NCIGF Economic Update:Implications for P/C Insurance

National Conference of Insurance Guaranty Funds2013 Annual Conference

Phoenix, AZ April 17, 2013

Steven N. Weisbart, Ph.D., CLU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: 212.346.5540 Cell: 917.494.5945 stevenw@iii.org www.iii.org

2

P/C Insurance Industry Financial Overview

Profit Recovery Was Set Backin 2011 and 2012

by High Catastrophe Lossesand Other Factors

2

3

P/C Net Premiums Written: % Change, Quarter vs. Year-Prior Quarter, 2002–2012

Sources: ISO; Insurance Information Institute.

Finally! A sustained period (10 quarters) of growth in net premiums written (vs. same quarter, prior year), and strengthening.

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% 3.

2% 3.8%

3.1% 4.

2% 5.1%

-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

This upward trendis likely to continue

as the economy’s recovery strengthens

Most recent “hard market”

Underwriting is Rarely a Profit SourceGain (Loss)* 1975–2012**

*Includes mortgage and financial guaranty insurers in all years. **through first three quarters of 2012Sources: A.M. Best; ISO; Insurance Information Institute.

Average yearly underwriting loss in the 2008-2011 low-interest-rate environment? $17.8B. With interest rates this low, large persistent

underwriting losses are not a recipe for success.

-$60

-$40

-$20

$0

$20

$40

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

In historical context, 2006-07 underwriting

results were an anomaly

$ BillionsNet

underwriting losses in 1st

3 qtrs of 2012 totaled

$6.7B

High cat losses in 2011 led to

the worst underwriting

year since 2002

Cumulative underwriting loss since 1975? $500B, averaging $13.2B/year.

5

P/C Insurance Industry Combined Ratio, 2001–2012:Q3*

* Excludes Mortgage & Financial Guaranty insurers 2008--2012. Including M&FG, 2008=105.1, 2009=100.7, 2010=102.4, 2011=108.2; 2012:Q3=100.9. Sources: A.M. Best; ISO.

95.7

99.3

100.8

106.4

100.0101.0

92.6

100.8

98.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012:Q3

Best Combined

Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid

Out Nearly $1.16 for Every $1 in

Earned Premiums

Relatively Low CAT Losses, Reserve Releases

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

P/C Net Income After Taxes1991–2012:Q3

$1

4,1

78

$5

,84

0

$1

9,3

16

$1

0,8

70

$2

0,5

98

$2

4,4

04 $

36

,81

9

$3

0,7

73

$2

1,8

65

$3

,04

6

$3

0,0

29

$6

2,4

96

$3

,04

3

$3

5,2

04

$1

9,1

50

$2

6,9

81

$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 12:Q3

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:Q3 ROAS1 = 6.3%

Through the first three quarters of 2012, P/C

Industry profits were up 222% from the comparable period in 2011, mainly due

to lower CAT losses in 2012:Q2 and Q3

* ROE figures are GAAP; 1Return on avg. surplus. Excluding Mortgage & Financial Guaranty insurers yields a 6.2% ROAS for 2012:H1, 4.6% ROAS for 2011, 7.6% for 2010 and 7.4% for 2009.Sources: A.M. Best; ISO; Insurance Information Institute.

$ Millions

$1

6.2

$1

5.6

$1

6.4

$1

4.6

$8

.6

$5

.8

-$1

0.3

-$0

.1

-$1

.0

$1

0.8

$1

1.0

$8

.2

$8

.3

-$3

.4

$3

.4

$1

1.2

$1

2.2

$6

.2

$1

1.3

$9

.0$1

0.7

$7

.0

$1

3.1

-$15.0

-$10.0

-$5.0

$0.0

$5.0

$10.0

$15.0

$20.0

20

07

:Q1

20

07

:Q2

20

07

:Q3

20

07

:Q4

20

08

:Q1

20

08

:Q2

20

08

:Q3

20

08

:Q4

20

09

:Q1

20

09

:Q2

20

09

:Q3

20

09

:Q4

20

10

:Q1

20

10

:Q2

20

10

:Q3

20

10

:Q4

21

1:Q

1

20

11

:Q2

20

11

:Q3

20

11

:Q4

20

12

:Q1

20

12

:Q2

20

12

:Q3

Sources: SNL Financial; Insurance Information Institute

P/C Industry Net Income,Quarterly, 2007:Q1-2012:Q3

Spring 2011 tornadoes

7

$Billions Financial crisis,

Hurricane Ike

Virtually a yearwithout any profits

$1

6.2

$1

5.6

$1

6.4

$1

4.6

$8.6

$5.8

-$10

.3

-$0.

