was up 3.4% from $47.6 billion in 2010. In 2013, unrealized investment gains totaled $36.1 billion, while net investment income for property-casualty insurers was $47.4 billion, a 1.3% decline from 2012 ($48.0 billion).However, in the first quarter of 2014, unrealized investment gains and net investment income declined 90.1% and 1.8%, respectively.

Realized investment gains (recognized when investments are sold) staged a dramatic turnaround in 2010 (driven mainly by a narrowing of credit spreads) to more than $5.9 billion. This contrasts rather sharply with the more than $7.9 billion of realized investment losses incurred by the industry in 2009. In 2011, realized gains grew 18.6% to reach $7.0 billion, but then declined 11.4% to $6.2 billion in 2012. In 2013, realized gains increased 83.9%, rising to $11.4 billion from $6.2 billion in the prior-year period. More than 100% increase in realized gains was recorded during the first quarter of 2014, rising to $2.9 billion from $1.4 billion in the same period in 2013.

Since the credit crisis in 2008, unrealized gains have been volatile. In that year, the industry posted nearly $53 billion in unrealized investment losses, which then rebounded to end 2009 with $23.1 billion in unrealized investment gains. During 2010, the industry saw its unrealized gains plummet to $16 billion. By 2011, results had deteriorated further, and the industry reported $4.4 billion in unrealized losses. Results rebounded in 2012 along with the bond and equity market, and industry aggregate unrealized gains totaled nearly $18.5 billion at year-end 2012. In 2013, unrealized gains increased 95.1% to $36.1 billion. Finally, in the first quarter of 2014, unrealized gains plunged 90.1% to $1.3 billion compared with the same period the previous year. [Note: analysts typically exclude the impact of net realized investment gains on insurers’ profits when forecasting earnings. Instead, they base earnings estimates on net operating earnings, which exclude these gains and/or losses.]


Loss trends improved in 2013 The largest expense item facing an insurer are often loss costs and related expenses, which are commonly referred to as loss adjustment expenses. A change in the direction of these expenses can dramatically affect bottom-line results.

In 2012, insurers in the ISO survey reported modest improvement in loss trends. Incurred losses declined 4.5% to $277.7 billion, from $290.8 billion in 2011, after an increase of 12.8% in 2011. Loss and loss adjustment expenses (the costs incurred in settling claims) inched up 3.2%, to $55.5 billion from $53.8 billion. However, net losses on underwriting equaled only 3.7% of earned premium in 2012, down from 8.3% in 2011. Underwriting results in 2012 remained unprofitable, but improved, year over year, despite an increase in direct insured catastrophe losses to approximately $35 billion for US insurers, from $33.6 billion in 2011. Consequently, loss ratios for most property-based lines of coverage (homeowners, commercial multi-peril, fire) declined in 2012. Pure loss ratios for most of the major property lines experienced a decline in 2012 (except allied lines, where the pure loss ratio went up, and auto physical damage, where the pure loss ratio was the same as in 2011). Pure loss ratios dropped for two of the four major casualty lines (general liability and medical malpractice), and increased for two (workers’ compensation and auto liability line of coverage).

This positive trend continued through 2013, as incurred losses plummeted by 6.6% to $259.3 billion from $277.7 in 2012. Loss and loss adjustment expenses inched up 0.4%, to $55.7 billion from $55.5 billion. In the first quarter of 2014, incurred losses, and loss and loss adjustment expenses both increased by 9.8% from $61.2 billion and 2.3% from $13.2 billion, respectively, compared with the same period in 2013.

In 2013, underwriting rebounded to a $15.5 billion gain after a $13.3 billion loss in 2012. This momentum continued in the first quarter of 2014 when underwriting registered a net gain

of $2.2 billion in the first quarter of 2014, but this gain is lower compared with a net gain of $4.5 billion in the same period in 2013. The net gain on underwriting equaled 1.9% of earned premium, a setback from the underwriting equal to 4.0% of earned premium in the 2013 period.

Combined ratio a key gauge of underwriting performance The combined ratio is a key measure of underwriting performance. It is the sum of the loss ratio, the expense ratio, and (where applicable) the dividend ratio. A combined ratio under 100% indicates an underwriting profit, while one in excess of 100% means there is an underwriting loss. For 2013, insurers in the ISO study reported a combined ratio of 96.1%, a decline from 102.9% in 2012. In the first quarter of 2014, the combined ratio improved to 97.3% from 94.9% in the same period in 2013. (For more information on the combined ratio and its implications for insurer profitability, please refer to the “How to Analyze a Property-Casualty Insurer” and “Key Industry Ratios” sections of this Survey.)

Underwriting results varied by type of insurer. Personal lines writers experienced an improvement in underwriting results, as their combined ratio dropped to 97.6% in 2013 from 101.1% in 2012. Commercial lines underwriters (excluding mortgage and financial guaranty insurers) also saw improvement in

Table B07 PREMIUM VOLUME AND UNDERWRITING RATIOS

PREMIUM VOLUME AND UNDERWRITING RATIOSFOR THE TOTAL US PROPERTY-CASUALTY INDUSTRY

NET NET

PREMIUMS PREMIUMS ‡LOSS †EXPENSE DIVIDEND COMBINED

WRITTEN EARNED RATIO RATIO RATIO RATIO

YEAR MILLIONS OF DOLLARS (%) (%) (%) (%)2014* 121,421 117,880 68.5 28.2 0.6 97.32013* 117,201 112,971 65.8 28.6 0.5 94.9

2013 477,676 467,890 67.3 28.2 0.5 96.1

2012 456,720 448,930 74.2 28.2 0.5 102.92011 438,031 434,449 79.3 28.4 0.4 108.12010 423,789 422,200 73.6 28.3 0.5 102.42009 418,365 422,302 72.5 28.0 0.5 101.02008 434,930 438,316 77.1 27.5 0.4 105.02007 440,583 438,908 67.7 27.3 0.6 95.52006 443,460 435,484 65.2 26.4 0.8 92.42005 425,500 417,635 74.6 25.8 0.4 100.9*Three months ended March. ‡Incurred to premiums earned. †Incurred to premiums w ritten. Source: Insurance Services Office.


underwriting results, with a combined ratio of 92.6% in 2013, compared with 104.0% in 2012. While a drop in catastrophe losses affected results for many industry participants, some broad-based improvements in a number of lines of coverage (including workers’ compensation in the commercial lines arena) also drove the improved underwriting results. Balanced lines underwriters, which write both commercial and personal lines of coverage, also witnessed an improvement in underwriting results in 2013, evidenced by their combined ratio of 92.6%, versus 104.0% in 2012. However, in the first quarter of 2014, personal lines underwriters witnessed further improvement as their combined ratio increased to 98.5% from 96.2% during the same period in 2013. Likewise, commercial lines underwriters experienced a retreat from past year improvement in underwriting results as their combined ratio increased to 95.0% during the first quarter of 2014, from 91.5% during the same period in 2013. Also in the first quarter of 2014, balanced lines underwriters saw their combined ratio worsen to 98.2% from 97.7% during the same period in 2013.

Loss ratios. For this representative group of insurers (accounting for approximately 96% of industry premium volume), loss ratios equaled 68.5% in the first quarter of 2014 versus 65.8% during the same period in 2013. Personal lines insurers registered a loss ratio of 72.5% compared with 70.3% during the same period in 2013. Commercial lines insurers posted an increase in the loss ratio to 64.5% from 61.1% a year earlier. Balanced lines underwriters also witnessed a decline in their loss ratios, which equaled 66.8% compared with 64.6% during the same period in 2013. These results reflected the combined impact of improvements in personal lines and commercial lines claim trends, particularly in the aftermath of a much more benign storm season in 2013.

In 2013, loss ratios equaled 67.3%, compared with 74.2% in 2012. Personal lines insurers posted a loss ratio of 71.7% in 2013, versus 75.1% in 2012. Commercial lines insurers also reported a decline in their loss ratios during 2013, with a loss ratio of 62.1%, versus 74.0% in 2012. Balanced lines underwriters also experienced a decline in their loss ratios, which equaled 67.1% in 2013, compared with 73.0% in 2012.

Expense ratios. Industry expense ratios declined slightly during the first quarter of 2014 to 28.2%, reflecting a stable to rising premium base and the impact of some broad-based cost-cutting measures on the part of many insurers. Still, expense ratios have been climbing steadily since 2003, when they ended the year at 24.9%. Results were similar by product line, as expense ratios for personal lines insurers declined slightly to 25.0% during the first quarter of 2014, compared with 25.2% in the prior-year period. Commercial line insurers saw their expense ratios inch up marginally to 30.1% from 30.0%, while the expense ratios of balanced lines insurers declined to 31.2% from 32.8%.

In 2013, results were mixed by product line, as expense ratios for personal lines insurers equaled 25.2% at the end of 2013, compared with 25.4% in 2012. Commercial lines insurers saw a slight increase in their expense ratios, to 29.9% in 2013, from 29.6% in 2012. However, the balanced insurers’ expense ratio declined to 31.3% in 2013, from 31.5% in 2012.

Dividend ratios. Finally, the dividend ratio equaled 0.6% in the first quarter of 2014 versus 0.5% during the same period in 2013. Results did not differ materially among types of underwriters. The dividend ratio ended 2013 at 0.5%, flat from 2012.

SURPLUS REMAINS ABUNDANT

In this industry, surplus refers to capital, or net worth: the amount by which an insurer’s assets exceed its liabilities. Surplus—often referred to as statutory surplus under statutory accounting principles (SAP)—is analogous to shareholders’ equity under generally accepted accounting principles (GAAP). In the ISO study published in April 2014, insurers reported a combined surplus of $653.3 billion as of December 31, 2013, up 11.3% from $587.0 billion on December 31, 2012.

The combined surplus continued to increase in the first quarter of 2014. As of March 31, 2014, insurers had a combined surplus of $662.0 billion, up 1.3% from $609.8 billion in the same period in 2013. The $8.7 billion increase in surplus reflected contributions from $13.7 billion in operating income, $1.3 billion in unrealized capital gains, $2.9 billion in realized capital gains, and $1.8 billion in new funds. These


contributions were partially offset by $0.7 billion in miscellaneous and other charges, and $7.4 billion in dividends paid to stockholders.

On December 31, 2013, the $66.3 billion increase in surplus reflected contributions from $64.3 billion in operating income, $36.1 billion in unrealized capital gains, $11.4 billion in realized capital gains, and $3.9 billion in new funds, all offset by $12.0 billion in income taxes and $28.3 billion in dividends paid to stockholders. As a result of this increase, industry leverage

continued to trend downward. [In this instance, leverage refers to the degree to which the industry utilizes its capital (or surplus) to underwrite policies.] The ratio used to measure leverage is the ratio of new written premiums to surplus. (For a more detailed explanation of leverage, please refer to the “How to Analyze a Property-Casualty Insurance Company” section of this Survey.)

The ratio of net written premiums to surplus stood at 0.18-to-1 on March 31, 2014. In other words, in the first quarter of 2014, insurers wrote $0.18 worth of premiums for every $1 of surplus. If we assume a “typical” rate of leverage of 2-to-1 (which is what regulators usually allow), the industry had approximately $601.3 billion of “excess” surplus on March 31, 2014, according to our estimates, compared with our estimate of $375.0 billion on March 31, 2013.

We arrived at this conclusion by using the following first-quarter 2014 data points: the $121.4 billion in net written premiums in the three months ended March 31, 2014, and policyholders’ surplus of $662.0 billion in the same period. If we assume a 2-to-1 leverage ratio, the amount of surplus required to support the actual level of premium volume is approximately $60.7 billion ($121.4 billion divided by 2). The difference between actual surplus ($662.0 billion) and so-called required surplus ($60.7 billion) is $601.3 billion. Put another way, this excess surplus could theoretically support another $1.2 trillion of written premiums, more than the industry is currently writing on an annual basis.

Although we need to qualify this exercise as one designed to illustrate the degree to which the industry has excess capital, we do it to make the point that on March 31, 2014, there remained an enormous amount of excess capital in the insurance marketplace.

US CATASTROPHE LOSSES SLIGHTLY INCREASED IN THE FIRST QUARTER OF 2014

Insured catastrophe losses in the US totaled $3.0 billion in the first quarter of 2014, a slight increase from $2.8 billion recorded in the same period in 2013, according to data compiled by the Property Claim Services Unit of the ISO, an industry research group. (Catastrophes are defined as natural or manmade disasters that cause at least $25 million in insured losses.) In 2013, insured catastrophe losses plunged to $12.9 billion, down 63% from $35.0 billion in 2012. In 2011, insured catastrophe losses in the US totaled $33.6 billion, which was up a considerable 135% from $14.3 billion in 2010. The losses in 2010 were up from $11.6 billion in 2009, but down from $27 billion in 2008. This followed a brief respite from heavy catastrophe losses in 2007 and 2006. Insured catastrophe losses totaled $6.7 billion in 2007 and $9.5 billion in 2006, significantly below the $66.1 billion of insured catastrophe losses in 2005. Aggregate catastrophe losses between 1989 and the first quarter of 2014 reached $388.7, which is significantly higher than the catastrophe losses between 1950 and 1988 that totaled $19.5 billion.

Historically, hurricanes have accounted for the majority of US catastrophe losses. Indeed, according to a study published by the Insurance Information Institute, during the 20 years from 1993–2012, hurricanes accounted for more than 40% of catastrophe losses, followed by tornados (36%), windstorms (7%),

Table B01 Estimated changes in Policyholder’s Surplus

ESTIMATED CHANGES IN POLICYHOLDERS' SURPLUS(Total property-casualty industry, in billions of dollars) --THREE MOS.--

ITEM 2010 2011 2012 2013 *2013 *2014

Policyholders' surplus—beg. of period 511.4 559.2 553.8 587.1 587.1 653.4Operating income 38.2 15.4 35.0 64.3 15.8 13.7Realized capital gains 5.9 7.0 6.2 11.4 1.4 2.9Income taxes (8.8) (3.0) (6.1) (12.0) (2.9) (2.8)

Net after-tax income 35.2 19.5 35.1 63.8 14.3 13.8Unrealized capital gains (loss) 16.0 (4.4) 18.5 36.1 13.1 1.3Stockholder dividends & other (31.4) (25.9) (23.8) (28.3) (5.0) (7.4)New funds 27.5 2.3 4.6 3.9 1.4 1.8Misc. surplus change 0.6 3.1 (1.1) (9.2) (1.2) (0.7)

Policyholders' surplus—end of period 559.2 553.8 587.1 653.4 609.8 662.0Source: Insurance Services Office.


terrorism (6%), earthquakes (5%), wind/hail/floods (4%), and fire (2%). However, catastrophe trends in 2013, a year in which no major hurricane made landfall, differed from these historical patterns. Insured catastrophe losses from tornados and thunderstorms totaled $10.3 billion in 2013, or just over 80% of the $12.9 billion in insured catastrophe losses for the entire year. These trends in catastrophe losses are supported by ISO’s inflation-adjusted direct catastrophe losses data in which hurricanes (40.3%) and tornados (39.0%) accounted for the majority of these losses between the second quarter of 1994 and first quarter of 2014.

For the second half of 2014, the catastrophe loss outlook is likely to be mixed. The first quarter of 2014 revealed underwriting results for many insurers that were negatively affected by claims from a series of winter storms from January 1 to February 21 that caused an estimated $1.5 billion in insured losses. However, partly offsetting the impact from the heavy 2014 winter storm season is the forecast of a below-average hurricane season toward the second half of 2014. Storm forecasters attribute this benign outlook to the formation of El Nino, a weather pattern that tends to suppress the development of hurricanes.

The 2013 hurricane season was uneventful compared with 2012, as there were only 13 tropical storms, of which two became hurricanes and neither was considered a “major” hurricane (Category three or higher). Conversely, in the 2012 storm season, 19 tropical storms formed, of which 10 became hurricanes. One in particular (Sandy) presently has the dubious distinction of being the third costliest hurricane on record (behind Hurricanes Andrew and Katrina), with some $18.75 billion of insured property losses. We expect a significant amount of business interruption claims to push the total losses from Sandy much higher.

Forecasts of an “above average” hurricane season in 2011 proved accurate, with 19 named storms, of which seven developed into hurricanes and three were classified as “major” (Category 3 or higher). Most significant was Hurricane Irene, which strengthened into a Category 3 hurricane on August 25, 2011. Irene cut a wide swath along the Eastern Seaboard of the United States and spawned at least eight tornados, leaving some 41 dead and causing $4.3 billion in insured damages.

The 2010 hurricane season also consisted of 19 named storms, of which 12 developed into hurricanes. The 2009 hurricane season was marked by “below average” Atlantic storm activity, with only nine named storms, of which only three developed into hurricanes. During the 2008 Atlantic hurricane season, there were 16 named storms and nine hurricanes. Hurricane Ike caused approximately $10.7 billion of insured losses (in 2008 dollars) and was the costliest of that season.

CONGRESS ADDRESSES MANMADE AND NATURAL CATASTROPHES

The issue of affordability and availability of property insurance (typically homeowners’ coverage) in storm-prone areas is one of the more pressing issues that both public and private-sector entities must address. Exacerbating the coverage gaps are the exclusions for flood and earthquake damage that are standard on most homeowners’ insurance policies. In other words, coverage in a number of coastal areas is difficult to obtain, and most homeowners’ policies do not cover most catastrophe-related damages. (Flood damage to vehicles, though, is typically covered under a comprehensive automobile insurance policy.)

As coastal areas are developed and become more densely populated, the potential for and magnitude of storm losses increase significantly. Indeed, Census Bureau data indicated that in 2011, Atlantic hurricanes seriously threatened 37.3 million, versus 35.7 million people in 2008 and 10.2 million people in 1950. Couple this with insurers’ need to preserve capital and mitigate risk by reducing their exposure to these storm-prone coastal areas, and an insurance crisis is born.

