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Overview & Outlook for the U.S. Economy, Businessowners and the P/C Insurance Industry Trends, Challenges and Opportunities National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013 Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5520 Cell: 917.453.1885 [email protected]

National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

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Overview & Outlook for the U.S. Economy, Businessowners and the P/C Insurance Industry Trends, Challenges and Opportunities. National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013. Robert P. Hartwig, Ph.D., CPCU, President & Economist - PowerPoint PPT Presentation

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Page 1: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Overview & Outlook for the U.S. Economy, Businessowners and the P/C Insurance IndustryTrends, Challenges and Opportunities

National Captives Owners’ ConferenceBanff, Alberta, CanadaSeptember 11, 2013

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

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

Page 2: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

2

Presentation Outline

U.S. Economic Overview and Outlook Key Sector Analysis: Construction, Manufacturing, Service

Interest Rates, Credit Markets and Fed Reserve Policy Labor Market Outlook P/C Insurance Industry Overview and Outlook Economic Factors Impacting Growth

Regional Analysis By Line Impacts

Catastrophe Loss Trends P/C Performance Analysis

Key Lines

The New Investment Reality The Challenge of Persistently Low Interest Rates

Page 3: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

The Strength of the Economy Will Influence P/C Insurer

Growth Opportunities

3

Growth Will Expand Insurer Exposure Base Across Most Lines

3

Page 4: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

4

US Real GDP Growth*

* Estimates/Forecasts from Blue Chip Economic Indicators.Source: US Department of Commerce, Blue Economic Indicators 9/13; Insurance Information Institute.

2.7

%0

.5%

3.6

%3

.0%

1.7

%-1

.8%

1.3

%-3

.7%

-5.3

%-0

.3%

1.4

%5

.0%

2.3

%2

.2%

2.6

%2

.4%

0.1

%2

.5%

1.3

%4

.1%

2.0

%1

.3% 3

.1%

1.1

% 2.5

%2

.1%

2.6

%2

.7%

2.8

%2

.9%

3.0

%

0.4

%

-8.9%

4.1

%1

.1%

1.8

%2

.5% 3.6

%3

.1%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

   2

00

0   

   2

00

1   

   2

00

2   

   2

00

3   

   2

00

4   

   2

00

5   

   2

00

6   

07

:1Q

07

:2Q

07

:3Q

07

:4Q

08

:1Q

08

:2Q

08

:3Q

08

:4Q

09

:1Q

09

:2Q

09

:3Q

09

:4Q

10

:1Q

10

:2Q

10

:3Q

10

:4Q

11

:1Q

11

:2Q

11

:3Q

11

:4Q

12

:1Q

12

:2Q

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12

:4Q

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:2Q

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:4Q

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

Gradually Benefit the Economy Broadly

Real GDP Growth (%)

Recession began in Dec. 2007. Economic toll of credit crunch, housing slump, labor market contraction

was severe

The Q4:2008 decline was the steepest since the Q1:1982

drop of 6.8%

2013 is expected to see uneven growth,

then gradually accelerate throughout the year and into 2014

Page 5: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

5

Real GDP Growth Forecasts: Major Economies: 2011 – 2014F

Sources: Blue Chip Economic Indicators (8/2013 issue); Insurance Information Institute.

1.8%

2.6%

3.9%

2.2%

2.9%

2.6%

2.4%

3.2% 3.

4%

0.9%

1.5%

4.6%

1.8%

3.0%

3.9%

-0.6

%

1.6% 1.7%

-0.6

%

3.0%

-1%

0%

1%

2%

3%

4%

5%

6%

US Canada Mexico Latin America Euro Area

2011 2012 2013F 2014F

Growth Prospects Vary Widely by Region: Growth Returning in the US, Recession in the Eurozone, Some strengthening in Latin America

The Eurozone is ending

Growth in Mexico and most of Latin America

outpace the USUS growth should accelerate in 2014,

bolstering construction activity

Page 6: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

6

Real GDP by State Percent Change, 2012:Highest 25 States

13

.4

4.8

3.9

3.6

3.5

3.5

3.4

3.3

3.3

3.3

2.7

2.7

2.6

2.4

2.4

2.4

2.4

2.2

2.2

2.2

2.2

2.1

2.1

2.1

2.1

2.0

0

2

4

6

8

10

12

14

ND TX OR WA CA MN UT IN TN WV NC SC AZ FL IA MD MS MA MI OH US CO GA MT OK MO

Pe

rce

nt

Ch

an

ge

(%

)

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

North Dakota was the economic growth juggernaut of the US

in 2012—by far

Only 10 states experienced growth in excess of 3%, which is what we would see nationally in

a more typical recovery

Page 7: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

7

1.9

1.7

1.6

1.5

1.5

1.5

1.5

1.4

1.4

1.4

1.3

1.3

1.3

1.2

1.2

1.1

1.1

0.7

0.5

0.5

0.4

0.2

0.2

0.2

0.2

-0.1

-0.4-0.20.00.20.40.60.81.01.21.41.61.82.0

IL PA HI LA NE NV WI KS KY RI AR NJ NY AL VT AK VA DC ME NH ID DE NM SD WY CT

Pe

rce

nt

Ch

an

ge

(%

)

Real GDP by State Percent Change, 2012: Lowest 25 States

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

Connecticut was the only state to shrink in 2012

Growth rates in 8 states (and DC) were still below

1% in 2012

Page 8: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

State-by-State Leading Indicatorsthrough 2013:Q4

Sources: Federal Reserve Bank of Philadelphia at http://www.philadelphiafed.org/index.cfm ;Insurance Information Institute. 8

The economic outlook for Northeast

and Mid-Atlantic regions is mixed but suggests growth in

the creation of insurable exposures

Page 9: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Federal Spending as a Share of State GDP: Vulnerability to Sequestration Varies

Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo; Insurance Information Institute. 9

Some Mid-Atlantic and Southern state are more

vulnerable to the effects of sequestration

Page 10: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

10

Defense and Non-Defense Federal Spending as a Share of State GDP: Top 10 States*

14

.6

10

.5

9.8

9.8

9.8

8.0

7.0

5.9

5.3

5.2

10

.0

10

.0

10

.0

9.2

4.9

3.8

3.1

2.8

2.7

2.6

0

2

4

6

8

10

12

14

16

HI AK DC MD VA KY AL MO CT AZ DC MD VA NM ID WV TN AK MT SC

Sh

are

of

Sta

te G

DP

(%

)

Federal defense spending accounts for approximately 10%+ of

GDP in 5 states

*As of 2010.Sources: Pew Center on the States (2012) Impact of the Fiscal Cliff on the States; Wells Fargo Securities; Insurance Information Institute.

Defense Spending Non-Defense Spending

Federal non-defense spending accounts for 10%+ of GDP in 3 states

Sequestration Could Adversely Impact Commercial Insurance Exposures Directly at Defense Contractors and Indirectly in Impacted Communities

Page 11: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

74

.47

3.6

73

.67

2.2

73

.6 76

67

.86

8.9

68

.26

7.7 7

1.6 74

.57

4.2 77

.56

7.5 69

.8 74

.37

1.5

63

.75

5.7 5

9.5

60

.9 64

.16

9.9

75

.07

5.3

76

.27

6.4 79

.37

3.2

72

.3 74

.38

2.6

82

.77

4.5

73

.8 77

.67

8.6

84

.58

4.1

85

.18

2.1

76

.4

40

45

50

55

60

65

70

75

80

85

90

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Fe

b-1

2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2O

ct-1

2N

ov-

12

De

c-1

2Ja

n-1

3F

eb

-13

Ma

r-1

3A

pr-

13

Ma

y-1

3Ju

n-1

3Ju

l-1

3A

ug

-13

Consumer Sentiment Survey (1966 = 100)

January 2010 through August 2013

Consumer confidence has been low for years amid high unemployment, falling home prices and other factors adversely impact

consumers, but improved substantially over the past two years

Source: University of Michigan; Insurance Information Institute

Optimism among consumers has remained fairly strong

despite tax hikes, federal budget concerns. July’s reading was

the highest since July 2007

11

Page 12: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

12

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4

15.5 15

.9

16.0

16.2

16.2

16.2

16.216

.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F15F 16F17F18F 19F

(Millions of Units)

Auto/Light Truck Sales, 1999-2019F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (8/13 and 3/13); Insurance Information Institute.

Car/Light Truck Sales Will Continue to Recover from the 2009 Low Point, Bolstering the Auto Insurer Growth and the Manufacturing Sector Along

With Workers Comp Exposures

New auto/light truck sales fell to the lowest level since the late 1960s. Forecast for 2013-14 is

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

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

2013 and beyond

Truck purchases by contractors are especially strong

Page 13: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

58

.35

7.1

60

.45

9.6

57

.85

5.3

55

.15

5.2

55

.3 56

.9 58

.25

8.5 6

0.8

61

.45

9.7

59

.75

4.2 55

.85

1.4 52

.55

2.5

51

.85

2.2 53

.1 54

.15

1.9 53

.35

4.1

52

.55

0.2

50

.55

0.7

51

.65

1.7

49

.95

0.2

53

.1 54

.2

50

.74

9.0 5

0.9

55

.45

5.7

51

.3

40

45

50

55

60

65

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Fe

b-1

2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2S

ep

-12

Oct

-12

No

v-1

2D

ec-

12

Jan

-13

Fe

b-1

3M

ar-

13

Ap

r-1

3M

ay-

13

Jun

-13

Jul-

13

Au

g-1

3

ISM Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through August 2013

The manufacturing sector expanded for 42 of the 44 months from Jan. 2010 through June 2013. Recent weakness stems largely from woes in

Europe and a Slowdown in China.

Source: Institute for Supply Management at http://www.ism.ws/ismreport/mfgrob.cfm; Insurance Information Institute.

Manufacturing expanded in August, albeit modestly

13

Page 14: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

14

$200,000

$300,000

$400,000

$500,000

Dollar Value* of Manufacturers’ Shipments Monthly, Jan. 1992—Apr. 2013

*seasonally adjustedSource: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Monthly shipments in Feb. 2013 exceeded their pre-crisis (July 2008) peak. Trough in May 2009. Growth from trough to Apr. 2013 was 34%. Manufacturing is an energy intensive

activity and growth leads to gains in many commercial exposures: WC, Commercial Auto, Marine, Property and Various Liability Coverages

The value of Manufacturing Shipments in Apr. 2013 were up 34% to $478.7B from its May 2009 trough. March figure is now 2.2% below its previous record high in Feb. 2013.

Modest weakening in recent months.

$ Millions

14

Page 15: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

15

Manufacturing Growth for Selected Sectors, 2013 vs. 2013*

3.7%

-0.6%

7.2%

0.7%3.1%

0.2%

-0.8%

2.8%

5.9%

1.6%2.6%

15.2%

-2.0%

1.0%

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

10%12%14%16%18%

All

Ma

nu

fact

uri

ng

Du

rab

le M

fg.

Wo

od

Pro

du

cts

Pri

ma

ryM

eta

ls

Fa

bri

cate

dM

eta

ls

Ma

chin

ery

Ele

ctri

cal

Eq

uip

.

Tra

nsp

ort

atio

nE

qu

ip.

No

n-D

ura

ble

Mfg

.

Fo

od

Pro

du

cts

Pe

tro

leu

m &

Co

al

Ch

em

ica

l

Pla

stic

s &

Ru

bb

er

Te

xtile

Pro

du

cts

Manufacturing Is Expanding—Albeit More Slowly—Across a Number of Sectors that Will Contribute to Growth in Insurable Exposures Including: WC,

Commercial Property, Commercial Auto and Many Liability Coverages

Growth (%)

Manufacturing of durable goods was especially

strong in 2012 but weakened in 2013

*Seasonally adjusted; Date are YTD comparing data through July 2013 to the same period in 2012.Source: U.S. Census Bureau, Full Report on Manufacturers’ Shipments, Inventories, and Orders, http://www.census.gov/manufacturing/m3/

Durables: +2.6% Non-Durables: +0.7%

Page 16: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Jun 0

1

Sep

Dec

Mar

02

Jun 0

2

Sep

Dec

Mar

03

Jun 0

3

Sep

Dec

Mar

04

Jun 0

4

Sep

Dec

Mar

05

Jun 0

5

Sep

Dec

Mar

06

Jun 0

6

Sep

Dec

Mar

07

Jun 0

7

Sep

Dec

Mar

08

Jun 0

8

Sep

Dec

Mar

09

Jun 0

9

Sep

Dec

Mar

10

Jun 1

0

Sep

Dec

Mar

11

Jun 1

1

Sep

Dec

Mar

12

Jun 1

2

Sep

Dec

Mar

13

Jun 1

3

Recovery in Capacity Utilization is a Positive Sign for Commercial Exposures

Source: Federal Reserve Board statistical releases at http://www.federalreserve.gov/releases/g17/Current/default.htm. 16

Percent of Industrial Capacity

Hurricane Katrina

March 2001-November 2001

recession

“Full Capacity”

The closer the economy is to operating at “full

capacity,” the greater the inflationary pressure

The US operated at 77.6% of industrial capacity in July 2013, well above the June

2009 low of 66.9% but is still below pre-recession levels.