1

-$1.

0

$7.0

$10.

7

$13.

1

$10.

8

$9.0 $1

1.0

$8.2

$8.3

-$3.

4

$3.4

$11.

2

$12.

2

$6.2

$11.

3-$15

-$10

-$5

$0

$5

$10

$15

$20

1st Quarter 2d Quarter 3rd Quarter 4th Quarter

200720082009201020112012

Sources: SNL Financial; Insurance Information Institute

P/C Industry Net Income,Quarterly, 2007:Q1-2012:Q3

Spring 2011 tornadoes

8

$Billions

Financial crisis,

Hurricane Ike

Hurricane Irene

Over the past 6 years, no calendar quarter has been consistently profitable.

-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

*1

2:

Profitability (ROE) Peaks & Troughs,P/C Insurance Industry, 1975 – 2012:Q3*

*Profitability = P/C insurer ROEs. 2012 is an estimate based on ROAS data. Note: Data for 2008-2012 exclude mortgage and financial guaranty insurers. 2012:H1 ROAS = 5.9% including M&FG.Sources: 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

ROE

1975: 2.4%

6+ years so far

History suggests next ROE peak will

be in 2016-2017

10

ROE vs. Equity Cost of Capital:U.S. P/C Insurance: 1991-2012*

* Return on average surplus in 2008-2012 excluding mortgage and financial guaranty insurers. 2012 figures are III estimates.Source: The Geneva Association, Insurance Information Institute

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

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

ROE Cost of Capital

-13

.2 p

ts

-9.0

pts

-6.4

pts

Over the last 22 years, the P/C insurance industryfell well short of earning its cost of capital in all but 4 years

From 2003 to 2007 U.S. P/C insurers were on target or

better.

The Cost of Capital:the Rate of Return

insurers must earn to attract and retain capital

-7.3

pts

-6.9

pts

From 1991 to 2002 US P/C Insurers missed earning their cost of capital by an average

6.7 percentage points.

From 2008 to 2012 U.S. P/C Insurers fell short again

12

Policyholder Surplus, 2006:Q4–2012:Q3

Sources: ISO; A.M .Best.

($ Billions)

$487.1$496.6

$512.8$521.8

$478.5

$455.6

$437.1

$463.0

$490.8

$511.5

$540.7$530.5

$544.8

$559.2 $559.1

$538.6$550.3

$583.5$570.7$566.5

$505.0$515.6$517.9

$425

$450

$475

$500

$525

$550

$575

$600

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

3

09:Q

4

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

3

Surplus as of 9/30/12 was a

new peak

The industry now has $1 of surplus for every $0.80 of NPW, the strongest claims-paying status in its history

Drop due to near-record 2011 CAT losses

Impairments

1313

Number of Financially-ImpairedP/C Insurers, 1969–2012

81

51

27

11

93

49

13

12

19

91

61

41

33

64

93

1 34

50

48

55

60

58

41

29

16

12

31

18 19

49 50

47

35

18

14 15 16 1

9 21

34

16

5

0

10

20

30

40

50

60

70

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

Sources: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012; BestWeek March 25, 2013; The 2012 count is preliminary. Insurance Information Institute.

The number of financially-impaired insurers varies each year, correlated with the P/C insurance cycle. Peaks occur well into hard markets.

3 small Missouri insurers had problems in 2011

following the May tornado in Joplin. They were absorbed

by a larger insurer and all claims were paid.