The creation of the National Flood Insurance Program (NFIP), a taxpayer-funded disaster relief program, rose out of the frequent flooding of the Mississippi River in the 1960s. The NFIP has three components: providing residential and commercial insurance coverage for flood damage; improving floodplain management; and developing maps of flood hazard zones.

A number of government-sponsored initiatives began to gain traction in an attempt to alleviate what was becoming a crisis in availability and affordability of homeowners’ insurance during the aftermath of the


2005 hurricane season and the widespread flooding caused by Hurricane Katrina. Following a study of these various initiatives, however, the Government Accountability Office (GAO) concluded that there is no perfect solution for the inherent conflicts between homeowners, who want affordable insurance protection, and taxpayers, who would potentially foot the bill for catastrophic damages.

The urgency to reopen this debate increased in 2011, following heavy flooding along the Mississippi River and in the Northeast in the spring, and in the aftermath of Hurricane Irene in late summer. Many proposals sought to reduce the disputes over whether damage was caused by wind or flood. The challenge, however, is that many of the initiatives would not likely be profitable; in essence, they would be a de facto subsidy to residents in storm-prone areas. This in turn would discourage the private insurance market from insuring these areas, further reducing accessibility of coverage. Most of the proposed legislative initiatives failed to gain enough traction in the midst of an election year and in the wake of the threatened government shutdown in late 2011.

The most concrete resolution was the extension of the National Flood Insurance Program (NFIP) through May 3, 2012. Then, on May 31, the program was further extended until July 31. Although a long-term alternative to this program has yet to materialize, several initiatives did emerge in both houses of Congress. In May 2012, both the House and Senate introduced legislation that would extend the NFIP through 2016. On July 6, 2012, President Obama signed into law the Biggert-Waters Flood Insurance Reform Act of 2012, which extends (with certain changes) the NFIP for five years through September 30, 2017. Subsequently, on March 21, 2014, the President signed into law the Homeowner Flood Insurance Affordability Act. This law, the genesis of which started in the aftermath of Hurricane Sandy, repeals some provisions of the Biggert-Waters Act. Many key provisions of the Biggert-Waters Act remain intact, however. Still, the new law lowers recent rate increases on some policies, prevents future rate increases, and implements a surcharge on all policyholders.

CONGRESS REFORMS CROP INSURANCE IN 2014

Since the early part of the 20th century, some form of crop insurance has been in existence in the US. Throughout this period, Congress has taken numerous measures to protect the agriculture industry and family farms in the US. However, in the wake of heavy losses in 2012 from the federally supported crop insurance program, lawmakers are seeking to reduce the subsidy farmers currently receive. The Agriculture Act of 2014 (discussed in more detail below) sought to address some of these issues.

Crop-hail coverage and multi-peril insurance are the two available crop insurance in the US. Crop-hail coverage, which is provided by the private insurance market, insures against the loss of crop value as a result of damage by hail. Multi-peril insurance, which is underwritten by the private sector and the federal government, covers the loss of crop value as a result of all types of natural disasters, including drought, excessive moisture, and unusually dry weather. The popularity of these two programs is evidenced by the fact that current crop insurance programs insure about 80% of insurable farmland, according to the National Crop Insurance Services (NCIS), an industry trade organization.

To put the size of this industry in perspective, in 2012 (latest available), direct premiums written for crop-hail insurance coverage totaled $958.2 million, up nearly 14% from $843.8 million of direct premiums written in 2011. Net premiums written for the larger multi-peril crop insurance program totaled nearly $4.2 billion in 2012, down over 22% from $5.5 billion in 2011.

In recent years, the US Midwest has witnessed severe dry weather and extremely harsh drought conditions, coupled with severe flooding in other areas. The severe weather conditions are also having a considerable impact on crop insurers’ underwriting results. The combined ratio for the multi-peril crop insurance market deteriorated to 106.6% in 2012, from 90.6% in 2011, and 73.9% in 2010. While this line was still profitable, it nevertheless experienced a significant jump in claims. To put these results in perspective, the multi-peril crop insurance line produced an underwriting profit (evidenced by a combined ratio of less than 100%) in the period 2004–2011. In contrast, significant claims in 2002 and 2003 had resulted in underwriting losses, and the combined ratio for multi-peril crop insurers climbed to 123.9% in 2002 and 109.8% in 2003.


The multi-peril crop insurance market is fairly concentrated, with a handful of companies underwriting the bulk of industry premium volume. According to data obtained from the Insurance Information Institute, the top 10 writers of multi-peril crop insurance wrote nearly 88% of US multi-peril coverage in 2012. The market leader is ACE Ltd., with an estimated 18.7% market share.

After several years of heavy losses (i.e., payments to farmers), pressure grew to reform the crop insurance program. On February 7, 2014, President Obama signed into law the Agriculture Act of 2014. The new law has a number of major reforms. Most significant to the crop insurance market is the repeal of the old system of direct payments to farmers regardless of how much they actually plant or the price for which they sell their crops. Instead, farmers would buy into an insurance policy that covers lost revenue due to drops in prices or increases in feed costs. The law also provides a new, permanent disaster assistance program for those producers affected by natural disasters. This provision of the farm bill is expected to save taxpayers $19 billion over the next 10 years. It may also lead to the creation of additional private-sector crop insurance coverage areas and products.

TRIA PROVIDES A FEDERAL BACKSTOP

While loses from natural disasters like Hurricane Sandy have made headlines in recent years, insurers have also had to contend with manmade disasters, including terrorist attacks. Insured losses from the September 11 terrorist attacks (which included property damage, business interruption coverage, commercial liability, and group life insurance claims) totaled $41.4 billion (in 2011 dollars), according to data obtained from the Insurance Information Institute. Reinsurers covered approximately two-thirds of these losses.

Prior to September 11, 2001, insurers typically provided terrorism coverage to their commercial insurance policies at essentially no additional cost because the risk of such an event on US soil was considered remote. In the aftermath of the unprecedented losses from the 9/11 attacks, however, many insurers and reinsurers instituted “terrorism exclusions” in a number of their policies. Those insurers who did offer terrorism coverage did so at premium rates that were prohibitively expensive. The US business community argued that a lack of coverage was hindering the economic recovery and threatening certain business sectors.

The Terrorism Risk Insurance Act (TRIA) was passed and signed into law in November 2002 in order to alleviate the market dislocation. The legislation set up a federal reinsurance program in which insurers and the federal government would share losses. At the time of its passage, the law was seen as a transition until a market-based solution could be created. In December 2005, however, it was extended for another two years amid a continued shortage of available reinsurance for insurers to lay off their risks.

TRIA’s extension in 2005, made with the support of a last-minute lobbying campaign from industry groups and other business leaders, left the industry still searching for longer-term alternatives to terrorism coverage. Before the elections in November 2006, the Bush Administration said that it would not support another extension of the program. The US Department of the Treasury, the program’s administrator, argued that the program would hinder development of coverage in the private market. Reports published in late 2006 by the US Government Accountability Office and the President’s Working Group on Financial Markets echoed these sentiments and said that the continuation of TRIA would hinder the formation of a meaningful, private market solution to the lack of terrorism insurance. Notwithstanding these criticisms, TRIA was extended again in late 2007, with an expiration date of December 31, 2014.

As the expiration of TRIA is fast approaching, on February 5, 2013, the House introduced legislation, the TRIA Reform Act of 2014, to extend TRIA through the end of 2019. The Committee on Financial Services passed this bill on June 19, 2014, but it was later placed in the union calendar on July 16, 2014. The Senate’s version of the bill, Terrorism Risk Insurance Program Reauthorization Act of 2014, which extends TRIA through December 31, 2021, was passed on July 20, 2014. However, many insurance industry experts caution that an automatic renewal of TRIA is not a sure thing at this point.

Terrorism insurance poses challenges for P/C industry From the standpoint of insurers, insuring terrorism is unlike any other risk for which the industry provides coverage. To be insurable, a risk must first be measurable. To adequately price a risk, insurers must be able


to ascertain the probable number of events (i.e., the frequency) likely to result in claims. Next, they must be able to estimate the potential maximum size or cost of these events (i.e., the severity). By calculating the probable frequency and severity of an event, insurers can then better evaluate the cost of insuring a particular risk. According to the insurance industry, a terrorist act does not possess these characteristics, rendering it impossible to price as a risk. Also, since there have been very few large-scale terrorist attacks, very little data exist from which to draw conclusions as to both severity and frequency trends.

There is a general agreement that the establishment and extension of TRIA has helped insurance companies provide some meaningful terrorism protection, largely due to the backstop protection the federal government offers. In return for the federal backstop, commercial insurers are required to make terrorism coverage available and to explicitly state its cost. Policyholders can opt out of the terrorism coverage if they choose. Nevertheless, each time TRIA has been extended, the point at which that government protection kicks in has been raised. When TRIA was extended in 2005, the amount of losses that private insurers would have to absorb before the government stepped in was increased to $50 million from $5 million. In 2007, the triggering event rose to $100 million: in other words, only terrorist events that produced losses in excess of $100 million would result in the outlay of federal funds. Moreover, individual insurance companies would have to incur losses equal to 20% of their commercial insurance premiums in 2007 before the federal program kicked in. When TRIA was extended in 2007, the definition of a certified act of terrorism was revised to eliminate the requirement that the individuals (or individual) are acting on behalf of a foreign person or foreign interest.

FINANCIAL REGULATORY REFORM WILL NOT MATERIALLY IMPACT MOST P/C INSURERS

President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173) on July 21, 2010. We highlight below some of the major tenets of the law, which alters the regulatory landscape for most financial institutions. The legislation contains provisions prohibiting financial institutions from engaging in proprietary trading, and puts restrictions on the ownership of hedge funds and private equity funds. The law also gives the government the tools necessary to address troubled financial institutions (like American International Group) and increases federal oversight of the regulation of insurance activities. However, S&P Capital IQ (S&P) thinks this legislation will not likely have a material impact on most property-casualty insurers.

The Volcker Rule The Volcker Rule was named after Paul Volcker, the former chairman of both the Federal Reserve Board and the President’s Economic Recovery Advisory Board. The rule states that financial institutions benefitting from government safeguards and guarantees should not be able to take undue risk and thus jeopardize the entire financial system. More specifically, the rule prohibits banks from conducting proprietary trades unless they are for customers’ accounts, for hedging purposes, or market making. Another component of the rule has limited the amount of capital banks can allocate to hedge fund and private equity investments (so-called alternative investments). The rule was incorporated into the Dodd-Frank Act, although the final details remain to be worked out. In October 2011, a 298-page draft outlining the details of the Volcker Rule was released for public comment by federal regulators, which included the Federal Reserve Board, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency (OCC).

Owing to a great deal of controversy surrounding the prohibition on proprietary trading by banks, the rule was only implemented on April 1, 2014. Banks in early April 2014 received another related reprieve (to July 2017) over their treatment of collateralized loan obligations (CLOs) held as of December 31, 2013. After July 21, 2017, they will have to deduct the value of these investments from their Tier 1 capital levels.

The Consumer Financial Protection Bureau In the wake of the credit crisis, many lawmakers have focused on consumer protection as they sought to reshape the financial landscape. To that end, the Dodd-Frank Act established the new Consumer Financial Protection Bureau (CFPB) as an agency of the Federal Reserve. The CFPB supervises and regulates consumer financial laws and products, including credit cards, mortgage loans, student loans, and auto loans.


In January 2012, President Obama made a recess appointment of former Ohio Attorney General Richard Cordray as the first director of the CFPB. Mr. Cordray had been running the enforcement arm of the CFPB. However, Senate Republicans regularly opposed the potential appointment of Mr. Cordray as a full-term director of the CFPB. In February 2013, members of the Senate Banking Committee asked the Republicans to stop objecting to Mr. Cordray’s appointment and allow a vote for or against his nomination to lead the CFPB so that the committee could function smoothly and start planning for the future. The US Senate formally confirmed Mr. Cordray in July 2013.

New rules for derivatives Derivatives markets are considered a major contributor to the depth and severity of the credit crisis, and will see increased regulation under the new rules. The US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC) will regulate the over-the-counter derivatives, including swaps. In addition, these derivatives will be traded on an exchange and processed through a central clearinghouse. Centralized clearinghouses provide various benefits: they can mandate increased margin and capital requirements, and can make it easier for regulators to monitor and evaluate market risks. Although standardized contracts and higher capital requirements may reduce profit margins for market participants, they would improve market efficiencies over time, in our view. Major market participants are most exposed to the possibility of increased regulation here, but a more efficient and safer marketplace for financial products should benefit the long-term health of the industry.

Streamlined regulatory system The financial services industry is set to be regulated under a more streamlined system after operating under an array of regulatory systems for many years (that nevertheless left some gaps in oversight). For insurers, the current, state-based regulatory model will remain intact. However, the Dodd-Frank Act established, under the auspices of the US Treasury, the Federal Insurance Office (FIO), an entity that will report to Congress and the President on the insurance industry. The FIO is responsible for monitoring the property-casualty insurance and reinsurance arenas (though not the health insurance industry).

The FIO has the authority to monitor the insurance industry, identify regulatory gaps or systemic risk, deal with international insurance matters, and monitor the extent to which underserved communities have access to affordable insurance products. The FIO will supersede the current state-based regulatory system only in instances where the FIO determines that the state law is inconsistent with a negotiated international agreement and treats a non-US insurer less favorably than a US insurer.

The creation of the FIO represented the culmination of years of attempts to address some of the shortcomings of the current regulatory framework, including the absence of one unified entity at the federal level that could address insurance-related issues, particularly those related to international insurers and reinsurers and excess and surplus lines insurers. However, the FIO is a supplement to, not a replacement of, the current state-based regulatory framework.

Although the FIO does have a degree of power and authority—i.e., it oversees the federal terrorism insurance program and has the authority to issue subpoenas—the current, state-based regulatory framework (under the auspices of the National Association of Insurance Commissioners) remains in place and basically unchanged. S&P thinks that this situation represents a huge “win” for property-casualty insurers, particularly in light of the broad-based changes being undertaken in other areas of the financial services industry.

REINSURANCE UPDATE: AFTER FIRMING IN THE WAKE OF HEAVY WORLDWIDE CATASTROPHE LOSSES, RATES MAY CONTINUE TO WEAKEN

In essence, reinsurance is insurance for insurance companies. Using reinsurance, insurers are able to manage their risk exposure to a variety of claims in both property and casualty (or liability) lines of business. Insurers transfer, or “cede,” a portion of a particular risk to reinsurers in exchange for a percentage of the premium dollars they collect from the insured parties.


Broadly speaking, reinsurance transactions can be structured in two forms: treaty and facultative. Treaty reinsurance coverage provides for a percentage of an entire class of business (for example, homeowners’ insurance), up to certain prearranged policy limits. Facultative reinsurance is a policy that provides coverage for specific individual risks that usually are either too large for the primary insurer to absorb adequately or that a company’s reinsurance treaties do not cover. An example might be coverage for a high-risk building.

Reinsurance fundamentals are similar to primary insurance fundamentals, in that the industry is highly cyclical, with periods of “soft” pricing (when there is excess capital or underwriting capacity) and periods of “hard” pricing (when capital is drained from the system). The latter typically occurs in the aftermath of a significant catastrophe, like the 2005 hurricanes or the 9/11 terrorist attacks.

Traditionally, reinsurance was a transaction entered into by two insurance entities (the primary insurance carrier and the reinsurer). However, the business of risk transfer has evolved into one where the transfer of risk can be achieved in one of two ways: through the traditional mechanism or through a capital markets mechanism (typically a catastrophe bond).

Underwriting results were mixed in first-quarter 2014 The latest available aggregate reinsurance data from the Reinsurance Association of America (RAA), a reinsurance trade and research organization, indicate that market conditions for most reinsurers are improving in the aftermath of heavy 2011 and 2012 weather and catastrophe claims, worldwide. Year to date results for the 12 months ended December 31, 2013, showed an improvement in top-line results and underwriting profitability. Market conditions for reinsurers are being driven by most of the same factors that drive rates and market conditions for primary insurers: an ample supply of underwriting capacity that has been buoyed by a recovery in asset values, offset by a continued high level of catastrophe and weather-related claims and the downward pressure a persistently low interest rate environment has had on investment income. Still, results for 2012 were relatively healthy for most reinsurers.

Reinsurers in the RAA survey reported net written premiums of $26.8 billion in the 12 months ended December 31, 2013, down 8.8% from the $29.4 billion of net written premiums reported for the 12 months of 2012. Because premiums are “earned” over the life of a policy and recorded as revenue, this level of written premiums portends a healthier level of top-line growth for many reinsurers in 2013. Earned premiums (a revenue component) for this representative group of reinsurers advanced 7.9%, year over year, to $26.7 billion in 2013, from $29.0 billion in 2012. However, net investment income for this group rose only 1.2% to $8.5 billion in 2013, from $8.4 billion in 2012. Realized capital gains for this representative group of reinsurers contracted rather sharply in 2013, to $2.4 billion from $8.4 billion in 2012. Consequently, total revenue growth for this representative group of reinsurers dipped by 4.1% in 2013, to $41.8 billion, from $43.6 billion in 2012.

Underwriting results for this group of reinsurers reflected the impact of lower catastrophe claims. Loss and loss adjustment expenses equaled $15.1 billion in 2013, compared with $19.2 billion in 2012. The loss ratio ended 2013 at 56.4%, compared with a much lower 66.4% for 2011. (The loss ratio is calculated by dividing loss and loss adjustments expenses by earned premiums.) Commissions and other underwriting expenses declined 13.1%, to $5.3 billion in 2013 from $6.1 billion. The rise in expenses helped the 2013 expense ratio remain flat at 30.4%. Consequently, the combined ratio, a key barometer of underwriting performance, showed a significant improvement in 2013, ending the year at a profitable 86.8%, compared with 96.2% in 2012.