December 2007-June 2009 Recession

March 2001 through July 2013

16

Page 17: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

17

Manufacturing Employment,Jan. 2010—August 2013*

11,4

6011

,460

11,4

6611

,497

11,5

3111

,539

11,5

5811

,548

11,5

5411

,555

11,5

7711

,590

11,6

2411

,662

11,6

8211

,707

11,7

1511

,724

11,7

4711

,760

11,7

6211

,770

11,7

6911

,797

11,8

4111

,870

11,9

1011

,920

11,9

2611

,935

11,9

5711

,943

11,9

2511

,931

11,9

3811

,951

11,9

6511

,988

11,9

8411

,977

11,9

7211

,965

11,9

4911

,963

11,000

11,200

11,400

11,600

11,800

12,000

12,200

12,400

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3A

ug-1

3

Manufacturing employment is up by more than 500,000 or 4.4% since Jan.

2010—a surprising source of strength in the economy. The sector has weakened

recently as US corporations remains cautious and Europe, China slow.

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

(Thousands)

Page 18: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

50

.7 52

.7 54

.15

4.6

54

.85

3.5

53

.75

2.8 53

.95

4.6 56 5

7.1 5

9.4

59

.75

6.3

54

.45

3.3

53

.45

3.8

52

.65

2.6

52

.65

2.6

53

.05

6.8

56

.15

5.0

53

.75

4.1

52

.75

2.9 54

.3 55

.25

4.8

54

.85

5.7

55

.25

6.0

53

.15

3.7

52

.25

6.0

54

.4

40

45

50

55

60

65

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Fe

b-1

2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2S

ep

-12

Oct

-12

No

v-1

2D

ec-

12

Jan

-13

Fe

b-1

3M

ar-

13

Ap

r-1

3M

ay-

13

Jun

-13

Jul-

13

ISM Non-Manufacturing Index(Values > 50 Indicate Expansion)

January 2010 through July 2013

Non-manufacturing industries have been expanding and adding jobs. The question is whether this will continue.

Source: Institute for Supply Management at http://www.ism.ws/ismreport/nonmfgrob.cfm; Insurance Information Institute.

Optimism among non-manufacturers is stable

and remains expansionary in 2013

18

Page 19: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

19

43,6

9448

,125

69,3

0062

,436

64,0

04 71,2

77 81,2

3582

,446

63,8

5363

,235

64,8

53 71,5

4970

,643

62,3

0452

,374

51,9

5953

,549

54,0

2744

,367

37,8

8435

,472

40,0

9938

,540

35,0

3734

,317

39,2

0119

,695 28

,322

43,5

4660

,837

56,2

8247

,806

40,0

75

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Business Bankruptcy Filings,1980-2012

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

Significant Exposure Implications for All Commercial Lines as Business Bankruptcies Begin to Decline

2012 bankruptcies totaled 40,075, down 16.2% from 2011—the third

consecutive year of decline. Business bankruptcies more than tripled during the financial crisis.

% Change Surrounding Recessions

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

19

Page 20: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

20

Private Sector Business Starts, 1993:Q2 – 2012:Q4*

17

51

86

17

41

80

18

61

92

18

81

87 18

91

86 1

90 1

94

19

11

99 2

04

20

21

95

19

61

96

20

62

06

20

11

92

19

82

06

20

62

03

21

12

05

21

22

00 2

05

20

42

04

19

72

03

20

92

01

19

21

92

19

32

01 20

42

02

21

0 21

22

09

21

6 22

0 22

32

20

22

02

10

22

12

12

20

42

18

20

92

07

20

71

99

19

1 19

31

72 1

76

16

91

84

17

5 17

91

88

20

01

83 1

87 1

91

19

71

93

19

1 19

31

92

20

3

150

160

170

180

190

200

210

220

230

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

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

Are Recovering Slowly* Data through Dec. 30, 2012 are the latest available as of Aug. 16, 2013; Seasonally adjusted. Source: Bureau of Labor Statistics, http://www.bls.gov/news.release/cewbd.t08.htm.

(Thousands)

Business starts were up 2.8% in 2012 to 769,000 following a 2.2% gain to

748,000 in 2011. Start-ups could accelerate in 2013.

Business Starts2006: 872,0002007: 843,0002008: 790,0002009: 697,000 2010: 742,000 2011: 748,000 2012: 769,000

20

Page 21: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

NFIB Small Business Optimism Index

January 1985 through July 2013

Source: National Federation of Independent Business at http://www.advisorperspectives.com/dshort/charts/indicators/Sentiment.html?NFIB-optimism-index.gif ; Insurance Information Institute. 21

Small business optimism is off crisis lows but still suffering

from economic and regulatory uncertainty. Confidence today is basically where it was when the crisis began in Dec. 2007.

Page 22: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

22

12 Industries for the Next 10 Years: Insurance Solutions Needed

Export-Oriented Industries

Health Sciences

Health Care

Energy (Traditional)

Alternative Energy

Petrochemical

Agriculture

Natural Resources

Technology (incl. Biotechnology)

Light Manufacturing

Insourced Manufacturing

Many industries are

poised for growth, though

insurers’ ability to

capitalize on these

industries varies widely

Shipping (Rail, Marine, Trucking, Pipelines)

Page 23: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

CONSTRUCTION INDUSTRY OVERVIEW & OUTLOOK

23

The Construction Sector Is Critical to the Economy and the P/C Insurance Industry

23

Page 24: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

24

Value of New Private Construction: Residential & Nonresidential, 2003-2013*

Billions of Dollars

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

03 04 05 06 07 08 09 10 11 12 13*

Non ResidentialResidential

Private Construction Activity Is Moving in a Positive Direction though Remains Well Below Pre-Crisis Peak; Residential Dominates

$298.1

$15.0

$613.7

New Construction peaks at $911.8. in 2006

Trough in 2010 at $500.6B,

after plunging 55.1% ($411.2B)

2013: Value of new pvt. construction hits $622.8B, up

24% from the 2010 trough but still

32% below 2006 peak

24

$261.8

$238.8

$332.1

$290.8

*2013 figure is a seasonally adjusted annual rate as of June.Sources: US Department of Commerce; Insurance Information Institute.

Page 25: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

25

$314.9$304.0

$286.4 $279.0$261.1

$216.1 $220.2$234.2

$255.4

$289.1$308.7

$0

$50

$100

$150

$200

$250

$300

$350

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

($ Billions)

Government Construction Spending Peaked in 2009, Helped by Stimulus Spending, but Continues to Contract As State/Local Governments

Grapple with Deficits and Federal Sequestration Takes Hold

Value of New Federal, State and Local Government Construction: 2003-2013*

*2013 figure is a seasonally adjusted annual rate as of June.Sources: US Department of Commerce; Insurance Information Institute.

Construction across all levels of government

peaked at $314.9B in 2009

Austerity Reigns

Govt. construction is still shrinking, down $53.8B or

17.1% since 2009 peak

Page 26: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

26

New Home Inventories and Rental Vacancy Rates, 2003-2013*

370

422

511536

497

353

234

190

151 150 161

8.2%

8.7%9.5%

10.2%10.6%

10.0%

9.7%9.7%9.8%

10.2%

9.8%

0

100

200

300

400

500

600

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Inv

en

tory

of

Ho

me

s f

or

Sa

le

0%

2%

4%

6%

8%

10%

12%

Va

ca

nc

y R

ate

for R

en

tal H

ou

sin

g

(Thousands)

Low new home inventories and falling vacancy rates bode well

for residential construction

*2013 figure is a seasonally adjusted annual rate as of June.Sources: US Department of Commerce; Insurance Information Institute.

Page 27: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

27

Change from Peak in New Construction Expenditures to 2013*

-28.8%

-61.6%

-48.6%-50.2%

-19.9%-11.8%

-17.1%-24.3%

-31.7%

-45.9%

-59.3%-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

All

Co

nst

ruct

ion

(20

06

)P

vt.

Co

nst

ruct

ion

(20

06

)

To

tal

Re

sid

en

tial

(20

06

)

Ne

w H

ou

sin

g(2

00

5)

To

tal

No

nre

sid

en

tial

(20

08

)

Lo

dg

ing

(20

08

)

Offi

ce (

20

08

)

Co

mm

erc

ial

(20

07

)

Ma

nu

fact

uri

ng

(20

09

)

Oth

er

(20

08

)

Go

vern

me

nt

(20

09

)

Despite Recent Improvements, Construction Activity (and Employment) Remains Far Below Pre-Crisis Peaks

Change (%)

Note: Year in parentheses is the year of peak expenditure.*2013 figure is a seasonally adjusted annual rate as of June.Sources: US Department of Commerce; Insurance Information Institute.

Residential Nonresidential Govt.

Page 28: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

28

Value of Construction Put in Place, July 2013 vs. July 2012*

-3.7%-2.4%

-3.7%

5.2%

9.5%

17.2%

2.0%

-5%

0%

5%

10%

15%

20%

TotalConstruction

Total PrivateConstruction

Residential--Private

Non-Residential--

Private

Total PublicConstruction

Residential-Public

Non-Residential--

Public

Overall Construction Activity is Up, But Growth Is Entirely in the Private Sector as State/Local Government Budget Woes Continue

Growth (%)

Private sector construction activity is now up in the

residential and nonresidential segments

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Private: +9.5% Public: -3.7%

Public sector construction activity remains depressed

Page 29: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

29

Value of Private Construction Put in Place, by Segment, July 2013 vs. July 2012*

2.6%

-3.0% -2.1%

-18.5%

3.3%

-12.1%

5.0%0.8%

-5.1%

9.5%17.2%

2.0%

32.8%

4.7%

-30%

-20%

-10%

0%

10%

20%

30%

40%

To

tal

Pri

vate

Co

nstr

ucti

on

Resid

en

tial

To

tal

No

nre

sid

en

tial

Lo

dg

ing

Off

ice

Co

mm

erc

ial

Healt

h C

are

Ed

ucati

on

al

Reli

gio

us

Am

usem

en

t &

Rec.

Tra

nsp

ort

ati

on

Co

mm

un

icati

on

Po

wer

Man

ufa

ctu

rin

g

Private Construction Activity is Up in Some Segments, Including the Key Residential Construction Sector, But Weakened in the First Half of 2013

Growth (%) Led by the Residential Construction, Lodging, Power and Office segments, Private

sector construction activity remains mixed after plunging during the “Great Recession.”

Most segments expanded in 2012 but weakened in the first half of 2013.

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Page 30: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

30

Private Construction by Segment/Project Type, July 2013 vs. July 2012*

-13.7%

0.4%

-14.2%

-1.0%

2.9%

-12.1%

9.5%

-0.5%

-0.6%-3.6%

-14.4%

12.4%

51.1%

9.5%17.2%

29.3%

6.6%0.4%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

To

tal

Pri

vate

Co

nst

ruct

ion

Res

iden

tial

:S

ing

le F

amil

y

Res

iden

tial

:M

ult

i-F

amil

y

Off

ice:

Gen

eral

Off

ice:

Fin

anci

al

Au

tom

oti

ve

Fo

od

/Bev

erag

e

Ret

ail:

Gen

eral

Mer

chan

dis

e

Ret

ail:

Sh

op

pin

gC

ente

r

Sh

op

pin

g M

all

Dru

g S

tore

Bu

ild

ing

Su

pp

ly

Oth

er

War

eho

use

:C

om

mer

cial

War

eho

use

:M

ini-

Sto

rag

e

Ho

spit

als

Med

ical

Bu

ild

ing

Sp

ecia

l C

are

Private Construction Activity is Up in Some Segments, Including the Key Residential Construction Sector, But Down in Others

Growth (%)Shopping malls and

warehouse construction are among the strongest nonresidential segments

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Page 31: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

31

Value of Public Construction Put in Place, by Segment, July 2013 vs. July 2012*

4.4%

-11.7%-13.9%

-17.6%

14.7%

-3.8%

5.1%8.7%

-12.0%

13.9%

-3.7%-2.4%

-3.7%

-20.9%

-13.8%

-25%-20%

-15%-10%

-5%0%

5%10%

15%20%

To

tal

Pu

bli

cC

on

str

ucti

on

Resid

en

tial

To

tal

No

nre

sid

en

tial

Off

ice

Co

mm

erc

ial

Healt

h C

are

Ed

ucati

on

al

Pu

bli

c S

afe

ty

Am

usem

en

t &

Rec.