14

1969-83 average: 13.4

1984-93 average: 46.2

1994-2011 average: 24.9

15

Financially-Impaired P/C Insurer Rate vs. Combined Ratio, 1969-2011

90

95

100

105

110

115

1206

97

07

17

27

37

47

57

67

77

87

98

08

18

28

38

48

58

68

78

88

99

09

19

29

39

49

59

69

79

89

90

00

10

20

30

40

50

60

70

80

91

01

1

Co

mb

ine

d R

ati

o

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Imp

airm

en

t Ra

te

Combined Ratio after DivP/C Impairment Frequency

Source: A.M. Best; Insurance Information Institute

2011 impairment rate was 0.91%, up from 0.67% in 2010

Impairment rates are highly correlated with underwriting performance. 2007 was a record low. The recent increase was not representative of the

industry overall; it was associated mainly with problems experienced by Mortgage and Financial Guaranty insurers.

average since 1969: 0.82%

16

Number of Financially-ImpairedP/C Insurers, by Primary LOB, 2010-2011

2 2 22

34

56

8

0

3

6

9

MortgageGuaranty

HO & FO WorkersComp

OtherLiability

CommercialAuto

CMP Surety Title PP Auto

2011 2010

Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012; Insurance Information Institute.

Number of Insurers

16

17

Number of Financially-ImpairedP/C Insurers, by Domicile, 2010 & 2011

2

1 1 1 1 1 1

0 0 0 0 0

1

3

1 1

2

1

22

33

666

0

3

6

9

AZ DE FL MO IL CA NC MN GA VA PR NY UT WI SD NV AR OK

2011 2010

Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012; Insurance Information Institute.

Number of Insurers

17

18

Number of Financially-Impaired P/C Insurers, by Impairment Cause, 2010-11

10

6

10 0

21 1

18

5 53

1 1

0

3

6

9

12

15

18

21

DLR/IP* AffiliateProblems

Unidentified CATs Misc. InvestmentProblems

AllegedFraud

RapidGrowth

2011 2010

*Deficient Loss Reserves/Inadequate PricingSource: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012; Insurance Information Institute.

Number of Insurers

18

19

Reasons for US P/C Insurer Impairments, 1969–2011

3.2%3.6%

8.3%

7.0%

8.3%

7.1%

7.5%13.1%

41.9%

Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012; Insurance Information Institute.

Historically, deficient loss reserves and inadequate pricing have beenthe leading cause of P-C insurer impairments, by far.

Investment and catastrophe losses have played a much smaller role.

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems (Overstatement of Assets)

Misc.

Sig. Change in Business

20

Top 10 Lines of Business forUS P/C Impaired Insurers, 1991–2011

7.4%

1.9%

3.8%

4.4%

6.1%

7.5%

9.0%

9.4% 9.0%

23.1%

18.4%

Source: A.M. Best Special Report “1969-2011 Impairment Review,” June 2012; Insurance Information Institute.

Commercial lines of business account for two-thirds of the premium volume of impaired insurers over the past two decades,

but PP Auto is the single largest line among impaired insurers.

Workers Comp

Financial Guaranty

Pvt. Passenger Auto

Homeowners

Commercial Multiperil Commercial Auto Liability

Other Liability

Med Mal

Surety

Title

Unknown

Catastrophes

2121

22

$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

3.1

$3

7.0

$1

4.0

$4

.8

$8

.0

$3

7.8

$8

.8

$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

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

US Insured Catastrophe Losses

*As of 1/2/13. Includes $20B gross loss estimate for Hurricane Sandy.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.

US CAT Losses in 2012 Will Likely Become the 2nd or 3rd Highest in US History on An Inflation-Adjusted Basis (Pvt

Insured). 2011 Losses Were the 5th Highest

2012 CAT losses were down nearly 50% from 2011 until Sandy struck in late October

Record Tornado Losses Caused

2011 CAT Losses to Surge

($ Billions, 2012 Dollars)

22

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 – 2012Number of Events (Annual Totals 1980 – 2012)

Source: MR NatCatSERVICE 23

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 184 natural disaster events in the

US in 2012

There were over 150 natural disaster events in the US every

year since 2006. That hadn’t happened in any year before.

24

The Dozen Most Costly Hurricanesin U.S. History

Insured Losses, 2012 Dollars, $ Billions

*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.

$9.2 $11.1$13.4

$20.0

$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)

Sandy will likely become the 3rd costliest hurricane in US insurance history

Irene became the 12th most expensive

hurricane in US history

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

25

If They Hit Today, the Dozen Costliest (to Insurers) Hurricanes in U.S. History

Insured Losses,2012 Dollars, $ Billions

*Estimate as of 12/09/12 based on estimates of catastrophe modeling firms and reported losses as of 1/12/13. Estimates range up to $25B.Sources: Karen Clark & Company, Historical Hurricanes that Would Cause $10 Billion or More of Insured LossesToday, August 2012; I.I.I.