For most reinsurers in our coverage universe, underwriting results in 2013 reflected an improved pricing environment in the aftermath of record worldwide catastrophe claims during the previous three years. However, many reinsurers also write casualty (or liability) lines of business and, while pricing in these lines has firmed, it is not likely to experience the sharper pricing swings and uptick in demand seen in property lines of coverage. Moreover, reinsurers’ earned premium levels in 2013were constrained by weak premium rates in prior periods that partially affected those results. This, coupled with a continued low interest rate environment, pressured total revenue growth for many reinsurers in 2013. Bottom-line results, however, were aided by a more favorable claims environment in the absence of heavy catastrophe claims.


According to the RAA, in the first quarter of 2014 reinsurers reported net written premiums of $19.1billion, an increase of 176.8% from $6.9 billion of net written premiums reported during the same period in 2013. Further, earned premiums skyrocketed by 146.2 % to $16.0 billion, from $6.5 billion. However, net investment income for this group plunged 14.3% to $1.8 billion during the first quarter of 2014, from $2.1 billion during the same period in 2013. Furthermore, realized capital gains advanced to a net gain of $805.0 million in the first quarter of 2014 from a net loss of $127.0 million in the year-earlier period. Loss and loss adjustment expenses equaled $12.6 billion, compared with $3.3 billion in the year-earlier period. The loss ratio stood at 79.0% compared with 50.7%. The expense ratio dipped to 15.0%, from 30.3%.

CASH FLOW DIAGRAM

CASH FLOW DIAGRAM — PROPERTY-CASUALTY INSURANCE COMPANIES(A simplified model)

4

2

3

POLICYHOLDERS'

SURPLUS PRODUCES

INVESTM ENT INCOM E

4

5 INVESTM ENT INCOM E 6

7

8

1 The excess of assets over liabilities.

2 Overhead costs — rent, salaries, etc.3 Federal, state, local taxes, licenses, and fees.4 Includes interest, dividends, rents, and realized capital gains.5 On certain lines only.6 Costs of operating the company's investment program.7 If underw riting loss exceeds investment gain, there w ill be a net operating loss.

8 Applies only in the case of capital stock companies.

Source: Insurance Information Institute.

NET INVESTM ENT GAIN (OR LOSS)

NET OPERATING INCOM E (OR LOSS)

DIVIDENDS TO STOCKHOLDERSADDITIONS TO

POLICYHOLDERS' SURPLUS TO SUPPORT FUTURE

GROWTH

PRODUCE PRODUCE

INVESTM ENT INCOM E INVESTM ENT INCOM E

TOTAL INVESTM ENT INCOM E

DIVIDENDS TO POLICYHOLDERS

COM PANY PAYS CLAIM S OR CREATES LOSS RESERVES TO PAY UNSETTLED

CLAIM S

COM PANY PAYS OTHER BUSINESS EXPENSES

COM PANY PAYS TAXES AND FEES

UNDERWRITING PROFIT (OR LOSS)

PREM IUM RESERVES LOSS RESERVES

POLICYHOLDER PAYS PREM IUMPOLICYHOLDERS' SURPLUS

AGENT WITHHOLDS COM M ISSION

COM PANY EARNS

PREM IUM OVER TERM

OF POLICY

COM PANY PUTS PREM IUM INTO UNEARNED PREM IUM RESERVE

COM PANY ADDS AM OUNT OF COM M ISSION TO UNEARNED PREM IUM

RESERVES

FULL PREM IUM NOW EARNED COM PANY REPLACES M ONEY TAKEN FROM SURPLUS


Consequently, the combined ratio, a key barometer of underwriting performance, spiked up to 93.9% in the first quarter of 2014, compared with 81.0% in the same period in 2013.

Stable credit spreads have buoyed asset valuations and balance sheets for most reinsurers. This balance sheet stability, while positive, also injected additional underwriting supply (or capital) into the reinsurance market. This additional supply will likely limit the extent to which premium rates rise. Another factor increasing supply of available reinsurance capital is an influx of alternative sources of reinsurance capacity, including hedge fund and private equity firms that either form captive entities or issue catastrophe bonds. The demand side of the equation is also affected by an economic recovery, which may increase overall demand for reinsurance products.

Finally, the nature of the competitive forces differs slightly for reinsurers, although most reinsurers are enduring a competitive pricing environment like their primary insurance counterparts. Unlike most primary insurers, reinsurers face competition from government-sponsored programs and from alternative risk transfer mechanisms. To illustrate this point, homeowners’ insurance for consumers is available from insurance companies, who compete for consumers’ business (usually based on price). The insurer that writes those homeowners’ policies can transfer its risk through a reinsurer, through a government-sponsored entity (like state-funded catastrophe funds) in some cases, or through the capital markets (via the issuance of catastrophe bonds). Companies use a combination of these as part of their risk-management strategies.

HOW THE INDUSTRY OPERATES

The property-casualty (P/C) insurance industry is essentially a risk-bearing enterprise. In the event of a loss, insurance is a means by which the burden of that loss—whether related to the destruction of property or an incurred liability—is shared. Typical P/C policies include auto coverage, workers’ compensation coverage, homeowners’ coverage, and others.

There are two kinds of ownership structures in the P/C industry: mutual and stock. A mutual insurance company is owned by its policyholders, and its capital is called policyholders’ surplus. State Farm Group—the largest P/C insurer in the United States, based on premium volume—is a mutual insurance company. The second largest P/C insurer, Allstate, is a stock insurance company. Investors (that is, shareholders) are issued stock as evidence of their ownership interest, which is represented by shareholders’ equity.

THE MONEY FLOWS IN…

Regardless of an insurance company’s ownership structure, the insurance business is one of shared risk. Insurers collect payments in the form of premiums from people who face similar risks. A portion of those payments is set aside to cover policyholders’ losses. Therefore, earned premiums are typically an insurer’s primary revenue source.

At the time a policy is issued, it is recorded on the insurer’s books as a written premium. Then, over the life of the policy, the premium is “earned,” or recognized as revenue, on a fractional basis. These premiums are classified as deferred revenues and assigned to an unearned premium reserve, which is listed as a liability on an insurer’s financial statement.

There is usually a lag of about 12 months between the time a policy is written and the time the full premium is recognized as revenue. For example, a $600 premium for a year of auto insurance coverage would be “earned” by the insurer at the rate of $50 a month for 12 months. (See the accompanying “Cash flow diagram” for details on the flow of funds.) After premiums, the second largest component of insurer revenues is investment income. This is derived from investing the funds set aside for loss reserves and unearned premium reserves and from policyholders’ surplus or shareholders’ equity.

The third and usually smallest revenue component is realized investment gains; this component is the most volatile and hardest to predict. Realized investment gains arise from the sale of securities (usually stocks and bonds) in an insurer’s investment portfolio. Because the timing and magnitude of the gains depend on


conditions in the securities markets, which are by their nature dynamic, it is difficult to forecast realized investment gains.

…AND THE MONEY FLOWS OUT

An insurer’s revenue must cover a variety of expenses. One expense is the commission paid to the insurance broker, agent, or salesperson for selling a policy; this is usually deducted immediately from the collected premium. The insurance company generally accounts for this commission by deducting it from its policyholders’ surplus account and crediting it to the unearned premium reserve.

After commissions are paid, premium dollars are used to cover a variety of expenses. The largest expense facing a P/C insurer is losses, also referred to as policyholder claims. Funds also are used to pay claims-related expenses and loss adjustment expenses, including insurance adjusters’ fees and litigation expenses. Insurers face other expenses related to the underwriting process, such as salaries for actuarial staff. The underwriting profit (or loss) is determined by subtracting these expenses from earned premiums.

Like most other companies, insurers incur various other operating expenses and interest costs. Pretax profits are calculated by subtracting these expenses from underwriting profits. After-tax (or net) income is derived by taking pretax profits and subtracting shareholder dividends and federal and state income taxes.

According to data from the Insurance Services Office Inc. (ISO), an industry research group, net written premiums for the P/C insurance industry rose 3.6% to $121.4 billion in the first quarter of 2014, from $117.2 billion in the year-earlier period. Earned premiums rose by 4.3% to $117.9 billion from $113.0 billion. In 2013, net written premiums for the P/C insurance industry rose 4.6% to $477.7 billion from $456.7 billion in 2012. Earned premiums rose by 4.2% to $467.9 billion in 2013, from $449.0 billion in 2012.

Underwriting results in the first quarter of 2014 were mixed, which can be attributed to an increase in and higher claims from personal and commercial lines. As a result, the industry posted a $2.2 billion pretax underwriting gain in the first quarter of 2014; this was down considerably from the $4.5 billion gain during the same period in 2013. The industry posted a $15.5 billion pretax underwriting gain, which was up considerably from a $15.4 billion loss in 2012. Pretax underwriting losses totaled $36.2 billion in 2011, $10.5 billion in 2010, and $3.0 billion in 2009. These results all contrast sharply with the $21.2 billion pretax underwriting gain recorded in 2008.

US catastrophe losses in the first quarter of 2014 rose to $3.0 billion from the $2.8 billion incurred in the year-earlier period. In 2013, these losses totaled $12.9 billion, down from $35 billion in 2012. Losses totaled $38 billion in 2011, $14.3 billion in 2010, $11.6 billion in 2009 (all net of reinsurance recoveries), according to ISO’s Property Claim Services unit. Catastrophe levels in recent years, however, represented a steep decline from the $61.9 billion of catastrophe claims recorded in 2005, the year that Hurricanes Katrina, Rita, and Wilma struck the US. (A catastrophe is defined as an incident or series of incidents causing insured losses of $25 million or more.)

The rise in underwriting profits was driven by the decline in incurred losses. During the first quarter of 2014, incurred losses declined by 9.8% to $67.2 billion from $61.2 billion, in the year-earlier period. During 2013, total incurred losses declined 6.5% to $259.3 billion, from $277.3 billion in 2012, but were up from $438.0 billion in 2011 and $423.8 billion in 2010. However, loss adjustment expenses (the expenses incurred in settling claims) increased by 2.3% to $13.5 billion in the first quarter of 2014, from $13.2 billion in the year-earlier period. Loss adjustment expenses totaled $55.7 billion in 2013, up 0.4% from 55.5 billion in 2012.

Investment results during the first quarter of 2014 were mixed, as low investment yields depressed investment income, but a modestly improved investment environment yielded some investment gains. Net investment income declined by 1.8% in the first quarter of 2014 to $11.2 billion, from $11.4 billion during the same period in 2013. Realized investment gains inched up to $2.9 billion from $1.4 billion. In 2013, net investment income dropped 1.3% to $47.4 billion, compared with $48.0 billion in 2012, but was down from $49.2 billion in 2012. However, realized investment gains of nearly $11.4 billion, $6.2 billion, $7.0


billion, and $5.9 billion, in 2013, 2012, 2011, and 2010, respectively, contrasted with investment losses of $7.9 billion in 2009. These results are in stark comparison to the $19.8 billion of net realized investment losses incurred in 2008.

During the first quarter of 2014, unrealized capital gains on investments totaled $1.3 billion, down from $13.1 billion during the year-earlier period. In 2013 and 2012, the biggest swing factor in the industry’s investment ledger was in its unrealized investment results. Insurers reported unrealized capital gains on investments of $36.1 billion in 2013 and $18.5 in 2012, versus $4.4 billion of unrealized capital losses in 2011. In 2010, insurers reported unrealized capital gains on investments of $16.0 billion. Another significant turnaround occurred in 2009, when the insurers in the ISO study reported unrealized investment gains of $23.1 billion, following unrealized capital losses of $52.9 billion in 2008. While investment results have historically bolstered underwriting results—and perhaps encouraged some insurers to “cash flow” underwrite (i.e., aggressively underwrite policies to bring in cash to invest)—the industry’s rather volatile investment performance in recent years illustrates the need to adhere to solid underwriting principles, in our view.

Pretax underwriting profits increased in 2013, but dipped in the first quarter of 2014. Such profits totaled $13.7 billion, down 70.0% from $15.8 billion in the year-earlier period. In 2013, the improvement in investment results resulted in wider pretax underwriting gains and the property-casualty insurance industry reported a significant 83.7% increase in pretax underwriting profits in 2013, to $64.3 billion, from $35.0billion in 2012, up from $15.4 billion in 2011. The increase in after-tax income, however, was lower, at 81.8%, to $63.8 billion in 2013, from $35.1 billion in 2012, which is up from $19.5 billion in 2011.

KEEP THE CASH CIRCULATING

Many property-related insurance claims are settled relatively quickly. They often are referred to as “short-tail” liabilities because the period between the incident causing the loss (such as a storm that damages a home) and the claim settlement is relatively short. Because of this, P/C insurers should maintain the majority of their investments in highly liquid securities that can be converted quickly to cash. This liquidity ensures

that policyholders can be paid promptly in the event of a loss.

Based on the latest available aggregate industry statistics from the Insurance Services Office Inc. (ISO), cash and invested assets of the P/C industry totaled nearly $1.4 trillion at December 31, 2012, up from $1.34 trillion at year-end 2011. Of the total cash and invested assets at year-end 2012, bonds accounted for some 65%. Other investments included common stocks (18.4%), preferred stocks (0.9%), and cash and short-term investments (6%). The remaining 9.4% of the P/C industry’s investments were in an array of other investments.

An insurer derives funds for investment from three primary sources: its loss reserves, its unearned premium reserve, and its

policyholders’ surplus. Loss reserves are the funds set aside to pay claims and are by far the largest component of the P/C industry’s liabilities. For the insurers in the ISO universe, loss and loss adjustment reserves amounted to $576.8 billion at year-end 2012, or more than half of the industry’s total liabilities (at September 30, 2013, such reserves totaled $573.55 billion).

The second largest liability on an insurer’s books, and a principal source of investment income, is the unearned premium reserve. The unearned premium reserve represents the liability for that portion of a written premium that has been charged to the policyholder but has not yet been used. Using our earlier

Chart H01 Distribution of Invested Assets

Bonds65.4%Preferred

stock0.9%

Common stock18.4%

Cash & short-term

investments6.0%

Other invested assets9.4%

DISTRIBUTION OF INVESTED ASSETS—2012(Total US property-casualty industry, in percent)

Totals may not add due to rounding. Source: Insurance Information Institute.


example of the $600 annual auto insurance premium, the unearned premium reserve would total $550 at the end of the first month, because $50 (or one-twelfth) of the annual premium had been “earned,” or accounted for as an earned premium on the insurer’s books. At year-end 2012, unearned premiums for insurers in the ISO universe exceeded $210 billion.

LOSS RESERVES: THE FINANCIAL BUFFER

As the largest component of an insurer’s liabilities, loss reserves have an important bearing on financial results. An insurer’s prosperity depends largely on its ability to quantify accurately the ultimate cost of the losses from the risks it assumes.

When reserve levels are too high—that is, when an insurer sets aside too much money to pay future claims—profits appear lower than they actually are. Consequently, premium rates might not appear high enough to cover losses, causing the insurer to raise its rates unnecessarily. Conversely, if reserves are too low, profits will be inflated, leading an insurer to lower its rates inappropriately. In either situation, once losses develop inaccurate reserve levels ultimately will have to be adjusted. Such erratic accounting adjustments can make an insurer’s financial position seem unstable.

Establishing premium and loss reserve levels requires an insurer to estimate the ultimate value of future losses, which is extremely difficult to do accurately. Along with the unpredictability of natural disasters, forecasts of future losses are subject to several other variables, including (but not limited to) real economic growth, inflation, interest rates, sociopolitical trends, judicial rulings, and voter initiatives.

The trend in recent years toward a greater proportion of the insurance business being written in casualty lines has made the reserving process even more difficult. It is considerably harder to estimate the ultimate losses from casualty lines than from property lines such as homeowners’ coverage, because casualty lines have “long tails”—that is, the periods between the origination of the policy, the event leading to a claim and the subsequent payment of that claim may be years or even decades. Inflation can have a highly negative impact on the insurer’s eventual costs as the liability’s “tail” lengthens. On the plus side, however, this characteristic of casualty lines lets the insurer invest those premium dollars for a longer time.

Estimating the losses… Calculating loss reserves involves considering four different kinds of losses, each with differing levels of uncertainty.

Losses that have been incurred, reported, and settled, but not yet paid. These losses are the most certain of the four loss types. Because the size of the ultimate loss has been established, setting aside an accurate reserve level is easiest here.

Losses that have been incurred and reported, but not settled. These carry a slightly increased level of uncertainty. Here, the insurer is aware that a loss has occurred, but the final payment terms have not yet been established.

Losses that have been incurred and reported, but not settled, due to a liability. Because such losses usually involve longer-tail liabilities, calculating the ultimate cost of settlement is more difficult.

Losses that have been incurred, but not reported (IBNR). These losses carry the most uncertainty. In some cases, insurers know about IBNR losses and try to make preliminary loss estimates. For example, suppose an earthquake hit a certain area on December 30, and a local P/C insurer ends its fiscal year on December 31. In its year-end statements, the insurer could estimate its earthquake-related IBNR loss based on its experience in prior earthquakes.

In some cases, however, IBNR losses emerge years after the damage first occurs. Such losses are very difficult to predict. For example, the various asbestos lawsuits that have plagued P/C insurers in recent years relate to injuries incurred many years ago, but reported much later.


