Overview and Outlook for the P/C Insurance Industry: Trends and Challenges for 2013 and Beyond

Underwriting Executives CouncilBonita Springs, FL

May 9, 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

SomeTrends & Challenges Affecting the P/C Industry

2

• Slow/Uncertain Exposure Growth• Growing Impact of CATs• Low Investment Income• Highly Variable Claims Drivers• Challenging Regulatory Environment

Challenge #1: Slow/Variable Exposure Growth

3

4

Real GDP Growth: Past Recessionsand Recoveries, Yearly, 1970-2012

Source: (GDP) U.S. Department of Commerce at http://www.bea.gov/national/xls/gdpchg.xls.

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

Real GDP Growth (%)

In most recoveries, real yearly GDP growth is

often 4% or more

In the current recovery, real yearly GDP growthhas been 2.4% or less

But, following the 1991 and 2001 recessions, real yearly GDP growth was weaker than 4%

5

April 2013 Forecasts of Quarterly US Real GDP for 2013-14

2.0%2.2% 2.3%

2.8% 2.9% 3.0%

3.6% 3.7%3.9%

2.0%

1.5%1.7%

0.8%

2.7%

1.8%2.4%

2.6%

3.4%3.6%

3.3%

2.6%

0%

1%

2%

3%

4%

13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4

10 Most Pessimistic

Median

10 Most Optimistic

Sources: Blue Chip Economic Indicators (4/13); Insurance Information Institute

Real GDP Growth Rate

Despite the sequester and other challenges to the U.S. economy,virtually every forecast in the Blue Chip universe in early April sees

improvement ahead

Currently, the sequester will have greatest effect here

6

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

Sources: ISO; Insurance Information Institute.

Finally! A sustained period (11 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%

4.8%

-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

This upward trendis likely to continue

as the economy’ strengthens

Most recent “hard market”

7

Growth Analysis by State and Business Segment

Premium Growth Rates Vary Tremendously by State

7

8

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 WI

KY

MT

OH LA VA

NJ MI

SC

CO

MO

NM

Pec

ent c

han

ge

(%)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

Just 10 states showed double-digit DPW growth over the 5-year period

2007-2012, which includes the “Great Recession”

9

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

-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

WV HI

AZ

OR

DE

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

13 states lost DPW over the 5-year period 2007-2012,

including New York, California, and Florida

12

Direct Premiums Written: HomeownersPercent Change by State, 2007-2012

44

.5

41

.2

40

.5

39

.7

39

.0

38

.3

36

.4

35

.7

34

.2

32

.4

32

.4

32

.2

32

.0

31

.3

31

.0

30

.5

29

.8

29

.7

28

.8

28

.7

27

.9

26

.9

26

.7

26

.5

26

.4

26

.0

0

5

10

15

20

25

30

35

40

45

OK

ND

MN

AR

TN

MO

KY

SD WI

KS

GA IA

WY

CO

MT

NE

OH

NM AL IN IL VA

DE

SC ID UT

Pe

ce

nt

ch

an

ge

(%

)

Sources: SNL Financial LC.; Insurance Information Institute.

Top 25 States

13

Direct Premiums Written: HomeownersPercent Change by State, 2007-2012

25

.6

25

.3

24

.8

24

.5

24

.3

23

.7

23

.6

23

.3

22

.0

21

.4

21

.3

20

.4

20

.0

19

.4

18

.6

16

.4

16

.2

15

.6

15

.1

12

.5

10

.5

10

.4

8.7

8.0

-1.9

-2.3-5

0

5

10

15

20

25

30

35

40

MS

ME LA

CT

TX NJ

NH RI

NC PA

WA

NY

U.S

.

WV

OR

MA

MD

DC

AK

VT MI

AZ

CA HI

NV

FL

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

14

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

.0

14

.6

8.8

6.3

4.6

3.3

2.8

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

15

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

-4.5

-4.6

-4.9

-4.9

-5.0

-5.1

-5.4

-5.9

-6.2

-6.5

-6.8

-6.9

-6.9

-7.3

-9.1

-10

.2

-11

.1

-12

.8

-13

.2

-15

.3

-16

.2

-16

.9

-20

.2

-22

.3

-27

.8

-30

.3

-40

-35

-30

-25

-20

-15

-10

-5

0

MD

NH NJ

MO

U.S

.

ME

NC

KY VA RI

CO MI

SC AL

GA

CA

UT

NY

DC HI

DE FL AZ

WV

OR

NV

Pe

ce

nt

ch

an

ge

(%

)

Bottom 25 States

Sources: SNL Financial LC.; Insurance Information Institute.