Tra

nsp

ort

ati

on

Po

wer

Hig

hw

ay &

Str

eet

Sew

ag

e &

Waste

Dis

po

sal

Wate

r S

up

ply

Co

nserv

ati

on

&D

evelo

p.

Public Construction Activity is Down in Many Segments as State and Local Budgets Remain Under Stress; Improvement Possible in 2014.

Growth (%)

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Public sector construction activity is down substantially in most segments, a situation that will likely persist, dragging

on public entity risk exposures

Transportation and Power projects lead

public sector construction

Page 32: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

32

Public Construction by Segment/Project Type, July 2013 vs. July 2012*

-41.7%

-19.0%-28.8%

27.4%

-28.8%-30.3%

13.7%6.6%

-19.3%-10.2%

-3.0%-3.7%

-16.5%

-3.6%

-50%-40%-30%-20%-10%

0%10%20%30%40%

To

tal

Pu

bli

cC

on

stru

ctio

n

Sta

te &

Lo

cal

Fed

eral

Ed

uca

tio

n:

Pri

mar

y/S

eco

nd

ary

Hig

her

Ed

uca

tio

n

Lib

rary

/Arc

hiv

e

Co

rrec

tio

nal

Pu

bli

c S

afet

y

Sp

ort

s

Pef

orm

ance

Cen

ter

Co

nve

nti

on

Cen

ter

Par

k/C

amp

Tra

nsp

ort

: A

ir

Hig

hw

ay &

Str

eet

Public Construction Activity is Down in Most Segements as Governments Grapple with Budget Deficits and Pension Shortfalls

Growth (%) It could be years before public sector construction

activity recovers

*seasonally adjustedSource: U.S. Census Bureau, http://www.census.gov/construction/c30/c30index.html ; Insurance Information Institute.

Page 33: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

33

(Millions of Units)

New Private Housing Starts, 1990-2019F

1.4

8

1.4

7 1.6

21

.64

1.5

71

.60 1.7

1 1.8

5 1.9

6 2.0

71

.80

1.3

6

0.9

10

.55

0.5

9

0.6

1 0.7

8 0.9

7

1.1

8 1.3

5

1.4

41

.50

1.5

11

.50

1.3

51.4

61

.29

1.2

0

1.0

11.1

9

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13F14F15F16F17F18F19F

Source: U.S. Department of Commerce; Blue Chip Economic Indicators (8/13 and 3/13); Insurance Information Institute.

Insurers Are Starting to See Meaningful Exposure Growth for the First Time Since 2005 Associated with Home Construction: Construction Risk Exposure,

Surety, Commercial Auto; Potent Driver of Workers Comp Exposure

New home starts plunged 72% from 2005-2009; A net

annual decline of 1.49 million units, lowest since records began

in 1959

Job growth, low inventories of existing homes, low mortgage

rates and demographics are stimulating new home construction

for the first time in years

Page 34: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

34

Construction Employment,Jan. 2010—August 2013*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

5,58

15,

522

5,54

25,

554

5,52

75,

512

5,49

75,

519

5,49

95,

501

5,49

75,

468

5,43

5 5,47

85,

485

5,49

75,

524

5,53

05,

547

5,54

6 5,58

35,

576

5,57

7 5,61

25,

629

5,64

45,

640

5,63

65,

615

5,62

25,

627

5,63

05,

633

5,64

95,

673 5,

711

5,73

5 5,78

35,

797

5,79

25,

791

5,80

15,

798

5,79

8

5,400

5,450

5,500

5,550

5,600

5,650

5,700

5,750

5,800

5,850

5,900

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

132/

30/2

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Construction employment growth accelerated in the second half of

2012 but flattened out by mid-2013. Construction is a key driver of

workers comp exposure growth.

(Thousands)

Page 35: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

35

Construction Employment, Jan. 2003–August 2013

Note: Recession indicated by gray shaded column.Sources: U.S. Bureau of Labor Statistics; Insurance Information Institute.

5,000

5,500

6,000

6,500

7,000

7,500

8,000

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

The “Great Recession” and housing bust destroyed 2.3 million constructions jobs

The Construction Sector Could Be a Growth Leader in 2013 and 2014 as the Housing Market and Private Investment Recover. WC Insurers Will Benefit.

Construction employment

troughed at 5.435 million in Jan.

2011, after a loss of 2.291 million jobs, a 29.7%

plunge from the April 2006 peak

35

Construction employment

peaked at 7.726 million in April 2006

(Thousands) Construction employment as of July 2013 totaled 5.798 million, an

increase of 358,000 jobs or 6.6% from the

Jan. 2011 trough

Page 36: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

36

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2013:Q2

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,25005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

13:Q

2

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2013:Q2) was $7.09 trillion, a new peak--$762B

above 2009 trough

Recent trough (2009:Q3) was $6.25 trillion, down

5.3% from prior peak

Payrolls are 13.4% above

their 2009 trough and up 2.7% over

the past year

36

Page 37: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

37

Credit Markets and Lending

Credit Market Conditions Have Vastly Improved

Mortgage Interest Rates Are RisingWhat Will the Fed Do Next?

37

Page 38: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

38

Number of Failed and Troubled Banks*

252

702

884813

651553

165192157140

250

100

200300

400500

600700

800900

1,000

2008 2009 2010 2011 2012 2013*

*As of June 30. FDIC insured institutions only.Sources: FDIC at http://www2.fdic.gov/qbp/2013jun/qbp.pdf; Insurance Information Institute.

Number of Institutions

US Banks Are Getting Healthier—Fewer Are Failing or Considered to Be “Troubled” by the FDIC. This is Critical for

the Construction Sector.

Failures are down and the number of “Troubled” banks is at its lowest level in

the post-crisis era

38

Page 39: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

39

Commercial & Industrial Loans Outstandingat FDIC-Insured Banks, Quarterly, 2006-2013*

$1.1

6

$1.1

8$1

.22

$1.4

4$1

.48

$1.4

9

$1.5

0$1

.49

$1.4

3$1

.37

$1.2

7

$1.2

1$1

.18

$1.1

7$1

.17

$1.1

8

$1.2

0$1

.24 $1

.28 $1

.35

$1.3

7 $1.4

2$1

.46 $1

.51

$1.5

3$1

.56

$1.1

3

$1.2

5 $1.3

0$1

.39

$1.0

$1.1

$1.2

$1.3

$1.4

$1.5

$1.6

06:Q

1

06:Q

2

06:Q

306

:Q4

07:Q

107

:Q2

07:Q

3

07:Q

408

:Q1

08;Q

208

:Q3

08:Q

4

09:Q

109

:Q2

09:Q

309

:Q4

10:Q

1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

2

11:Q

311

:Q4

12:Q

112

:Q2

12:Q

3

12:Q

413

:Q1

13:Q

2

Outstanding loan volume has been growing for over two yearsand (as of year-end 2012) surpassed previous peak levels.

*Latest data as of 9/8/2013.Source: FDIC at http://www2.fdic.gov/qbp/; Insurance Information Institute.

$Trillions In nominal dollar terms, this is an

all-time high.

Recession

Page 40: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

40

Percent of Non-Current Commercial & Industrial Loans Outstanding at FDIC-Insured Banks,Quarterly, 2006-2013:Q2*

0.70

%

0.74

%

0.64

%

0.67

%

0.81

%

1.07

%

1.18

% 1.69

% 2.25

% 2.80

%

3.57

%

3.43

%

3.05

%

2.83

%

2.73

%

2.44

%

1.89

%

1.65

%1.

49%

1.29

%

1.17

%

1.09

%

0.97

%

0.88

%

0.80

%0.

74%

0.71

%

0.63

%

0.62

%

0.63

%

0%

1%

2%

3%

4%

06:Q

1

06:Q

2

06:Q

3

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08;Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2

09:Q

309

:Q4

10:Q

1

10:Q

2

10:Q

3

10:Q

4

11:Q

1

11:Q

2

11:Q

3

11:Q

4

12:Q

1

12:Q

2

12:Q

3

12:Q

4

13:Q

1

13:Q

2

Non-current loans (those past due 90 days or more or in nonaccrual status) are nearly back to early-recession levels, fueling bank willingness to lend.

*Latest data as of 9/8/2013.Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.

Almost back to “normal” levels of noncurrent

industrial & commercial loans

Recession

Page 41: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

41

Mortgage Interest Rates Will Rise as Expectations Over the Fed’s Tapering of QE3 Persist; Still Low by Historical Standards

3.34

%3.

40%

3.38

%3.

42%

3.53

%3.

53%

3.53

%3.

56%

3.51

%3.

52%

3.63

%3.

54%

3.57

%3.

54%

3.43

%3.

41%

3.40

%3.

35%

3.42

%3.

51%

3.59

%3.

81%

3.91

%3.

98%

3.93

%4.

46%

4.29

%4.

51%

4.37

%4.

31%

4.39

%4.

40%

4.40

% 4.58

%4.

51%

4.57

%

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

4.8%

03-J

an

10-J

an

17-J

an

24-J

an

31-J

an

07-F

eb

14-F

eb

21-F

eb

28-F

eb

07-M

ar

14-M

ar

21-M

ar

28-M

ar

04-A

pr

11-A

pr

18-A

pr

25-A

pr

02-M

ay

09-M

ay

16-M

ay

23-M

ay

30-M

ay

06-J

un

13-J

un

20-J

un

27-J

un

04-J

ul

11-J

ul

18-J

ul

25-J

ul

01-A

ug

08-A

ug

15-A

ug

22-A

ug

29-A

ug

05-S

ep

30-year mortgage rates are up 122 basis points since early May

30-Year Mortgages in 2013 Are Rising: What Will Be the Impact on Construction?

*Weekly through September 5, 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.; Insurance Information Institutes.

Page 42: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

42

Interest Rate on Convention 30-Year Mortgages: Headed Back Up, 1990–2013*

*Monthly, through August 2013. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

0%

2%

4%

6%

8%

10%

12%

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

Yields on 30-Year mortgages have been below 6% for a five

years

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

Yields on 30-Year Mortgages in the U.S. plunged to all time record

lows in late 2012 and early 2013 but are now rising as the Fed

considers tapering its QE program

42

30-yr. mortgage rates are up 111 basis points since the

beginning of the year

Page 43: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

43

Where Are Interest Rates Headed?

Longer Term Interest Rates Headed Up as Fed Begins to “Taper” its $85B/month Quantitative Easing (QE) Prog. 10-Year Treasury already up to 2.92% from less than 2% in early

2013; Could see 3.4% by year-end 2014

Shorter-Term Rates Will Remain Low Fed will keep rates low until the unemployment rates falls to 6.5%

and/or inflation spikes beyond 2.5% Neither is immediately likely (Late 2014? Early 2015?) Holders of cash and short-term securities still starved for yield

Lending Standards Will Remain Tighter But credit markets are thawing Banks will want to lend as spread increases

Equity Markets Can Withstand Unwinding of QE

Page 44: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

44

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

2.8 2.6

1.51.9

3.3 3.4

1.3

2.5 2.3

3.0

3.8

2.8

3.8

-0.4

1.6

3.2

2.11.6

1.9

2.92.4

3.23.0

5.14.9

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

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

Sources: US Bureau of Labor Statistics; Blue Chip Economic Indicators, 9/13 (forecasts).

The slack in the U.S. economy suggests that inflationary pressures should remain subdued for an extended period of times. Energy, health care and

commodity prices, plus U.S. debt burden, remain longer-run concerns

Annual Inflation Rates (%)

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

commodity bubble reduced inflationary pressures in 2009/10

Inflationary expectations remain quite

low, far below the Fed’s 2.5%

threshold

Page 45: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

45

U.S. 10-Year Treasury Note Yields:A Long Downward Trend, 1990–2013*

*Monthly, except Sept. figure of 2.92% is as of Sept. 6, 2013. Note: Recessions indicated by gray shaded columns.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institutes.

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

Yields on 10-Year U.S. Treasury Notes recently plunged to record modern-era lows and remain low

by historical standards.

2.92% as of Sept 6.