…and calculating the loss reserves Most insurance companies assign the task of establishing appropriate loss reserve levels to their actuarial staffs. Actuaries—specialists trained in mathematics, statistics, and accounting—are responsible for calculating premium rates, reserves, and dividends. They use a variety of quantitative methods to establish loss reserves. The five most commonly used methods are the following:

Claim-file estimates plus. This method establishes the estimated liability for reported losses by aggregating pending claim-file estimates (such as estimates being prepared by the claims department), from which payments that have already been made are deducted. Added to this total are formula calculations for additional payments on closed claims that will be reopened for IBNR losses. The sum of the component parts constitutes the full loss liability as of the end of the accounting period.

This method, considered the least sophisticated, is appropriate for property lines in which claim frequency is low and the range of loss costs is sizable. Furthermore, its dependence on claims department estimates exposes it to a degree of subjectivity.

Percentage of losses paid to date. Although this method of extrapolating liability from past percentages of losses paid is regarded as simple to apply, its use is limited to coverages where payment patterns are relatively consistent. The percentage of losses paid to ultimate incurred losses is calculated for various stages of development for prior years. From this history, percentages paid are selected for each stage of development. The amount of losses paid to date for the period under review is then divided by the appropriate percentage, to arrive at the estimated ultimate loss cost. The amount of losses paid to date is subtracted from this figure to produce the estimated loss liability.

Counts and average costs of incurred losses. This method indirectly establishes the liability for losses from loss counts and average costs. The projected number of loss units is obtained from the number of loss units received to date, based on percentages reported in prior years at the same stage of development.

The average cost of loss units closed to date is calculated and compared with average closed costs of prior years at the same stage of development. To arrive at the total estimated ultimate loss, the estimated ultimate average cost derived is multiplied by the projected ultimate number of loss units. Losses paid to date are then subtracted to obtain the estimated liability.

Counts and average values of unpaid losses. This method directly establishes the liability from loss counts and average values of unpaid losses. In this case, a selected average value is applied to the number of loss units. If the data are based on reported losses, the selected average value is applied to the number of open loss units, and a separate calculation for IBNR losses is necessary. If the data are based on accidents incurred, the selected average value is based on the total number of open and IBNR losses.

Loss ratio. This method estimates the ultimate loss by using an estimated loss ratio. Selected for whatever period of coverage is involved, the ratio is applied to the applicable earned premiums, producing the estimated ultimate losses incurred for that period. Losses paid to date on accidents occurring during the period are deducted from this total to derive the estimated total loss liability.

This overview illustrates the various methods used to quantify an insurer’s estimated liability for losses as of the evaluation date. Obviously, a great deal more detail and considerable judgment are involved in applying these methods. Furthermore, no single method is ideal for all situations: which one a particular insurer chooses will depend on that company’s unique experience and product mix. In fact, many companies use more than one method to ensure a high degree of accuracy and reliability. For a more detailed discussion of the various loss-reserving methods, S&P Capital IQ recommends Property & Casualty Insurance Accounting, published by the Insurance Accounting and Systems Association.

SURPLUS FUNDS: CAPITAL COUNTS

After investment assets and loss reserves, the third largest component of an insurer’s balance sheet is policyholders’ surplus, which is analogous to shareholders’ equity. On December 31, 2013, the insurers in


the ISO survey had an aggregate surplus of $653.3 billion, up 11.3% from the year-end 2012 surplus of $587.1 billion. As of March 31, 2014, surplus for insurers in the ISO study climbed 8.9% to $662.0 billion compared with same period in 2013.

Policyholders’ surplus is one of the indicators that state regulators use to monitor and control insurers’ solvency and growth. Industry surplus (sometimes referred to as capital or equity) appreciates or depreciates through retained earnings or losses, unrealized gains or losses from investment portfolios, and additions to investors’ capital.

Typically, regulators permit insurers to leverage their surplus to a certain extent, allowing them to underwrite business equal to two to three times the amount of their surplus. Regulators tend to give insurers more leeway on the short-tail property lines than on the long-tail casualty lines, because of the former’s relatively greater predictability of underwriting performance.

As the industry has increased its exposure to casualty lines, its leverage has declined. Industry leverage also has declined in response to reassessments of risk and because of various factors contributing to overcapacity. (Industry surplus leverage is discussed further in the “How to Analyze” section of this Survey.)

Two accounting methods used P/C insurers generally account for their surplus by using statutory accounting principles (SAP), which require them to expense immediately all costs related to writing business, rather than by using generally accepted accounting principles (GAAP), which attempt to match an insurer’s income and expenses by prorating the costs of an insurance policy over its assumed life.

Many insurers report their financial results using both accounting systems. They report their results to regulators using SAP; for investors, they use GAAP. (Many analysts, however, also use SAP financial statements when analyzing an insurer.) This difference largely reflects the disparate priorities of shareholders, investors, and regulators. Shareholders and investors are likely to be most interested in a company’s ability to earn a profit, while regulators’ primary concern is the company’s solvency—its ability to meet policyholder obligations.

The primary difference between GAAP and SAP lies in an accounting concept known as the matching principle. Under GAAP accounting, an insurer charges expenses to the period in which they were used to generate revenues. Under SAP accounting, expenses are recognized as soon as they occur.

For example, when an insurer uses SAP, any expenses associated with writing an insurance policy—such as commissions and other underwriting expenses—are immediately deducted from income. Under GAAP accounting, these same charges are treated as assets—referred to as deferred policy acquisition costs—and are amortized over the insurance policy’s life. Hence, the more conservative SAP emphasizes a company’s solvency. An insurer’s income and surplus tend to be lower under SAP than under GAAP, which emphasizes the firm’s ongoing profitability.

FORMS OF OWNERSHIP

A P/C insurer’s ownership structure can take one of two forms: a publicly held stock insurance company or a mutual insurance company owned by its policyholders. In addition, an insurance company can be structured as a hybrid mutual holding company.

Stock insurance companies. As their name implies, stock insurance companies are owned by shareholders, who can buy or sell shares in the public stock market. The capital of a stock insurance company is called shareholders’ equity. Since these companies are publicly held, they are required to file quarterly financial reports with the US Securities and Exchange Commission (SEC). Thus, obtaining timely financial information about these companies is relatively easy.

As publicly owned companies, these insurance companies are obligated to provide the most favorable return on shareholders’ capital. Sometimes, this goal may conflict with the interests of policyholders. For example,


a stockholder-owned insurer may be under pressure to keep claim costs in line in order to return a profit to its shareholders. This scrutiny of claims, although certainly legal, may not always be in the best interest of the policyholder, who relies on the insurer to promptly pay his or her claim.

Mutual insurance companies. For mutual insurance companies, in contrast, policyholders are the owners. A mutual insurance company’s capital is called policyholders’ surplus. Because these companies are owned by their policyholders, they are not required to publicly disclose financial information. Although some mutual insurers distribute financial information to policyholders, obtaining financial information about a mutual insurer is more difficult.

Mutual holding companies. In some instances, insurance companies have formed mutual holding companies to combine the benefits of mutual ownership with those of public ownership. In this case, the holding company remains in the hands of the policyholders, while shares in the operating subsidiary are sold to the public. However, this arrangement can lead to conflicting priorities, as management seeks to please both policyholders, who prefer that the company retain its capital to pay claims, as well as shareholders, who prefer that management use its capital to grow the business and pay dividends.

Demutualization The process by which a mutual insurance company converts to a shareholder-owned structure is called demutualization. Between 1997 and 2001, five of the 15 largest US life insurers demutualized. Prudential Financial Inc. completed its initial public offering in December 2001. In 2000, Metropolitan Life Insurance Co. and John Hancock Financial Services Inc. demutualized. (John Hancock was acquired by Manulife Financial Corp. in 2004.)

The forces behind these high-profile demutualizations differ from those that drove a number of other companies, including The Equitable, to demutualize in the late 1980s. Back then, insurers needed access to the capital markets to sell equity and debt securities in an attempt to boost their sagging capital bases. At that time, many companies were saddled with illiquid and underperforming real estate loans and assets, which eroded the strength of their capital bases and threatened their solvency. They needed to raise capital in order to survive.

The more recent spate of demutualizations was driven by insurers’ need to increase their operating and financial flexibility. One aspect of this is the ability to issue stock. Although the M&A boom of the late 1990s has slowed considerably, the ability to acquire another company through the issuance of stock (the currency of choice in most deals) is a critical success factor for many companies. Furthermore, in this era of rewarding performance with stock options, many mutual insurers believed they were at a disadvantage in recruiting and retaining top management talent by not being able to offer this benefit to employees.

LINES OF COVERAGE

Although P/C insurance is available on a wide variety of coverages, several lines constitute the bulk of industry premium volume, as shown in the accompanying chart, “Property/casualty industry’s product line distribution,” which is based on the latest available data from the Insurance Information Institute (III).

Automobile coverage. This is the largest P/C line; it covers both physical (property) damage and car owners’ liability. According to the Insurance Information Institute, this sector (which includes both private passenger and commercial auto coverage) accounted for approximately 41.5% of the industry’s net written premium volume in 2012 (latest available). Automobile coverage has long dominated the industry’s product mix. Its growth over the past 20 years has been fueled by the adoption of mandatory automobile insurance in many states and by escalating litigation and medical care costs.

Homeowners’ multi-peril. This is another principal line of business for the P/C insurance industry, accounting for some 14.8% of written premium volume in 2012 (latest available). Homeowners’ insurance covers both the physical damage to the insured property and the liability or legal responsibility arising from any injuries and/or property damage that the policyholder may cause to other people. Damage caused by


most natural disasters is covered, except that caused by floods and earthquakes. A separate policy usually is required to cover earthquake and flood damage.

Workers’ compensation. Another major line of business for the P/C industry is workers’ compensation, which accounted for some 8.3% of 2012 written premium volume (latest available). This business line insures organizations that are required by state laws to compensate employees who are injured or disabled because of an occupational hazard. It also helps compensate families of employees killed on the job.

During the 1960s and 1970s, the growth in this business line was helped by changes in certain state laws that increased mandated coverage and by the general upgrading of benefit levels. However, this market has contracted in recent years, as corporations and local governments have sought less costly means of providing this coverage, such as self-insuring. Some insurers have also withdrawn from this line of business in response to poor underwriting results.

Other lines. The remaining 35.4% or so of the market

comprises a variety of types of coverage, including commercial multi-peril coverage, surety, inland marine, and an array of liability coverages.

Chart H03 Product line distribution

Private passenger auto

liability21.3%


collision and comprehensive

14.5%Commercial auto liability, collision,

and comprehensive

5.7%

Homeowners multiple peril

12.4%

Worker's compensation

9.1%

Other liability7.7%

PROPERTY/CASUALTY INDUSTRY'S PRODUCT LINE DISTRIBUTION(In percent, by net premiums written)

2007

Totals may not add due to rounding. Source: Insurance Information Institute.


liability22.6%



14.1%

Commercial auto liability and


4.8%

Homeowners multiple peril

14.8%

Worker's compensation

8.3%

Other liability9.2%

2012

Table B03 Classification of Net premiums

CLASSIFICATION OF NET PREMIUMS — LEADING LINES FOR PROPERTY-CASUALTY INSURANCE COMPANIES*(Premiums written, in millions of dollars and as a percentage of total)

‡AUTO WORKERS' HOMEOWNERS' COMMERCIAL

†AUTO LIABILITY PHYS. DAMAGE COMPENSATION **MISC. LIABILITY STRAIGHT FIRE MULTIPLE PERIL MULTIPLE PERIL

YEAR WRITTEN % WRITTEN % WRITTEN % WRITTEN % WRITTEN % WRITTEN % WRITTEN %

2012 119,938 22.6 69,578 14.1 37,944 8.3 48,912 10.7 10,766 2.4 67,374 14.8 31,038 6.82011 116,752 22.7 67,596 14.3 35,664 8.1 47,666 10.8 10,319 2.3 64,131 14.5 29,995 6.82010 113,919 22.9 67,472 14.7 31,494 7.4 46,827 11.0 10,218 2.4 61,296 14.4 28,847 6.82009 111,398 22.4 67,890 14.8 32,010 7.6 47,604 11.3 10,100 2.4 57,680 13.6 28,867 6.82008 112,369 21.5 70,073 14.6 36,523 8.3 50,783 11.5 9,905 2.3 56,405 12.8 30,224 6.92007 114,029 21.3 71,262 14.5 40,583 9.1 54,409 12.2 9,765 2.2 55,586 12.4 31,176 7.02006 115,127 21.3 72,084 14.5 41,735 9.3 56,156 12.5 9,338 2.1 55,085 12.3 31,778 7.12005 114,579 22.2 71,867 15.2 39,788 9.3 52,771 12.4 7,883 1.8 52,466 12.3 29,633 6.92004 112,464 21.9 71,887 15.3 36,689 8.6 52,127 12.3 8,044 1.9 49,595 11.7 29,049 6.82003 107,684 22.1 68,892 15.3 32,942 8.2 47,488 11.8 8,384 2.1 45,642 11.3 27,341 6.8†Bodily injury and property damage combined. ‡Fire-theft and collision combined. **Includes product liability, malpractice, etc.*Latest available.Source: Insurance Information Institute.


DISTRIBUTION: GETTING POLICIES TO THE PEOPLE

Insurance companies distribute their personal and commercial policies through either direct selling systems or agency systems. In a direct selling distribution system, the insurance company (sometimes referred to as a direct writer) contacts its customers (“insureds”) through its own employees. Within this framework, the insurer sells policies through a number of outlets, including direct mail, online, and through company-run agencies. Under an agency system, the insurer contracts outside agents to sell its policies in exchange for a commission. Some agents may sell only a single insurer’s policies (“exclusive agents”), while others (“independent agents”) may offer policies from various insurance companies.

While there are advantages and disadvantages to both systems, the tradeoff is between costs and control. A direct selling system can be expensive to establish and operate, but it gives an insurer more control over the distribution process. The agency system reduces the amount of control an insurer has over each aspect of the distribution system, but it usually offers an established network through which the insurer can distribute its products. This is especially helpful to small and regional insurers without the means to establish their own distribution network.

REGULATION AND COMPETITION HOLD INSURERS IN LINE

The insurance industry is regulated on a state-by-state basis, although it now operates under the auspices of a federal overseer. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. One component of this broad-based overhaul of financial services regulation was the creation of the Federal Insurance Office (FIO) in the US Treasury. (See the “Industry Trends” section of this Survey for a discussion of the latest regulatory developments.) Despite this development, insurance regulation still remains state-based. The FIO was to have submitted a report to Congress in early 2012 on how to modernize insurance regulation. In mid-June 2013, the FIO issued its first report, which provided an overview of the industry, but did not directly address any regulatory changes. Each of the 50 states and the District of Columbia has an insurance commissioner, who grants insurers operating licenses to let them conduct business within that state. On December 12, 2013, the FIO submitted a modernization report to Congress, which noted that the states and the federal government should handle insurance regulation collaboratively. It also made several proposals to improve the US system of insurance regulation.

State regulators serve three primary functions. First, they monitor the financial condition and claims-paying ability of each insurance company operating in their state. Second, they serve as consumer watchdogs, ensuring that policyholders are not overcharged or discriminated against. Finally, regulators try to ensure that essential insurance coverage is readily available to all consumers.

The National Association of Insurance Commissioners (NAIC), based in Kansas City, Missouri, coordinates the activities of state insurance commissioners. Founded in 1871 as the National Convention of Insurance Commissioners, the NAIC undertook the formulation of uniform accounting procedures as one of its first actions. Today, one of the NAIC’s main functions is to develop and improve insurance reporting and accounting standards and practices. These actions are intended to improve state regulators’ knowledge of the financial condition of insurers in their jurisdiction.

Insurance companies are required to file a set of financial statements each year with regulators in every state in which they operate. These records, called annual statements, use statutory accounting terms to outline the company’s profits, losses, and overall financial condition.

Other forms of regulation and control also govern the insurance industry. For instance, publicly held insurance companies—those that issue stock—are subject to regulation by the SEC. Finally, the intense level of competition among industry participants in all lines also usually serves as a measure of control. Competition helps keep pricing in line and prevents any one participant from becoming too powerful.


KEY INDUSTRY RATIOS AND STATISTICS

For purposes of formulating industry-wide benchmarks in this portion of the Survey, we define the property-casualty insurance industry as comprising the companies that report their operating statistics to the Insurance Services Office Inc., an industry research and data collection organization. According to Insurance Services Office Inc. (ISO), an industry research and trade organization, these companies comprised 96% of the insurance industry in 2012.

Return on assets (ROA). This is a measure of profitability; it is equal to net income divided by average total assets. The ROA for most property-casualty insurers typically ranges from 2.0% to 5.0%.

Return on equity (ROE). Usually considered in tandem with ROA, ROE is another measure of profitability. For a stockholder-owned insurance company, ROE is calculated by dividing net income by average shareholders’ equity. To calculate the ROE for the entire property-casualty insurance industry (which includes mutual insurance companies), the denominator in this equation would be policyholders’ surplus. Policyholders’ surplus is a statutory accounting term that is generally analogous to shareholders’ equity. The return on equity/surplus for property-casualty insurers can range from under 5% to about 18%. Most insurers strive to earn an ROE of 12% to 15%.

Net investment yield. This measure of investment performance is typically calculated as net investment income divided by average invested assets. Investment yields typically fall within a range of 4% to 12%, though they can be lower than or well above that range, depending on the mix of invested assets in an insurer’s portfolio. For the property-casualty industry, the average yield on cash and invested assets in 2012 dropped to 3.6%, from 3.8% in both 2011 and 2010, 4.1% in 2009, 4.2% in 2008, and 4.5% in 2007.

Underwriting performance The next two ratios, which measure underwriting performance, are derived from data published quarterly by the ISO.