20

16.9

16.5

16.1

13.2

10.4

11.6

12.7

14.4 15

.4 15.9

16.9

16.617

.117.5

17.8

17.4

9

10

11

12

13

14

15

16

17

18

19

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

(Millions of Units)

Auto/Light Truck Sales, 1999-2014F

Sources: U.S. Department of Commerce; Blue Chip Economic Indicators (4/13); Insurance Information Institute.

Job growth and improved credit market conditions will boost auto sales in 2013 and beyond, bolstering the manufacturing sector and the

economy generally.

Lowest level since the late

1960s

Forecast range for 2013 is 14.7 to 15.9 million

units

21

$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 premiums written are recovering 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

$ Billion

23

Millions of Units

Private Housing Unit Starts, 1990-2014F

1.4

8

1.4

7 1.6

2

1.6

4

1.5

7

1.6

0 1.7

1 1.8

5 1.9

6 2.0

7

1.8

0

1.3

6

0.9

1

0.5

5

0.5

9

0.6

1 0.7

8 1.0

0 1.2

11.3

51.4

6

1.2

9

1.2

0

1.0

11.1

9

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

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: U.S. Department of Commerce; Blue Chip Economic Indicators (4/13); Insurance Information Institute.

Homeowners insurers are starting to see meaningful exposure growth for the first time since 2005. Commercial insurers with construction risk

exposure, surety also benefit.

Starts plunged 72% from 2005-2009 to lowest level since

records began in 1959

Forecast range for 2013 is 0.89 to 1.35 million

unitsHousing“Bubble”

So Far, the Pickup Is Mostly in Multi-Family Housing Starts

100

150

200

250

300

350

400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

400

600

800

1000

1200

1400

1600

1800

units in multi-family buildings single family units

*average of annualized seasonally adjusted January, February, and March 2013 data; March is preliminary.Source: US Census Bureau at www.census.gov/construction/nrc/pdf/newresconst.pdf.

Thousands of Units, Multi-Family

2013:Q1 multi-unit starts at a seasonally adjusted annual rate of 325,000,are nearly back to the average annual pre-recession rate of 339,000.

Multi-family-unit starts rose in 2011, more in 2012, still

more so far in 2013.

Thousands of Units, Single Family

Multi-family plunge did not begin until 2009

Single family plunge began

in 2006

Housing Unit Starts: Building Momentum,Monthly, Jan 2011-Mar 2013*

187

112

164

124

129

165

176

152 21

9

175 23

9

153

193

240

215

234

178

215

211

205

245

281

261 34

7

275

309 39

2

437

388 41

8

411

414 44

3

429

422 42

2

439 46

0

520 51

1

470

481 50

4

513 53

1

506

538 59

0 589

570

617

616 65

0 619

0

200

400

600

800

1000

Jan

11

Mar

11

May

11

Jul 1

1

Sep

11

Nov

11

Jan

12

Mar

12

May

12

Jul 1

2

Sep

12

Nov

12

Jan

13

Mar

13

units in multi-family buildings single family units

*at annualized rate, seasonally adjusted; Mar 2013 numbers are preliminary.Source: US Census Bureau at www.census.gov/construction/nrc/pdf/newresconst.pdf.

Thousandsof Units

The number of units in multi-unit starts more than doubledfrom Dec 2011 to Dec 2012. Single family start rose nicely, too.

26

Commercial & Industrial Loans Outstandingat FDIC-Insured Banks, Quarterly, 2006-2012*

$1.1

6

$1.1

8

$1.2

2

$1.4

4

$1.4

8

$1.4

9

$1.5

0

$1.4

9

$1.4

3

$1.3

7

$1.2

7

$1.2

1

$1.1

8

$1.1

7

$1.1

7

$1.1

8

$1.2

0

$1.2

4 $1.2

8 $1.3

5

$1.3

7 $1.4

2

$1.4

6 $1.5

1

$1.1

3

$1.2

5 $1.3

0

$1.3

9

$1.0

$1.1

$1.2

$1.3

$1.4

$1.5

$1.6

06:Q

1

06:Q

3

07:Q

1

07:Q

3

08:Q

1

08:Q

3

09:Q

1

09:Q

3

10:Q

1

10:Q

3

11:Q

1

11:Q

3

12:Q

1

12:Q

3

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

*Latest data as of 2/28/2013.Source: FDIC at http://www2.fdic.gov/qbp/ (Loan Performance spreadsheet); Insurance Information Institute.