45

Page 46: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

46

Trajectory of Interest Rates as Fed’s Monetary Stimulus Programs Unwind

0.25% 0.25% 0.25%

0.69%

1.52%

0.76%

1.32%

2.03%

2.63%2.78%

2.92%

4.08%

4.55%4.46%

3.66%

4.31%

4.93%

5.40%

0.25%

3.65%3.18%

2.62%

1.80%

3.91%3.63%

0%

1%

2%

3%

4%

5%

6%

2011 2012 2013F 2014F 2015F

Federal Fund Rate5-Year Treasury10-Year Treasury30-Year TreasuryConventional Mortgage

The End of the Fed’s Quantitative Easing Program and Economic Growth Will Send Intermediate and Longer Term Rates Higher While

Short Term Rates Are Held Low Until Unemployment Drops Below 6.5% or Until Inflation Expectations Exceed 2.5%

Source: Wells Fargo Securities, Sept. 2013;; Insurance Information Institute.

Page 47: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

47

Labor Market Trends

Massive Job Losses Sapped the Economy and Commercial/Personal

Lines Exposure, But Trend is Improving

47

Page 48: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

48

Unemployment and Underemployment Rates: Stubbornly High, But Falling

2

4

6

8

10

12

14

16

18

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Jan06

Jan07

Jan08

Jan09

Jan10

Jan11

Jan12

Jan13

Traditional Unemployment Rate U-3

Unemployment + Underemployment Rate U-6

Unemployment stood at 7.3% in Aug. 2013—its

lowest level since Dec. 2008.

Unemployment peaked at 10.1% in

October 2009, highest monthly rate since 1983.

Peak rate in the last 30 years: 10.8% in

November - December 1982

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

U-6 went from 8.0% in March

2007 to 17.5% in October 2009; Stood at 13.7% in August 2013

January 2000 through August 2013, Seasonally Adjusted (%)

Recession ended in

November 2001

Unemployment kept rising for

19 more months

Recession began in

December 2007

Stubbornly high unemployment and underemployment constrain overall economic growth, but the job market is now clearly improving

48

Page 49: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

22

75

41

68

50

12

36

61

-79

24 6

8 74

51

2-1

14

-10

5-2

22

-21

9-2

03

-26

7-2

69

-42

9-4

84

-78

6 -70

1-8

21

-69

2-8

12

-82

1-2

88

-44

2-2

82 -2

22 -1

62

-23

3-3

4-1

67

-17

-26

17

01

02

94 10

31

29

11

3 18

81

54

11

48

02

43

22

3 30

31

83

17

72

06

12

92

56

17

41

97 24

9 32

32

65

20

81

20 15

27

81

77

13

11

18

21

7 25

62

24

16

43

19

15

4 18

81

87

19

41

27

15

2

11

1

(1,000)

(800)

(600)

(400)

(200)

0

200

400

Jan

-07

Fe

b-0

7M

ar-

07

Ap

r-0

7M

ay-

07

Jun

-07

Jul-

07

Au

g-0

7S

ep

-07

Oct

-07

No

v-0

7D

ec-

07

Jan

-08

Fe

b-0

8M

ar-

08

Ap

r-0

8M

ay-

08

Jun

-08

Jul-

08

Au

g-0

8S

ep

-08

Oct

-08

No

v-0

8D

ec-

08

Jan

-09

Fe

b-0

9M

ar-

09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

No

v-0

9D

ec-

09

Jan

-10

Fe

b-1

0M

ar-

10

Ap

r-1

0M

ay-

10

Jun

-10

Jul-

10

Au

g-1

0S

ep

-10

Oct

-10

No

v-1

0D

ec-

10

Jan

-11

Fe

b-1

1M

ar-

11

Ap

r-1

1M

ay-

11

Jun

-11

Jul-

11

Au

g-1

1S

ep

-11

Oct

-11

No

v-1

1D

ec-

11

Jan

-12

Fe

b-1

2M

ar-

12

Ap

r-1

2M

ay-

12

Jun

-12

Jul-

12

Au

g-1

2S

ep

-12

Oct

-12

No

v-1

2D

ec-

12

Jan

-13

Fe

b-1

3M

ar-

13

Ap

r-1

3M

ay-

13

Jun

-13

Jul-

13

Jul-

13

Monthly Change in Private Employment

January 2007 through August 2013 (Thousands, Seasonally Adjusted)

Private Employers Added 7.41 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

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

Monthly Losses in Dec. 08–Mar. 09 Were

the Largest in the Post-WW II Period

152,000 private sector jobs were created in July

49

Jobs Created2013 YTD: 1.485 Mill

2012: 2.247 Mill2011: 2.420 Mill2010: 1.235 Mill

Page 50: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

0.05

10.

053

-0.0

61-0

.166

-0.3

88-0

.607

-0.8

10-1

.077

-1.3

46-1

.775

-2.2

59-3

.045

-3.7

46-4

.567

-5.2

59-6

.071

-6.8

92-7

.180

-7.6

22-7

.904

-8.1

26-8

.288

-8.5

21-8

.555

-8.7

22-8

.739

-8.7

65-8

.654

-8.4

84-8

.382

-8.2

88-8

.185

-8.0

56-7

.943

-7.7

55-7

.601

-7.4

87-7

.407

-6.9

41-6

.638

-6.4

55-6

.278

-6.0

72-5

.943

-5.6

87-5

.513

-5.3

16-5

.067

-4.7

44-4

.479

-4.2

71-4

.151

-3.9

99-3

.921

-3.7

44-3

.613

-3.4

95-3

.278

-3.0

22-2

.798

-2.6

34-2

.315

-2.1

61-1

.973

-1.7

86-1

.592

-1.4

65-1

.313

-7.1

64

-10

-8

-6

-4

-2

0

2

De

c-0

7Ja

n-0

8F

eb

-08

Ma

r-0

8A

pr-

08

Ma

y-0

8Ju

n-0

8Ju

l-0

8A

ug

-08

Se

p-0

8O

ct-0

8N

ov-

08

De

c-0

8Ja

n-0

9F

eb

-09

Ma

r-0

9A

pr-

09

Ma

y-0

9Ju

n-0

9Ju

l-0

9A

ug

-09

Se

p-0

9O

ct-0

9N

ov-

09

De

c-0

9Ja

n-1

0F

eb

-10

Ma

r-1

0A

pr-

10

Ma

y-1

0Ju

n-1

0Ju

l-1

0A

ug

-10

Se

p-1

0O

ct-1

0N

ov-

10

De

c-1

0Ja

n-1

1F

eb

-11

Ma

r-1

1A

pr-

11

Ma

y-1

1Ju

n-1

1Ju

l-1

1A

ug

-11

Se

p-1

1O

ct-1

1N

ov-

11

De

c-1

1Ja

n-1

2F

eb

-12

Ma

r-1

2A

pr-

12

Ma

y-1

2Ju

n-1

2Ju

l-1

2A

ug

-12

Se

p-1

2O

ct-1

2N

ov-

12

De

c-1

2Ja

n-1

3F

eb

-13

Ma

r-1

3A

pr-

13

Ma

y-1

3Ju

n-1

3Ju

l-1

3A

ug

-13

Mill

ion

sCumulative Change in Private Employment: Dec. 2007—Aug. 2013

December 2007 through August 2013 (Millions)

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

Cumulative job losses peaked at 8.765 million

in February 2010

Cumulative job losses as of Aug. 2013 totaled

1.313 million

50

Private Employers Added 7.29 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

Page 51: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

-0.0

17-0

.043

0.06

80.

238

0.34

00.

434

0.53

70.

666

0.77

90.

967

1.12

11.

235

1.31

51.

558

1.78

12.

084

2.26

72.

444

2.65

02.

779

3.03

53.

209

3.40

63.

655

3.97

84.

243

4.45

14.

571

4.72

34.

801

4.97

85.

109

5.22

75.

444

5.70

05.

924

6.08

86.

407

6.74

96.

936

7.13

07.

257

7.40

9

6.56

1

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11F

eb-1

1

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2A

ug-1

2

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3

Mar

-13

Apr

-13

May

-13

Jun-

13Ju

l-13

Aug

-13

Mill

ion

sCumulative Change in Private Sector Employment: Jan. 2010—August 2013

January 2010 through August 2013* (Millions)

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

Cumulative job gains through Aug. 2013 totaled 7.41 million

51

Job gains and pay increases have added more than $750 billion to payrolls

since Jan. 2010

Private Employers Added 7.41 million Jobs Since Jan. 2010 After Having Shed 4.98 Million Jobs in 2009 and 3.80 Million in 2008 (State and Local Governments Have Shed Hundreds of Thousands of Jobs)

Page 52: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

4-1

033

9251

128

798

-68

-224 -1

84-1

94-2

13-2

24-2

71-2

89-2

88-3

56 -324

-452

-449

-480

-488

-511

-530

-542

-536

-539

-547

-574

-565

-589 -555

-535

-592

-601

-606

-622

-609

-610

-621

-643

-666

-649-6

21

-800

-600

-400

-200

0

200

400

600

Jan-

10

Feb

-10

Mar

-10

Apr

-10

May

-10

Jun-

10

Jul-1

0

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb

-12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Jul-1

3

Cumulative Change in Government Employment: Jan. 2010—August 2013

January 2010 through August 2013* (Millions)

Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

Cumulative job losses through June 2013 totaled 649,000

52

Governments at All Levels are Under Severe Fiscal Strain As Tax Receipts Plunged and Pension Obligations Soared During the

Financial Crisis: Sequestration Will Add to this Toll

Government at all levels has shed nearly 650,000 jobs since

Jan. 2010 even as private employers created 7.41 million jobs, though losses may now

be stabilizing.

Temporary Census hiring distorted 2010

figures

Page 53: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

53

Net Change in Government Employment: Jan. 2010—August 2013*

-649

-418

-143-88

-700

-600

-500

-400

-300

-200

-100

0

Total Local State Federal

(Thousands)

Local government employment shrank by 418,000 from Jan.

2010 through Aug. 2013, accounting for 64% of all government job losses,

negatively impacting WC exposures for those cities and counties that insure privately

*Cumulative change from prior month; Base employment date is Dec. 2009.Source: US Bureau of Labor Statistics http://www.bls.gov/data/#employment; Insurance Information Institute

State government employment fell by 2.4% since the end of 2009 while

Federal employment is down by 2.9%

Page 54: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

54

Unemployment Rates by State, July 2013:Highest 25 States*

9.5

9.2

8.9

8.9

8.8

8.8

8.7

8.6

8.6

8.5

8.5

8.5

8.4

8.1

8.1

8.0

8.0

7.5

7.5

7.4

7.4

7.4

7.2

7.2

7.1

7.1

0

2

4

6

8

10

12

NV IL NC RI GA MI CA DC NJ KY MS TN IN CT SC AZ OR NY PA US AR DE MA OH CO FL

Un

em

plo

ym

en

t R

ate

(%

)

*Provisional figures for July 2013, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In July, 28 states and the District of Columbia had over-the-month

unemployment rate increases, 8 states had decreases, and 14 states had no

change.

Page 55: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

55

7.1

7.1

7.0

6.9

6.9

6.9

6.8

6.6

6.5

6.3

6.3

6.2

5.9

5.7

5.3

5.3

5.2

5.1

4.8

4.6

4.6

4.6

4.5

4.2

3.9

3.0

0

2

4

6

8

MD MO LA ME NM WA WI ID TX AL AK WV KS VA MT OK MN NH IA UT VT WY HI NE SD ND

Une

mpl

oym

ent R

ate

(%)

Unemployment Rates by State, July 2013: Lowest 25 States*

*Provisional figures for July 2013, seasonally adjusted.Sources: US Bureau of Labor Statistics; Insurance Information Institute.

In July, 28 states and the District of Columbia had over-the-month

unemployment rate increases, 8 states had decreases, and 14 states had no

change.

Page 56: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

56

Oil & Gas Extraction Employment,Jan. 2010—August 2013*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

6 169.

317

0.1

171.

017

2.5

173.

6 176.

317

8.2

178.

518

0.9

181.

918

3.1

184.

818

5.2

185.

718

6.8

187.

618

8.0

188.

018

8.2

190.

019

1.7

191.

919

3.4

192.

419

2.6

193.

119

3.3

194.

919

6.3

150

155

160

165

170

175

180

185

190

195

200

Jan-

10F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Ju

n-10

Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11Ju

l-11

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

122/

30/2

Mar

-12

Apr

-12

May

-12

Jun-

12Ju

l-12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13F

eb-1

3M

ar-1

3A

pr-1

3M

ay-1

3Ju

n-13

Jul-1

3Ju

l-13

Oil and gas extraction employment is up 25.5%

since Jan. 2010 as the energy sector booms.

Domestic energy production is essential to any robust economic

recovery in the US.