$40$50 $50 $50

$65

$125

$40$35$25$20$20$20

$0

$20

$40

$60

$80

$100

$120

$140

Sandy*(2012)

Betsy(1965)

Hazel(1954)

Donna(1960)

NewEngland(1938)

Katrina(2005)

Galveston(1915)

Andrew(1992)

south-Florida(1947)

Galveston(1900)

mid-Florida(1928)

Miami(1926)

When you adjust for the damage prior storms could have done if they occurred today, Hurricane Katrina slips to a tie for 6th among the most

devastating storms.

Storms that hit long ago had less property and businesses to damage, so simply adjusting their actual claims for inflation doesn’t capture their

destructive power.Karen Clark’s analysis aims to overcome that.

Auto, 230,500 ,

17%

Commercial, 167,500 ,

12%

Homeowner, 982,000 ,

71%

Hurricane Sandy resulted in an

estimated 1.4 million privately insured

claims resulting in an estimated $15 to $25

billion in insured losses. Hurricane

Katrina produced 1.74 million claims and $47.6B in losses

(in 2011 $)

Superstorm Sandy:Number of Claims by Type*

*PCS claim count estimate as of 11/26/12. Loss estimate represents high and low end estimates by risk modelers RMS, Eqecat and AIR. PCS estimate of insured losses as of 11/26/12 $11 billion. All figures exclude losses paid by the NFIP.Source: PCS; AIR, Eqecat, AIR Worldwide; Insurance Information Institute. 26

Sandy was a high frequency, (relatively

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

Location of Tornadoes in the US, 2012*

*Through Dec. 31, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html# 27

1,119 tornadoes killed 68 people through Dec. 31

Location of Large Hail Reports in the US, 2012*

28*Through Dec. 31, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html#

There were 7,033 “Large Hail”

reports through Dec. 31, 2012,

causing extensive damage to homes,

businesses and vehicles

Location of Wind Damage Reports in the US, 2012*

29*Through Dec. 31, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html#

Extreme density due to late June derecho

Hurricane Sandy resulted

in a large volume of wind damage reports

There were 14,351 “Wind Damage” reports through Dec. 31, causing

extensive damage to homes and businesses

Severe Weather Reports, 2012*

30*Through Dec. 31, 2012.Source: NOAA Storm Prediction Center; http://www.spc.noaa.gov/climo/online/monthly/2012_annual_summary.html#

There were 22,503 severe

weather reports through Dec. 31; including

1,119 tornadoes;

7,033 “Large Hail” reports

and 14,351 high wind events

31

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

P/C Industry Homeowners Claim Frequency, US, 1997-2011

1.57

2.822.34

1.842.32

1.69

2.67 2.572.97

2.28

1.32

3.42

2.39 2.35

3.68

6.996.71 6.45 6.26 6.53

5.83

4.63

3.83 3.64 3.77 3.94 4.03 4.16 4.17 4.31

8.56

9.53

8.798.10

8.85

7.52 7.30

6.40 6.616.05

5.26

7.46

6.55 6.52

7.99

0

2

4

6

8

10

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2010 2011

CAT-related claims Non-CAT-related claims All Claims

Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.29; Insurance Information Institute

Claims Paid per 100 Exposures

P/C Industry Homeowners Average Claim Severity, 1997-2011

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

non-cat claims cat claims

Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p. 29, BLS inflation calculator,and Insurance Information Institute

HO average claim severity is now

three times what it was in 1997.

Investments: The New Reality

34

Investment Performance is a Key Driver of Profitability

34

35

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

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

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

35

36

Distribution of Bond Maturities,P/C Insurance Industry, 2003-2011

16.0%

15.2%

15.7%

16.2%

16.3%

29.8%

29.2%

28.8%

29.5%

30.0%

32.4%

36.2%

39.5%

41.4%

31.3%

32.5%

34.1%

34.1%

33.8%

31.2%

28.7%

26.7%

26.8%

15.4%

15.4%

13.6%

13.1%

12.9%

12.7%

11.7%

11.1%

10.3%

9.2%

7.6%

7.6%

7.4%

8.1%

8.1%

7.3%

6.4%

6.3%15.2%

14.4%

16.0%

15.4%

0% 20% 40% 60% 80% 100%

2003

2004

2005

2006

2007

2008

2009

2010

2011

Under 1 year

1-5 years

5-10 years

10-20 years

over 20 years

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

The main shift over these years has been from bonds with longer maturities to bonds with shorter maturities. The industry first trimmed its holdings of over-10-year bonds

(from 24.6% in 2003 to 16.9% in 2011) and then trimmed bonds in the 5-10-year category. Falling average maturity of the P/C industry’s bond portfolio is contributing to a drop in

investment income along with lower yields.