$Trillions In nominal dollar terms, this is an

all-time high.

Recession

27

Percent of Non-current Commercial & Industrial Loans Outstanding at FDIC-Insured Banks,Quarterly, 2006-2012*

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

%

0.87

%

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

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

2

12:Q

3

12:Q

4

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

*Latest data as of 2/28/2013.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

29

Business Bankruptcy Filings: Fallingbut Still High in 2012 (1994:Q1 – 2012:Q3)

13.9

13.6

12.9

12.0 13

.112

.2 12.6

12.9 13

.4 14.0

13.2

12.9 13

.814

.013

.512

.712

.411

.610

.39.

99.

210

.49.

09.

0 9.5

9.2

8.2 8.4

10.0

10.3

9.5 10

.09.

89.

79.

49.

58.

8 9.3

8.3

10.6

8.2

7.6 7.8 8.1 8.

7 9.5

12.8

4.1 4.

9 5.3 5.6 6.

3 6.7 7.

2 8.0 8.

79.

711

.512

.914

.316

.014

.2 15.0

14.6

14.5

14.0

13.0

12.4

12.3

11.7

11.1

11.0

10.4

9.2

8.4

0

2

4

6

8

10

12

14

16

18

94

:Q1

94

:Q3

95

:Q1

95

:Q3

96

:Q1

96

:Q3

97

:Q1

97

:Q3

98

:Q1

98

:Q3

99

:Q1

99

:Q3

00

:Q1

00

:Q3

01

:Q1

01

:Q3

02

:Q1

02

:Q3

03

:Q1

03

:Q3

04

:Q1

04

:Q3

05

:Q1

05

:Q3

06

:Q1

06

:Q3

07

:Q1

07

:Q3

08

:Q1

08

:Q3

09

:Q1

09

:Q3

10

:Q1

10

:Q3

11

:Q1

11

:Q3

12

:Q1

12

:Q3

Business bankruptcies were down 42% in 2012:Q3 vs. recent peak in 2009:Q2 but were still higher than 2008:Q1, the first full quarter of the Great Recession.

Bankruptcies restrict exposure growth in all commercial lines.Sources: American Bankruptcy Institute at www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=61633; Insurance Information Institute.

(Thousands) New Bankruptcy Law Takes Effect

Recessions in orange

Quarterly average for 2001:Q1-2005:Q3 was 8,915

30

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

175

185

173

182 18

719

318

4 189

189

185 18

819

519

119

9 204

203

195

196

195

206

206

200

189

199

206

206

199

213

204 20

920

020

620

420

419

420

4 208

199

193

191 19

320

020

720

320

921

020

921

6 221

221

220

221

210

221

214

206

216

208

207

201

191

188

172 17

716

918

317

5 179

188

200

189 19

219

8 202

193

191

201

150

160

170

180

190

200

210

220

230

93:Q

2

94:Q

1

95:Q

1

96:Q

1

97:Q

1

98:Q

1

99:Q

1

00:Q

1

01:Q

1

02:Q

1

03:Q

1

04:Q

1

05:Q

1

06:Q

1

07:Q

1

08:Q

1

09:Q

1

10:Q

1

11:Q

1

12:Q

1

Business starts were down nearly 20% in the Great Recession, holding back most types of commercial insurance exposure,

but now are recovering.* Data through Jun 30, 2012 are the latest available (posted Jan 29, 2013); Seasonally adjusted.Sources: Bureau of Labor Statistics, www.bls.gov/news.release/cewbd.t08.htm; NBER (recession dates).

(Thousands)Business Starts2006: 861,0002007: 844,0002008: 787,0002009: 701,000 2010: 742,000 2011: 781,000

30

Recessions in orange

66%

68%

70%

72%

74%

76%

78%

80%

82%

Mar

01

Sep

Mar

02

Sep

Mar

03

Sep

Mar

04

Sep

Mar

05

Sep

Mar

06

Sep

Mar

07

Sep

Mar

08

Sep

Mar

09

Sep

Mar

10

Sep

Mar

11

Sep

Mar

12

Sep

Mar

13

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. 31

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

78.5% of industrial capacity in Feb. 2013, above the June 2009 low of

66.9% and close to its post-crisis peakDecember 2007-

June 2009 Recession

March 2001 through Mar. 2013

31

Challenge #2: Dealing with Catastrophes

32

Are they more frequent and more severe?

33

$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

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)

33

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 34

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.