Net premiums written to surplus. This ratio measures the extent to which the industry (or an insurer) has leveraged its capital to write business. Sometimes referred to as a measure of capacity utilization, it is equal to net written premiums divided by policyholders’ surplus. Typically, regulators permit an insurer to have a ratio of net written premiums to surplus of 2-to-1. In other words, insurers would be permitted to write $2

in premiums for every $1 in capital. Because premium rates for many lines of business remained weak, the industry remained underleveraged.

On March 31, 2014, the ratio of net written premiums to policyholders’ surplus was 0.18-to-1, down from 0.19-to-1 on March 31, 2013. In other words, the industry wrote $0.18worth of premiums for every $1.00 in capital. This is down from a premiums-to-surplus ratio level of 0.73-to-1 at year-end 2013 (or $0.73 of premiums for every $1.00 of capital).

Combined ratio. A key measure of underwriting performance, the combined ratio is calculated by adding three figures:

the loss ratio (losses plus loss adjustment expenses, divided by earned premiums), the expense ratio (other underwriting expenses divided by written premiums), and the dividend ratio (policyholder dividends divided by earned premiums). A combined ratio of 100% or less indicates an underwriting profit; in excess of 100%, it signals an underwriting loss.

Chart H04 Combined ratios

0

20

40

60

80

100

120

2002 03 04 05 06 07 08 09 10 11 12 2013 '13* '14*

Commercial lines Personal lines

US PROPERTY/CASUALTY COMBINED RATIOS

*Three months ended March.Source: Insurance Services Office.


A typical range for combined ratios is 100% to 110%. The loss ratio usually ranges from 60% to 80%, and the expense ratio from 25% to 35%. The dividend ratio usually ranges from 1.0% to 2.0%.

Companies strive to earn a profit from underwriting, but only a small percentage of them actually achieve this goal. According to a study by the ISO, between 1952 and 1998, the industry earned a profit from underwriting (and achieved a combined ratio below 100%) in just 15 of those 47 years. Until 2004, the last time this happened was in 1978, when the industry’s combined ratio equaled 97.5%. In 2009, the industry’s combined ratio exceeded 100%.

For the first quarter of 2014, the combined ratio for the industry stood at 97.3%, an increase compared with 94.3% in the year-earlier period. This was down from 102.9%, 108.1%, and 102.9% in 2012, 2011, and 2010, respectively, which showed a significant deterioration in 2011 and rebound in 2012. During 2009, insurers in the ISO study reported a combined ratio of 101.0%, while in 2008 the combined ratio stood at a much higher 105.0%, largely due to higher catastrophe claims. The combined ratio for 2013 consisted of a loss ratio of 67.3% (versus 74.2% in 2012), an expense ratio of 28.2% (flat in 2012), and a dividend ratio of 0.5% (flat in 2012).

HOW TO ANALYZE A PROPERTY-CASUALTY INSURANCE COMPANY

When analyzing a property-casualty (P/C) insurer, consider three central points: its profitability, or ability to make money; its liquidity, or ability to convert assets into cash to pay claims and meet other expenses; and its leverage, or the extent to which it uses its capital to produce business.

As with the markets for most other goods and services, the P/C insurance market functions within supply and demand curves. Demand for insurance is fairly stable and inelastic: it is influenced by growth in the economy (as measured by gross domestic product), the inflation rate, and the need to protect assets. The supply curve, however, moves primarily with interest rates.

PRICING MOVES INVERSELY WITH INTEREST RATES

Theoretically, when interest rates rise, insurers are willing to provide more insurance at the same price, because each premium dollar generates more investment income for the insurer. Thus, insurance prices decline until additional demand is stimulated or until it becomes unprofitable to provide coverage, prompting insurers to withdraw. Either way, supply and demand are brought back into balance. The fundamental relationship between insurance pricing and interest rates, therefore, is that prices increase when interest rates fall, and they decline when interest rates rise. The magnitude of changes in price varies with the magnitude of changes in interest rates.

Price and premium growth levels also are influenced by competitive pressures within the industry and by each firm’s capacity to underwrite. The industry is competitive and has relatively few barriers to entry, so companies tend to overreact to interest rate changes, either overpricing or underpricing as situations warrant. In recent years, however, this theory did not match reality. During a period of historically low interest rates, insurance pricing remained competitive. This is largely attributable to an oversupply of underwriting capacity (or capital) in the insurance marketplace.

Prospects for inflation also play an important role in insurance prices. If claim costs are expected to rise because of inflation, a higher level of income will be needed to cover these potentially higher costs in the future. Thus, insurance companies must incorporate estimates of future inflation into their pricing structures.

When there is a wide range of inflation expectations, companies with lower-than-average estimates of future inflation may offer their products for below-average prices. Of course, insurers often can garner market share when their policies are priced below those of their competitors. Therefore, overall price trends tend to move toward the levels set by companies with a less inflationary outlook.


PREDICTING PROFITS

Two broad profitability measures applicable to P/C insurance companies are return on assets (ROA) and return on equity (ROE). ROA is net income divided by average total assets. A typical range of ROAs for the P/C insurance industry is 0.5%–2.0%, with the average around 1.5%. ROE is calculated by dividing the insurer’s net income by average shareholders’ equity. Most insurers strive to achieve an ROE of at least 15%, although many fail to attain that goal. A P/C insurer’s profitability depends primarily on two components: underwriting income and investment income. In the following section, we discuss each of these components of an insurer’s operating income.

Principles of underwriting The first element to consider when analyzing underwriting results is the rate of written premium growth. It should be compared with industry data to judge how a company stacks up against its peers.

Pay careful attention to the circumstances surrounding the rate of premium growth. For example, if a company expands its written premium base at 10% a year while the overall industry is growing at 6% a year, that company would appear to be outperforming its peer group. Presumably, the stock market would award that firm a higher valuation than some of its slower-growing counterparts would enjoy. However, if the insurer is achieving premium growth by following risky underwriting standards—such as underpricing policies to gain market share or writing a great deal of business in a high-risk coverage line avoided by other insurers—the insurer’s valuation would have to be adjusted downward.

Conversely, a company growing its premium base at a rate slower than the overall industry could be doing so because it is limiting its exposure to an unattractive class of business. For example, a number of insurers have reduced their exposure to workers’ compensation insurance in response to that line’s adverse claim trends. These insurers may have posted minimal written premium growth in recent years, but many have seen their profitability improve after purging these loss-laden business lines.

Another factor that affects a company’s premium growth rate is the extent to which an insurer uses reinsurance, which is the practice of transferring some of its risk—and premium income—to reinsurance companies. In an attempt to offset slowing premium growth, an insurer might reduce the level of premiums that it cedes to reinsurers. Using less reinsurance lets an insurer keep more of each premium dollar, so a reduced level of reinsurance may enhance year-to-year premium growth comparisons. At the same time, using less reinsurance removes the protection it affords, potentially exposing the primary insurer to a large financial claim.

The combined ratio. To evaluate an insurer’s underwriting performance, many analysts use a statistical measure called the combined ratio. This ratio equals the sum of the loss ratio, the expense ratio, and the dividend ratio, which are described following. A combined ratio below 100% indicates an underwriting profit; one above 100% means an insurer has incurred an underwriting loss. Unless otherwise stated, most companies calculate these ratios using statutory accounting principles (SAP).

The loss ratio. The loss ratio measures claims cost experience. It is derived by dividing losses and loss adjustment expenses by earned premiums. This ratio typically ranges from 60% to 80%, but can soar during a period of heavy catastrophe losses.

The expense ratio. The expense ratio measures how cost-effectively an insurer writes new business. It is derived by dividing operating expenses by written premiums. It typically ranges from 25% to 35%.

The dividend ratio. The dividend ratio, the smallest component of the combined ratio (typically ranging from 1% to 2%), is obtained by dividing policyholders’ dividends by earned premiums. The combined ratio often is presented excluding the dividend ratio.

Playing the investment field Investment income is an important source of profits for P/C insurers. Theoretically, investment income should be used to provide financial protection against unforeseen and unanticipated underwriting losses. Many insurers, however, have come to rely on investment income to remain profitable. When evaluating an


insurer’s investment portfolio, analysts review a company’s asset allocation strategy, making sure its mix of invested assets is appropriate for the type of business it writes.

For most P/C insurers, this process is fairly straightforward: the typical P/C insurer maintains most of its invested assets in relatively liquid fixed-income or equity securities that are converted easily into cash. This is because most P/C insurance claims are settled in a relatively short amount of time. Within each asset class, such as stocks or bonds, a review of asset quality and diversification is necessary. To help in the analysis of asset quality, insurers usually provide the debt rating of bonds in their portfolio or an average debt rating for their entire portfolio.

Two important ratios used in analyzing investment results are the investment yield and the total return on the portfolio. Investment yield is usually calculated as the net investment income during a certain time period, divided by the portfolio’s average value during the same period. Total return is usually calculated as net investment income plus or minus realized and unrealized gains, divided by beginning market value of the portfolio, plus or minus the weighted average of additions or dispositions.

CASH FLOW AND LIQUIDITY

Liquidity is another key benchmark for analyzing a P/C insurer, because of the insurer’s need to pay claims promptly. An insurer’s sources of liquidity arise from underwriting cash flow, investment cash flow, and asset liquidation cash flow. All of these are considered internal sources because they are generated by the insurer’s operations.

Because of the somewhat unpredictable nature of the P/C insurance business, cash flow from underwriting activities is probably the most volatile element of an insurer’s total cash flow. Nevertheless, the underwriting cash flow for most insurers is usually positive; when combined with the cash flow from investment activities, most insurers end up with a substantial positive cash flow.

LOOKING AT LEVERAGE

For P/C insurers, leverage refers to how the company uses its surplus, or capital, to write policies. The ratio of net written premiums to policyholders’ surplus is usually a good indicator of the industry’s capacity utilization.

Historically, insurers leveraged their surplus by a multiple of two to three, depending on the types of business they underwrote. For example, an insurer with $10 million of surplus could probably write $20 million to $30 million of annual premiums. Regulators tend to give insurers more leeway in surplus leverage on shorter-tail property lines of coverage than on longer-tail liability lines, because the former have greater predictability. (The terms “short-tail” and “long-tail” refer to the time between the occurrence of a claim and its settlement; short-tail claims usually can be settled more quickly than long-tail claims.)

Thus, as the industry’s exposure to casualty lines has increased, surplus leverage has decreased. Overcapacity in the insurance business also has caused surplus leverage to decline, as have strong investment returns. Thus, while regulators still may use a 2-to-1 leverage of surplus as a benchmark, this benchmark has to be considered against a backdrop of industry-wide “underleverage.” In fact, industry leverage has been less than 1-to-1 for much of the last 15 years. Industry leverage increased somewhat in the aftermath of the September 2001 terrorist attacks and back-to-back record hurricane seasons in 2004 and 2005. Industry leverage declined slightly in 2012 (versus 2011), and remained well below the 2-to-1 benchmark level.

Based on the latest available data obtained from Insurance Services Office Inc. (ISO), an industry research and trade organization, the ratio of net written premiums to policyholder surplus was 0.18-to-1 on March 31, 2014, down from 0.19-to-1 on March 31, 2013 and 0.20-to-1 on March 31, 2012. Looking into full-year data, the ratio of net written premiums to policyholder surplus was 0.73-to-1 on December 31, 2013, which is lower than 0.78-to-1 and 0.79-to-1 in the same period in 2012 and 2011, respectively. This compares with 0.75-to-1 on December 31, 2010, 0.82-to-1 on December 31, 2009, 0.95-to-1 on December 31, 2008, 0.85-to-1 on December 31, 2007, 0.91-to-1 on December 31, 2006, 1.00-to-1 on December 31, 2005, and 1.08-to-1 on December 31, 2004—all of which were down from 1.17-to-1 on December 31, 2003.


GLOSSARY

Acquisition cost—The amount of money paid by an insurance company for new policies that it underwrites or for the purchase of another block of business; it includes commissions to agents and brokers and, in some cases, field supervision expenses.

Actuary—Insurance professional who estimates statistical risks, sets premium levels, and analyzes technical aspects of insurance.

Administrative services only (ASO) agreement—An agreement under which an insurer provides a client with such services as actuarial work, benefit plan design, claims processing, financial advice, and report preparation. The client typically accepts the underwriting risk or self-insures.

Agent—A person who sells insurance policies as a representative of the insurer. An independent agent represents two or more underwriters, while an exclusive agent may be an employee or commissioned representative of a single company.

Broker—A producer that deals with either agents or underwriting companies to arrange insurance coverage for clients. Legally, a broker represents the buyer of insurance rather than the underwriting company.

Capacity—The level of underwriting business an insurer can support, based on its ability or willingness to accept risks, with certain protection limits.

Captive insurer—An insurance organization established by an entity to insure its own risks.

Catastrophe—An incident or series of related incidents causing insured losses of $25 million or more.

Cede—The transfer of part of an insurer’s liability to a reinsurance company. The insurer “cedes” its liability; the reinsurer “assumes” the liability.

Combined ratio—A financial measure of underwriting performance used in the insurance industry; it is the sum of the loss ratio, the expense ratio, and the dividend ratio. A combined ratio of less than 100% generally indicates an underwriting profit, while a ratio in excess of 100% indicates an underwriting loss.

Convention statement—Documents filed with state insurance departments detailing the financial statistics of individual insurance companies; prepared using statutory accounting principles, rather than generally accepted accounting principles.

Dividend ratio—Policyholders’ dividends as a percentage of earned premiums. It is a component of the combined ratio.

Earned premium—Portion of a premium for which the insurer already has provided protection to the policyholder.

Expense ratio—Operating expenses as a percentage of premiums written, calculated on a statutory basis. It measures an insurer’s efficiency in writing new business and is a component of the combined ratio.

Finite reinsurance—A broad term used to describe reinsurance transactions that include limited transfer of risk; can also refer to financial reinsurance, or the transfer of a known loss, with the only uncertainty being the timing of the loss payment.

Generally accepted accounting principles (GAAP)—An accounting method that, among other things, attempts to match income and expenses by prorating costs over the assumed life of an insurance policy. The GAAP method is used in the audited financial statements of publicly held companies. (See Statutory accounting principles.)

Insurance examiner—A state insurance department representative assigned to participate in the official audit and examination of insurance companies.

Insurance in force—The potential maximum claim against an insurer.

Loss ratio—An insurer’s loss and loss adjustment expenses as a percentage of premiums earned, calculated on a statutory basis. A component of the combined ratio, it is a measure of an insurer’s claims cost experience.


Managing general agent (MGA)—A special type of producer that, unlike other persons or firms selling insurance, often has “binding authority” in certain insurance and reinsurance markets. MGAs have contractual agreements whereby they can accept entire books of business on behalf of insurance and reinsurance underwriters.

Mutual insurance company—An incorporated insurance organization with a governing body elected by policyholders. Mutual insurance companies generally issue participating policies.

Net operating income—After-tax income before net realized investment gains or losses. Analysts most commonly use this measure of insurer profitability when modeling future earnings of an insurer.

Net premiums written—Premium income brought in by insurance companies, directly or through reinsurance, minus payments made for business reinsured.

Nonparticipating policy—An insurance policy in which the insurer does not distribute any part of its surplus to policyholders. Premiums are usually lower for nonparticipating policies than for comparable participating policies.

Participating policy—An insurance policy under which the insurer agrees to distribute to its policyholders the portion of its surplus that management does not deem necessary to retain. Such a distribution serves to reduce the premiums that each policyholder has paid during the year.

Policy reserves—The funds that an insurer holds specifically for the fulfillment of its policy obligations.

Premium—The payment, or one of the periodic payments, that a policyholder agrees to make for an insurance policy.

Premium loan—A policy loan made for the purpose of paying premiums.

Primary insurer—An insurance company that, either through an independent insurance agent or a broker, provides coverage in the outside market. The buyers of primary insurance are consumers.

Producer—A person or firm that sells insurance. A producer may be an agent or a broker.

Reinsurance—Coverage that a primary insurer (or “reinsured”) purchases from another company to protect itself from losses beyond a dollar amount it feels can be safely carried. This amount is normally called the reinsured’s “net line.” The reinsurance company can, in turn, reinsure through a process known as retrocession.

Reserves—Funds an insurer sets aside to cover obligations to policyholders; may represent both actual and potential liabilities.

Rider—A special provision or group of provisions added to a policy to expand or limit the benefits otherwise payable.

Statutory accounting principles (SAP)—An accounting format used by state insurance regulators. As opposed to the generally accepted accounting principles (GAAP) method, statutory accounting is essentially cash-oriented (rather than accrual) and has such requirements as immediately expensing all costs related to writing business. More conservative than GAAP, SAP focuses on a firm’s ability to meet its obligations (its solvency), whereas GAAP focuses on profit growth.

Stock insurance company—An insurance company owned by its stockholders, who elect a board to direct the firm’s management. In general, stock companies issue nonparticipating insurance, but they may also issue participating policies.

Surplus lines—Generally, a risk for which no normal insurance market exists.

Underwriting profit/loss—Profits or losses of an insurance company that result from insurance activities, calculated on a statutory basis. A net underwriting profit or loss represents underwriting results after policyholder dividends are deducted.

War risks insurance—Coverage on ships or cargo against loss or damage by enemy action and against damages sustained in fighting such an action. The perils of war are excluded from most policies.


INDUSTRY REFERENCES

PERIODICALS

Business Insurance http://www.businessinsurance.com Weekly; covers corporate risk, employee benefit, and managed healthcare news.

National Underwriter (Property/Casualty edition) http://www.propertycasualty360.com Weekly newspaper; covers issues related to the property-casualty insurance market.