Property/Casualty Insurance Industry Investment Gain: 1994–2012F1

$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

$50.8

$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 12F

In 2012 (1st three quarters) both investment income and realized capital gains were lower than in the comparable period in 2011. And because

the Federal Reserve Board aims to keep interest rates exceptionally low through mid-2015, maturing bonds will be re-invested at even lower rates.

1Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.*2005 figure includes special one-time dividend of $3.2B; 2012F figure is I.I.I. estimate based on annualized actual 2012:Q3 result of

$38.089B. Sources: ISO; Insurance Information Institute.

($ Billions)

Investment gains through 2012:Q3 are about 20%

below their pre-crisis peak

This trend line should be rising

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:H1 combined ratio including M&FG insurers is 102.2, ROAS = 5.9%; 2011 combined ratio including M&FG insurers is 108.2, ROAS = 3.5%. Source: Insurance Information Institute from A.M. Best and ISO data.

97.5

100.6 100.1 100.8

92.7

101.099.3

100.9 101.1

106.4

95.7

6.2%4.6%

7.6%7.4%4.4%

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:H10%

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

Year Ago

2011:H1 = 109.4, 2.3% ROE

39

-1.8

%

-1.8

%

-2.0

%

-3.6

%

-3.3

%

-3.3

%

-3.7

%

-4.3

%

-5.2

%

-5.7

%

-7.3%

-1.9

%

-2.1

%

-3.1

%

-8%-7%-6%-5%-4%-3%-2%-1%0%

Perso

nal L

ines

Pvt Pass

Aut

o

Pers P

rop

Comm

ercia

l

Comm

l Auto

Credit

Comm

Pro

p

Comm

Cas

Fidelity

/Sure

ty

War

rant

y

Surplu

s Line

s

Med

Mal

WC

Reinsu

ranc

e**

Lower Investment Earnings Place a Greater Burden on Underwriting and Pricing Discipline

*Based on 2008 Invested Assets and Earned Premiums**US domestic reinsurance onlySource: A.M. Best; Insurance Information Institute.

Reduction in Combined Ratio Necessary to Offset 1% Decline in Investment Yield to Maintain Constant ROE, by Line*

39

40

Perspectives onPremium Growth

Premium Growth RatesVary Tremendously

40

41

Total P/C Direct Premiums Written: Percent Change by State, 2006-2011

6.3%

6.1%

4.9%

2.2%

2.1%

2.1%

0.4%

0.4%

-0.8

%

-1.6

%-1

0.8%

-11.

7%

3.9%

-1.1

%

-2.0

%-2

.5%

-3.2

%

0.7%

-1.9

%-3

.5%

-5.2

%-5

.8%

-10.

5%

4.2%

-10.

3%

-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

LA AR TN NC KY

SC AL

MS

VA

GA

WV FL DE

NY

PA NJ

MD VT

CT

MA RI

ME

NH

AK HI

Sources: SNL Financial, LLC.; Insurance Information Institute.

Southeast Mid-Atlantic New England

42

Total P/C Direct Premiums Written: Percent Change by State, 2006-2011

2.1% 5.

8%

22.6

%

20.8

%

6.6%

0.9%

18.2

%

-13.

5%

2.4%

10.5

% 26.4

%

-1.3

%

-3.1

%

-4.1

%

11.8

%

4.7%

71.5

%

41.8

%

-0.6

%

22.8

%

-6.0

%-0

.8%

-4.4

%

-12.

0%-1

9.2%

-50%

-25%

0%

25%

50%

75%

100%

OK TX NM AZ

MT

WY UT

CO ID

WA

OR

CA

NV WI IN O

H IL MI

ND

SD IA NE

KS

MN

MO

Sources: SNL Financial, LLC.; Insurance Information Institute.