35

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

36

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

$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)

Sandy could become the 2nd costliest hurricane in

US insurance historyIrene became the

12th most expensive hurricane in US

history

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

37

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.

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

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

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.

40

U.S. Employment in Insurance Claims Adjusting: 2004–2013*

Thousands

45

50

55

60

Jan

-04

Ma

y-0

4

Se

p-0

4

Jan

-05

Ma

y-0

5

Se

p-0

5

Jan

-06

Ma

y-0

6

Se

p-0

6

Jan

-07

Ma

y-0

7

Se

p-0

7

Jan

-08

Ma

y-0

8

Se

p-0

8

Jan

-09

Ma

y-0

9

Se

p-0

9

Jan

-10

Ma

y-1

0

Se

p-1

0

Jan

-11

Ma

y-1

1

Se

p-1

1

Jan

-12

Ma

y-1

2

Se

p-1

2

Jan

-13

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

As of February 2013, claims

adjusting employment was 51,800

Katrina, Rita, Wilma

Gustav, Ike

IreneSandy

Auto, 230,500 ,

17%

Commercial, 167,500 ,

12%

Homeowner, 982,000 ,

71%

Sandy caused 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 (barely a CAT 1) Sandy:1.4 million 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. 41

Sandy was a high-frequency, (relatively) low-severity event(avg. severity <50% Katrina)

44

Flood-Damaged Structures with/without Flood Insurance: Long Island NY

Source: Newsday, 1/14/13 from FEMA and Small Business Administration.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Nassau Suffolk

Uninsured

Insured

Here’s a marketing challenge. Most people wholive on the coast in Long Island didn’t buy flood insurance.

46,681

28,055$2.2

44

74,736

20,798

46,681

5,74715,051

62.5% of flood-damaged buildings in Nassau County

were uninsured for flood

73.4% of flood-damaged buildings in Suffolk County

were uninsured for flood

5,747

Number of structures

Source: Wharton Center for Risk Management and Decision Processes, Issue Brief, Nov. 2012; Insurance Information Institute.

Residential NFIP Flood Take-Up Rates in NY, CT (2010) & Sandy Storm Surge

45

Flood insurance

penetration rates were

under 15% in many very vulnerable

areas of NY and CT.

These coastal areas should have take-up rates of 75%

and over

Less than 5% penetration!

Challenge #3: Prolonged Low Investment Gains

49

Investment Performance is a Key Driver of Profitability

51

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

*Monthly, constant maturity, nominal rates, through Mar 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

51

52

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.

Purchasing Power of P/C Industry Investment Gains: 1994–2012F1

$54.8

$64.5

$69.1

$74.8

$57.6

$45.9

$56.5$59.4

$69.8

$63.4

$70.9

$33.8

$42.0

$56.2 $57.4

$50.8

$81.7

$71.5$75.9

$30

$60

$90

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 until the unemployment rate hits 6.5%—likely at

least another year off—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, 2012 dollars) Average yearly gain: $60.85B.

We haven’t hit that average in the last 5 years.

Challenge #4: Highly VariableP/C Claims Drivers

56

57

Change* in the Consumer Price Index, 2004–2013

*Monthly, year-over-year, through March 2013. Not seasonally adjusted.Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

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

RecessionCPICore CPI

Over the last decade, prices generally rose about 2% per year.

57

For two months in 2008, led by gasoline, the

general price level was rising at a 5.5% pace

58

Prices for Hospital Services:12-Month Change,* 1998–2013

*Percentage change from same month in prior year; through January 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

2%

4%

6%

8%

10%

12%

14%

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Recession Outpatient Services Inpatient Services

Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)

59

Forces that Drive Car Repair Costs:12-Month Change,* 2001–2013

*Percentage change from same month in prior year; through January 2013; seasonally adjustedSources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.

0%

2%

4%

6%

8%

10%

12%

14%

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

Recession Auto repair Auto body work

Cyclical peaks in PP Auto tend to occur approximately every 10 years(early 1990s, early 2000s, and possibly the early 2010s)

61

Change* in Price Index for Lumber: A Downward Trend but Sudden Spikes, 2004–2013

*Monthly, year-over-year, through March 2013. Not seasonally adjusted. Dec. 2012 and Jan., Feb., and Mar. prices are preliminary.Sources: US Bureau of Labor Statistics, Producer Price Index series WPS0811; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

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

RecessionHardwoodSoftwood Lumber

The prices of building materials vary wildly and change levels rapidly.Prices for hardwood have been much less variable than softwood lumber.