(Thousands)

Page 57: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

57

US Unemployment Rate Forecast

4.5

%4

.5%

4.6

%4

.8%

4.9

% 5.4

% 6.1

%6

.9%

8.1

%9

.3%

9.6

% 10

.0%

9.7

%9

.6%

9.6

%

8.9

%9

.1%

9.1

%8

.7%

8.3

%8

.2%

8.0

%7

.8%

7.7

%7

.6%

7.4

%7

.3%

7.2

%7

.1%

7.0

%6

.8%

9.6

%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

07

:Q1

07

:Q2

07

:Q3

07

:Q4

08

:Q1

08

:Q2

08

:Q3

08

:Q4

09

:Q1

09

:Q2

09

:Q3

09

:Q4

10

:Q1

10

:Q2

10

:Q3

10

:Q4

11

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

:Q4

Rising unemployment

eroded payrolls

and workers comp’s

exposure base.

Unemployment peaked at 10%

in late 2009.

* = actual; = forecastsSources: US Bureau of Labor Statistics; Blue Chip Economic Indicators (9/13 edition); Insurance Information Institute.

2007:Q1 to 2014:Q4F*

Unemployment forecasts have been revised slightly

downwards. Optimistic scenarios put the

unemployment as low as 6.5% by Q4 of next year.

Jobless figures have been revised

slightly downwards for 2013/14

Page 58: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

59

Nonfarm Payroll (Wages and Salaries):Quarterly, 2005–2013:Q2

Note: Recession indicated by gray shaded column. Data are seasonally adjusted annual rates.Sources: http://research.stlouisfed.org/fred2/series/WASCUR; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

$5,500

$5,750

$6,000

$6,250

$6,500

$6,750

$7,000

$7,25005

:Q1

05:Q

205

:Q3

05:Q

406

:Q1

06:Q

206

:Q3

06:Q

407

:Q1

07:Q

207

:Q3

07:Q

408

:Q1

08:Q

208

:Q3

08:Q

409

:Q1

09:Q

209

:Q3

09:Q

410

:Q1

10:Q

210

:Q3

10:Q

411

:Q1

11:Q

211

:Q3

11:Q

412

:Q1

12:Q

212

:Q3

12:Q

413

:Q1

13:Q

2

Prior Peak was 2008:Q1 at $6.60 trillion

Latest (2013:Q2) was $7.09 trillion, a new peak--$762B

above 2009 trough

Recent trough (2009:Q3) was $6.25 trillion, down

5.3% from prior peak

Payrolls are 13.4% above

their 2009 trough and up 2.7% over

the past year

59

Page 59: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

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

$25

$30

$35

$40

$45

$50Wage & Salary DisbursementsWC NPW

60

Payroll Base* WC NWP

Payroll vs. Workers Comp Net Written Premiums, 1990-2012E

*Private employment; Shaded areas indicate recessions. WC premiums for 2012 are I.I.I. estimate based YTD 2012 actuals.Sources: NBER (recessions); Federal Reserve Bank of St. Louis at http://research.stlouisfed.org/fred2/series/WASCUR ; NCCI; I.I.I.

Continued Payroll Growth and Rate Increases Suggest WC NWP Will Grow Again in 2012; +7.9% Growth in 2011 Was the First Gain Since 2005

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

$Billions $Billions

WC premium volume dropped two years before

the recession began

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

$33.8B in 2010 after peaking at $47.8B

in 2005

+9% in 2012E

Page 60: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

61

P/C Insurance Industry Financial Overview

So Far, So Good:Profit Recovery in 2013 After High CAT Losses in 2011-12

61

Page 61: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

P/C Net Income After Taxes1991–2013:H1 ($ Millions)

2005 ROE*= 9.6% 2006 ROE = 12.7% 2007 ROE = 10.9% 2008 ROE = 0.1% 2009 ROE = 5.0% 2010 ROE = 6.6% 2011 ROAS1 = 3.5% 2012 ROAS1 = 5.9% 2013:H1 ROAS1 = 9.1%E

• ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 9.7% ROAS in 2013:Q1, 6.2% ROAS in 2012, 4.7% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.

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

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $3

6,8

19

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,4

56 $

33

,52

2

$2

7,0

00

$2

8,6

72

-$6,970

$6

5,7

77

$4

4,1

55

$2

0,5

59

$3

8,5

01

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213:Q1E

Net income is up substantially (+64%) from

2012:H1 $16.4B

Page 62: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

-5%

0%

5%

10%

15%

20%

25%

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

:H1

Profitability Peaks & Troughs in the P/C Insurance Industry, 1975 – 2013:H1*

*Profitability = P/C insurer ROEs. 2011-13 figures are estimates based on ROAS data. Note: Data for 2008-2013 exclude mortgage and financial guaranty insurers.Source: Insurance Information Institute; NAIC, ISO, A.M. Best.

1977:19.0% 1987:17.3%

1997:11.6%2006:12.7%

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

10 Years

10 Years9 Years

2012: 5.9%

History suggests next ROE peak will be in 2016-2017

ROE

1975: 2.4%

2013:H1 9.1%(est)

Page 63: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

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

Combined Ratio / ROE

* 2008 -2012 figures are return on average surplus and exclude mortgage and financial guaranty insurers. 2012 combined ratio including M&FG insurers is 103.2, 2011 combined ratio including M&FG insurers is 108.1, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.299.5

101.0

94.8

102.4

106.5

95.79.7%

6.2%4.7%

7.9%7.4%

4.3%

9.6%

15.9%

14.3%

12.7% 10.9%

8.8%

80

85

90

95

100

105

110

1978 1979 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013:Q10%

3%

6%

9%

12%

15%

18%

Combined Ratio ROE*

Combined Ratios Must Be Lower in Today’s DepressedInvestment Environment to Generate Risk Appropriate ROEs

A combined ratio of about 100 generates an ROE of ~7.0% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Catastrophes and lower investment

income pulled down ROE in 2012

Page 64: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

65

RNW All Lines by State, 2002-2011 Average:Highest 25 States

21

.3

16

.9

14

.8

13

.4

12

.8

12

.8

12

.5

12

.1

12

.0

11

.7

11

.2

11

.1

11

.1

11

.1

11

.1

11

.1

11

.0

10

.9

10

.8

10

.7

10

.5

10

.3

10

.1

9.8

9.8

9.4

02468

1012141618202224

HI AK ME UT IA WY VT ID NE WA ND NH NM RI SC VA NC SD DC MA CT OR OH CA KS CO

Source: NAIC.

There is enormous regional variation in the

profitability of the insurance industry

Page 65: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

66

9.0

8.9

8.9

8.5

8.2

8.0

7.8

7.7

7.5

7.1

7.1

7.1

6.9

6.9

6.9

6.0

6.0

5.9

5.4

5.2

4.8

3.9

3.4

1.5

-8.3

-10

.8

-14-12-10-8-6-4-202468

10

WI IN WV MD MN MT FL US NJ AR IL MO AZ PA TX KY NV NY GA MI TN OK DE AL MS LA

Un

em

plo

ym

en

t R

ate

(%

)

RNW All Lines by State, 2002-2011 Average: Lowest 25 States

Source: NAIC.

Page 66: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

67

U.S. Insured Catastrophe Loss Update

Catastrophe Losses in Recent Years Have Been Very High

Billions in Claims for Repair/Rebuilding and Rebuilding Have Been Paid

67

Page 67: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

68

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

$1

1.5

$1

4.4

$3

3.6

$3

5.0

$7

.9$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*

U.S. Insured Catastrophe Losses

*Through 6/2/13. Includes $2.6B for 2013:Q1 (PCS) and $5.32B for the period 4/1 – 6/2/13 (Aon Benfield Monthly Global Catastrophe Recap).Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.) Sources: Property Claims Service/ISO; Insurance Information Institute.

2012 Was the 3rd Highest Year on Record for Insured Losses in U.S. History on an Inflation-Adj. Basis. 2011 Losses Were the 6th Highest. YTD 2013 Running Below

Average But Q3 Is Typically the Costliest Quarter.

2012 was likely the third most expensive year ever for insured

CAT losses

Record tornado losses caused

2011 CAT losses to surge

($ Billions, $ 2012)

68

Page 68: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

69

Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

$7.8 $8.7 $9.2 $11.1$13.4$18.8

$23.9 $24.6$25.6

$48.7

$7.5$7.1$6.7$5.6$5.6$4.4

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Hurricane Sandy could become the 4th or 5th costliest event in US

insurance history

Hurricane Irene became the 12th most expense hurricane

in US history in 2011

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

12 of the 16 Most Expensive Events in US History Have

Occurred Over the Past Decade

*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

Page 69: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

70

Top 12 Most Costly Hurricanesin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

*PCS estimate as of 4/12/13.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

$9.2 $11.1$13.4

$18.8

$25.6

$48.7

$8.7$7.8$6.7$5.6$5.6$4.4

$0

$10

$20

$30

$40

$50

$60

Irene(2011)

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Andrew(1992)

Katrina(2005)

Hurricane Sandy became the 3rd costliest hurricane in US

insurance historyHurricane Irene

became the 12th most expensive hurricane in US history in 2011

10 of the 12 most costly hurricanes in insurance history occurred over the past 9 years (2004—2012)

Page 70: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Nu

mb

er

Geophysical (earthquake, tsunami, volcanic activity)

Climatological (temperature extremes, drought, wildfire)

Meteorological (storm)

Hydrological (flood, mass movement)

Natural Disasters in the United States, 1980 – June 2013*Number of Events (Annual Totals 1980 – June 2013*)

*Through June 30, 2013.Source: MR NatCatSERVICE 72

41

19

121

3

50

100

150

200

250

300

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

There were 68 natural disaster events in the

first half of 2013

Page 71: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Losses Due to Natural Disasters in the US, 1980–2012 (Overall & Insured Losses)

75

Overall losses (in 2012 values) Insured losses (in 2012 values)

Source: MR NatCatSERVICE

(2012 Dollars, $ Billions)(Overall and Insured Losses)

20

40

60

80

100

120

140

160

180

200

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

2012 was the 2nd or 3rd most expensive year on record for insured catastrophe losses in

the US.

Approximately 57% of the overall cost of

catastrophes in the US was covered by insurance in 2012

2012 Losses

Overall : $101.1B

Insured: $57.9B

Page 72: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

U.S. Thunderstorm Loss Trends, 1980 – June 30, 2013

81Source: Property Claims Service, MR NatCatSERVICE

Average thunderstorm

losses are up 7 fold since the early

1980s. The 5- year running average

loss is up sharply.

Hurricanes get all the headlines, but thunderstorms are consistent

producers of large scale loss. 2008-2012 are the most expensive

years on record.

1st Half 2013 thunderstorm losses total $6.325B; The

system that included the EF-5 tornado in Moore, OK, accounted for $1.575B

Page 73: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

EarthquakeMexico, 20 March

EarthquakeItaly, 29 May/3 June

EarthquakeIran, 11 August

Severe Storms, tornadoesUSA, 2–4 March

Severe WeatherUSA, 28–29 April Severe storms

USA, 28 June –2 July

Hurricane IsaacUSA, Caribbean24–31 August

Hurricane SandyUSA, Caribbean24–31 October

Floods, flash floodsAustralia, Jan – Feb

Flash FloodsRussia, 6–8 July

FloodsChina, 21–24 July

DroughtUSA, Summer

Cold WaveEastern Europe, Jan – Feb

Cold WaveAfghanistan, Jan – Mar

FloodsUnited Kingdom, 21–27 November

Typhoon Bopha Philippines, 4–5 December

Floods. flash floodsAustralia, Feb – Mar

Typhoon Haikui China, 8–9 August

FloodsNigeria, Jul – Oct

Floods, hailstormsSouth Africa, 20 –21 October

FloodsPakistan, 3 –27 September

FloodsColumbia, Mar – Jun

Hailstorms, severe weatherCanada, 12–14 August

Number of events: 905

Geophysical events(earthquake, tsunami, volcanic activity)

Meteorological events (storm)

Selection of significant Natural catastrophes

Natural catastrophes Hydrological events(flood, mass movement)

Climatological events(extreme temperature, drought, wildfire)

Winter Storm AndreaEurope, 5–6 January

85

Natural Loss Events:Full Year 2012

World Map

Source: Geo Risks Research, NatCatSERVICE – As of January 2013

Page 74: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Hurricane Sandy Summary

86

Sandy Became One of the Most Expensive Events in

Insurance History

86

Page 75: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Hurricane Sandy: Claim Payments to Policyholders, by State

$9,600

$6,300

$700 $500 $410 $295 $292 $210 $103 $84 $57 $55 $37 $36 $13$58$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

NY NJ PA CT MD VA OH MA RI DE WV NC NH DC ME VT

Insurers Will Pay at Least $18.75 Billion to 1.52 Million Policyholders Across 15 States and DC in the Wake of Hurricane Sandy

87

At $9.6B and $6.6B, respectively, NY and NJ suffered, by far, the largest losses

from Hurricane Sandy

TOTAL = $18.75 BILLION($ Thousands)

Sources: Catastrophe loss data is for Catastrophe Serial No. 90 (Oct. 28 – 31, 2012) from PCS as of Jan. 18, 2013; Insurance Information Institute .