BOOKS

Glossary of Insurance Terms, 2nd Ed. Richard V. Rupp, CPCU Chatsworth, Calif.: NILS Publishing Co., 1996

Property & Casualty Insurance Accounting, 8th Ed. Insurance Accounting & Systems Association, 2003 http://www.iasa.org

TRADE ASSOCIATIONS

Insurance Information Institute (III) http://www.iii.org Nonprofit, industry-supported organization that provides information about the property-casualty insurance industry.

Insurance Services Office Inc. (ISO) http://www.iso.com Trade organization and publisher of aggregate industry underwriting statistics.

Reinsurance Association of America (RAA) http://www.reinsurance.org The leading trade association of property and casualty reinsurers doing business in the United States.

COMPANY REPORTS

ACE Ltd.: http://www.acegroup.com Allstate Corp.: http://maintenance.allstate.com/allstate/ American International Group: http://www.aig.com Aon PLC: http://www.aon.com/ Brown & Brown Inc.: http://www.bbinsurance.com The Chubb Corp.: http://www.chubb.com Cincinnati Financial Corp.: http://www.cinfin.com CNA Financial Corp.: http://www.cna.com Hartford Financial Services Group:

http://www.thehartford.com Marsh & McLennan Companies Inc.: http://www.mmc.com MBIA Inc.: http://www.mbia.com Progressive Corp.: http://www.progressive.com The Travelers Companies Inc.: http://www.travelers.com Willis Group Holdings plc: http://www.willis.com XL Group plc: http://xlgroup.com


COMPARATIVE COMPANY ANALYSIS

Operating Revenues

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

PROPERTY CASUALTY‡ACE [] ACE LTD DEC 19,232.0 A 17,952.0 A 16,847.0 A 15,885.0 A 15,096.0 13,609.0 A 10,689.7 6.0 7.2 7.1 180 168 158 149 141ALL [] ALLSTATE CORP DEC 34,165.0 33,078.0 32,495.0 A 31,311.0 32,154.0 29,466.0 32,149.0 0.6 3.0 3.3 106 103 101 97 100AMSF § AMERISAFE INC DEC 356.3 321.2 280.7 248.2 282.2 302.4 190.7 6.4 3.3 10.9 187 168 147 130 148AHL † ASPEN INSURANCE HOLDINGS LTD DEC 2,410.4 2,289.2 2,084.5 2,181.1 F 2,055.1 1,882.5 839.5 11.1 5.1 5.3 287 273 248 260 245WRB † BERKLEY (W R) CORP DEC 6,340.8 A 5,746.5 5,146.5 A 4,732.2 4,604.7 A 4,642.4 A 3,623.1 5.8 6.4 10.3 175 159 142 131 127

CB [] CHUBB CORP DEC 13,898.0 13,557.0 13,546.0 13,284.0 12,977.0 13,189.0 11,461.0 1.9 1.1 2.5 121 118 118 116 113CINF [] CINCINNATI FINANCIAL CORP DEC 4,531.0 4,111.0 3,803.0 3,772.0 3,903.0 3,824.0 3,181.0 3.6 3.5 10.2 142 129 120 119 123EIG § EMPLOYERS HOLDINGS INC DEC 723.6 579.2 464.2 415.6 495.9 396.8 A NA NA 12.8 24.9 ** ** ** ** NAFNF FIDELITY NATL FINL FNF GROUP DEC 8,571.0 D 7,026.5 A,F 4,839.6 D 5,740.3 5,828.4 D 4,329.1 A 5,970.7 3.7 14.6 22.0 144 118 81 96 98FAF † FIRST AMERICAN FINANCIAL CP DEC 4,950.8 A 4,528.2 A 3,812.5 A 3,898.2 A 4,036.0 4,370.4 NA NA 2.5 9.3 ** ** ** ** NA

THG † HANOVER INSURANCE GROUP INC DEC 4,793.7 4,590.7 3,931.6 A 3,152.2 2,834.1 2,680.4 A,C 3,263.6 3.9 12.3 4.4 147 141 120 97 87HCI § HCI GROUP INC DEC 241.1 162.9 93.9 68.6 68.4 49.5 NA NA 37.2 48.0 ** ** ** ** NAIPCC § INFINITY PROPERTY & CAS CORP DEC 1,344.8 1,246.7 1,068.5 961.3 883.4 930.9 762.3 5.8 7.6 7.9 176 164 140 126 116MIG § MEADOWBROOK INS GROUP INC DEC 791.2 996.8 837.2 750.1 627.6 437.8 A 210.8 14.1 12.6 (20.6) 375 473 397 356 298MCY † MERCURY GENERAL CORP DEC 2,821.0 F 2,783.4 F 2,777.3 F 2,775.9 3,121.5 A 2,414.2 2,265.5 2.2 3.2 1.4 125 123 123 123 138

NAVG § NAVIGATORS GROUP INC DEC 917.6 F 882.4 F 771.1 F 777.0 F 760.0 F 683.7 F 304.7 11.7 6.1 4.0 301 290 253 255 249ORI † OLD REPUBLIC INTL CORP DEC 5,442.7 4,970.1 4,645.3 4,102.6 A 3,803.5 3,237.6 3,285.7 5.2 10.9 9.5 166 151 141 125 116PRA § PROASSURANCE CORP DEC 732.6 A 722.7 720.2 690.8 671.2 A 570.6 709.6 0.3 5.1 1.4 103 102 101 97 95PGR [] PROGRESSIVE CORP-OHIO DEC 18,156.4 17,070.3 15,494.7 14,945.0 14,552.5 12,831.3 11,880.5 F 4.3 7.2 6.4 153 144 130 126 122RLI § RLI CORP DEC 705.6 660.8 A,C 619.2 A 583.4 546.6 561.0 519.9 3.1 4.7 6.8 136 127 119 112 105

SAFT § SAFETY INSURANCE GROUP INC DEC 745.1 703.9 660.2 612.7 592.0 641.0 591.8 2.3 3.1 5.9 126 119 112 104 100SIGI § SELECTIVE INS GROUP INC DEC 1,887.9 1,723.7 1,576.8 1,544.3 1,535.7 D 1,708.7 1,356.1 3.4 2.0 9.5 139 127 116 114 113STC § STEWART INFORMATION SERVICES DEC 1,930.8 1,906.1 1,637.5 A 1,666.8 1,706.0 1,570.4 2,236.7 (1.5) 4.2 1.3 86 85 73 75 76TRV [] TRAVELERS COS INC DEC 26,080.0 A 25,740.0 25,446.0 25,112.0 24,680.0 24,477.0 15,139.2 5.6 1.3 1.3 172 170 168 166 163UFCS § UNITED FIRE GROUP INC DEC 877.0 F 813.2 F 705.0 A,F 591.1 F 572.2 F 601.4 F 573.3 4.3 7.8 7.8 153 142 123 103 100

UVE § UNIVERSAL INSURANCE HLDGS DEC 301.2 269.9 224.3 238.8 203.8 182.7 6.5 46.8 10.5 11.6 4,648 4,165 3,462 3,685 3,146XL [] XL GROUP PLC DEC 7,402.8 7,172.0 6,670.5 6,347.5 6,114.8 7,425.8 7,883.1 (0.6) (0.1) 3.2 94 91 85 81 78

REINSURANCE‡Y † ALLEGHANY CORP DEC 4,907.6 4,269.7 1,003.6 990.6 1,218.6 1,037.5 D 1,018.2 A,F 17.0 36.5 14.9 482 419 99 97 120RE † EVEREST RE GROUP LTD DEC 5,593.9 F 4,857.9 F 4,637.1 A,F 4,635.1 F 4,439.3 F 3,527.6 F 4,106.7 3.1 9.7 15.2 136 118 113 113 108RGA † REINSURANCE GROUP AMER INC DEC 10,271.8 9,840.9 8,764.0 8,261.7 7,027.9 5,681.2 3,174.3 12.5 12.6 4.4 324 310 276 260 221RNR † RENAISSANCERE HOLDINGS LTD DEC 1,355.4 D 1,377.5 1,138.5 1,253.6 D 1,670.5 1,215.0 A 1,352.9 0.0 2.2 (1.6) 100 102 84 93 123

MULTI-LINE GROUP‡AFG † AMERICAN FINANCIAL GROUP INC DEC 5,092.0 C 4,861.0 4,716.0 4,519.0 4,249.5 4,292.7 A 3,339.8 D 4.3 3.5 4.8 152 146 141 135 127AIG [] AMERICAN INTERNATIONAL GROUP DEC 67,375.0 C,F 65,890.0 D,F 64,353.0 C,F 76,791.0 D,F 97,260.0 D,F 8,062.0 F 81,303.0 (1.9) 52.9 2.3 83 81 79 94 120AIZ [] ASSURANT INC DEC 9,031.3 F 8,456.7 F 8,252.3 F 8,517.3 F 8,539.3 F 8,570.5 F 6,997.9 2.6 1.1 6.8 129 121 118 122 122GNW [] GENWORTH FINANCIAL INC DEC 9,403.0 D,F 9,871.0 F 10,238.0 10,102.0 9,229.0 10,018.0 A 11,671.0 A,C (2.1) (1.3) (4.7) 81 85 88 87 79HIG [] HARTFORD FINANCIAL SERVICES DEC 25,949.0 D,F 26,216.0 F 21,616.0 D,F 22,167.0 F 25,042.0 F 9,664.0 F 18,733.0 3.3 21.8 (1.0) 139 140 115 118 134

HCC † HCC INSURANCE HOLDINGS INC DEC 2,536.9 F 2,525.8 F 2,374.0 F 2,302.3 F 2,373.9 A,F 2,279.4 A,F 942.0 D,F 10.4 2.2 0.4 269 268 252 244 252HMN § HORACE MANN EDUCATORS CORP DEC 1,025.4 1,004.9 998.3 974.7 941.2 834.8 866.2 1.7 4.2 2.0 118 116 115 113 109KMPR † KEMPER CORP/DE DEC 2,400.1 2,453.0 2,485.4 D 2,694.6 2,885.7 A 2,818.5 A,C 2,943.8 (2.0) (3.2) (2.2) 82 83 84 92 98L [] LOEWS CORP DEC 15,053.0 F 14,552.0 A,F 14,127.0 F 14,615.0 F 14,117.0 F 13,247.0 D,F 15,809.6 A,C (0.5) 2.6 3.4 95 92 89 92 89

INSURANCE BROKERS‡AON [] AON PLC DEC 11,815.0 11,514.0 11,287.0 8,512.0 A 7,595.0 7,631.0 A,C 9,810.0 D 1.9 9.1 2.6 120 117 115 87 77AJG † ARTHUR J GALLAGHER & CO DEC 3,179.6 A,F 2,518.9 A 2,134.2 A 1,863.0 A 1,728.9 A 1,658.8 A 1,289.5 A 9.4 13.9 26.2 247 195 166 144 134BRO † BROWN & BROWN INC DEC 1,363.3 A 1,196.4 A 1,012.2 A 972.0 A 967.9 A 977.6 A 551.0 A 9.5 6.9 13.9 247 217 184 176 176EHTH § EHEALTH INC DEC 179.2 155.5 151.6 160.4 134.9 111.2 NA NA 10.0 15.2 ** ** ** ** NAMMC [] MARSH & MCLENNAN COS DEC 12,261.0 F 11,924.0 C,F 11,526.0 10,550.0 A,C 10,493.0 A 11,587.0 A 11,588.0 A 0.6 1.1 2.8 106 103 99 91 91

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change.D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a f iscal year change.


Net Income

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

PROPERTY CASUALTY‡ACE [] ACE LTD DEC 3,758.0 2,706.0 1,585.0 3,108.0 2,549.0 1,197.0 1,417.5 10.2 25.7 38.9 265 191 112 219 180ALL [] ALLSTATE CORP DEC 2,280.0 2,306.0 788.0 928.0 854.0 (1,679.0) 2,720.0 (1.7) NM (1.1) 84 85 29 34 31AMSF § AMERISAFE INC DEC 43.6 29.4 24.1 33.4 46.4 43.8 8.6 17.6 (0.1) 48.7 508 342 281 388 540AHL † ASPEN INSURANCE HOLDINGS LTD DEC 329.8 280.6 (105.6) 312.7 473.9 103.8 152.1 8.0 26.0 17.5 217 184 (69) 206 312WRB † BERKLEY (W R) CORP DEC 499.9 510.6 394.8 449.3 309.1 281.1 337.2 4.0 12.2 (2.1) 148 151 117 133 92

CB [] CHUBB CORP DEC 2,345.0 1,545.0 1,678.0 2,174.0 2,183.0 1,804.0 808.8 11.2 5.4 51.8 290 191 207 269 270CINF [] CINCINNATI FINANCIAL CORP DEC 517.0 421.0 166.0 377.0 432.0 429.0 374.0 3.3 3.8 22.8 138 113 44 101 116EIG § EMPLOYERS HOLDINGS INC DEC 63.8 106.9 48.3 62.8 83.0 101.8 NA NA (8.9) (40.3) ** ** ** ** NAFNF FIDELITY NATL FINL FNF GROUP DEC 403.0 601.4 280.5 370.1 224.1 (179.0) 683.3 (5.1) NM (33.0) 59 88 41 54 33FAF † FIRST AMERICAN FINANCIAL CP DEC 186.4 301.0 78.3 127.8 122.4 (84.0) NA NA NM (38.1) ** ** ** ** NA

THG † HANOVER INSURANCE GROUP INC DEC 245.7 46.1 31.9 153.2 187.8 84.5 86.9 11.0 23.8 433.0 283 53 37 176 216HCI § HCI GROUP INC DEC 65.6 30.2 10.0 5.4 10.9 12.7 NA NA 39.0 117.4 ** ** ** ** NAIPCC § INFINITY PROPERTY & CAS CORP DEC 32.6 24.3 42.1 91.5 70.6 19.3 58.2 (5.6) 11.1 34.2 56 42 72 157 121MIG § MEADOWBROOK INS GROUP INC DEC (112.3) 11.7 43.6 59.7 52.7 27.4 10.1 NM NM NM (1,112) 116 432 591 521MCY † MERCURY GENERAL CORP DEC 112.1 116.9 191.2 152.2 403.1 (242.1) 184.3 (4.8) NM (4.1) 61 63 104 83 219

NAVG § NAVIGATORS GROUP INC DEC 63.5 63.8 25.6 69.6 63.2 51.7 7.7 23.5 4.2 (0.5) 826 830 333 905 822ORI † OLD REPUBLIC INTL CORP DEC 447.8 (68.6) (140.5) 30.1 (99.1) (558.3) 459.8 (0.3) NM NM 97 (15) (31) 7 (22)PRA § PROASSURANCE CORP DEC 297.5 275.5 287.1 231.6 222.0 177.7 38.7 22.6 10.9 8.0 769 712 742 598 574PGR [] PROGRESSIVE CORP-OHIO DEC 1,165.4 902.3 1,015.5 1,068.3 1,057.5 (70.0) 1,255.4 (0.7) NM 29.2 93 72 81 85 84RLI § RLI CORP DEC 126.3 103.3 130.6 127.4 93.8 78.7 71.3 5.9 9.9 22.2 177 145 183 179 132

SAFT § SAFETY INSURANCE GROUP INC DEC 61.4 58.1 13.7 56.3 54.2 70.3 28.5 8.0 (2.7) 5.7 215 204 48 198 190SIGI § SELECTIVE INS GROUP INC DEC 107.4 38.0 20.5 69.3 44.7 43.8 66.3 4.9 19.7 182.9 162 57 31 104 67STC § STEWART INFORMATION SERVICES DEC 63.0 109.2 2.3 (12.6) (51.0) (241.9) 123.8 (6.5) NM (42.3) 51 88 2 (10) (41)TRV [] TRAVELERS COS INC DEC 3,673.0 2,473.0 1,426.0 3,216.0 3,622.0 2,924.0 1,696.0 8.0 4.7 48.5 217 146 84 190 214UFCS § UNITED FIRE GROUP INC DEC 76.1 40.2 0.0 47.5 (10.4) (13.1) 55.6 3.2 NM 89.3 137 72 0 85 (19)

UVE § UNIVERSAL INSURANCE HLDGS DEC 59.0 30.3 20.1 37.0 28.8 40.0 (0.3) NM 8.1 94.6 NM NM NM NM NMXL [] XL GROUP PLC DEC 1,059.9 651.1 (474.8) 643.4 75.0 (2,553.8) 412.0 9.9 NM 62.8 257 158 (115) 156 18

REINSURANCE‡Y † ALLEGHANY CORP DEC 628.4 702.2 143.3 198.5 271.0 40.6 162.4 14.5 73.0 (10.5) 387 432 88 122 167RE † EVEREST RE GROUP LTD DEC 1,259.4 829.0 (80.5) 610.8 807.0 (18.8) 426.0 11.4 NM 51.9 296 195 (19) 143 189RGA † REINSURANCE GROUP AMER INC DEC 418.8 631.9 599.6 574.4 407.1 187.8 178.3 8.9 17.4 (33.7) 235 354 336 322 228RNR † RENAISSANCERE HOLDINGS LTD DEC 688.2 598.6 (41.3) 682.1 881.2 29.0 623.4 1.0 88.4 15.0 110 96 (7) 109 141

MULTI-LINE GROUP‡AFG † AMERICAN FINANCIAL GROUP INC DEC 471.0 488.0 343.0 479.0 519.3 195.8 321.2 3.9 19.2 (3.5) 147 152 107 149 162AIG [] AMERICAN INTERNATIONAL GROUP DEC 9,001.0 7,490.0 16,282.0 9,904.0 (10,383.0) (99,289.0) 9,265.0 (0.3) NM 20.2 97 81 176 107 (112)AIZ [] ASSURANT INC DEC 488.9 483.7 545.8 279.2 430.6 447.8 185.7 10.2 1.8 1.1 263 261 294 150 232GNW [] GENWORTH FINANCIAL INC DEC 572.0 323.0 122.0 142.0 (460.0) (572.0) 969.0 (5.1) NM 77.1 59 33 13 15 (47)HIG [] HARTFORD FINANCIAL SERVICES DEC 310.0 (33.0) 576.0 1,680.0 (887.0) (2,749.0) (91.0) NM NM NM NM NM NM NM NM

HCC † HCC INSURANCE HOLDINGS INC DEC 407.2 391.2 255.2 345.1 353.9 304.8 106.9 14.3 6.0 4.1 381 366 239 323 331HMN § HORACE MANN EDUCATORS CORP DEC 110.9 103.9 70.5 80.9 73.5 10.9 19.0 19.3 59.0 6.8 584 547 371 426 387KMPR † KEMPER CORP/DE DEC 214.5 91.8 70.9 183.8 162.2 (38.0) 123.6 5.7 NM 133.7 174 74 57 149 131L [] LOEWS CORP DEC 595.0 568.0 1,064.0 1,307.0 566.0 (182.0) (666.1) NM NM 4.8 NM NM NM NM NM

INSURANCE BROKERS‡AON [] AON PLC DEC 1,113.0 994.0 975.0 733.0 636.0 621.0 663.0 5.3 12.4 12.0 168 150 147 111 96AJG † ARTHUR J GALLAGHER & CO DEC 268.6 195.0 144.1 163.3 133.1 111.4 146.2 6.3 19.2 37.7 184 133 99 112 91BRO † BROWN & BROWN INC DEC 217.1 184.0 164.0 161.8 153.3 166.1 110.3 7.0 5.5 18.0 197 167 149 147 139EHTH § EHEALTH INC DEC 1.7 7.1 6.7 17.5 15.3 14.2 NA NA (34.4) (75.7) ** ** ** ** NAMMC [] MARSH & MCLENNAN COS DEC 1,351.0 1,179.0 960.0 549.0 227.0 (69.0) 1,540.0 (1.3) NM 14.6 88 77 62 36 15

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available.


Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

PROPERTY CASUALTY‡ACE [] ACE LTD DEC 19.5 15.1 9.4 19.6 16.9 4.0 3.0 1.9 3.9 3.4 13.3 10.4 6.7 14.6 14.9ALL [] ALLSTATE CORP DEC 6.7 7.0 2.4 3.0 2.7 1.8 1.8 0.6 0.7 0.6 10.8 11.7 4.2 5.2 5.8AMSF § AMERISAFE INC DEC 12.2 9.1 8.6 13.4 16.5 3.4 2.5 2.1 3.0 4.2 10.9 8.0 7.1 10.6 16.7AHL † ASPEN INSURANCE HOLDINGS LTD DEC 13.7 12.3 NM 14.3 23.1 2.9 2.5 NM 3.4 5.8 8.7 7.5 NM 8.9 14.8WRB † BERKLEY (W R) CORP DEC 7.9 8.9 7.7 9.5 6.7 2.5 2.6 2.2 2.6 1.8 11.6 12.3 10.2 12.3 9.3

CB [] CHUBB CORP DEC 16.9 11.4 12.4 16.4 16.8 4.6 3.0 3.3 4.3 4.4 14.7 9.8 10.8 14.0 15.0CINF [] CINCINNATI FINANCIAL CORP DEC 11.4 10.2 4.4 10.0 11.1 3.0 2.6 1.1 2.6 3.1 9.0 8.0 3.3 7.7 9.7EIG § EMPLOYERS HOLDINGS INC DEC 8.8 18.5 10.4 15.1 16.7 1.8 3.1 1.4 1.8 2.2 11.5 21.1 10.0 12.7 17.6

FNF FIDELITY NATL FINL FNF GROUP DEC 4.7 8.6 5.8 6.4 3.8 3.9 6.8 3.6 4.7 2.7 8.6 15.2 7.9 11.0 7.3

FAF † FIRST AMERICAN FINANCIAL CP DEC 3.8 6.6 2.1 3.3 3.0 3.0 5.3 1.4 2.3 2.2 7.8 13.8 3.9 6.4 6.3

THG † HANOVER INSURANCE GROUP INC DEC 5.1 1.0 0.8 4.9 6.6 1.8 0.4 0.3 1.8 2.2 9.5 1.8 1.3 6.4 8.8

HCI § HCI GROUP INC DEC 27.2 18.5 10.6 7.9 16.0 15.1 10.8 5.1 3.9 8.1 46.5 32.2 16.6 11.8 26.4

IPCC § INFINITY PROPERTY & CAS CORP DEC 2.4 2.0 3.9 9.5 8.0 1.4 1.1 2.2 5.0 4.0 5.0 3.7 6.3 14.3 12.3

MIG § MEADOWBROOK INS GROUP INC DEC NM 1.2 5.2 8.0 8.4 NM 0.5 1.9 2.9 2.8 NM 2.0 7.7 11.4 11.2MCY † MERCURY GENERAL CORP DEC 4.0 4.2 6.9 5.5 12.9 2.6 2.8 4.6 3.6 9.9 6.1 6.3 10.5 8.5 24.7

NAVG § NAVIGATORS GROUP INC DEC 6.9 7.2 3.3 9.0 8.3 1.6 1.7 0.7 2.0 1.9 7.1 7.6 3.1 8.5 8.5ORI † OLD REPUBLIC INTL CORP DEC 8.2 NM NM 0.7 NM 2.7 NM NM 0.2 NM 12.1 NM NM 0.8 NMPRA § PROASSURANCE CORP DEC 40.6 38.1 39.9 33.5 33.1 5.9 5.6 5.8 4.9 5.0 12.8 12.4 14.3 13.0 14.2PGR [] PROGRESSIVE CORP-OHIO DEC 6.4 5.3 6.6 7.1 7.3 4.9 4.1 4.7 5.2 5.5 19.1 15.3 17.1 18.1 21.2RLI § RLI CORP DEC 17.9 15.6 21.1 21.8 17.2 4.7 3.9 5.0 5.0 3.8 15.5 12.8 16.2 15.7 12.2

SAFT § SAFETY INSURANCE GROUP INC DEC 8.2 8.3 2.1 9.2 9.1 3.8 3.8 0.9 3.9 3.8 8.8 8.6 2.1 8.8 8.8SIGI § SELECTIVE INS GROUP INC DEC 5.7 2.2 1.3 4.5 2.9 1.6 0.6 0.4 1.3 0.9 9.6 3.5 1.9 6.7 4.7STC § STEWART INFORMATION SERVICES DEC 3.3 5.7 0.1 NM NM 4.8 8.9 0.2 NM NM 10.3 21.4 0.5 NM NMTRV [] TRAVELERS COS INC DEC 14.1 9.6 5.6 12.8 14.7 3.5 2.4 1.4 3.0 3.3 14.6 9.9 5.7 12.2 13.8UFCS § UNITED FIRE GROUP INC DEC 8.7 4.9 0.0 8.0 NM 2.1 1.1 0.0 1.6 NM 10.1 5.6 0.0 6.8 NM

UVE § UNIVERSAL INSURANCE HLDGS DEC 19.6 11.2 9.0 15.5 14.1 6.4 3.3 2.4 5.1 4.7 34.8 19.2 13.9 29.2 26.8XL [] XL GROUP PLC DEC 14.3 9.1 NM 10.1 1.2 2.3 1.4 NM 1.3 NM 10.3 6.5 NM 5.7 NM

REINSURANCE‡Y † ALLEGHANY CORP DEC 12.8 16.4 14.3 20.0 22.2 2.7 4.8 2.2 3.1 4.3 9.4 15.1 4.9 7.1 10.5RE † EVEREST RE GROUP LTD DEC 22.5 17.1 NM 13.2 18.2 6.4 4.3 NM 3.4 4.6 18.4 12.9 NM 9.9 14.6RGA † REINSURANCE GROUP AMER INC DEC 4.1 6.4 6.8 7.0 5.8 1.0 1.7 2.0 2.1 1.7 6.5 9.7 10.7 12.9 12.6RNR † RENAISSANCERE HOLDINGS LTD DEC 50.8 43.5 NM 54.4 52.7 8.2 7.2 NM 8.0 10.6 20.1 18.3 NM 19.5 30.1

MULTI-LINE GROUP‡AFG † AMERICAN FINANCIAL GROUP INC DEC 9.2 10.0 7.3 10.6 12.2 1.2 1.3 1.0 1.6 1.9 10.3 10.7 7.6 11.6 16.6AIG [] AMERICAN INTERNATIONAL GROUP DEC 13.4 11.4 25.3 12.9 NM 1.7 1.4 2.5 1.3 NM 9.1 7.4 21.9 33.4 NMAIZ [] ASSURANT INC DEC 5.4 5.7 6.6 3.3 5.0 1.7 1.7 2.0 1.1 1.7 9.8 9.5 11.1 5.8 10.1GNW [] GENWORTH FINANCIAL INC DEC 6.1 3.3 1.2 1.4 NM 0.5 0.3 0.1 0.1 NM 3.7 2.0 0.8 1.1 NMHIG [] HARTFORD FINANCIAL SERVICES DEC 1.2 NM 2.7 7.6 NM 0.1 NM 0.2 0.4 NM 1.5 NM 2.5 6.7 NM

HCC † HCC INSURANCE HOLDINGS INC DEC 16.1 15.5 10.8 15.0 14.9 4.0 3.9 2.7 3.9 4.1 11.3 11.4 7.7 10.9 12.5HMN § HORACE MANN EDUCATORS CORP DEC 10.8 10.3 7.1 8.3 7.8 1.3 1.3 1.0 1.2 1.2 9.5 8.9 7.2 10.1 12.6KMPR † KEMPER CORP/DE DEC 8.9 3.7 2.9 6.8 5.6 2.7 1.1 0.9 2.2 1.9 10.2 4.2 3.3 9.1 9.1L [] LOEWS CORP DEC 4.0 3.9 7.5 8.9 4.0 0.7 0.7 1.4 1.7 0.8 3.1 3.0 5.7 7.4 3.8

INSURANCE BROKERS‡AON [] AON PLC DEC 9.4 8.6 8.6 8.6 8.4 3.7 3.3 3.3 2.8 2.8 14.0 12.6 11.9 10.8 11.9AJG † ARTHUR J GALLAGHER & CO DEC 8.4 7.7 6.8 8.8 7.7 4.4 4.0 3.6 4.8 4.1 14.3 13.4 12.3 16.3 16.3BRO † BROWN & BROWN INC DEC 15.9 15.4 16.2 16.6 15.8 6.4 6.4 6.5 7.0 7.1 11.4 10.7 10.4 11.2 11.7EHTH § EHEALTH INC DEC 1.0 4.6 4.4 10.9 11.4 1.0 3.8 3.7 9.8 9.1 1.1 4.3 4.2 11.1 10.0MMC [] MARSH & MCLENNAN COS DEC 11.0 9.9 8.3 5.2 2.2 8.1 7.4 6.2 3.6 1.5 18.7 19.0 15.7 9.0 3.9

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.


Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

PROPERTY CASUALTY‡ACE [] ACE LTD DEC 9 - 7 10 - 9 16 - 12 7 - 5 7 - 4 14 30 22 14 19 1.9 - 1.5 3.5 - 2.9 1.8 - 1.4 2.8 - 2.1 4.7 - 2.6ALL [] ALLSTATE CORP DEC 11 - 8 9 - 6 23 - 15 21 - 16 21 - 9 21 19 56 47 51 2.5 - 1.8 3.3 - 2.1 3.8 - 2.4 3.0 - 2.3 5.8 - 2.4AMSF § AMERISAFE INC DEC 19 - 12 18 - 13 21 - 12 11 - 9 10 - 6 14 0 0 0 0 1.2 - 0.7 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0AHL † ASPEN INSURANCE HOLDINGS LTD DEC 10 - 8 10 - 7 NM- NM 8 - 6 5 - 3 17 19 NM 16 10 2.2 - 1.7 2.5 - 2.0 2.7 - 1.9 2.5 - 1.9 3.3 - 2.1WRB † BERKLEY (W R) CORP DEC 12 - 10 11 - 9 13 - 9 10 - 8 16 - 10 11 36 11 9 12 1.0 - 0.9 4.0 - 3.3 1.2 - 0.9 1.1 - 0.9 1.3 - 0.8

CB [] CHUBB CORP DEC 11 - 8 14 - 12 12 - 10 9 - 7 9 - 6 19 29 27 22 22 2.3 - 1.8 2.5 - 2.0 2.8 - 2.2 3.1 - 2.5 4.1 - 2.6CINF [] CINCINNATI FINANCIAL CORP DEC 17 - 13 16 - 12 34 - 23 14 - 11 11 - 7 52 63 157 69 59 4.2 - 3.1 5.4 - 4.0 6.8 - 4.7 6.3 - 4.9 8.8 - 5.3EIG § EMPLOYERS HOLDINGS INC DEC 16 - 10 6 - 5 16 - 8 12 - 8 9 - 4 12 7 18 16 13 1.2 - 0.7 1.5 - 1.2 2.2 - 1.1 1.9 - 1.4 3.0 - 1.4FNF FIDELITY NATL FINL FNF GROUP DEC 19 - 13 9 - 6 14 - 10 10 - 8 23 - 12 38 21 38 42 60 3.0 - 2.0 3.7 - 2.4 3.7 - 2.8 5.5 - 4.3 5.0 - 2.6FAF † FIRST AMERICAN FINANCIAL CP DEC 16 - 12 9 - 4 23 - 14 13 - 10 NA - NA 28 13 32 15 NA 2.4 - 1.7 2.9 - 1.4 2.3 - 1.4 1.5 - 1.1 NA - NA

THG † HANOVER INSURANCE GROUP INC DEC 11 - 7 41 - 33 69 - 44 14 - 12 12 - 8 24 119 158 30 20 3.5 - 2.2 3.7 - 2.9 3.6 - 2.3 2.5 - 2.1 2.7 - 1.7HCI § HCI GROUP INC DEC 9 - 3 8 - 2 6 - 4 10 - 6 5 - 3 16 25 35 34 0 4.8 - 1.8 11.1 - 3.3 8.7 - 6.0 5.8 - 3.3 0.0 - 0.0IPCC § INFINITY PROPERTY & CAS CORP DEC 26 - 19 33 - 22 18 - 13 9 - 5 9 - 6 42 43 21 8 9 2.2 - 1.7 2.0 - 1.3 1.6 - 1.1 1.5 - 0.9 1.6 - 1.0MIG § MEADOWBROOK INS GROUP INC DEC NM- NM 52 - 23 13 - 10 9 - 5 9 - 5 NM 74 20 12 10 1.4 - 0.9 3.3 - 1.4 2.1 - 1.6 2.2 - 1.2 1.8 - 1.1MCY † MERCURY GENERAL CORP DEC 25 - 18 22 - 17 13 - 10 17 - 13 6 - 3 120 115 69 85 32 6.8 - 4.8 6.8 - 5.2 7.1 - 5.2 6.3 - 5.1 10.4 - 5.1

NAVG § NAVIGATORS GROUP INC DEC 15 - 12 12 - 10 32 - 22 12 - 9 15 - 11 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0ORI † OLD REPUBLIC INTL CORP DEC 10 - 6 NM- NM NM- NM NM- 77 NM- NM 41 NM NM 531 NM 6.7 - 4.1 9.1 - 6.3 9.8 - 5.0 6.9 - 4.5 9.4 - 5.3PRA § PROASSURANCE CORP DEC 12 - 9 10 - 9 9 - 6 9 - 7 8 - 6 22 70 5 0 0 2.5 - 1.9 8.1 - 6.7 0.9 - 0.6 0.0 - 0.0 0.0 - 0.0PGR [] PROGRESSIVE CORP-OHIO DEC 15 - 11 16 - 13 14 - 10 14 - 10 11 - 6 15 94 25 72 0 1.3 - 1.0 7.4 - 6.0 2.4 - 1.8 7.2 - 5.2 0.0 - 0.0RLI § RLI CORP DEC 18 - 11 15 - 13 12 - 8 10 - 8 14 - 10 74 129 100 134 25 6.7 - 4.1 10.1 - 8.3 12.2 - 8.3 16.4 - 13.2 2.5 - 1.7

SAFT § SAFETY INSURANCE GROUP INC DEC 14 - 11 13 - 10 56 - 39 13 - 9 12 - 8 60 58 222 48 46 5.2 - 4.2 5.6 - 4.6 5.6 - 4.0 5.3 - 3.6 5.7 - 3.9SIGI § SELECTIVE INS GROUP INC DEC 15 - 10 29 - 24 50 - 32 15 - 11 28 - 12 27 75 137 40 62 2.7 - 1.8 3.2 - 2.6 4.3 - 2.7 3.7 - 2.7 5.2 - 2.2STC § STEWART INFORMATION SERVICES DEC 12 - 8 5 - 2 NM- 68 NM- NM NM- NM 4 2 42 NM NM 0.4 - 0.3 0.9 - 0.4 0.6 - 0.4 0.6 - 0.3 0.6 - 0.2TRV [] TRAVELERS COS INC DEC 9 - 7 12 - 9 19 - 14 9 - 7 9 - 5 20 28 47 21 19 2.7 - 2.1 3.2 - 2.4 3.5 - 2.5 3.0 - 2.5 3.7 - 2.3UFCS § UNITED FIRE GROUP INC DEC 11 - 7 17 - 10 NM- NM 14 - 9 NM- NM 23 38 NM 33 NM 3.1 - 2.0 3.8 - 2.3 4.1 - 2.6 3.8 - 2.4 3.8 - 1.9