61

The price of lumber dropped

before and during the recession…

But 30% spikes can

happen with no warning

62

Change* in Price Index for Plywood: A Downward Trend but Sudden Spikes, 2004–2013

*Monthly, year-over-year, through March 2013. Not seasonally adjusted. Dec. 2012 and Jan., Feb., and Mar. prices are preliminary.Sources: US Bureau of Labor Statistics, Producer Price Index series WPU083; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

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

Recession

Plywood

From the end of the recession (June 2009) to March 2013, the effectof the ups and downs of the price of plywood has resulted in a rise of 25.6%.

62

The price of plywood rose by

50% in late Spring 2004 over

the prior year March 2013: +8.4%

63

Price Index for Waferboard, Monthly 2008–2013

Through March 2013. Not seasonally adjusted. Dec. 2012 and Jan., Feb., and Mar. price indeses are preliminary.Sources: US Bureau of Labor Statistics, Producer Price Index series WPU09220124; National Bureau of Economic Research (recession dates); Insurance Information Institutes.

100

150

200

250

300

'08 '09 '10 '11 '12 '13

1991

=100

The prices of building materials such as waferboard and strandboard vary wildly and change levels rapidly.

63

The price of waferboard rose

by 50% during the recession, but then subsided

Oct 2012

Mar 2013The price of

waferboard rose by 50% again in the last year; will

it drop again?

64

But Something Unusual is Happening:Miles Driven*, 1990–2013

*Moving 12-month total. The latest data is for February 2013. Note: Recessions indicated by gray shaded columns..Sources: Federal Highway Administration (http://www.fhwa.dot.gov/ohim/tvtw/tvtpage.cfm ); National Bureau of Economic Research (recession dates); Insurance Information Institute.

Billions

2,100

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

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

A record: miles driven has been below the prior

peak for 63 straight months. Previous record

was in the early 1980s (39 months)

Will the trend toward hybrid and non-gasoline-powered vehicles affect

miles driven? What about the aging and

retirement of the baby boomers?

Miles Driven Growth per 5-Yr Span1997 vs. 1992: 13.9%2002 vs. 1997: 11.5%2007 vs. 2002: 6.1%2012 vs. 2007: -3.0%

Some of the growth in miles driven is due to population growth: 1997 vs. 1992: +5.1%2002 vs. 1997: +7.4%2007 vs. 2002: +4.7%2012 vs. 2007: +3.4%

Challenge #5: Regulatory Pressure?

65

From Congress (TRIA), HUD, CFPB, FSOC/Federal Reserve (SIFIs),

the NAIC’s SMI, etc.

66

I.I.I. Congressional Testimony on the Future of the Terrorism Risk Insurance Program

Issue: Act expires 12/31/14. Insurers still generally regard large-scale terror attacks as fundamentally uninsurable

I.I.I. Input: Testified at first hearing on the issue in DC (on 9/11/12) on trends in terrorist activity in the US and abroad, difficulties in underwriting terror risk; Noted that bin Laden may be dead but war on terror is far from over

Status: New House FS Committee Chair Jeb Hensarling has opposed TRIA in the past; Obama Administration does not seem to support extension; Little institutional memory on insurance subcommittee

Media: Virtually no media coverage yet apart form trade press; WSJ will likely editorialize against it.

Objective: Work with trades, risk management community and others to help build support

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)

Terrorism Violates Traditional Requirements for Insurability

Requirement Definition Violation

EstimableFrequency

Insurance requires large number of observations to develop predictive rate-making models (an actuarial concept known as credibility)

Very few data pointsTerror modeling still in infancy, untested.Inconsistent assessment of threat

EstimableSeverity

Maximum possible/ probable loss must be at least estimable in order to minimize “risk of ruin” (insurer cannot run an unreasonable risk of insolvency though assumption of the risk)

Potential loss is virtually unbounded.Losses can easily exceed insurer capital resources for paying claims.Extreme risk in workers compensation and statute forbids exclusions.

Source: Insurance Information Institute

Exhibit 3A

Requirement Definition Violation

Diversifiable Risk

Must be able to spread/distribute risk across large number of risks“Law of Large Numbers” helps makes losses manageable and less volatile

Losses likely highly concentrated geographically or by industry (e.g., WTC, power plants)

Random Loss Distribution/Fortuity

Probability of loss occurring must be purely random and fortuitousEvents are individually unpredictable in terms of time, location and magnitude

Terrorism attacks are planned, coordinated and deliberate acts of destructionDynamic target shifting from “hardened targets” to “soft targets”Terrorist adjust tactics to circumvent new security measuresActions of US and foreign govts. may affect likelihood, nature and timing of attack

Source: Insurance Information Institute

Terrorism Violates Traditional Requirements for Insurability (cont’d)

70

The New HUD Ruling

HO Underwriting vs. Disparate Impact

71

What Did HUD Rule?