Page 76: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Auto, 250,500 ,

16%

Commercial, 202,500 ,

13%

Homeowner, 1,067,000 ,

71%

Hurricane Sandy resulted in an

estimated 1.52 million privately insured

claims resulting in an estimated $18.75 to

$25 billion in insured losses. Hurricane

Katrina produced 1.74 million claims and

$48.7B in losses (in 2012 $)

Hurricane Sandy: Number of Claims by Type*

*PCS claim count estimate s as of 1/18/13. Loss estimate represents PCS total ($18.75B) and upper end of range estimates by risk modelers RMS, Eqecat and AIR. All figures exclude losses paid by the NFIP.Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute. 88

Sandy is a high HO frequency, (relatively

low) severity event (avg. severity <50% Katrina)

Total Claims = 1.52 Million*

Page 77: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Auto, $2,729 , 15%

Commercial, $9,024 ,

48%

Homeowner, $6,997 ,

37%

Although Commercial Lines accounted for

only 13% of total claims, they account for 48% of all claim

dollars paid. In most hurricanes,

Commercial Lines accounts for about

1/3 of insured losses.

Hurricane Sandy: Insured Loss byClaim Type* ($ Millions)

*PCS insured loss estimates as of 1/18/13. Catastrophe modeler estimates range up to $25 billion. All figures exclude losses paid by the NFIP.Source: PCS; Insurance Information Institute. 89

Total Claim Value = $18.75 Billion*

Page 78: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

90

Total Value of Insured Coastal Exposure in 2012

(2012, $ Billions)

Source: AIR Worldwide

$293.5$239.3

$182.3$164.6$163.5

$118.2$106.7$81.9$64.0$60.6$58.3

$17.3

$567.8$713.9

$849.6$1,175.3

$2,862.3$2,923.1

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

New YorkFloridaTexas

MassachusettsNew JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

In 2012, New York Ranked as the #1 Most Exposed State to Hurricane Loss, Overtaking Florida with $2.862 Trillion. Texas is very exposed too, and

ranked #3 with $1.175 Trillionin insured coastal exposure

The Insured Value of All Coastal Property Was $10.6 Trillion in 2012 , Up 20% from $8.9 Trillion in 2007 and

Up 48% from $7.2 Trillion in 2004

Page 79: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

94

Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1992–20111

0.4%

1.6%

3.8%4.7%

6.3%

7.3%

33.9%

42.0%

1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2. Excludes snow.3. Does not include NFIP flood losses4. Includes wildland fires5. Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.

Hurricanes & Tropical Storms, $161.3

Fires (4), $6.0

Tornadoes (2), $130.2

Winter Storms, $28.2

Terrorism, $24.4

Geological Events, $18.2

Wind/Hail/Flood (3), $14.8

Other (5), $1.4

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1992-2011

totaled $384.3B, an average of $19.2B per year or $1.6B

per month

Page 80: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

96

Combined Ratio Points Associated with Catastrophe Losses: 1960 – 2012*

Notes: Private carrier losses only. Excludes loss adjustment expenses and reinsurance reinstatement premiums. Figures are adjusted for losses ultimately paid by foreign insurers and reinsurers.Source: ISO (1960-2011); A.M. Best (2012E) Insurance Information Institute.

0.4

1.2

0.4 0.

8 1.3

0.3 0.4 0.

71.

51.

00.

40.

4 0.7

1.8

1.1

0.6

1.4 2.

01.

3 2.0

0.5

0.5 0.7

3.0

1.2

2.1

8.8

2.3

5.9

3.3

2.8

1.0

3.6

2.9

1.6

5.4

1.6

3.3

3.3

8.1

2.7

1.6

5.0

2.6

3.4

8.7 9.

4

3.6

0.9

0.1

1.1

1.1

0.8

0

1

2

3

4

5

6

7

8

9

10

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

E

The Catastrophe Loss Component of Private Insurer Losses Has Increased Sharply in Recent Decades

Avg. CAT Loss Component of the Combined Ratio

by Decade

1960s: 1.04 1970s: 0.85 1980s: 1.31 1990s: 3.39 2000s: 3.52 2010s: 7.20*

Combined Ratio Points Catastrophe losses as a share of all losses reached

a record high in 2012

Page 81: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

98

Federal Disaster Declarations Patterns:

1953-2013

98

Disaster Declarations Set New Records in Recent Years

Page 82: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Number of Federal Disaster Declarations, 1953-2013*

13 1

7 18

16

16

7 71

21

22

22

0 25

25

11

11

19

29

17

17

48

46

46

38

30

22 2

54

22

31

52

42

13

42

7 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

19

94

74

143

0

20

40

60

80

100

120

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

*Through September 8, 2013.Source: Federal Emergency Management Administration; http://www.fema.gov/disasters; Insurance Information Institute.

The Number of Federal Disaster Declarations Is Rising and Set New Records in 2010 and 2011. Hurricane Sandy Produced 13 Declarations in 2012/13.

The number of federal disaster declarations set a

new record in 2011, with 99, shattering 2010’s record 81

declarations.

There have been 2,130 federal disaster

declarations since 1953. The average

number of declarations per year is 35 from 1953-2012, though

there few haven’t been recorded since 1995.

41 federal disasters were declared so far in 2013*

99

Page 83: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

100

Federal Disasters Declarations by State, 1953 – 2013: Highest 25 States*

87

78

74

67

66

60

57

56

55

54

52

52

52

51

51

50

49

48

47

47

47

46

43

40

39

0

10

20

30

40

50

60

70

80

90

100

TX CA OK NY FL LA AL KY MO AR MS IL IA TN WV MN KS PA NE VA OH WA ND NC IN

Dis

as

ter

De

cla

rati

on

s

Over the past 60 years, Texas has had the highest

number of Federal Disaster

Declarations

*Through Sept. 8, 2013. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

Page 84: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

101

Federal Disasters Declarations by State, 1953 – 2013: Lowest 25 States*

42

40

38

37

36

36

35

33

29

28

26

26

26

24

24

24

23

23

21

19

17

15

15

13

11

11

9

0

10

20

30

40

50

SD ME AK WI GA VT NJ NH MA OR PR HI MI AZ MD NM ID MT CO CT NV DE SC DC UT RI WY

Dis

as

ter

De

cla

rati

on

s

Over the past 60 years, Wyoming and Rhode Island had the fewest

number of Federal Disaster Declarations

*Through Sept. 8, 2013. Includes Puerto Rico and the District of Columbia.Source: FEMA: http://www.fema.gov/news/disaster_totals_annual.fema; Insurance Information Institute.

Page 85: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

102

SEVERE WEATHER REPORT UPDATE: 2013

Damage from Tornadoes, Large Hail and High Winds Keep Insurers Busy

102

Page 86: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Location of Tornado Reports:Through August 30, 2013

103Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013_annual_summary.html#; PCS.

There were 720 tornadoes

through Aug. 30, causing extensive property

damage in several states

The storm system that spawned the deadly EF-5

tornado on May 19 in Moore, OK,

produced insured losses of $1.575 billion

Page 87: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Location of Large Hail Reports:Through August 30, 2013

105Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013_annual_summary.html#

There were 5,003 “Large Hail” reports through Aug. 30, causing extensive

property and vehicle damage

Page 88: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Location of High Wind Reports:Through August 30, 2013

106Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013_annual_summary.html#

There were 10,572 “Wind

Damage” reports through Aug. 4, causing

extensive property damage

Page 89: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Severe Weather Reports:Through August 30, 2013

107Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2013_annual_summary.html#

Severe weather reports are

concentrated east of the Rockies

There were 16,296 severe

weather reports through Aug. 30; including

720 tornadoes; 5,003 “Large Hail” reports

and 10,572 high wind events

Page 90: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Terrorism Update

109

Boston Marathon Bombings Underscore the Need for Extension of the Terrorism

Risk Insurance ProgramDownload III’s Terrorism Insurance Report at: http://www.iii.org/white_papers/terrorism-risk-a-constant-threat-2013.html

109

Page 91: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

110

Terrorism Risk Insurance Program

Reauthorization Was a Major Industry Initiative for 2013 Even Before Boston

I.I.I. Testified at First Congressional Hearing on 9/11/12 Provided testimony at NYC hearing on 6/17/13

I.I.I. Accelerated Planned Study on Terrorism Risk and Insurance in the Wake of Boston and Was Well Received Terrorism: A Constant Threat issued in June 2013

Page 92: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Life$1.2 (3%)

Aviation Liability

$4.3 (11%)

Other Liability

$4.9 (12%)

Biz Interruption $13.5 (33%)

Property -WTC 1 & 2*$4.4 (11%) Property -

Other$7.4 (19%)

Aviation Hull$0.6 (2%)

Event Cancellation

$1.2 (3%)Workers Comp

$2.2 (6%)

Total Insured Losses Estimate: $40.0B***Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.

**$32.5 billion in 2001 dollars.

Source: Insurance Information Institute.

Loss Distribution by Type of Insurancefrom Sept. 11 Terrorist Attack ($ 2011)

($ Billions)

Page 93: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

117

Growth Analysis by State and Business Segment

Premium Growth Rates Vary Tremendously by State

117

Page 94: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

118

Direct Premiums Written: Total P/CPercent Change by State, 2007-2012*

58

.4

25

.4

24

.5

21

.0

19

.2

17

.6

16

.3

13

.2

13

.2

12

.4

9.9

9.2

9.2

8.5

8.0

6.2

5.8

5.2

4.5

4.4

4.3

4.3

4.2

4.0

3.8

3.6

0

10

20

30

40

50

60

70

ND

SD

OK

NE IA KS

VT

AK

TX

WY

MN

AR

TN IN W

I

KY

MT

OH LA

VA

NJ

MI

SC

CO

MO

NM

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

North Dakota was the country’s growth leader over the past 5 years with premiums written

expanding by 58.4%

Page 95: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

119

Direct Premiums Written: Total P/CPercent Change by State, 2007-2012*

3.6

3.1

3.0

2.9

2.7

2.2

2.1

2.1

2.0

1.8

1.1

0.0

-0.1

-0.3

-0.7

-0.9

-2.8

-5.6

-6.0

-7.2

-7.2

-9.3

-10

.1

-11

.2

-12

.5

-17

.3

-20

-15

-10

-5

0

5

CT

MS

NC AL

MD PA

U.S

.

MA IL

WA

GA

UT

NH RI

ID ME

NY FL

CA

DC

WV HI

AZ

OR

DE

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

Growth was negative in 13 states and DC between

2007 and 2012

Page 96: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

124

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2012*

72

.2

35

.2

28

.8

25

.7

21

.0

20

.2

16

.0

15

.1

14

.6

8.8

6.3

4.6

3.3

2.9

1.5

1.2

0.0

-1.5

-2.3

-2.4

-2.6

-2.6

-3.2

-3.3

-3.5

-3.7

-20

0

20

40

60

80

ND

OK

SD VT

NE IA KS

AK ID WY

TX

MN IN WI

AR

TN

MT

OH LA

MA

PA

CT

MS

NM IL

WA

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Only 16 states showed any commercial lines growth

2007 and 2012

Page 97: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

125

Direct Premiums Written: Comm. LinesPercent Change by State, 2007-2012*

-4.1

-4.2

-4.5

-4.6

-4.9

-4.9

-5.1

-5.4

-5.9

-6.2

-6.5

-6.8

-6.8

-6.9

-7.3

-9.1

-10

.2

-11

.1

-13

.2

-14

.5

-15

.3

-16

.2

-16

.8

-20

.2

-22

.2

-30

.3

-40

-35

-30

-25

-20

-15

-10

-5

0

US

NY

MD

NH NJ

MO

ME

NC

KY VA RI

CO MI

SC AL

GA

CA

UT

DC

OR HI

DE FL AZ

WV

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

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

the past 5 years

Page 98: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

126

Direct Premiums Written: Workers’ CompPercent Change by State, 2007-2012*

27

.9

21

.7

18

.8

12

.4

4.0

0.8

0.2

-0.3

-1.1

-1.8

-2.5

-2.7

-3.6

-3.9

-4.7

-5.4

-6.8

-9.1

-9.2

-9.7

-10

.2

-10

.8

-11

.6

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

1015202530

OK IA SD

NY

KS

CT

CA

NE IN WI

NJ

MI

MN IL VA

PA

NH VT

US

AK

NM TX

MD

Pe

ce

nt

ch

an

ge

(%

)

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Page 99: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

127

Direct Premiums Written: Worker’s CompPercent Change by State, 2007-2012*

-12

.1

-12

.9

-14

.3

-15

.4

-15

.5

-15

.9

-16

.0

-16

.6

-16

.9

-17

.8

-18

.3

-19

.9

-20

.8

-21

.9

-24

.6

-25

.5

-26

.0

-27

.4

-31

.8

-33

.9

-35

.1

-38

.3

-43

.4

-49

.1

-60

-55

-50

-45

-40

-35

-30

-25

-20

-15

-10

TN

DC

MA RI

MS

GA

AR ID LA

ME

NC

SC AL

MO

MT

CO

KY AZ

UT

OR FL HI

DE

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

*Excludes monopolistic fund states: ND, OH, WA, WY as well as WV, which transitioned to a competitive structure during this period.Sources: SNL Financial LC.; Insurance Information Institute.