Southwest Mountain Far West Great PlainsGreat Lakes

43

$125

$135

$145

$155

$165

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011215

220

225

230

235

240

245

250

Private Passenger Auto Premium No. of Vehicles in Operation (millions)

PP Auto net written premiums are starting to recover from a period of no growth attributable to the weak economy affecting new vehicle sales, car

choice, and increased price sensitivity among consumers

Sources: A.M. Best; NADA, State of the Industry Report 2012, p. 16, at www.nada.org/nadadata citing R. L. Polk; Insurance Information Institute.

PP Auto NWP vs. # of Vehiclesin Operation, 2001–2011

NWP$ Billions

Vehicles in Operation (millions)

44

HO Insurance Net Written Premium vs.No. of Housing Units*, 2000–2011

$30

$35

$40

$45

$50

$55

$60

$65

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013100

104

108

112

116

HO premium Number of Housing Units

*occupied as of start of year indicatedSources: A.M. Best; Insurance Information Institute.

$ Billions

Homeowners insurance NWP continues rising (up 95% 2000-2011) despite very little unit growth in recent years. Reasons include rate increases, esp

Millions of Occupied

Units

45

Employment in the P/C Insurance Industry

45

46

U.S. Employment in the DirectP/C Insurance Industry: 1990–2013*

*As of January 2013; Seasonally adjusted; Does not include agents & brokers.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

Thousands

480

500

520

540

560

580

600

620

640

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

49

Employment in the U.S. Reinsurance Industry: 1990–2013*

Thousands

24

28

32

36

40

44

48

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

*As of January 2013; Seasonally adjusted; Does not including agents & brokers.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

As of January 2013, US employment in the reinsurance industry was

down by 800 or 3.0% to 25,800 since the recession began in Dec. 2007

(vs. overall US employment decline of 2.3%).

50

U.S. Employment in Insurance Agencies & Brokerages: 1990–2013*

Thousands

500

550

600

650

700

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

*As of January 2013; Seasonally adjusted. Includes all types of insurance.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

As of January 2013, employment at insurance agencies and brokerages

was down by 14,900 or 2.2% to 662,800 since the recession began in

Dec. 2007 (vs. overall US employment decline of 2.3%).

51

U.S. Employment in Insurance Claims Adjusting: 1990–2013*

Thousands

40.0

42.5

45.0

47.5

50.0

52.5

55.0

57.5

60.0

Jan

-90

Oct

-90

Jul-

91

Ap

r-9

2

Jan

-93

Oct

-93

Jul-

94

Ap

r-9

5

Jan

-96

Oct

-96

Jul-

97

Ap

r-9

8

Jan

-99

Oct

-99

Jul-

00

Ap

r-0

1

Jan

-02

Oct

-02

Jul-

03

Ap

r-0

4

Jan

-05

Oct

-05

Jul-

06

Ap

r-0

7

Jan

-08

Oct

-08

Jul-

09

Ap

r-1

0

Jan

-11

Oct

-11

Jul-

12

*As of January 2013; Seasonally adjusted.Note: Recessions indicated by gray shaded columns.Sources: U.S. Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

As of January 2013, claims adjusting employment was up by 400 or 0.8% to 52,800 since the recession began in Dec. 2007 (vs.

overall US employment decline of 2.3%).

Katrina, Rita, Wilma

52

Key Take-aways

52

53

P/C Insurance Exposures Will Grow With the U.S. Economy Personal and commercial exposure growth is likely in 2013

– But restoration of destroyed exposure will take until mid-decade Wage growth is also positive and could modestly accelerate

P/C Industry Growth in 2013 Will Be Strongest Since 2004 Growth likely to exceed A.M. Best projection of +3.8% for 2012 No traditional “hard market” emerges in 2013

Underwriting Fundamentals Weak But Improving Some pressure from claim frequency, severity in some key lines But WC will be tough to fix

Industry Capacity Hits a New Record by Year-End 2013 (Barring Meg-CAT)

Investment Environment Is/Remains Challenging Interest rates remain low

Take-aways:Insurance Industry Predictions for 2013

www.iii.org

Thank you for your timeand your attention!

Insurance Information Institute