The Fair Housing Act prohibits discrimination in the sale, rental, or

financing of dwellings on the basis of race, color, religion, sex,

disability, familial status, or national origin.

HUD’s rule says Plaintiffs may use statistical analysis to show that

certain insurer/lender/municipality behavior had a

disproportionately adverse effect on the sale, rental, or financing of

housing for minorities Under the rule, this showing violates the federal Fair Housing

Act even if the insurer/lender/municipality did not intend to discriminate

Defendant can prevail if it shows the practice was needed to achieve one or more substantial, legitimate, nondiscriminatory interests

But plaintiff may win by showing that another practice with a less discriminatory effect could achieve this interest

72

Potential Impact onProperty Insurance Underwriting

Why does this affect property insurance? Insurers don’t use race, religion, sex, etc. to underwrite property

insurance But they do use credit-based insurance scores, neighborhood, and

other factors that could be the basis of a “disparate impact” conclusion

Isn’t this a federal government agency’s intrusion into state regulation, against McCarran-Ferguson?

HUD says M-F says federal laws/regulations that “specifically relate to the business of insurance” supercede state law

But how can insurers defend themselves if they don’t have data on race (which they’re prohibited from collecting)? HUD says plaintiff have the same problem, so it’s fair

73

Potential Impact on Property Insurance Underwriting (cont’d) Could increase costs to monitor compliance and defend

suits alleging discrimination Potentially Changes State/Federal Regulatory Balance

Not necessarily by itself, but in the trail of– Federal Insurance Office– FSOC– CFPB

74

Other Regulatory Challenges?

Designating Some Insurers as Systemically Important?

Creating a two-tiered, “unlevel playing field”

Extending the “Reach” of the Consumer Financial Protection Bureau? The CFPB is now proposing regulations for mortgage servicers

regarding property insurance on homes with mortgages Will it deal with insurance offered with credit cards? Bank marketing of insurance products?

Brief Overview ofP/C Industry Financial Status

75

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

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

Average yearly underwriting loss in the 2008-2012 low-interest-rate environment? $17.2B. 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

$ Billions Net underwriting

losses in 2012 totaled

$14.6B

High cat losses in 2011 led to

the worst underwriting

year since 2002

P/C Net Income After Taxes1991–2012

$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

9,4

56 $

33

,52

2

$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

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%

* 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

1.1

$6

.4$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

20

12

:Q4

Sources: SNL Financial; Insurance Information Institute

P/C Industry Net Income,Quarterly, 2007:Q1-2012:Q4

Spring 2011 tornadoes

79

$Billions Financial crisis,

Hurricane Ike

Virtually a yearwithout any profits

Sandy

$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.

1

$6.4

-$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:Q4

Spring 2011 tornadoes

80

$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

*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 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

82

Policyholder Surplus, Quarterly, 2006:Q4–2012:Q4

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

$553

.8

$583

.5

$583

.5

$586

.9

$570

.7

$566

.5

$505

.0

$515

.6

$517

.9

$350

$400

$450

$500

$550

$600

$650

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

12:Q

3

12:Q

4

The industry now (at year-end 2012) has $1 of surplus for every $0.78 of NPW, the strongest claims-paying status in its history.

Up $150 Billion from the 2009:Q1 trough,

a new peak

Down $84 Billion from the previous peak,

due to the financial crisis,

CATs

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:Q3 combined ratio including M&FG insurers is 100.9, ROAS = 6.3%; 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

100.9 100.0

106.4

95.7

6.6%

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 2012:9M0%

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 ~6.6% in 2012, ~7.5% ROE in 2009/10,

10% in 2005 and 16% in 1979

Year Ago

2011:Q3 = 108.1, 3.1% ROE

85

Policyholder Surplus, 2006:Q4–2012:Q4

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

$586

.9

$570

.7

$566

.5

$505

.0

$515

.6

$517

.9

$400

$450

$500

$550

$600

$650

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

12:Q

4

Surplus as of 12/31/12 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

87

Key Takaways

87

88

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 Deteriorate Modestly 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

Takeaways:Insurance Industry Predictions for 2013

www.iii.org

Thank you for your timeand your attention!

Insurance Information Institute