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

the past 5 years

Page 100: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Workers Compensation Operating Environment

128

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

Increasingly Challenging

128

Page 101: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Workers Compensation Combined Ratio: 1994–2012P

102.

0

97.0 10

0.0

101.

0

112.

6

108.

6

105.

1

102.

7

98.5

103.

5

104.

5 110.

6 115.

0

115.

0

109.

0

121.

7

107.

0

115.

3

118.

2

80

85

90

95

100

105

110

115

120

125

130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Workers Comp Results Began to Improve in 2012. Underwriting Results Deteriorated Markedly from 2007-

2010/11 and Were the Worst They Had Been in a Decade. Sources: A.M. Best (1994-2009); NCCI (2010-2012P) and are for private carriers only; Insurance Information Institute. 129

WC showed a better-than-expected

improvement for private carriers in 2012

Page 102: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Workers Compensation Medical SeverityModerate Increase in 2012

130

Accident Year

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2010: +6.0%

Average Medical Cost per Lost-Time ClaimMedicalClaim Cost ($000s)

$8

.1

$8

.2

$8

.1

$8

.8

$9

.2

$9

.9

$1

0.9

$11

.8

$1

3.1

$1

4.0

$1

5.9

$1

7.3

$1

8.7

$1

9.7

$2

1.2

$2

2.3

$2

3.7

$2

5.3

$2

6.4

$2

6.7

$2

7.7

$2

8.5

+6.8%+1.3%-2.1%+9.0%+5.1%

+7.4%+10.1%

+8.3%+10.6%

+7.3%

+13.5%+8.8%

+7.7%+5.4%

+7.8%+5.4%

+6.3%

+6.6%+4.1%+1.4%

+3.6%+3%

5

10

15

20

25

30

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112012p

2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Cumulative Change = 252%(1991-2012p)

Annual Change 1991–1993: +1.9%Annual Change 1994–2001: +8.9%Annual Change 2002–2011: +5.7%

Accident Year

Page 103: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

4.5%

3.5%2.8%

3.2%3.5%4.1%

4.6%4.7%4.0%

4.4%4.2%4.0%4.4%

3.7%3.2%3.4%

3.0%

5.1%

7.4%

10.1%10.6%

13.5%

5.4%

7.8%

6.3%6.6%

4.1%3.6% 4%

3%

1.4%

5.4%

8.8%

7.7%

7.3%

8.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12P

Change in Medical CPI

Change Med Cost per Lost Time Claim

WC Medical Severity Generally Outpaces the Medical CPI Rate

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

Average annual increase in WC medical severity form 1995 through 2011 was well above the medical CPI (6.8% vs. 3.8%), but

the gap is narrowing.

Page 104: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

$9

.8

$9

.5

$9

.2

$9

.7

$9

.8

$1

0.4

$1

1.2

$1

2.2

$1

3.5

$1

4.8

$1

6.2

$1

6.7

$1

7.5

$2

2.2

$2

2.4

$2

2.2

$2

2.4$

18

.2

$1

7.7

$1

9.2

$2

0.8

$2

1.7

+1%-3.0%

+0.7%+8.8% +2.2%

+5.6%+3.1%

+1.0%+4.6%+3.1%+9.2%

+10.1%

+10.1%

+9.0%+7.7%

+5.9%+1.7%+4.9%

-2.8%-3.1%+1.0%

+6.2%

5

7

9

11

13

15

17

19

21

23

25

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112012p

IndemnityClaim Cost ($ 000s)

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2011:+3.2%

Accident Year

Workers Comp Indemnity Claim Costs: Small Increase in 2012

Average indemnity costs per claim were up 1% in

2012 to $22,400

Average Indemnity Cost per Lost-Time Claim

2012p: Preliminary based on data valued as of 12/31/2012.1991-2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services including state funds, excluding WV; Excludes high deductible policies.

Page 105: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Workers Compensation Lost-Time Claim Frequency Declined in 2012Lost-Time Claims

134

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012p

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

-4.2 -4.4

-9.2

0.3

-6.5

-4.5

0.5

-3.9

-2.3

-4.5

-6.9

-4.5 -4.1 -3.7

-6.6

-4.5

-2.2

-4.3

-5.7

11

-4-5.0

3.8

-0.9

AdjustedIndicated

Frequency Change: 2007—2012

Contracting: 7.97.1 -9.3%

Manufacturing: 13.612.0 -11.8%

Percent

Accident Year*Adjustments primarily due to significant audit activity.2012p: Preliminary based on data valued as of 12/31/20121991–2011: Based on data through 12/31/2011, developed to ultimateBased on the states where NCCI provides ratemaking services, including state funds; excludes high deductible policiesFrequency is the number of lost-time claims per $1M pure premium at current wage and voluntary loss cost levelSource: NCCI.

Cumulative Change of –55.4%(1991–2011 adj.)

Page 106: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

4.2%

5.2%5.6%

4.7%

6.3%

2.3%

1.1%

2.7%

4.3%4.7%4.6%

2.7%

5.9%

7.7%

9.0%

10.1%

4.6%

3.6%

5.6%6.2%

8.8%

2%

2.9%2.3%

1.1%3.5%

3.6%

1%

2.2%

0.7%

-3.0%

1.0%1.7%

10.1%

9.2%

3.1%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12P

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

WC Indemnity Severity vs. Wage Inflation, 1995 -2012p

2011p: Preliminary based on data valued as of 12/31/2011; 1991-2010: Based on data through 12/31/2010, developed to ultimate. Based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies. CPS = Current Population Survey.Source: NCCI

WC indemnity severity turned

positive again in 2011

Annual Change 1991–1993: -1.7%Annual Change 1994–2001:+7.3%Annual Change 2002–2011:+3.2%

Indemnity severities usually

outpace wage gains

Page 107: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Workers Compensation Premium: Second Consecutive Year of IncreaseNet Written Premium

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012p

0

10

20

30

40

50

31.0 31.3 29.8 30.5 29.126.3 25.2 24.2 23.3 22.3

25.0 26.129.2 31.1

34.737.8 38.6 37.6

33.830.3 29.9

32.335.2

31.0 31.329.8 30.5

29.126.3

28.226.9 25.9 25.0

28.6

32.1

37.7

42.3

46.547.8

46.544.3

39.3

34.6 33.836.4

39.6

State Funds ($ B)

Private Carriers ($ B)

Pvt. Carrier NWP growth was +9.0% in 2012, the

best since 2005

$ Billions

Calendar Yearp Preliminary

Source: 1990–20102p Private Carriers, Annual Statement Data, NCCI.1996–2012p State Funds: AZ, CA, CO, HI, ID, KY, LA, MD, MO, MT, NM, OK, OR, RI, TX, UT Annual Statements

State Funds available for 1996 and subsequent

Page 108: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Average Approved BureauRates/Loss Costs

12.1

7.4

10.0

2.9

-6.4

-3.2

-6.0

-8.0

-5.4

-2.6

3.5

1.2

4.9

6.6

-6.0-5.1

-5.7-6.6

-3.1-2.0

-0.7

0.4

7.8

-10

-5

0

5

10

15

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

Percent

Calendar Year

Cumulative1990–1993

+36.3%

Cumulative 2000–2003

+17.1%

Cumulative 2004–2011

-25.6%

Cumulative 1994–1999

-27.8%

*States approved through 7/31/12.Note: Countrywide approved changes in advisory rates, loss costs and assigned risk rates as filed by applicable rating organization.Source: NCCI.

History of Average WC Bureau Rate/Loss Cost Level Changes

Approve rates/loss costs are seeing their

first significant increase since 2003

Page 109: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Workers Comp Rate Changes,2008:Q4 – 2013:Q2

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

-5.5%-4.6%

-4.0%-4.6%

-3.7%-3.9%

-5.4%

-3.7%-3.4%

-1.6%

2.6%

4.1%

7.5%7.4%8.3%8.1%

9.0%9.8%

8.3%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2

WC rate changes have been positive for 9

consecutive quarters, longer than any other

commercial line

(Percent Change)

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Page 110: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

The BIG Question:Where Is the Market Heading?

144

Catastrophes and Other Factors Are Pressuring Insurance Markets

144

New Factor: Record Low Interest Rates Are Contributing to

Underwriting and Pricing Pressures

Page 111: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

INVESTMENTS: THE NEW REALITY

145

Investment Performance is a Key Driver of Profitability

Depressed Yields Will Necessarily Influence Underwriting & Pricing

145

Page 112: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Property/Casualty Insurance Industry Investment Income: 2000–2013*1

$38.9$37.1 $36.7

$38.7

$54.6

$51.2

$47.1 $47.6$49.2

$47.7$45.5

$39.6

$49.5

$52.3

$30

$40

$50

$60

00 01 02 03 04 05 06 07 08 09 10 11 12 13*

Investment Income Fell in 2012 and is Falling in 2013 Due to Persistently Low Interest Rates, Putting Additional Pressure on (Re) Insurance Pricing

1 Investment gains consist primarily of interest and stock dividends..*Estimate based on annualized actual Q1:2013 investment income of $11.385B.Sources: ISO; Insurance Information Institute.

($ Billions)

Investment earnings are running below their 2007

pre-crisis peak

Page 113: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

147

P/C Insurer Net Realized Capital Gains/Losses, 1990-2013:Q1

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

$2.8

8

$4.8

1 $9.8

9

$9.8

2

$10.

81 $18.

02

$13.

02

$16.

21

$6.6

3

-$1.

21

$6.6

1

$9.1

3

$9.7

0

$3.5

2 $8.9

2

-$7.

90

$5.8

5

$7.0

4

$6.2

1

$1.3

8

-$19

.81

$9.2

4

$6.0

0

$1.6

6

-$25

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213:Q1

Insurers Posted Net Realized Capital Gains in 2010, 2011 and 2012 Following Two Years of Realized Losses During the Financial Crisis. Realized Capital

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

($ Billions) Realized capital gains in 2012 were down 12% from 2011

Page 114: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Property/Casualty Insurance Industry Investment Gain: 1994–2013:Q11

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.7

$64.0

$31.7

$39.2

$53.4$56.2

$53.9

$12.8

$58.0

$51.9$56.9

$0

$10

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02 03 04 05* 06 07 08 09 10 11 12 13:Q1

Investment Gains Are Slipping in 2012 as Low Interest Rates Reduce Investment Income and Lower Realized Investment Gains; The Financial

Crisis Caused Investment Gains to Fall by 50% in 2008

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

($ Billions)

Investment gains in 2012 were approximately 16%

below their pre-crisis peak

Page 115: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

151

U.S. Treasury Security Yields:A Long Downward Trend, 1990–2013*

*Monthly, constant maturity, nominal rates, through August 2013.Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm. National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

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

Recession2-Yr Yield10-Yr Yield

Yields on 10-Year U.S. Treasury Notes have been essentially below 5% for a full decade.

Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations, most P/C insurer portfolios will have low-yielding bonds for years to come.

U.S. Treasury security yields

recently plunged to record lows

151

Page 116: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

1. UNDERWRITING

155

Underwriting Losses in 2011 and 2012 Are Elevated by High

Catastrophe Losses

155

Page 117: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

156

P/C Insurance Industry Combined Ratio, 2001–2013:Q1*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.1; 2012:=103.2. Sources: A.M. Best, ISO.