UVE § UNIVERSAL INSURANCE HLDGS DEC 9 - 3 6 - 4 12 - 6 7 - 4 8 - 3 30 61 63 34 71 11.6 - 3.3 15.3 - 9.8 9.7 - 5.3 8.0 - 4.8 22.5 - 8.4XL [] XL GROUP PLC DEC 9 - 7 12 - 9 NM- NM 13 - 9 31 - 4 15 21 NM 23 66 2.2 - 1.7 2.3 - 1.7 2.5 - 1.7 2.6 - 1.8 15.6 - 2.1

REINSURANCE‡Y † ALLEGHANY CORP DEC 11 - 9 8 - 6 21 - 17 14 - 11 10 - 7 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0RE † EVEREST RE GROUP LTD DEC 6 - 4 7 - 5 NM- NM 8 - 6 7 - 4 9 12 NM 18 14 2.0 - 1.4 2.3 - 1.7 2.6 - 2.0 2.8 - 2.2 3.3 - 2.1RGA † REINSURANCE GROUP AMER INC DEC 13 - 9 7 - 6 8 - 5 7 - 5 9 - 4 19 10 7 6 6 2.0 - 1.4 1.7 - 1.4 1.3 - 0.9 1.1 - 0.8 1.7 - 0.7RNR † RENAISSANCERE HOLDINGS LTD DEC 6 - 5 7 - 6 NM- NM 6 - 5 4 - 3 7 10 NM 9 7 1.4 - 1.1 1.5 - 1.3 1.7 - 1.4 2.0 - 1.6 2.4 - 1.7

MULTI-LINE GROUP‡AFG † AMERICAN FINANCIAL GROUP INC DEC 11 - 8 8 - 7 11 - 9 7 - 5 6 - 3 34 19 20 13 12 4.5 - 3.1 2.7 - 2.4 2.2 - 1.8 2.4 - 1.8 4.1 - 2.0AIG [] AMERICAN INTERNATIONAL GROUP DEC 9 - 6 8 - 5 7 - 2 4 - 1 NM- NM 3 0 0 0 NM 0.6 - 0.4 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0AIZ [] ASSURANT INC DEC 10 - 5 8 - 6 7 - 5 17 - 12 9 - 4 15 14 12 25 16 2.8 - 1.4 2.5 - 1.8 2.3 - 1.7 2.2 - 1.5 3.6 - 1.8GNW [] GENWORTH FINANCIAL INC DEC 14 - 7 15 - 6 59 - 19 67 - 35 NM- NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0HIG [] HARTFORD FINANCIAL SERVICES DEC 55 - 34 NM- NM 26 - 12 11 - 7 NM- NM 75 NM 33 7 NM 2.2 - 1.4 2.6 - 1.7 2.7 - 1.3 1.1 - 0.7 6.0 - 0.7

HCC † HCC INSURANCE HOLDINGS INC DEC 11 - 9 10 - 7 14 - 11 10 - 8 9 - 6 19 17 26 19 17 2.1 - 1.7 2.4 - 1.7 2.4 - 1.8 2.3 - 1.9 2.6 - 1.8HMN § HORACE MANN EDUCATORS CORP DEC 12 - 7 8 - 5 10 - 6 10 - 5 8 - 3 28 21 26 17 13 3.9 - 2.5 4.0 - 2.8 4.4 - 2.5 3.1 - 1.8 3.9 - 1.6KMPR † KEMPER CORP/DE DEC 11 - 8 21 - 18 27 - 19 10 - 7 9 - 3 26 62 82 30 41 3.2 - 2.3 3.5 - 2.9 4.3 - 3.0 4.1 - 2.8 13.4 - 4.5L [] LOEWS CORP DEC 32 - 27 30 - 26 17 - 13 13 - 10 28 - 13 16 17 10 8 19 0.6 - 0.5 0.7 - 0.6 0.8 - 0.6 0.8 - 0.6 1.4 - 0.7

INSURANCE BROKERS‡AON [] AON PLC DEC 24 - 15 19 - 15 19 - 14 18 - 14 21 - 15 19 21 21 24 27 1.2 - 0.8 1.4 - 1.1 1.5 - 1.1 1.7 - 1.3 1.7 - 1.3AJG † ARTHUR J GALLAGHER & CO DEC 23 - 17 24 - 20 26 - 19 19 - 14 20 - 11 67 84 102 82 97 4.0 - 2.9 4.2 - 3.6 5.4 - 3.9 5.8 - 4.3 8.6 - 4.9BRO † BROWN & BROWN INC DEC 23 - 17 22 - 17 24 - 15 21 - 14 20 - 14 25 27 28 27 28 1.5 - 1.1 1.6 - 1.2 1.9 - 1.2 1.9 - 1.3 2.0 - 1.4EHTH § EHEALTH INC DEC NM- NM 78 - 39 49 - 36 25 - 12 31 - 18 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0MMC [] MARSH & MCLENNAN COS DEC 20 - 14 17 - 14 18 - 14 27 - 20 59 - 40 39 42 49 80 186 2.8 - 2.0 2.9 - 2.5 3.4 - 2.7 4.0 - 2.9 4.7 - 3.1

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.

20092013 2012 2011 2010


Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

PROPERTY CASUALTY‡ACE [] ACE LTD DEC 11.02 7.96 4.68 9.15 7.57 67.27 64.38 56.40 52.50 44.21 104.07 - 79.79 82.07 - 68.53 73.76 - 56.90 62.63 - 47.09 55.64 - 30.92ALL [] ALLSTATE CORP DEC 4.87 4.71 1.51 1.72 1.58 45.07 40.38 34.79 33.79 29.16 54.84 - 40.65 42.81 - 26.98 34.40 - 22.27 35.51 - 26.86 33.50 - 13.77AMSF § AMERISAFE INC DEC 2.37 1.62 1.32 1.79 2.27 22.41 20.88 19.33 17.72 16.01 44.50 - 27.62 28.40 - 21.56 27.75 - 15.58 19.96 - 15.50 21.97 - 13.12AHL † ASPEN INSURANCE HOLDINGS LTD DEC 4.29 3.51 (1.82) 3.80 5.82 50.06 49.03 44.60 45.67 39.57 41.43 - 32.23 33.70 - 25.89 31.57 - 21.99 31.60 - 23.80 28.44 - 18.46WRB † BERKLEY (W R) CORP DEC 3.69 3.72 2.83 3.02 1.93 31.41 30.79 28.49 25.62 22.29 45.59 - 38.03 40.39 - 33.34 36.05 - 26.52 28.83 - 23.89 31.07 - 18.59

CB [] CHUBB CORP DEC 9.08 5.73 5.80 6.81 6.24 62.95 58.68 55.45 50.67 45.68 97.79 - 75.99 81.80 - 66.65 70.48 - 55.39 60.23 - 47.10 53.79 - 34.44CINF [] CINCINNATI FINANCIAL CORP DEC 3.16 2.59 1.02 2.32 2.66 37.24 33.45 31.20 31.06 29.38 53.74 - 39.60 40.96 - 30.06 34.33 - 23.65 32.27 - 25.25 29.66 - 17.84EIG § EMPLOYERS HOLDINGS INC DEC 2.05 3.40 1.30 1.52 1.81 16.70 16.01 12.92 11.31 10.41 32.90 - 20.57 20.74 - 15.89 21.00 - 10.73 17.75 - 12.31 16.73 - 8.00FNF FIDELITY NATL FINL FNF GROUP DEC 1.75 2.72 1.28 1.64 1.00 8.70 5.84 7.41 6.11 5.39 33.80 - 21.99 24.30 - 15.66 17.43 - 13.07 16.07 - 12.60 22.85 - 11.97FAF † FIRST AMERICAN FINANCIAL CP DEC 1.74 2.83 0.74 1.23 1.18 9.79 8.61 6.04 5.68 NA 28.57 - 20.39 24.98 - 12.45 17.37 - 10.51 15.95 - 11.90 NA - NA

THG † HANOVER INSURANCE GROUP INC DEC 5.58 1.03 0.71 3.36 3.71 55.14 54.41 52.11 50.81 46.05 61.72 - 38.88 41.72 - 33.60 48.95 - 31.00 47.99 - 40.27 45.45 - 28.01HCI § HCI GROUP INC DEC 5.82 3.45 1.49 0.88 1.62 14.67 11.15 10.27 7.51 7.03 53.50 - 19.81 26.60 - 7.88 8.70 - 6.05 9.15 - 5.15 8.73 - 4.12IPCC § INFINITY PROPERTY & CAS CORP DEC 2.85 2.09 3.47 7.13 5.17 50.55 50.06 50.22 46.99 40.22 72.70 - 54.32 68.53 - 45.29 63.97 - 43.64 64.60 - 36.93 47.54 - 30.78MIG § MEADOWBROOK INS GROUP INC DEC (2.25) 0.23 0.83 1.11 0.92 7.68 8.22 8.56 7.36 6.17 8.90 - 5.78 11.91 - 5.21 10.90 - 8.27 10.46 - 6.01 8.21 - 5.04MCY † MERCURY GENERAL CORP DEC 2.04 2.13 3.49 2.78 7.36 31.62 31.90 32.10 30.87 30.33 51.00 - 36.03 46.76 - 36.01 46.61 - 33.81 46.66 - 37.38 46.09 - 22.45

NAVG § NAVIGATORS GROUP INC DEC 4.49 4.54 1.71 4.33 3.73 63.04 62.11 57.07 52.24 47.16 67.56 - 51.72 54.22 - 44.43 54.59 - 38.36 52.35 - 36.86 57.64 - 42.80ORI † OLD REPUBLIC INTL CORP DEC 1.74 (0.27) (0.55) 0.13 (0.42) 13.88 13.24 13.92 15.12 15.47 17.45 - 10.74 11.21 - 7.76 13.92 - 7.15 15.50 - 10.02 12.85 - 7.24PRA § PROASSURANCE CORP DEC 4.82 4.49 4.70 3.64 3.38 35.64 33.34 31.93 26.80 24.25 55.44 - 42.29 46.87 - 38.81 40.74 - 28.90 31.26 - 24.39 27.58 - 20.16PGR [] PROGRESSIVE CORP-OHIO DEC 1.95 1.50 1.61 1.62 1.59 10.39 9.94 9.47 9.13 8.55 28.54 - 21.36 23.41 - 19.01 22.08 - 16.88 22.13 - 16.18 18.22 - 9.76RLI § RLI CORP DEC 2.95 2.43 3.10 3.03 2.17 17.54 16.94 17.92 18.25 18.95 52.56 - 32.27 37.51 - 30.93 37.22 - 25.43 30.99 - 24.84 31.00 - 21.25

SAFT § SAFETY INSURANCE GROUP INC DEC 4.00 3.80 0.90 3.74 3.49 45.18 45.31 43.22 43.37 41.20 57.63 - 45.75 48.18 - 39.51 50.10 - 35.50 49.95 - 33.72 41.45 - 28.16SIGI § SELECTIVE INS GROUP INC DEC 1.93 0.69 0.38 1.30 0.84 20.49 19.63 20.24 19.81 18.68 28.31 - 19.53 20.31 - 16.22 18.97 - 12.10 18.94 - 14.13 23.28 - 10.06STC § STEWART INFORMATION SERVICES DEC 2.85 5.66 0.12 (0.69) (2.80) 14.83 13.58 7.75 7.77 8.26 34.39 - 22.74 28.35 - 11.54 12.74 - 8.12 14.96 - 7.79 23.75 - 8.45TRV [] TRAVELERS COS INC DEC 9.84 6.35 3.40 6.69 6.38 59.86 57.39 52.65 49.56 44.94 91.68 - 72.50 74.70 - 55.86 64.17 - 45.97 57.55 - 47.35 54.47 - 33.07UFCS § UNITED FIRE GROUP INC DEC 3.01 1.58 0.00 1.81 (0.39) 29.80 27.78 26.02 27.35 J 25.35 J 34.21 - 22.11 26.33 - 15.90 23.29 - 14.79 24.57 - 15.99 31.31 - 15.72

UVE § UNIVERSAL INSURANCE HLDGS DEC 1.64 0.76 0.51 0.95 0.76 4.97 4.00 3.74 3.55 3.00 14.83 - 4.23 4.69 - 3.01 6.05 - 3.31 6.72 - 3.98 6.45 - 2.40XL [] XL GROUP PLC DEC 3.68 2.12 (1.52) 1.74 0.61 34.45 33.82 28.57 30.88 25.09 33.12 - 25.20 25.78 - 18.85 25.43 - 17.69 22.51 - 15.59 19.02 - 2.56

REINSURANCE‡Y † ALLEGHANY CORP DEC 37.44 45.48 16.26 21.85 29.25 399.42 366.56 325.86 309.41 279.01 420.89 - 337.67 364.89 - 281.51 340.91 - 277.03 304.90 - 246.19 289.76 - 213.13RE † EVEREST RE GROUP LTD DEC 25.67 15.85 (1.49) 10.73 13.26 145.60 130.06 112.33 115.45 102.86 159.86 - 110.31 114.60 - 82.16 94.14 - 73.35 89.11 - 68.71 93.23 - 58.09RGA † REINSURANCE GROUP AMER INC DEC 5.82 8.57 8.15 7.85 5.59 81.78 91.49 83.54 68.60 52.88 77.55 - 54.33 60.69 - 48.36 64.32 - 44.51 56.49 - 42.72 49.85 - 21.27RNR † RENAISSANCERE HOLDINGS LTD DEC 15.08 11.35 (1.53) 11.28 13.50 80.11 67.95 59.10 62.31 50.43 97.53 - 79.83 82.76 - 70.00 75.16 - 59.50 64.50 - 50.81 57.37 - 39.37

MULTI-LINE GROUP‡AFG † AMERICAN FINANCIAL GROUP INC DEC 5.27 5.18 3.39 4.38 4.49 48.12 47.85 42.58 38.71 29.31 58.44 - 39.76 40.54 - 36.24 37.50 - 29.45 32.75 - 23.90 26.63 - 12.77AIG [] AMERICAN INTERNATIONAL GROUP DEC 6.11 4.44 8.60 14.65 (17.43) 67.62 65.39 54.61 50.34 25.19 53.33 - 34.56 37.67 - 23.40 62.87 - 19.18 61.68 - 21.54 55.90 - 6.60AIZ [] ASSURANT INC DEC 6.38 5.74 5.65 2.52 3.65 50.69 53.64 45.33 36.93 30.30 66.73 - 34.83 44.54 - 32.41 41.90 - 30.65 41.87 - 29.08 33.37 - 16.34GNW [] GENWORTH FINANCIAL INC DEC 1.16 0.66 0.25 0.29 (1.02) 26.68 30.42 30.13 24.27 20.79 15.78 - 7.66 9.68 - 4.06 14.77 - 4.80 19.36 - 10.26 13.68 - 0.78HIG [] HARTFORD FINANCIAL SERVICES DEC 0.67 (0.17) 1.20 2.70 (2.93) 40.61 48.67 48.24 42.07 35.77 36.76 - 22.64 23.29 - 15.65 31.08 - 14.56 30.46 - 18.81 29.59 - 3.33

HCC † HCC INSURANCE HOLDINGS INC DEC 4.05 3.84 2.31 3.00 3.14 27.70 26.32 23.24 21.53 19.37 46.38 - 37.37 37.65 - 26.62 33.12 - 24.66 29.18 - 23.85 29.01 - 20.07HMN § HORACE MANN EDUCATORS CORP DEC 2.75 2.63 1.77 2.05 1.88 25.97 30.44 26.14 21.00 17.15 31.81 - 19.95 19.99 - 13.80 18.43 - 10.51 19.50 - 11.16 14.81 - 6.09KMPR † KEMPER CORP/DE DEC 3.75 1.55 1.17 2.97 2.60 31.26 31.65 31.61 29.50 25.43 41.31 - 29.87 33.00 - 27.77 31.69 - 22.07 31.12 - 21.63 23.87 - 7.96L [] LOEWS CORP DEC 1.53 1.44 2.63 3.12 1.31 49.33 47.12 45.20 42.44 37.74 49.43 - 41.06 43.36 - 37.02 45.31 - 32.90 40.34 - 30.22 36.84 - 17.40

INSURANCE BROKERS‡AON [] AON PLC DEC 3.57 3.03 2.91 2.50 2.25 (11.41) (13.37) (12.22) (12.06) (5.60) 84.33 - 54.65 57.92 - 45.04 54.58 - 39.68 46.24 - 35.10 46.19 - 34.81AJG † ARTHUR J GALLAGHER & CO DEC 2.08 1.61 1.29 1.56 1.32 (8.52) (4.97) (4.13) (2.40) (2.81) 48.49 - 34.97 38.24 - 32.01 33.99 - 24.29 29.80 - 21.90 26.02 - 14.82BRO † BROWN & BROWN INC DEC 1.50 1.28 1.15 1.14 1.08 (4.25) (3.27) (1.23) (1.19) (1.22) 35.13 - 25.31 28.17 - 21.85 27.07 - 16.77 24.39 - 16.32 21.50 - 14.95EHTH § EHEALTH INC DEC 0.09 0.36 0.32 0.76 0.63 5.93 7.23 6.59 6.30 6.47 J 48.34 - 14.85 28.07 - 13.96 15.73 - 11.45 18.98 - 9.33 19.60 - 11.59MMC [] MARSH & MCLENNAN COS DEC 2.46 2.16 1.76 1.01 0.43 0.26 (1.83) (2.46) (1.24) (2.54) 48.56 - 34.43 35.78 - 30.69 32.00 - 25.29 27.50 - 20.21 25.46 - 17.18

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. J-This amount includes intangibles that cannot be identif ied.

The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poor’s.

In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poor’s.

The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.


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