95.7

99.3100.8

106.3

102.4

94.8

101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120Best

Combined Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out

Nearly $1.16 for Every $1 in Earned

Premiums

Relatively Low CAT Losses, Reserve Releases

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Avg. CAT Losses,

More Reserve Releases

Higher CAT

Losses, Shrinking Reserve

Releases, Toll of Soft

Market

Cyclical Deterioration

Lower CAT

Losses Before Sandy

Page 118: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Underwriting Gain (Loss)1975–2013:Q1*

* Includes mortgage and financial guaranty insurers in all years.Sources: A.M. Best, ISO; Insurance Information Institute.

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213:Q1

Cumulative underwriting deficit from 1975 through

2012 is $510B

($ Billions)Underwriting

profit in 2013:Q1

totaled $4.6B

High cat losses in 2011 led to the highest

underwriting loss since 2002

Page 119: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

159

2

(2)

(8)

(3)

(7)(10)(10)

(4)

(0)

11

24

1411 9

(5)

(9)

(13)(12)

(10)

(14)(12)

(10)(7) (7)

-$20

-$15

-$10

-$5

$0

$5

$10

$15

$20

$25

$309

2

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

E

14

E

15

E

Pri

or

Yr.

Re

se

rve

Re

lea

se

($

B)

-6

-4

-2

0

2

4

6

8 Imp

ac

t on

Co

mb

ine

d R

atio

(Po

ints

)

Prior Yr. ReserveDevelopment ($B)

Impact onCombined Ratio(Points)

P/C Reserve Development, 1992–2015E

Note: 2005 reserve development excludes a $6 billion loss portfolio transfer between American Re and Munich Re. Including this transaction, total prior year adverse development in 2005 was $7 billion. The data from 2000 and subsequent years excludes development from financial guaranty and mortgage insurance. Sources: A.M. Best, ISO, Barclays Research (estimates).

Page 120: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

166

Performance by Segment

166

Page 121: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

10

9.4

11

0.2

11

8.8

10

9.5 1

12

.5

11

0.2

10

7.6

10

4.1

10

9.7

11

0.2

10

2.5 1

05

.4

91

.1

93

.6

10

4.2

98

.9

10

2.1

10

6.7

10

4.9

10

2.1

10

1.4

10

1.3

10

2.0

11

1.1

11

2.3

12

2.3

90

95

100

105

110

115

120

125

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

F

14

F

15

F

Co

mm

erc

ial L

ine

s C

om

bin

ed

Ra

tio

*2007-2012 figures exclude mortgage and financial guaranty segments.Source: A.M. Best (1990-2011); Conning (2012-2015F) Insurance Information Institute

Commercial Lines Combined Ratio, 1990-2015F*

Commercial lines underwriting

performance is expected to improve as

improvement in pricing environment persists

171

Page 122: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Commercial Auto Combined Ratio: 1993–2015F

11

2.1

11

2.0

11

3.0

11

5.9

10

2.7

95

.2

92

.9

92

.1

92

.4 94

.3 96

.8 99

.4

98

.0

10

4.6

10

7.1

10

1.7

10

0.3

99

.8

11

8.1

11

5.7

11

6.2

80

85

90

95

100

105

110

115

120

125

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12E 13F 14F 15F

Commercial Auto is Expected to Improve as Rate Gains Outpace Any Adverse Frequency and Severity Trends

172Sources: A.M. Best (1990-2012E);Conning (2012-2015F); Insurance Information Institute.

Page 123: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

General Liability Combined Ratio: 2005–2015F

112.

9

95.1 99

.0

94.2

101.

4

104.

4

105.

8

108.

3

107.

1 110.

8

99.8

80

85

90

95

100

105

110

115

05 06 07 08 09 10 11 12 13F 14F 15F

Commercial General Liability Underwriting Performance Has Been Volatile in Recent Years

Source: Conning Research and Consulting. 174

Page 124: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

2. SURPLUS/CAPITAL/CAPACITY

178

How Will Large Catastrophe Losses Impact Capacity?

178

Page 125: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

180

Policyholder Surplus, 2006:Q4–2013:Q1

Sources: ISO, A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$559.2 $559.1

$538.6

$550.3

$567.8

$583.5$586.9

$607.7

$570.7$566.5

$505.0$515.6$517.9

$420

$440

$460

$480

$500

$520

$540

$560

$580

$600

$620

06:Q407:Q107:Q207:Q307:Q408:Q108:Q208:Q308:Q409:Q109:Q209:Q309:Q410:Q110:Q210:Q310:Q411:Q111:Q211:Q311:Q412:Q112:Q212:Q312:Q413:Q1

2007:Q3Pre-Crisis Peak

Surplus as of 3/31/13 stood at a record high $607.7B

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

The Industry now has $1 of surplus for every $0.80

of NPW, close to the strongest claims-paying

status in its history.

Drop due to near-record 2011 CAT losses

The P/C Insurance Industry Both Entered and Emerged from the 2012 Hurricane

Season Very Strong Financially.

Page 126: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

182

3. REINSURANCE MARKET CONDITIONS

Ample Capacity Despite Heavy Global

Catastrophe Activity in Recent Years

182

Page 127: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1Q1360

80

100

120

140

160

180

200

US

D b

n

Soft market

Hard market

Hard market softening

Crisis

Excess capital

Long-Term Evolution of Shareholders’ Funds for the Guy Carpenter Global Reinsurance Composite

Source: Guy Carpenter

Page 128: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

187

CATASTROPHE BONDS, ANNUAL RISK CAPITAL ISSUED, 2002-2012

$2.73

$3.39

$4.60

$3.86

$5.85

$1.22$1.73

$1.14

$1.99

$4.69

$7.00

$0

$1

$2

$3

$4

$5

$6

$7

$8

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: GC Securities and Guy Carpenter & Company, LLC.

($ Billions)

Note

Page 129: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

4. RENEWED PRICING DISCIPLINE

189

Evidence of a Broad and Sustained Shift in Pricing

189

Page 130: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

191

-5%

0%

5%

10%

15%

20%

25%

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213

:Q1

Net Premium Growth: Annual Change, 1971—2013:Q1

(Percent)1975-78 1984-87 2000-03

Shaded areas denote “hard market” periodsSources: A.M. Best (historical and forecast), ISO, Insurance Information Institute.

Net Written Premiums Fell 0.7% in 2007 (First Decline

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

2013:Q1 = 4.1%

2012 growth was +4.3%

Page 131: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

192

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

Sources: ISO, Insurance Information Institute.

Sustained Growth in Written Premiums(vs. the same quarter, prior year) Will Continue through 2013

10.2

%15

.1%

16.8

%16

.7%

12.5

%10

.1%

9.7%

7.8%

7.2%

5.6%

2.9%

5.5%

-4.6

%-4

.1%

-5.8

%-1

.6%

10.3

%10

.2% 13

.4%

6.6%

-1.6

%2.

1%0.

0%-1

.9%

0.5%

-1.8

%-0

.7%

-4.4

%-3

.7%

-5.3

%-5

.2%

-1.4

%-1

.3%

1.3% 2.

3%1.

7% 3.5%

1.6%

4.1%

3.8%

3.0% 4.

2% 5.1%

4.8%

4.1%

-10%

-5%

0%

5%

10%

15%

20%

2002

:Q1

2002

:Q2

2002

:Q3

2002

:Q4

2003

:Q1

2003

:Q2

2003

:Q3

2003

:Q4

2004

:Q1

2004

:Q2

2004

:Q3

2004

:Q4

2005

:Q1

2005

:Q2

2005

:Q3

2005

:Q4

2006

:Q1

2006

:Q2

2006

:Q3

2006

:Q4

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

2011

:Q1

2011

:Q2

2011

:Q3

2011

:Q4

2012

:Q1

2012

:Q2

2012

:Q3

2012

:Q4

2013

:Q1

Premium growth in Q1 2013 was up 4.1% over Q1 2012, marking the

12th consecutive quarter of growth

Page 132: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

194

Average Commercial Rate Change,All Lines, (1Q:2004–2Q:2013)

-3.2

%-5

.9%

-7.0

%-9

.4%

-9.7

%-8

.2%

-4.6

% -2.7

%-3

.0%

-5.3

%-9

.6%

-11

.3%

-11

.8%

-13

.3%

-12

.0%

-13

.5%

-12

.9%

-11

.0%

-6.4

%-5

.1%

-4.9

%-5

.8%

-5.6

%-5

.3%

-6.4

%-5

.2%

-5.4

% -2.9

%

2.7

% 4.4

%4

.3%

3.9

%5

.0%

5.2

%4

.3%

-0.1

% 0.9

%

-0.1

%

-16%

-11%

-6%

-1%

4%

9%

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

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

KRW Effect

Pricing as of Q2:2013 was positive for the89th consecutive

quarter. Gains are likely to continue through 2013.

(Percent)

Q2 2011 marked the last of 30th

consecutive quarter of price declines

Page 133: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

195

Change in Commercial Rate Renewals, by Account Size: 1999:Q4 to 2013:Q2

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Percentage Change (%)

Pricing turned positive in Q3:2011, the first increase in

nearly 8 years; Q2:2013 renewals were up 4.3%. Some insurers posted

stronger numbers.

Pricing Turned Negative in Early

2004 and Remained that

way for 7 ½ years

Peak = 2001:Q4 +28.5%

Trough = 2007:Q3 -13.6%

KRW : No Lasting Impact

Page 134: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

196

Cumulative Qtrly. Commercial Rate Changes, by Account Size: 1999:Q4 to 2013:Q2

Source: Council of Insurance Agents and Brokers; Barclay’s Capital; Insurance Information Institute.

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

1999:Q4 = 100Despite 8 consecutive quarters

of gains (Q2:2013 = 4.3%), pricing today is where is was in

late 2001 (around 9/11), suggesting additional rate need going forward, esp. in light of

record low interest rates

Page 135: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

199

Change in Commercial Rate Renewals, by Line: 2013:Q2

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

Major Commercial Lines Renewed Uniformly Upward in Q2:2013 for the 8th Consecutive Quarter; Property Lines & Workers Comp Leading the Way; Cat

Losses and Low Interest Rates Provide Momentum Going Forward

Percentage Change (%)

5.4%5.9% 5.9%

8.3%

1.1%

3.5% 3.6% 3.7%4.6% 4.5%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Su

rety

Ge

ne

ral

Lia

bili

ty

Bu

sin

ess

Inte

rru

ptio

n

Um

bre

lla

Co

mm

erc

ial

Au

to

Co

nst

ruct

ion

EP

L

D&

O

Co

mm

erc

ial

Pro

pe

rty

Wo

rke

rsC

om

p

Workers Comp rate increases are large than any other line, followed

by Property lines

Note: CIAB data cited here are based on a survey. Rate changes earned by individual insurers can and do vary, potentially substantially.

Page 136: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Shifting Legal Liability & Tort Environment

202

Is the Tort PendulumSwinging Against Insurers?

202

Page 137: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

203

Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E

$0

$50

$100

$150

$200

$250

$300

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

To

rt S

ys

tem

Co

sts

1.50%

1.75%

2.00%

2.25%

2.50%

To

rt Co

sts

as

% o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

($ Billions)

Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A

Tort costs in dollar terms have remained high but relatively stable

since the mid-2000s., but are down substantially as a share of GDP

Deepwater Horizon Spike

in 2010

1.68% of GDP in 2013

2.21% of GDP in 2003

= pre-tort reform peak

Page 138: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

Business Leaders Ranking of Liability Systems in 2012

Best States

1. Delaware

2. Nebraska

3. Wyoming

4. Minnesota

5. Kansas

6. Idaho

7. Virginia

8. North Dakota

9. Utah

10. Iowa

Worst States

41. Florida

42. Oklahoma

43. Alabama

44. New Mexico

45. Montana

46. Illinois

47. California

48. Mississippi

49. Louisiana

50. West Virginia

Source: US Chamber of Commerce 2012 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2012

Wyoming Minnesota Kansas Idaho

Drop-offs

Indiana Colorado Massachusetts South Dakota

Newly Notorious

Oklahoma

Rising Above

Arkansas

206

Page 139: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

207

The Nation’s Judicial Hellholes: 2012/2013

Source: American Tort Reform Association; Insurance Information Institute

West VirginiaIllinoisMadison County

New YorkAlbany and

NYC

Watch List

Philadelphia, Pennsylvania

South Florida Cook County, Illinois New Jersey Nevada Louisiana

Dishonorable Mention

MO Supreme Court WA Supreme Court

California

MarylandBaltimore

Page 140: National Captives Owners’ Conference Banff, Alberta, Canada September 11, 2013

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Thank you for your timeand your attention!

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208